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 Copies of all Operating Agreements, all amendments to Operating Agreements and any Operating Agreements no longer in effect.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

Changes to Valuation Regulations Will Impact Transfers of Family Businesses

Changes to Valuation Regulations Will Impact Transfers of Family Businesses

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!

Commercial Listing Contracts:  Risky Business

Commercial Listing Contracts: Risky Business

When someone decides to sell commercial real estate, he or she will often hire a licensed real estate broker to assist in the process. A licensed real estate broker will require that the property owner sign the form WB-5 Commercial Listing Contract – Exclusive Right to Sell (the “Listing Contract”). This is a document approved for use by the Wisconsin Department of Regulation and Licensing as the primary contract between the broker and the property owner with respect to the listing and eventual sale of the property and the payment of the broker’s commission.

The Listing Contract is a standardized form with several blanks that are filled in by the broker prior to signing. Due to the standardized nature of the form, most people do not seek legal counsel prior to entering into the Listing Contract. However, the Listing Contract may contain terms that are unfavorable to the seller, particularly with respect to when the seller is required to pay the broker’s commission.

The standard Listing Contract has many provisions that you would expect with respect to when the broker’s commission is earned. For example, the commission is due when the property is sold, exchanged, or an option to purchase the property is granted and subsequently exercised. Unfortunately, the Listing Contract also contains what might be some unexpected terms regarding when the seller must pay the broker’s commission. For example, the Listing Contract also provides that the commission becomes due in the event: (i) a transfer occurs which causes an effective change in ownership or control of all or any part of the property; or (ii) a buyer is procured for the property at no less than the price and terms described in the Listing Contract even if seller does not accept the offer or the transaction does not close.

Based on the above language, if the seller dies during the term of the Listing Contract and the seller’s ownership interest in the property is transferred to the seller’s heirs, the broker’s commission is due under the Listing Contract. Likewise, if the seller accepts an offer to purchase the property and the potential buyer is unable to obtain financing and the transaction never closes, the broker’s commission is still due. If you think a broker would never attempt to collect a commission under these circumstances, think again.

In Ash Park, LLC v. Alexander & Bishop, Ltd., 363 Wis. 2d 699 (2015), the Wisconsin Supreme Court recently enforced the terms of a Listing Contract against the property owner and required the payment of the broker’s commission in a similar situation. Ash Park involved a seller that contracted with a broker to sell vacant land. An offer to purchase was signed, but the buyer was unable to obtain financing and the transaction never closed through no fault of the seller. The broker subsequently sued the property owner for payment of the broker’s commission even though the transaction never closed. The Court determined that there was an enforceable contract and the commission was due and payable to the broker.

The result in Ash Park should be a lesson to property owners who are considering hiring a licensed real estate broker to sell their property. This is just one example of potential unintended consequences for a seller when the terms of the Listing Contract are not clearly understood and negotiated. Potential sellers should consider having legal counsel review any proposed Listing Contract for the sale of their property prior to entering into this type of agreement.

Landlord/Tenant Law has Significant Changes

Landlord/Tenant Law has Significant Changes

A new law passed earlier this year made several changes to Chapter 704 of the Wisconsin Statutes that impact the rights of residential landlords and tenants. The following is a brief summary of some of the most significant changes:

1. Disposing of Tenant’s Personal Property. Absent a written agreement to the contrary, a landlord may now presume that any property left behind by the tenant has been abandoned and may dispose of such property as the landlord deems appropriate (including by private or public sale). For this provision to apply, the landlord must provide the tenant with written notice prior executing the lease that landlord does not intend to store the tenant’s property.

2. Disclosures by Landlords. Landlords are now required to disclose to prospective tenants any building or housing code violations that the landlord is aware of that affect the lease space, or are a significant threat to health or safety and have not been corrected. This disclosure must be made prior to the execution of a lease or acceptance of any money by landlord.

3. Check-In Procedures. For all new tenants (not renewals) landlords must provide a standardized check-in sheet to the tenant with an itemized description of the condition of the premises at the time of check-in. The tenant has seven days to complete the check-in sheet and return it to the landlord.

4. Damages for Failure to Vacate. If a tenant remains in possession of the premises beyond the end of the lease term without the landlord’s consent, then the landlord is entitled to damages of at least twice the rental value for the space apportioned on a daily basis.

5. Security Deposit Requirements. If a landlord wants to have the ability to withhold any portion of the tenant’s security deposit for any reason other than those specifically stated in the statute, then those additional items must be contained in a separate document titled “NONSTANDARD RENTAL PROVISIONS” and signed by the tenant. The landlord must also discuss each of the additional items with the tenant.

6. Potential Remedies for Tenants. In what might be the most significant change, the new law also provides that a violation of Chapter 704 of Wisconsin Statutes “may also constitute unfair methods of competition or unfair trade practices under Wis. Stat. § 100.20. The effect of this language is to allow the tenant to seek the remedies available under Wis. Stat. § 100.20, which include double damages and the recovery of attorneys’ fees.

Landlords should review their form residential leases to ensure that they are in compliance with the new law. In addition, some aspects of the new law also apply to commercial landlords and tenants. The real estate attorneys at Anderson O’Brien can answer any questions you may have about the new law and how it may apply to your lease agreement.

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