If you are a business owner, then you, no doubt, have or will go through the process of finalizing your financial statements and gathering your other accounting records and tax documents for your CPA. I encourage you to take time to also locate your company record book and critical legal documents. Having your legal house in order is an important part of business risk management and planning. A basic business check-up should include the following:

1.) Corporate/Company Record Book Review.
Make sure you can locate your company record book and that it is up-to-date, including the ownership records. There are statutory requirements as to certain minimum records that must be kept by certain types of companies. For a detailed list of the records that must be kept, refer to the following article: Statutory Requirements for Record Books.

2.) Organizational Document Review.
A company’s organizational documents contain the rules that should be followed in carrying out business operations. For corporations, the controlling document is the Articles of Incorporation. For limited liability companies, the controlling document is the Articles of Organization. Usually both of these documents contain relatively few provisions. However, whatever provisions they do contain will control if other documents contain conflicting provisions. Watch out for particular limitations or restrictions on ownership. Sometimes restrictions that once made sense are no longer applicable. If those restrictions are in your Articles, they will still be binding!

After reviewing the Articles, you should review the Bylaws (for corporations) and Operating Agreement (for LLCs). These documents should contain more specific details regarding the management and general operations of the business. Review the documents for specific restrictions placed on the authority of managers, officers and directors. Are you acting in compliance with these restrictions? This can be especially critical if you are not the sole owner of the business; however, even if you are the sole owner, it is still important to understand what “position” has what authority.

In addition to reviewing the basic organizational documents, now is the time to review your meeting minutes or resolutions. Some businesses will hold formal meetings to conduct business at the shareholder, member, director and manager levels. Other businesses opt to use “informal action resolutions” or other forms of written consent to document important decisions. In either case, it is important that your records are accurate and kept up-to-date. Remember, if you want others to respect your company as a distinct legal entity, then you must respect it too.

3.) Buy-Sell Agreements.
If you are in business with someone other than your spouse, take a few minutes to review the following article written by my colleague, Steven Thompson: Buy-Sell Agreements: Working for the Best and Planning for the Worst. This article discusses the value of a buy-sell agreement to your business.

4.) Key Contract Review.
Review your key contracts, including leases, customer contracts and vendor agreements. Calendaring important dates from each contract can help you avoid costly mistakes. Many contracts will automatically renew each year or at the end of the term unless some advance notice is given. This may be a good or bad thing, depending on your perspective on any given contract. What it should not be is a surprise!

I find that most owners have a pretty good handle on the “business terms” of their contracts but the standard legal terminology and provisions are often a mystery. Such standardized legal language is known as “legal boilerplate.” Those “boilerplate” terms, however, are often the most important. For example, look at the “assignment” provisions to understand if your contract could be assigned to another person. If you are planning to sell, then assignability of a key customer contract could be crucial. Other often overlooked terms include limitations on liability, indemnification and insurance requirements. While these provisions may mean little if all goes well, they could be the most important provisions if there is a problem. Ask yourself if those provisions are both fair and adequately protect your business.

5.) Insurance Review.
Forming an LLC, corporation, or other business entity can be a critical part of your business risk management and control. However, forming a business entity alone is not sufficient. Proper liability and property insurance coverage is critical. Hopefully you meet at least annually with your insurance agent or broker to review coverage. If it has been a while, then you should take time now to review what you have in place. Consider the following:

• General commercial liability and products liability.
• Fire and extended insurance coverage for your business assets.
• Worker’s compensation insurance as required by law.
• Insurance for business vehicles (liability, collision and comprehensive).
• Non-owned and hired vehicle insurance coverage.
• Theft, vandalism and malicious mischief.
• Bonding for employees handling funds of business and required bonding for fiduciaries of qualified retirement plans.
• Any insurance required of you under a lease arrangement.
• Make sure that owners and your subsidiary companies are included as additional insured parties or are covered on their own policies and include necessary parties (like landlords or mortgagees) as additional insured parties or as loss payees, if required in your leases, contracts or mortgages.

Make reviewing these basic business records part of your normal routine! Reviewing these types of business records routinely puts your business in a safer and more productive state. If, during your review, you have questions or need assistance, contact the skilled attorneys at the Anderson O’Brien Law Firm.

There are statutory requirements as to certain records that must minimally be kept in a Corporate/Company Record Book. These records vary based on the type of company. The following is a list of different types of records to be kept for LLCs and Corporations:

For LLCs the following records must be kept:

1. A list, kept in alphabetical order, of each past and present member and, if applicable, manager. The list shall include the full name and last-known mailing address of each member or manager, the date on which the person became a member or manager and the date, if applicable, on which the person ceased to be a member or manager.
2. A copy of the Articles of Organization and all amendments to the Articles.
3. Copies of the limited liability company’s federal, state and local income or franchise tax returns and financial statements, if any, for the four most recent years or, if such returns and statements are not prepared for any reason, copies of the information and statements provided to, or which should have been provided to, the members to enable them to prepare their federal, state and local income tax returns for the four most recent years.
4. Copies of all Operating Agreements, all amendments to Operating Agreements and any Operating Agreements no longer in effect.
5. Unless already set forth in an Operating Agreement, written records containing all of the following information: 1) The value of each member’s contribution made to the limited liability company as determined under Wis. Stat. Section 183.0501(2); 2) Records of the times at which, or the events upon which any additional contributions are agreed to be made by each member; 3) Any events upon which the limited liability company is to be dissolved and its business wound up; 4) Other writings as required by an Operating Agreement.

For CORPORATIONS the following records must be kept:

1. Minutes of meetings of its shareholders and board of directors.
2. Records of actions taken by the shareholders or board of directors without a meeting.
3. Records of actions taken by a committee of the board of directors in place of the board of directors and on behalf of the corporation.
4. Appropriate accounting records.
5. A record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, by class or series of shares and showing the number and class or series of shares held by each shareholder.

Making sure you locate your company’s record book and ensuring that it is up-to-date is an important part of keeping your legal “house in order.” The maintenance of your company’s record book is a part of proper risk management and a step in checking up on your business. For information about other documents recommended you review for a business check-up check out the article: A Business Check-up Checklist.

As many people have learned, it is relatively easy to form a new limited liability company (LLC) these days. Often when new clients come in for business advice, they have already filed the Articles of Organization through the Wisconsin Department of Financial Institutions (www.wdfi.org). Sometimes they figured it out on their own, and other times another advisor, such as an accountant, helped them with the filing. All it takes is a credit card and a few minutes of time, and you too can have your very own LLC. These simple state filings are an important and necessary step in the business organization process. However, there is more that should be done to ensure that your business is properly organized!

One of the foundational documents that every LLC should have in place is an operating agreement. An operating agreement provides the basic rules of the road with respect to management and ownership of the company. Without a written operating agreement, the LLC and its members (members are the “owners” of an LLC) will be governed by the default statutory rules. For Wisconsin-based LLCs, those rules are found in Chapter 183 of the Wisconsin Statutes. No offense to our hardworking legislators, but would you really want to rely on the statutes to govern your relationship with your company and business partners?

Operating agreements range from the relatively simple to the extremely complex. The level of complexity depends on the nature of the business and the goals of the members. For example, a husband and wife forming an LLC usually need a straightforward operating agreement that spells out the basics about governance (like who can sign contracts on behalf of the LLC) and liability protections (helping ensure the members are not liable for the debts of the LLC). Typically, extensive rules governing transfers of ownership are not needed when just two spouses are involved. (That is what marital property agreements are for…a topic for another day.)

As soon as ownership of the LLC expands beyond one person and their spouse, it is extremely important to spell out the rules on who can own the LLC and under what terms. For example, if one member wants out of the LLC, will the other members have to buy their interest? At what price? What happens if one member dies or gets divorced? (Would you want to be in business with your partner’s kids or ex?) How will the owners handle a fundamental disagreement about the direction of the business? These are just a few of the questions and issues that an operating agreement should address.

Addressing these types of issues up-front, hopefully before there is a death, disability, divorce, or disagreement, may save both the business and the relationships between the members. While negotiating and drafting these agreements does take time and cost money, it is an investment in peace of mind and, hopefully, a way to avoid future litigation.

These same issues and concerns are present in business corporations, partnerships and even family cottage LLCs. And remember, even when the business owners are all family (or maybe especially when that is the case), addressing these issues up-front is better than losing those relationships or ending up in court

On August 4, 2016, the U.S. Treasury Department issued proposed regulations under Internal Revenue Code Section 2704. If finalized as proposed, the new regulations will eliminate many valuation discounts that currently apply to certain transfers of closely-held entities (including family-owned corporations and limited liability companies) between family members.

Under current regulations, when a family member gives another family member a portion of the family-owned entity, the value of the gift may be reduced from the full enterprise value because the recipient is usually unable to liquidate the business or transfer the interest to third parties outside the family. The amount of the reduction (valuation discount) is typically determined by a certified appraiser and often ranges from 25% to 40%. Under the proposed regulations, the same transfer between family members would be valued without applying these discounts.

The potential impact for families with closely-held businesses is dramatic. Assume that the full enterprise value (value without discounts) of a business is $5,000,000 and is owned by a widower who wants to transfer the business equally to each of his three children. With typical valuation discounts applied under current law, the adjusted valuation of the business could very well drop to $3,000,000. Assuming the father otherwise has a taxable estate (that is the value of his assets is above the current exemption amount of $5.45 million), then estate tax savings because of the valuation discounts could easily be upwards of $800,000.

As with most changes to the tax laws, whether this change is good or bad will depend on each family’s unique circumstances. Those taxpayers who have an estate under the current estate, gift and generation-skipping tax exemption amounts (typically $5.45 million without prior lifetime gifts) may benefit from the new regulations. The benefit comes from having heirs inherit assets from a deceased taxpayer with a tax basis equal to the fair market value at the time of death. So, if the taxpayer holds on to the closely-held business until death so that the children (or other heirs) inherit the asset with a higher tax basis, then the heirs may have less capital gain to pay if they later sell the business. (See the side bar article about tax basis adjustments for more information.)

For procedural reasons, the regulations cannot be finalized until December 2016 at the earliest, giving taxpayers a window of opportunity through the end of 2016 to plan under current law. While each situation is unique, if your estate may exceed your current estate tax exemption amount, then you should consult with your estate planning attorney and other tax advisors to review your planning options.

Tax Basis

Basis is a concept used to track your investment in a certain asset for tax purposes. For example, assume you purchased a share of Apple Inc. in 2006 for $11.00. Your basis in that share of stock would be $11.00. If you sold it today for $108.00, then you would have a capital gain of $97.00 (sale price minus your $11.00 basis). If you give your share of Apple Inc. stock away during your life, the recipient would also get your basis of $11.00 in the stock. If, however, you hold onto your stock until you pass away, then whoever inherits the stock from your estate will have a basis in the stock equal to the value on your date of death. So, if on the day you died the Apple Inc. stock was worth $108.00, then your heir who receives the stock would have a basis equal to $108.00 and could sell it at that price without any capital gain!