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Think Your Corporation or LLC Totally Protects You From Personal Liability? Think Again

Cava Faulkner

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One of the primary reasons business owners set up corporations and limited liability companies (LLC) is to shield their personal assets from debts and other liabilities incurred by the business. Below, you’ll learn how your innocent mistakes will remove LLC protection.

Indeed, corporations and LLCs exist as separate legal entities from their owners, meaning the business itself can acquire assets, enter into contracts, and take on debt. In turn, if a corporate entity is unable to pay its debts, creditors are typically only allowed to go after the company’s assets, not the owners’ personal assets.

However, there are several circumstances whereby business owners can be held personally liable for corporate or LLC debts. Sometimes, business owners simply make innocent mistakes when running a business that leave them personally liable.

Other times, when business owners take certain actions, such as using the corporation to promote fraud, failing to observe corporate formalities, or even just inadvertently commingling corporate and personal assets, a court can hold the owners personally liable for the debts and liabilities of the corporate entity. When this happens, it’s known as “piercing the corporate veil.”

If you’re a business owner who’s thinking of incorporating, or if you already own a corporation or LLC, be aware of the following considerations, which can leave you personally on the hook for business debts.

Sign up to be liable

If you cosign on a business loan or personally guarantee a financial obligation for the corporation or LLC, you share responsibility with the company for paying it back, and creditors can come after your personal assets if the business defaults on the loan.

Use personal assets as collateral

Since many small business owners don’t have a lot of startup capital, you may be asked to use personal property, such as your home or other assets, as collateral on a business loan. If so, the personal property you pledged as collateral can be seized and sold off to pay your company’s creditors.

Commit fraud

If you make fraudulent representations or omissions to secure a business loan for your company,  you can be held personally liable for those debts. What’s more, if your corporation or LLC was created to further a fraudulent purpose or you made business deals knowing the company wasn’t able to pay for them, you can be convicted of fraud, thereby voiding your personal liability protection.

Commingle your business and personal finances

As a small business owner, you may be tempted to commingle your personal finances with those of your company. It can be something as benign as using a company account to pay your mortgage or depositing a check made out to the company into your own account. In doing this, a court can decide that you’re using your company as an extension of yourself, and therefore you should be held personally liable for its debts.

When you’re working with us as your Creative Business Lawyer® on an ongoing basis, we regularly review your financials with you and ensure you’re keeping everything separate in the exact way you need to in order to protect your personal assets.

Fail to follow corporate formalities

Corporations and LLCs are legally required to follow certain formalities and observe certain rules. If you fail to treat the business like a corporate entity by not observing these formalities—such as keeping detailed records (minutes) of meetings where important business decisions are made and adopting corporate bylaws—the court can rule your company is nothing but a shell and remove the veil of corporate protection covering your personal assets.

Indeed, maintaining corporate formalities is the single-most important aspect of keeping you safe from business creditors. When you’re working with us, we offer maintenance packages to help you with this and keep your personal assets safe.

Given all of the complexities surrounding corporations and LLCs, you should consult with us to make sure you’re not opening yourself up to be personally liable for your business debts. We can not only help you decide which business entity structure is best suited for your situation, we can also help you properly set up and maintain that entity, so your personal assets are protected.

We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.

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As a business owner, you’re likely monitoring a number of key performance indicators (KPI) to determine how well your company is doing. And if you’re launching a new business, you’ve undoubtedly heard about the importance of KPIs. Whether related to your financials, advertising, turnover, and/or website traffic, these metrics can be a great way to measure, maintain, and improve a business’ growth.

Yet there are a few metrics vital to a company’s long-term success that many business owners—especially first-timers—overlook or fail to track effectively. Ignoring these numbers can keep your company from achieving its full potential. Here are three such metrics you should keep a close eye on.

Employee Satisfaction

While most business owners are aware that employee satisfaction is important, most don’t realize just how critical it is. Indeed, some business experts rank employee happiness as the single-biggest driver of a company’s success.

This makes sense, seeing that happy employees are not only more productive, they also typically deliver better customer service, which can lead to increased sales and repeat business. On the flip side, unhappy employees can cause slow and/or lost sales, as well as decreased customer satisfaction.

What’s more, a satisfied team means less turnover, which can be uber costly in terms of recruiting, hiring, and training expenses. Given this, it can be useful to track both employee satisfaction and the costs of employee turnover. When employee satisfaction increases, your turnover costs should fall.

Start by making sure your employees are as content as possible, and most of the other stuff will usually fall into place on its own.

Cash Conversion Cycle

One frequently overlooked financial metric is your company’s cash conversion cycle (CCC), which tracks how quickly your customers pay you, compared to how long it takes you to pay your suppliers. According to Harvard Business Review, Amazon’s Jeff Bezos has mastered the CCC, which frees up loads of cash to invest as he pleases.

CCC is easy to calculate and a good measure of your cash flow:
1. First, determine the number of days of inventory you hold on average.

2. To that number, add the average number of days it takes for your customers to pay you.

3. Then, subtract the average number of days it takes for you to pay your suppliers.

The lower the number, the better. Back in 2013, Amazon had a record CCC of negative 30.6 days. However, getting your company’s CCC into the single digits is a fine target to shoot for. This often requires incredibly efficient inventory systems, flexible terms for your suppliers, and encouraging customers to use speedy payment options.

Profitability Per Product Or Service

Many business owners assume that selling their most expensive product or service should be their top priority. But sometimes, the most profitable thing to sell is less expensive. To this end, you should track profitability per product or service to figure out which items are making your company the most money.

If you primarily sell products, determine the true cost of each product compared to how much you’re selling it for, and then check the average price your competitors are charging for similar products. Products with the highest gross margin (revenue produced by goods minus cost of goods) are the most profitable.

But be certain you’re tracking the gross margin accurately to find out which products are your “best bets.” In some cases, you may need to increase prices to make a profit or stop selling a product all together.

For service-based companies, it can be more challenging to track such profitability unless you charge by the hour, as opposed to charging on a per-project basis or by the month or quarter. To see how well your time is being spent, carefully track the service, breaking down how many hours your team spends to deliver it, along with its costs in terms of employee salary and other expenses. To do this, you’ll need a clear picture of exactly what goes into providing each service, so you can determine which ones are top money makers and which are losers.

However, sometimes a company will offer a service (or product) that loses money in order to attract new clients or to ultimately sell something more profitable to these clients. This strategy, known as a “loss leader,” can be a good way for a new business to introduce itself to the market, build a loyal customer base, and secure future revenue.

We can help you determine which metrics are the most valuable for achieving sustainable business growth. Also, you should factor your legal, financial, insurance, and tax expenses into the above calculations to get the most accurate measurements, and our unparalleled experience in these areas can be invaluable. Contact us today to streamline your operations and minimize risks, so your company can reach its full potential.

We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.

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Create a pet trust in your estate plan

Set up a pet trust in your estate plan. It’s sad but true that many pets end up in shelters after their owner dies or becomes incapacitated. In fact, the Humane Society estimates that between 100,00 to 500,000 pets are placed in shelters each year for exactly this reason, and a large number of these animals are ultimately euthanized.

Whether we like it or not, the law considers pets to be nothing more than personal property just like cars, furniture, and electronic devices. In light of this cold reality, it’s vital that you provide for your pet’s future care through estate planning, so when you die or if you become incapacitated, your beloved friend won’t wind up in a shelter or worse.

The following tips offer helpful advice to ensure your faithful companion receives the best possible care when you’re no longer able to do it yourself.

 

Identify a new caregiver for your pet

Selecting a trustworthy caregiver is the first—and most important—step in protecting your pet(s) through estate planning. Many people assume their children, relatives, or friends will be suitable guardians, and these folks may even tell you as much in conversation. But the reality is, properly caring for most pets is a major commitment of time, emotion, and finances.

It’s best to come up with a list of potential candidates, and then have a frank talk with each of them, discussing the extent of care your pet requires and whether they have any personal issues (allergies, housing, other pets) that might prevent them from providing the necessary care.

If you don’t know any suitable caregivers, charitable groups, such as the Safe Haven® Surviving Pet Care Program, can provide for your pet in the event of your death or incapacity.

Get it in writing

Once you’ve chosen a guardian—along with one or two alternates in case something happens to your top choice—outline all of your pet’s care requirements, listing its health issues, dietary concerns, medications, etc. These requirements should be indicated within a properly drafted legal document to ensure that your wishes are properly carried out and enforceable.

We can help you create a legally binding agreement detailing your pet’s specific needs, which can be easily added to your other estate planning documents.

Provide funding for your pet’s continued care

All pets have basic food, shelter, and medical needs, and these needs can be quite expensive, depending on the animal’s age and health. And if you’re like most pet owners, you probably want your pet to receive more than just the bare necessities, so it’s imperative that you leave enough money to cover all such expenses.

Be sure to not only provide clear, detailed instructions on how your pet should be taken care of in your estate plan, but also include the necessary funding to cover these costs. And be sure you think about all of your pet’s future needs, including any extra services—grooming, boarding, and walking services—when calculating these expenses.

Set up a pet trust

Because pet care can be quite complicated and costly, the best way to ensure your wishes are properly carried out is to set up a pet trust.

While it’s possible to leave care instructions and funding for your pet in a will, a will cannot guarantee the new caregiver will use the funds properly or even that they’ll care for your pet at all. Indeed, a person who’s left your pet in a will can simply drop the animal off at a local shelter and keep the money for themselves.

A pet trust, on the other hand, allows you to lay out detailed rules for exactly how the trust’s funds can be used. To ensure your wishes are accurately carried out, you should name someone other than the caregiver as trustee, so this person can manage the funds and make sure they’re only used as spelled out by the rules you’ve created.

While leaving assets in a pet trust is fairly simple, creating a properly drafted trust that includes all of the necessary terms can be quite complex. To be certain that all of the necessary elements are in place to ensure your pet will continue to receive the love and care it deserves if you aren’t around to do it.

We don’t just draft documents – we ensure you make informed and empowered decisions for yourself and the people you love.  Our clients tell us that after meeting with us they feel more empowered and financially organized than ever before. Schedule online.

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The whirlwind of excitement and activity surrounding the launch of a startup can feel overwhelming. You’re so focused on managing the day-to-day logistics of getting your business up and running, you often don’t have time to focus on the bigger picture.

Because of this, it can be easy to overlook some perilous legal pitfalls that can turn your entrepreneurial dreams into a nightmare. Indeed, not having the proper legal protections in place is one of the biggest reasons startups fail. But with sound legal advice and planning, it’s fairly easy to safely sidestep these potential dangers.

While you should consult with us early and often during the startup phase, here are four of the most common legal landmines to watch out for:

1. Choosing the wrong business entity

Choosing the right legal structure for your business is crucial, not only for protecting your personal assets from liability, but also for boosting your income and saving on taxes. Whether its a sole proprietorship, limited liability company (LLC), or S-Corporation, each entity comes with unique advantages and disadvantages, all of which must be carefully considered before launching.

Consult with us for help choosing and setting up the business entity structure that’s best suited for your particular operation.

2. Not having a clear founders’ agreement

In a startup’s early days, it can be tempting to skip clearly documenting each co-founder’s responsibilities, rights, decision-making power, and equity. You’re all in this together, right? But if you don’t have a thorough founders’ agreement in place from the start, you risk major legal and financial conflicts down the road.

Such agreements should be in writing and created with the guidance of lawyers like us who specialize in business law. And they should be in place before you begin earning revenue. Once a business starts making money, you’ll often find your co-founders’ goals aren’t as closely aligned with yours as you first thought.

3. Not having the proper employment agreements

As with a founders’ agreement, you should also have comprehensive employment contracts in place for every person who works for you—both full-time employees and independent contractors. It doesn’t matter how long you’ve known the person, you should have an agreement in writing clearly laying out the terms and conditions of employment.

Require your workers to sign these contracts to provide evidence that both parties are aware of the employment relationship, especially when it comes to classifying employees versus independent contractors. These documents should also include any non-disclosure agreements and/or non-compete agreements you need to ensure your trade secrets and clients don’t fall into the hands of your competitors.

4. Not protecting your intellectual property

Protecting your intellectual property (IP) from outsiders and competitors by securing patents, trademarks, and copyrights is essential. But don’t forget to protect your IP from insiders as well.

Make sure that all intellectual property (IP) brought into your business by its founders before startup, along with any IP created by owners, employees, and/or contractors after its launch, is owned by the company, not the individual.

The transfer of ownership rights from the individual to the company can be done using IP assignment agreements and work-for-hire clauses. We can help you draft these agreements as well as put in place other legal protections to ensure you actually own all of the work you’re paying others to create.

5. Cover all of your legal bases

Starting a business is hard enough without having to worry about costly legal problems hanging over your head. Begin by sitting down with us to ensure your company has the proper legal protections in place. Even if you’ve worked with another lawyer, we can review your existing documents to make sure they’re correct and up to date.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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This week Tom Petty’s daughters escalated the battle over their late father’s estate by filing a lawsuit against Petty’s second wife that seeks $5 million in damages.

In the lawsuit, Adria Petty and Annakim Violette claim their father’s widow, Dana York Petty, mismanaged their father’s estate, depriving them of their rights to determine how Petty’s music should be released.

Petty died in 2017 of an accidental drug overdose at age 66. He named Dana as sole trustee of his trust, but the terms of the trust give the daughters “equal participation” in decisions about how Petty’s music may be used. The daughters, who are from Petty’s first marriage, claim the terms should be interpreted to mean they get two votes out of three, which would give them majority control.

Alex Weingarten, an estate planning attorney for Petty’s daughters, issued a statement to Rolling Stone magazine asserting that Petty’s widow is not abiding by his wishes for his two children.

“Tom Petty wanted his music and his legacy to be controlled equally by his daughters, Adria and Annakim, and his wife, Dana. Dana has refused Tom’s express wishes and insisted instead upon misappropriating Tom’s life’s work for her own selfish interests,” he said.

In April, Dana filed a petition in a Los Angeles court seeking to put Petty’s musical assets under the control of a professional manager who would assist the three women in managing the estate’s assets. Dana alleged that Adria has made it difficult to conduct business by acting abusive and erratic, including sending angry emails to various managers, record label reps, and even members of Petty’s band, the Heartbreakers.

Since Petty’s death, two compilations of his music have been released, including “An American Treasure” in 2018 and “The Best of Everything” in 2019. Both albums reportedly involved intense conflict between Petty’s widow and daughters, over “marketing, promotional, and artistic considerations.”

In reply to the new lawsuit, Dana’s attorney, Adam Streisand, issued a statement claiming the suit is without merit and could potentially harm Petty’s legacy.

“This misguided and meritless lawsuit sadly demonstrates exactly why Tom Petty designated his wife to be the sole trustee with authority to manage his estate,” he said. “Dana will not allow destructive nonsense like this to distract her from protecting her husband’s legacy.”

Destructive Disputes

The fight over Petty’s music demonstrates a sad but true fact about celebrity estate planning. When famous artists leave behind extremely valuable – and highly complex – assets like music rights, contentious court disputes often erupt among heirs, even with planning in place.

The potential for such disputes is significantly increased for blended families like Petty’s. If you are in a second (or more) marriage with children from a prior marriage, there is always a risk for conflict as your children and spouse’s interests often are not aligned. In such cases, it is essential to plan well in advance to reduce the possibility for conflict and confusion.

Petty did the right thing by creating a trust to control his music catalog, but the lawsuit centers around the terms of his trust and how those terms divide control of his assets.

While it is unclear exactly what the trust stipulates, it appears the terms giving the daughters “equal participation” with his widow in decisions over Petty’s catalog are somewhat ambiguous. The daughters contend the terms amount to three equal votes, but his widow obviously disagrees.

Reduce Conflict With Clear Terms and Communication

It is critical that your trust contain clear and unambiguous terms that spell out the beneficiaries’ exact rights, along with the exact rights and responsibilities of the trustee. Such precise terms help ensure all parties know exactly what you intended when setting up the trust.

You should also communicate your wishes to your loved ones while you are still alive rather than relying on a written document that only becomes operative when you die or should you become incapacitated. Sharing your intentions and hopes for the future can go a long way in preventing disagreements over what you “really” wanted.

For the Love of Your Family

While such conflicts frequently erupt among families of the rich and famous like Petty, these can occur over anyone’s estate regardless of its value.

Working with the right lawyer to draft clear terms for your plan as well as facilitate family meetings where you can explain your wishes to your loved ones in person and answer any questions they may have both can dramatically reduce the chances of conflict over your estate and bring your family closer at the same time.

Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.

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