Is Your Business Protected from Business Interruption During the COVID-19 Pandemic?

Is Your Business Protected from Business Interruption During the COVID-19 Pandemic?

With the COVID-19 pandemic occurring, many states, including Wisconsin, have ordered all nonessential businesses, including restaurants and bars, to close their doors.  Unfortunately, there will be a substantial amount of revenue lost by these businesses for as long as their businesses are required to remain closed.  A significant question is whether these businesses will have any recourse under any of their business insurance policies to recoup lost revenue based upon the coronavirus and/or whether there is coverage triggered by government-mandated closures.  The answers to these questions require a detailed analysis of each individual insurance policy, as well as the circumstances surrounding the losses of each business.

Coverage for business interruption is typically an endorsement to the insured’s property insurance policy and designed to protect the insured for losses of business income it sustains as a result of the direct loss, damage, or destruction to insured property by a covered peril.  A typical clause in an insurance policy reads as follows (although there are variations to this depending on the insurance company):

“We will pay for the actual loss of business income you sustain due to the necessary suspension of your operations during the period of restoration.  The suspension must be caused by the direct physical loss, damage, or destruction to property.  The loss or damage must be caused by or result from a covered cause of loss.”

Usually, in order to recover under this policy provision, a business owner will need to demonstrate that (1) the business sustained physical damage to the insured property; (2) this damage was caused by a peril covered under the policy; (3) which resulted in quantifiable losses because of the business interruption, and (4) that these losses occurred during the time period needed to restore property that was damaged.

There are presently many lawsuits pending throughout this country in which businesses are attempting to enforce business interruption coverage under business insurance policies and to seek a determination by the courts of whether the coronavirus can be deemed to cause physical damage by infecting surfaces in the business, similar to gaseous fumes which have been found in some cases to constitute a physical loss.

In addition to determining whether the coronavirus may be deemed to be a physical loss under the business interruption policy, each insurance policy must be analyzed to determine whether any language provides coverage for business interruption due to civil authority – such as mandated closures by local, state, or the federal governments.

Each policy’s specific language and endorsements must be individually analyzed.   These provisions must also be evaluated in light of any exclusions in the policy and within the specific context of each business owner’s circumstances. Business owners financially impacted by this unprecedented pandemic should timely consult with an experienced attorney to determine whether or not there may be a valid claim under their insurance policy to pursue significant losses of revenue.  The attorneys at Anderson O’Brien are here to assist you with an insurance coverage analysis or other legal issues that may arise out of any business losses you sustain during these difficult times.

 

Best Practices for Using Volunteers in Your Wisconsin Non-Profit.

Best Practices for Using Volunteers in Your Wisconsin Non-Profit.

The great majority of work performed by non-profits comes from unpaid volunteers. While volunteers can be vital to helping a non-profit reach its goals, their presence raises certain risks that leaders of non-profit organizations should be aware of to craft effective policies for their recruitment, management and retention.

The typical non-profit organization in Wisconsin is simultaneously subject to two sets of laws. The entity is organized under state law, specifically Chapter 181 of the Wisconsin Statutes, titled “Nonstock Corporations.” However, an organization’s tax-free status is controlled by federal law, specifically Section 501(c)(3) of the U.S. Internal Revenue Code, which generally requires the organization be operated for the sole purpose of pursuing one of several listed causes recognized as deserving tax-free treatment. The many requirements of these laws are beyond the scope of this article, but they affect certain aspects of volunteer management practices.

Recruitment:

Before you can manage your volunteers, you must recruit them. Consider how potential volunteers are screened and appropriate policies are put in place. A bad fit can be more trouble than they are worth, and someone with bad intent or ulterior motives can be disastrous both to the organization and to the cause it is trying to help. Outside of the damage an ill-intended individual can cause directly, bad press from being associated with that person can do lasting damage to an organization’s reputation.

The screening process can be as simple as an application form and/or interview asking relevant questions. A more thorough screening may also include background checks. The extent of the screening process should be commensurate to the level of trust that will be placed in that person. Volunteers entrusted with responsibility over expensive goods which can be stolen or vulnerable people who can be abused should be screened with extra caution. These concerns must be balanced with making volunteering as simple and easy as possible, so volunteers do not lose interest when faced with a daunting application process.

During recruitment, take steps to ensure no improper biases or discrimination are applied to volunteer selection. Discrimination against protected classes is generally illegal, even for non-profits. Among the classes protected by anti-discrimination laws are: age, sex, religion, national origin, race, disability or genetic status. Many of these laws are written with the employment context in mind, but there is legal precedent for their application to unpaid volunteers in certain circumstances. Although the law is unclear in many cases, the safest route is to assume anti-discrimination laws will apply. Some types of organizations have limited exceptions to these rules. For example, religious organizations have a narrow window allowing discrimination on the basis of religion. Discrimination laws are complex and you should consult with an attorney if you believe a decision or practice could potentially expose the non-profit to legal action. Even if a form of discrimination is technically allowed under current law, an organization known to discriminate against certain groups may lose moral credibility, which can translate to reduced donations. Additionally, the non-profit risks losing out on federal funding or contracts.

Another concern with incoming volunteers is their classification within the organization itself. Non-profits in Wisconsin can either have members or not have members. If you are unsure whether a non-profit has members, the Articles of Incorporation filed with the State of Wisconsin will indicate the classification. If an organization has members, they may have voting and other rights to control the organization. If the non-profit is a member organization, be careful to be clear who is a member with these rights, and who is a volunteer.

Training and Supervision:

Once a non-profit has recruited volunteers, they must be trained and supervised to perform their duties. A volunteer orientation process promotes consistent training among volunteers and can ensure vital information is passed to everyone working on behalf of the organization. Key policies and procedures, as well as a mechanism for volunteers to get answers to any questions that may arise during the course of their duties, should be implemented and addressed. While certain training procedures should be uniform across all volunteers, job specific training should also be given based on the task the volunteer will be performing. Job duties may change over time, so updates and refresher training will likely be necessary, even for frequent volunteers.

In addition to initial training, a volunteer handbook can serve as a reference for important procedures and rules for volunteers. Detailed handbooks can also help protect the organization from liability should a volunteer do something against the organization’s policy. Some things a volunteer handbook should include are: non-discrimination and non-harassment policies, confidentiality rules, policies and permission statements for information and images of volunteers in promotional materials, policies for working with certain vulnerable groups, attendance, scheduling, conduct expectations and emergency procedures. This list is non-exhaustive and most non-profits will have unique policies to address their specific functions and organizational structure. It is important the handbook reflect current practices for the non-profit. Thus, it should be reviewed and updated regularly. Changes should be identified to existing volunteers so they are aware of the new expectations and they should be provided with the new handbook.

As discussed in the above “Recruitment” section, a non-profit should exercise care to avoid discrimination against or by volunteers. Monitor both supervisors and other volunteers for signs of discrimination or harassment. Harassment can include continuous jokes or jeers directed at a volunteer’s expense, or otherwise creating a hostile environment for them to perform their volunteer duties. Outside of legal concerns, not allowing such behavior can help keep volunteers eager to return and be productive in their duties.

Liability Protection:

When a volunteer makes a mistake, becomes injured, or otherwise takes action which gives rise to a legal claim, there are two major sources of protection for the organization and the volunteers themselves: state law and insurance.

In Wisconsin, a volunteer who provides services to a non-profit has limited liability under state statutes for damages arising from their acts as a volunteer, subject to certain exceptions including, but not limited to, violations of criminal law, willful misconduct if they are also an employee of the non-profit, or if the act was in their capacity as an officer or director of the organization.

Given the long list of exceptions, it is safest to procure insurance. Insurance also can help pay for the expenses of a volunteer who is injured while performing their volunteer duties. Many organizations purchase volunteer liability coverage to protect themselves and their volunteers from the costs of personal injury or property damages stemming from their volunteer duties. Auto insurance should also be considered if the volunteers will either be driving or riding in a vehicle as part of their volunteer duties. Wisconsin has minimum insurance requirements for all drivers, but these amounts are not nearly enough to cover expenses incurred in all but minor accidents.

Incentives:

By definition, volunteers should not expect payment in return for their services. Regardless, many non-profits desire to reward their loyal volunteers with some token of appreciation for their hard work. This can create issues with accidently classifying the volunteers as “employees,” or with the tax-exemption of the organization under federal law.

The tax-free status of an organization can be revoked if the organization is providing a “private” rather an “public” benefit. This can happen if monetary or other valuable rewards are given to volunteers. Likewise, the classification of a volunteer versus an employee is in part based on whether they receive anything in exchange for their work. Non-cash benefits to volunteers are allowed to a point, but beyond this hard to define threshold, problems can quickly accumulate. One thing is clear, avoid giving cash or gift cards to volunteers if the non-profit is looking for ways to reward its volunteers.

The laws regarding volunteering and Wisconsin non-profits can be complex and you should consult with an attorney if have questions about recruitment, training and supervision, liability protection and incentives for your non-profit.

 

A Business Check-up Checklist

A Business Check-up Checklist

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.

 

Statutory Requirements for Record Books

Statutory Requirements for Record Books

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.

 

Buy-Sell Agreements: Working for the Best and Planning for the Worst

Buy-Sell Agreements: Working for the Best and Planning for the Worst

However optimistic you are about the future of your business, the reality is at some point your business will either end or change hands. A thorough business plan takes this into consideration. The best-case scenario is after many years of success, your business partners or a successor will fund a comfortable retirement for you by purchasing your interest in the business. The worst-case scenarios generally involve death, disability, divorce, disagreement or bankruptcy of you or your business partners. From the best-case to the worst, both you and your business may benefit from having a Buy-Sell Agreement in place.

Buy-Sell Agreements are sometimes called “business pre-nups” because they serve a similar function to the agreements soon-to-be married couples enter into which direct how their assets would be divided upon their death or divorce. Buy-Sell Agreements are binding contracts which spell out who business owners can sell their interests to, on what terms, and how the price will be determined. When the business is going well, and all the owners are getting along, it is much easier to agree on equitable terms than when tensions are high at the time of a buy-out and parties have little incentive to negotiate fairly. By discussing issues in advance and setting the ground rules for what happens upon the occurrence of certain events, business owners can avoid future arguments and limit the potential for expensive litigation down the road.

Starting with the best-case scenario, a voluntary retirement from a successful business, Buy-Sell Agreements can help define an exit strategy and ownership succession. The value of a business is not always clear and can be calculated in different ways with a wide range of potential results. The Agreement can state which valuation method will be used for the exiting owner’s share of the Company. The Agreement can also help define the structure of the exit to minimize taxes or allow them to be paid over time. For business owners hoping to fund a large part of their retirement using these proceeds, not knowing their buy-out price or tax burdens in advance can seriously jeopardize their ability to plan for retirement. These Agreements also are helpful in getting owners to think about who their buyers may be. As the Baby Boomer generation is entering retirement age, there will be a lot of small business owners looking to sell, and the market for willing and able buyers may be strained. If a buyer must be found unexpectedly or on short notice, the purchase price will likely be much lower than the true value.

As great as you and your business partners may get along now, it is possible at some point business or personal disagreement will rise to the level where one of you will be forced to leave the business. Business owners may also unexpectedly exit the business for reasons like a desire to focus on their families, illness of themselves or a loved one, or moving out of the area. In these situations, you and the exiting owner may have different opinions about what fair buy-out prices and procedures would be. In the absence of an Agreement, these disagreements can escalate quickly and may result in litigation. By having the Agreement in place, the emotional impact of dispute and the tendency for people to believe they are being treated unfairly is checked by being able to look to an agreement everyone consented to beforehand for how the exit will take place.

Even if you and your business partners are lucky enough to always agree, events outside of your control, such as an owner’s death, divorce, disability or bankruptcy, can lead to uncertainty as to who ends up with control of the business. When an owner dies, his or her share passes to their heirs. This often results in the spouse or children of a deceased business partner either wanting to participate in the business or, more commonly, wanting their proportionate share of the business earnings without having to work for them. Divorce can lead to a similar situation, and a court may order the business interest divided between divorcing spouses. If a business owner becomes disabled and unable to contribute to the business, their interest may become a burden on the other owners. Buy-Sell Agreements also often contain provisions for what happens if an owner becomes involved in criminal activity or becomes mentally unstable. If a business partner goes bankrupt, potentially for reasons having nothing to do with your business, creditors may be able to pursue their business interest to pay off what they are owed. Each of these situations result in either an unwanted business partner or an unexpected party demanding the value of the interest they now possess. A Buy-Sell Agreement can give the remaining owners rights to force out owners who have become a liability or purchase interests at a determined price to prevent heirs, ex-spouses, or creditors from gaining control. These goals are often accomplished by terms which give the remaining owners the first option to purchase any interest transferred from an owner for a price determined in the agreement. The source of funding the buy-out can vary, but is often a life insurance policy, which ensures available funds to buy the interest from the owner’s heirs.

Whatever the future holds for you and your business, a Buy-Sell Agreement can help make sure you are prepared for it. If your business already has a Buy-Sell Agreement in place, it may be time to review the document to make sure you understand it and that it still meets the needs of your business. An Agreement drafted for a start-up may no longer suit a business which has grown or added new business partners.

 

LLC Operating Agreement – Do I Really Need One?

LLC Operating Agreement – Do I Really Need One?

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

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