When Your LLC Designation is Not Enough

When Your LLC Designation is Not Enough

A limited liability entity, such as a LLC or Corporation, is an important part of protecting your individual assets from liabilities arising from your business. By operating the business within the limited liability entity, lawsuits stemming from the business – such as contractual claims or damages from personal injuries – generally will be restricted to pursuing claims against the business itself and the assets owned by the business. Your personal assets, held outside the business entity, are typically left untouched. You may need to liquidate the assets held in the business to pay the judgement, or even have the business declare bankruptcy. Obviously paying any claim, even if limited to company assets is not ideal, but the losses at least stop there and you personally will be spared from needing to pay.

This legal separation between you and your business for purposes of liability is known as the “corporate veil.” Over the years, courts have developed rules around the limits and exceptions to the protection of the corporate veil, sometimes to remedy an otherwise unequitable situation and sometimes to prevent individuals who sought to take advantage of the rule. When courts decide to override the limited liability status of an entity and allow a claimant to pursue the owners individually, it is known as “piercing” the corporate veil. This can be particularly disastrous to an owner of multiple businesses, as once a debt has reached them personally, the assets of their other entities are also at risk through a “reverse pierce.” The individual cases where judges have ruled for a piercing of the corporate veil have developed into a few broad categories which now form the precedent judges consider when deciding whether to uphold or pierce the veil in any given case. If you wish to rely on the corporate veil to protect you in the event of a large lawsuit, you should be aware of the triggers for veil piercing listed below and work to ensure that business operations are conducted in a way that will not trigger them.

  1. Fraud. Unsurprisingly, courts do not look kindly upon parties who actively seek to defraud others. Fraud might be the source of the lawsuit itself or committed in an effort to avoid the consequences of the lawsuit. Both may cause a court to consider piercing the corporate veil to allow the victim of the fraud to better recover their damages. This exception is often applied after “fraudulent conveyances” are made to remove assets from the entity after a legal claim is known of but before the claimant can secure payment. For example, transferring all of the cash in the business account to the owner’s personal account in the middle of a lawsuit and then claiming the business lacks the funds needed to pay the judgement. Here, an owner’s desire to save the money in the business account from the lawsuit may ultimately backfire and lead to all of their assets being subject to the claim.
  2. Lack of Formality of Entity Operations. Maintaining an entity separate from you as owner requires certain formal processes and bookkeeping requirements. Entities can be created fairly simply by filing with the state department of financial institutions, but it is important to fully flesh out the organization with proper agreements, resolutions, etc. Failure to properly keep up these formalities may give grounds for piercing the corporate veil if the record keeping is sufficiently lacking or may tip the scale when paired with other considerations. One of the reasons LLCs are such a popular choice of entity type is that they require substantially less formality than corporations. Bear in mind, even the relatively simple requirements of LLCs still require some formalities to properly form and maintain.
  3. Undisclosed Corporate Principle. In order to effectively claim your limited liability entity is the appropriate party to sue and not you personally, you should be able to show that the plaintiff knew or should have known they were dealing with your limited liability business – not you personally – for the acts that gave rise to the lawsuit. In essence, it is unfair to prevent a plaintiff from suing the owner of a business personally if they thought they were dealing with that person personally. Even if the plaintiff knew they were dealing with a company, if they were not aware that company was a limited liability entity (for example if the contract uses most of the company name but omits the “LLC” or “Inc.”), they could still claim this principle should apply. This is why it is important to properly identify the company’s full name on all signage, advertising and, especially, in contracts. While you, as owner, will be signing your name to most contracts, it should be in your capacity as a representative of the business, not as the party to who the contract binds.
  4. Undercapitalization. There is substantial caselaw of business owners attempting to take advantage of limited liability entities by keeping virtually no assets in the name of the business, so that when they are sued, there is nothing to take. Here again, getting too greedy in protecting assets can lead to jeopardizing additional assets. While keeping company assets relatively trimmed is a good practice, taking this too far can lead to a piercing of the corporate veil. As a general rule, the company should own at least sufficient capital and assets to be able to carry on its regular business. For example, in addition to reasonable operating funds in a business account, a real estate rental business should typically own the real estate it rents, an auto repair business should own the tools needed to complete the repairs. If ownership of physical assets is unclear, bills of sale should be prepared to formally transfer the assets into the name of the company.
  5. Tortious or Professional Misconduct. A limited liability entity will not protect you as owner from personal liability for your personal improper or professionally negligent behavior. Incidents stemming from road rage while driving for business purposes or stealing a client’s property while in their home making repairs may well lead to a court denying you the protections of the limited liability entity as it was really you who did the act the lawsuit is about, not your company. Additionally, if you are a member of a profession that is held personally responsible for malpractice, using a limited liability entity will not prevent malpractice suits against you. For example, if a patient slips and falls in a doctor’s waiting room operated as a LLC, the corporate veil will likely prevent the patient from suing the doctor personally. If however the doctor commits malpractice while providing the patient medical services, the LLC should not hinder the patient’s medical malpractice claim against the doctor.
  6. Lack of Separation Between Owner and Entity. For a court to treat you and your limited liability as separate, you should be able to demonstrate that you treated you and your entity as separate. This includes keeping separate bank accounts and using your personal funds for personal purposes and the company funds for company purposes. It also means keeping a clear record of what is owned by you and the company and respecting that distinction. If a lawsuit secures a judgement against your entity, these steps will be important to identify what belongs to you and what belongs to the company. If that distinction cannot be made, a court may elect to look past it and pierce the veil.
  7. Contractual Agreements to Guarantee Debts of the Company. Banks, landlords and suppliers are aware that limited liability entities may result in their loans going unpaid or contracts unfulfilled and so, it is not unusual for contracts provided by these parties to include a clause having you, as owner, guarantee the debt of the limited liability entity. Most business loans and commercial leases contain such clauses, especially if your limited liability entity is small or has an unproven track record of paying its debts. To risk stating the obvious, if you as owner contractually agree to be personally responsible for a debt, you cannot use your limited liability entity as a shield to block such obligation. Keep track of what debts you have guaranteed and what debts you have not – if your business becomes insolvent, having such information on hand can prove important to properly allocate the remaining funds to creditors. If you have a business partner, you should also ensure the personal guarantees on the debts are spread over the owners equitably to avoid a situation where the business fails, they walk away free, and you are held liable for numerous company debts.

    If you have any questions about your LLC, please contact one of our experienced Business Attorneys.

Shareholder Rights With Corporations

Shareholder Rights With Corporations

As part of my business litigation practice, I regularly represent corporations and shareholders in corporations. On the shareholder side, parties often seek to learn more about what is going on with the corporation they partially own.

Wisconsin law gives shareholders in corporations certain inspection rights depending on the extent or length of their ownership interest in the corporation. Unless you satisfy certain criteria as a shareholder, your inspection rights are generally limited to viewing the corporation’s bylaws and a list of shareholders entitled to notice of a shareholders’ meeting.

If, however, you have owned stock for at least six months or own at least five percent of outstanding shares, your inspection rights as a shareholder are broader. In that case, you may be entitled to access the following:

  1. Excerpts from any minutes or records that the corporation is required to keep as permanent records. These include: (a) Minutes of meetings of its shareholders and board of directors. (b) Records of actions taken by the shareholders or board of directors without a meeting. (c) 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.
  2. Accounting records of the corporation.
  3. The record of shareholders.

While this information could give you a wealth of insight into the workings of a corporation you hold ownership in, you must have a reason to request the information. Specifically, to access the more detailed information described above, you are required to make a written request to the corporation stating a good faith purpose for your inquiry and the records requested must be connected to that purpose.

For more information on these rights please consult the Wisconsin State Legislature.

If you have questions about shareholder rights, please reach out to one of our experienced Business Attorneys.

Wisconsin’s New LLC Act

Wisconsin’s New LLC Act

The Wisconsin Legislature recently passed a new law governing limited liability companies in Wisconsin (the “Act”). The Act is primarily based on the most recent version of the Revised Uniform Limited Liability Company Act, albeit with certain Wisconsin specific modifications. The Act applies to all LLCs that are formed on or after January 1, 2023. Additionally, as of January 1, 2023, the Act will also apply to pre-existing LLCs unless they filed an election to be governed by the existing law by December 31, 2022. The following is a summary of some of the key differences between the previous law and the Act.

The Act has redefined the term “Operating Agreement” to include any agreement that is oral, implied, written, or any combination thereof that is between all members of the LLC, including a sole member, and pertains to the internal affairs of the company. The legislature also added a new definition for a “Written Operating Agreement” and the Act distinguishes what things may only be done via a written operating agreement.

Another difference is that the Act has altered the requirements for filing the Articles of Organization. The Act will now allow organizers to file their own form of the Articles of Organization with terms addressing more matters than previously allowed to be addressed. Moreover, the Articles of Organization will no longer be required to state the type of management style of the LLC. This will allow more flexibility for the LLCs to change their management style without having to amend their Articles of Organization.

Additionally, the Act has eliminated the idea of apparent authority and has clearly established that members of an LLC do not have authority as a result of simply being a member. In order to clarify the authority of a certain position, a certain individual, or to clarify certain limitations of authority for a position or person, the LLC may file a Statement of Authority, which will be effective for five years. Because this document is only effective for five years, LLCs will need to be cognizant of renewing, amending, and or cancelling the Statement of Authority as changes are made within the company.

Some other differences are that non-economic members will now be allowed under the Act. This means that an individual may become a member without being required to make a contribution or acquire a transferable interest. Furthermore, the Act alters how LLCs that are taxed as partnerships are to handle distributions and voting power. In addition to the aforementioned changes, the Act goes on to address and modify various other items, such as wrongful dissociation, priority of distributions of assets in the dissolution of the LLC, mergers, interest exchanges, conversions, and domestication.

While there are some important differences between existing law and the new Act, most of these changes will not materially affect existing LLCs that have a well drafted written Operating Agreement. That being said, we still recommend that all LLC owners seek the advice of a business law attorney to determine whether the Act will impact your LLC and to periodically review your Operating Agreement to ensure it is still appropriate for your situation.

If you have questions about the new Act or how it may affect your LLC, do not hesitate to reach out to one of our experienced business law attorneys.

 

Updating a Business Name in Wisconsin

Updating a Business Name in Wisconsin

Maybe your business has changed or maybe your tastes have, but the good news is that your business is not stuck with the first name you chose. The steps below describe how to legally change the name of a Wisconsin corporation. When changing your business’s name, it is always a good idea to meet with an attorney who can answer your questions and make sure you have taken all the right steps.

  1. Choose a New Name. After you have a few ideas for your new business name, you will need to do some research to make sure the name you want is available. A basic internet search can be conducted to see what similarly named businesses already exist. The United States Patent and Trademark Office’s trademark database should also be searched. The new name should avoid creating confusion with another live trademark and should not be too similar to an existing trademark that is used for products or services that are similar to your own. Though not required, it is also prudent to check the availability of related domain names for a business website if your business uses a website.

According to Wisconsin Statues §180.0401, 181.0401, 183.0112 (2019-20) all business names need to be distinguishable from existing Wisconsin business names. You can check to see if your name is taken by searching the Wisconsin Department of Financial Institutions (DFI) Corporate Records. Additionally, your new name must contain one of the following words or similar words that accurately describes your business: corporation, incorporated, company, or limited. Alternatively, you may use the abbreviation of one of the aforementioned words like, “LLC,” “Inc.,” or “Co.”

 

  1. Change Your Name with the Wisconsin DFI. Legally change your name by filing Articles of Amendment with the Wisconsin DFI. The DFI has a form available to file your name change consistent with your business’s organizing documents. Depending on a business’s operating agreement or bylaws, it may be necessary for shareholders, members, directors, or managers to pass resolutions consenting to the change.

Note: It should be noted that it is also possible for a business to use another name without legally changing the name of the business through the use of a trade name, sometimes known as a “DBA” or “doing business as …” name. Using a new trade name can change the branding of a business but does not change the legal name of a business. In Wisconsin, you can register your trade name with the DFI to protect your trademark. The name will be protected for 10 years and can be renewed. Much like with a legal name change, it is necessary to search the database to ensure your intended name not already in use by others.

 

  1. Notify the IRS. If a corporation is filing a return for the current year, there is a box on the return to notify the IRS of a name change. If a corporation is changing its name after filing its return, a notice can be sent to the IRS separately. Usually, a business that has only changed its name will not need a new EIN. The IRS provides information on EINs after name changes in this publication.

 

  1. Communicate With Your Bank. Your bank may allow for the name on the business’s account to change or may require opening a new account.

 

  1. Notify the Wisconsin Department of Revenue (DOR). Whether a business changes its legal name or adopts a DBA, the DOR should be notified. If adopting a DBA, the DOR may be notified by calling or emailing their office and providing the current name of the business, the EIN of the business, the new name of the business, and the date the name is to take effect. If a business has changed its legal name, the above information should be faxed, emailed, or mailed to the DOR along with a copy of the Articles of Amendment that were filed with the DFI in Step 2. Any other business licenses and permits should also be updated.

 

  1. Update Your Branding. Customers and the business community need to know the name has changed. Update websites, signs, and branded materials to be consistent with the new name.

 

If you are ready to change your business name, please make an appointment with one of our experienced business attorneys. They can guide you through the process.

WI Supreme Court Rules Against Bars and Restaurants on COVID-19 Pandemic Financial Losses

WI Supreme Court Rules Against Bars and Restaurants on COVID-19 Pandemic Financial Losses

This article is a follow up to one I wrote on August 10, 2020 relating to potential insurance coverage for business losses due to the government shutdowns and restrictions for in-person dining during the COVID-19 pandemic. The first lawsuit on this issue was filed nearly two years ago.

One case finally made its way to the Wisconsin Supreme Court, and on June 1, 2022, the Court unanimously held that Society Insurance Company did not have to provide coverage for business interruption losses claimed by restaurants and bars due to government shutdowns and restrictions imposed on in-person dining. This case is Colectivo Coffee Roasters, Inc. v. Society Insurance, 2021AP463 (June 1, 2022).

In this lawsuit, the plaintiff and other bars and restaurants experienced substantial losses as a result of the COVID-19 pandemic and related government restrictions on in-person dining. The Supreme Court addressed the specific issue of whether those losses are covered by a property insurance policy issued by Society Insurance. Specifically, the questions are: (1) Whether a bar or restaurant’s inability to use its dining space for in-person dining because of the pandemic and related government restrictions constitutes a direct physical loss of or damage to its property under Society’s policy; and (2) Whether the presence of COVID-19 on a bar or restaurant’s property caused the bar or restaurant to suspend its operations, thereby entitling it to coverage under the policy’s contamination provision. The Supreme Court concluded that the answer to both questions is no, and ruled against the bars and restaurants.

The Wisconsin Supreme Court followed the majority of courts nationwide in holding that the presence of COVID-19 does not constitute a physical loss of or damage to property because it does not “alter the appearance, shape, color, structure, or other material dimensions of the property.”  The Court held that although the restaurants could not use their dining room for in-person dining for a period of time, “the dining room was still there, unharmed and it was not physically lost or damaged. Without such a harm, the policy’s business income and extra expense provisions do not apply.”

With respect to the civil authority provisions of the insurance policy, which the restaurant argued should apply based upon the government’s imposed shutdown, the Court ruled that the restaurant did not identify any physical loss or damage to its property or surrounding property such that the business income or extra expense coverage should apply.

Finally, the Court affirmed the ruling of no coverage under the contamination provision of the policy for three reasons. (1) The restaurant did not suspend its operations due to the presence of COVID-19, but did so based upon the Governor’s orders. (2) The Governor’s orders did not prohibit access to the restaurant’s property – they restricted how the property could be used. (3) The Governor’s orders did not prohibit the restaurant from producing its products – they prevented it only from serving its products for in-person dining.

This ruling by the Wisconsin Supreme Court marks a trend among state Supreme Courts in finding no business interruption coverage for alleged COVID-19 related losses, and also follows the well-established nationwide trend in the federal courts denying insurance coverage for these claims.

 

What is a Real Estate 1031 Excange?

What is a Real Estate 1031 Excange?

In the field of real estate, a commonly used term is a 1031 Exchange. But what exactly is that? A 1031 Exchange is aptly named after Section 1031 of the U.S. Internal Revenue Code, which permits the deferral of capital gains tax in certain real estate transactions. Capital gains taxes are owed on the profits from the sale of most investments if they are held for at least one year. Due to the possibility of deferring the tax, there are many requirements in place that must be followed in order to receive the benefit of deferring the capital gains tax.

The first requirements is that a 1031 Exchange can only be used in certain real estate transactions. A 1031 Exchange is only applicable to the sale of real property that is held for productive use in a trade, business or for investment. Furthermore, the replacement property that is purchased also has to be held for productive use in a trade, business or for investment. Therefore, a 1031 Exchange would not be allowed in real estate transactions with property that is used for personal reasons, such as your residence.

The second requirement of a 1031 Exchange is that a qualified intermediary is required to facilitate the transaction by handling the funds. As part of the regulations, you (the owner) are unable to receive or control the funds from the sale of the property in a 1031 Exchange. A qualified intermediary can be a person or a company, however, they cannot be a disqualified person as defined in the Treasury Regulations. The qualified intermediary will take possession of the funds from the sale of your property and hold those funds until they can be transferred to the seller of the replacement property you are purchasing.

The next requirement is that there are certain time periods that must be met to complete the 1031 Exchange. Firstly, you have 45 days from the sale of the property to identify a replacement property. Secondly, you need to conclude the 1031 exchange within 180 days. If you miss any of these deadlines, then the 1031 Exchange will not be complete and you will not receive the tax benefit of deferring the capital gains tax.

Although these are three important requirements of a 1031 Exchange there are still other requirements and technicalities involved with completing a 1031 Exchange. For that reason, if you are considering utilizing a 1031 Exchange it will be helpful to seek the advice of a real estate attorney before selling your property. A real estate attorney will be able to help you navigate through the requirements and technicalities of a 1031 Exchange so that you may benefit from the deferral of capital gains tax. If you have any questions about completing a 1031 Exchange, do not hesitate to reach out to one of our experienced real estate attorneys.

Pin It on Pinterest