6 posts tagged “corporate law”
Hi All,
Six days and counting till the CorporateVeil Pro system test flight!!! (starts Monday July 7)
Tim Birch asked a good question on my last post about what I meant by "border-line" activities and whether I was referring to adult sites, online gambling, etc? My answer:
"Border-line criminal" would be things like borrowing money in the corporations name that you know you probably can't pay back, getting it into your personal name, and then having the corporation go bankrupt and trying to keep the borrowed money, or taking on a contract that you almost certainly can't fulfill on and causing great harm to another person or company...
I am not talking specifically about the actual type of business, as long as an adult site is run within the legal limits, then it can be protected. I think on-line gambling is pretty illegal in the US at present, and I don't know what a "begging site" is. I am talking mainly about the types of activities that the owner might be engaged in to try and defraud someone."
Here is a bit more explanation...
As an owner, incorporation gives your personal assets a layer of protection (often called “the corporate veil”), but this is not 100% iron-clad protection. This is also referred to as "limited liability" in Legalese.
In some circumstances, courts will rule that a corporation doesn't really exist and that its owners should not be shielded from personal liability. This is called “piercing the corporate veil”. Your personal assets are still at risk if you:
□ personally injure someone; (you need Liability insurance*-see note below)
□ personally guarantee a bank loan or other debt which is not repaid;
□ fail to deposit payroll taxes withheld from your employees’ paychecks; (the IRS has no sense of humor)
□ do anything intentionally fraudulent or illegal that causes harm; or
□ fail to follow routine “corporate formalities”.
This last item is the focus of my step-by-step system called CorporateVeil ProTM. This is the one that traps many totally honest business people and can cause them to lose their asset protection. Their major sin is that they are too busy and pre-occupied with their business, and they never learned the routine tasks of operating a corporation “by the rules”.
Although it might seem opposite, small businesses are at the most risk of engaging in these behaviors that can cause the veil to be pierced. When the owner(s) are the same people that are acting as the day-to-day executive(s), or where close relationships exist between the owners, it becomes easier to start acting informally and this is when the line can be crossed that puts you in danger of losing your personal asset protection,
The three major corporate formalities that are often ignored by small business owners:
□ co-mingling of corporate and personal assets and records;
□ signing corporate documents incorrectly;
□ failure to maintain proper corporate documentation.
These often ignored items are addressed in my system, and I will walk you step-by-step through the requirements as I understand them (you should of course consult an attorney as to your specific situation, and laws may vary from state to state that I am not aware of. Do not consider the information I am giving you to be legal advice).
*Note on Liability Insurance
Incorporating and observing the corporate formalities helps protect your personal assets from business events gone wrong. But, your corporation is still at risk from business lawsuits and claims. A solid business liability insurance policy guards your corporate assets and can protect you against many of the risks of doing business. For example, if you personally injure someone while doing business for the corporation, say by causing a car accident, liability insurance will usually kick in and you won’t have to use corporate or personal assets. You also need to have adequate personal liability insurance as another level of protection in most cases.
You should talk to a Business Insurance Agent or better yet an unbiased Business Insurance consultant to ensure that you have the proper coverage for your business and that there are no gaps. I use Sonya Lenzo at www.sonyamlenzo.com to demystify my business insurance and I highly recommend her services. There will be special bonus coming your way as part of the CorporateVeil Pro program specifically dealing with business insurance!
That's all for now...
Rob Northrup
Is Your Corporation Protecting You?
PS: Tomorrow I will be sending everyone that I know of who is in the Test Flight a short questionaire and asking you to respond. Please be looking for it, I will also post on this blog with an explanation of the simple questions and my reasons for asking. Thanks in advance, the secret batcave is getting a fresh coat of paint right now and is almost ready for us to move in on Monday!
Hi all,
I am hard at work preparing for the Test Flight of CorporateVeil Pro on July 7th. I will be sending out a very short survey to the group of you that are going to participate to let me know a little about your situations. The content will be delivered by email and on a special "secret batcave" website I am setting up for the test flight!
I did a great interview last night I am calling Corporate Basics 101 that was done with a fantastic attorney who is very easy to understand, and who wants to help small coporation owners just like I do, to get their records in order and done right so their family's and lifestyles are protected. I am looking forward to having you all in the program...
You'll receive details and your secret decoder rings in about ten days! If you have specific questions that you want to have answered, please senf them to Rob@corporatebasecamp.com and I'll do my best.
Rob
Is Your Corporation Protecting You?
Hi all,
In one of my earlier posts, "Why did you start your corporation?", I ended with the comment
...in order to get the personal liability protection from your corporation there are VERY SPECIFIC THINGS that you need to be doing in order to maintain this "corporate veil" of protection?"
As a reminder, see the disclaimer at the bottom of this post. Now, to answer the question...
Corporations call the people who own the business "shareholders" or "owners". The shareholders elect "directors" who control the strategic direction of the corporation, and the directors also hire the "officers" who run the day-to-day business. The President/CEO, Vice President, Secretary and Treasurer are the typical officers.
When you start your corporation, there are some papers which are filed with the state during the Incorporation and some tax forms to get you ID numbers with the fed and state tax authorities. These are called "external records" since you send them out if the corporation, and every year you file an annual renewal with your state, as well as all the required tax forms and deposits.
There are many other records which are just maintained in the files of the corporation, and they are kept within the corporate files to document various corporate decisions. These are called the "internal records". One of these internal records is the Corporate Bylaws, which describes the rules for the corporation. It is just like the rules for a board game, it tells you when the shareholders will meet, and what they do. It lays down the rules for electing the directors, and describes the rules that the board will follow in decision making. And the Bylaws describe how the Bylaws can be changed. This is an important document.
In movies like Wall Street and Other Peoples Money, there are battles waged in the boardroom that are based on these corporate Bylaws, (in addition to SEC regulations which govern public companies which are outside of the scope of my information).
In a small corporation, there might be only one owner that owns 100% of the shares of the stock. In this case, the sole shareholder is often also the sole Director, and appoints him or herself to fill the roles of all the officers. They are even the Janitor, they clean up when they are done and everyone else has gone home. So, there is one person filling all three of these roles--shareholder, director and officer.
There are important differences in the way that each of these differnent roles needs to make and document decisions. Since it seems silly to have a meeting with yourself, and fill out paperwork documenting a decision reached and voted on by a single person, this is often neglected. This is potentially a multi-million dollar mistake--- that's $1,000,000's. [And that's a whole lot more than my product to help the business owner get their records in order-- www.corporateveilpro.com ]
In addition to documenting decisions, there are usually requirements for an annual Shareholders meeting, and an annual Directors meeting. Notifications of the date and time for these meetings needs to follow certain rules, and the agenda and topics discussed during the meeting need to be documented in a proper way. This is all usually covered in the Bylaws.
There are other things that need to be done, and it can be quite confusing and it can easily cost $2500-5000 for a small businesss that has been lax in this area for several years to go to an attorney and get his records ship-shape.
My new product CorporateVeil Pro, is getting ready for a Test Flight starting July 7. I will be releasing this system in a step-by-step manner as an eWorkshop, Each Monday, I release a piece of the puzzle, in a clear and concise way for the busy business owner, both written and audi versions...At the end of the workshop, you'll be ready for a brief meeting with your attorney to verify that you are ship-shape for your specific situation...
Tomorrow, I'll explore what can happen when you ignore these record keeping functions?
Rob Northrup
Is Your Corporation Protecting You?
IMPORTANT DISCLAIMER: As a reminder, I am not dispensing legal advice, you should always consult a lawyer about your specific situation. You need to have a lawyer if you have a business. I can save you time by educating you about specific terminology and general requirements, saving you many hours with your lawyer to complete these important tasks.
At Big Bucks per Hour, you need to plan ahead...
You need to plan ahead before meeting with your corporate lawyer so that you do not waste money, and remember it can add up fast. Business lawyers usually charge by the hour, so waiting till the meeting to gather your thoughts is a bad idea. As the Boy Scouts say, Be Prepared! And this is true for those of us that own S corps and LLCs as well.
For the first meeting, ask if there is any pre-questionnaire to complete and fill it out and send it in advance of the meeting. Sometimes they will ask for a few supporting documents- have these ready.
What is the Major Purpose for the Meeting?
You need to put together an adenda and a list of questions. This will help you to focus and get back on track if you start going off on tangential discussions.
I personally like to write out about a page or two that outlines the situation I want to discuss mainly for my own use to crystallize my thinking. It can also be put into a letter form and sent to the lawyer ahead of time so that he can be prepared with any relevant answers or documents.
During the Meeting, Be Focused... (Avoid Tangents and Goosechases)
In our "regular" conversations with people, we might be the sort of person who likes to have deep interesting conversations and really learn a lot about people and their topics. When dealing with a lawyer we need to suppress that urge and remain on topic. A well-planned agenda will go a long way towards keeping the meeting flowing.
Effective Advice Requires you to Be 100% Honest...
I assume that you've heard about Garbage In, Garbage Out?
Assuming that you are looking to get relevant, solid advice, it is important that you are totally honest with your attorney about your concerns and situation. In some cases, they can minimize or dismiss your worries by putting them into the proper legal context. In all cases, they need to know the truth so that they can take all factors into account.
I am a huge believer in the concept of Accurate Thinking. I first heard it mentioned in Napoleon Hill's work. (You have read Think and Grow Rich haven't you? If not, you can get a free copy online here: http://www.20hrworkweek.com/ebooks/ThinkandGrowRich.pdf ) In order to make great decisions, they must be based on accurate facts. But that is a topic for another day...
Thanks for reading,
Rob Northrup
There are many factors to consider when choosing an attorney.
I am in the process of preparing a Special Report for my CorporateVeilPro system (target launch June 30, 2008) which outlines "How to Assemble your Professional Team" in far greater detail.
As a small business owner, you need to have the best possible advice on legal/security matters ("Small business" does not mean small in revenue or profitability-- that's yet another future Blog post- "What is a "Small" business? and why that isn't a putdown...)
Your Professional Team
It is better to have these relationships established BEFORE there is a pressing emergency need for them. In many cases an ounce of prevention can equal a tanker truck full of "cure" (Corporate record keeping is one such area). You should have established relationships with the following people.
1. Lawyer (attorney)
2. Business insurance agent
3. Accountant/CPA
4. Banker
5. Mentor/Coach
Choosing your Lawyer:
There will be more information on this topic in the Special Report, but here are the basics.
1. You want a business lawyer, not one that handles divorces, or child custody, or your Uncle Ned who passed the bar exam on his ninth try and operates a Hair Care, Smoothie Bar and Law Office in Wichita. Lawyers come in two types, those who specialize in litigation/lawsuits and those who specialize in day-to-day stuff like contracts, agreements, and other legal mumbo-jumbo. These second types are what you want- they are sometimes called "Transactional Lawyers". (Of course if you are already involved in a lawsuit, then you want the litigator)
2. You want to choose a lawyer who is licensed in your state.
3. You want to hire a lawyer who has experience in your specific type of business, especially if there are going to be a lot of contracts that need to be evaluated and/or written. At attorney rates, it is just too expensive to have to pay them to learn the basics of your business and the special issues that arise. You are better to find one that already has relevant experience in your field as compared to a generalist.
4. You want a lawyer who is actively engaged in his law practice. Things change and you want someone who is abreast of the changes so they can let you know when things come up that concern your situtation. You want a successful person like yourself to represent you.
5. You want to meet them and make sure you are both on the same page. You can interview attorneys like you interview real estate agents, they want your business and know they need to earn it. Look for people that you can understand, that do not drag everything out, that appear authentic, and who you trust. But you aren't looking for a friend, they can be found for far less money per hour, you want someone who exudes competence.
6. You will ask for and check references. (You really should check them you know).
7. You need to discuss money and fees. A great lawyer at $350 an hour could be a bargain compared with the incompetent one at $200. Sometimes you get what you pay for. Sometimes not. If they have relevant experience in your field, they make only charge you for 30 minutes to pull something from their files, and fax or email it to you with a cover letter. If they are starting from scratch, you might be looking at a four hour project or even more for them to research and draft the entire reply. Which is better? 30 minutes at $350 and hour or 6 hours @ $250? Have I made the point that specific experience is good?
8. Talk to at least three attorneys, then make your decision. I know this is hard, and it is a pain in the neck, but you will be working with this person and his team for the next ___ years, isn't it worth it to choose the right firm?
Getting Referrals:
This is the tried and true method to finding any professionals for your team. As long as you ask the right people, referrals can be the key to finding a great attorney. You are better off asking people in your field of business, or associations in your field for recommendations because they will refer you to people who understand your field already (as discussed above).
Secrets to Using Your Attorney Wisely:
I'll discuss this in a future post. The key is preparation. See you soon...
Rob Northrup
Why an S corp?
The S corp is a very popular business structure for many startup companies. You start a regular corporation and then you file for S corporation status a little later using a special form for the purpose (IRS Form 2553) . One reason that S corporations are used is because they do not have to pay corporate taxes on the profits that they generate. For a regular corporation, these rates quickly rise above 30% of profits.
With an S corp, all of the profits from the business are calculated and then these profits are apportioned to the various shareholders as a percentage of their ownership (on what is called a K-1 form). These owners report this income as a line on their regular 1040 personal tax forms and they pay the income tax on the personal income. They only pay the tax on the profits one time, so this is why they say that double taxation is avoided.
A quick example...
If there are two owners- Joe with 60%, and Kevin with 40% and after totalling everything the S corp has net profits of $300,000, then Joe will get a K-1 that declares $180,000 and Kevin will get one that says $120,000. Joe and Kevin will have to pay income tax on these amounts on their regular personal returns.
All of the detail about the corporate numbers (income and expenses) is contained on the corporate tax form. Only the single number ($180,000 or $120,000 in my example) is shown on the personal tax form.
Disclaimer: I am an S corp owner, not a lawyer. Repeat. I am not a lawyer. I am not giving legal advice here and I urge all business owners to have an attorney who advises them on legal matters. I also recommend that you learn the basics and the terminology before you go to the lawyer. At $350+ an hour, they make very expensive teachers. And most of them don't want to deal with the basic cookbook stuff anyway, they want to deal with more interesting things... I will talk about lawyers and how to choose and work with them most effectively on a future post, stay tuned...
There are a LOT of S corps in the US...
In the US, in 2004, there were 3.5 million S corporations with 6.1 million total shareholders. So we can see that the typical S corporation is owned by about 1.7 people. That tells me that there are a ton of businesses out there, maybe yours?, that are S corps with one or two owners total.
These 3.5 million S corps were responsible for over $4.5 trillion in reeipts (these are 2004 numbers) and of that almost $500 Billion was income for the owners (officer salaries and net profits added together). Another almost $500 billion was paid as wages to other employees that worked for them. So you can see that S corps, although individually small, make up a good sized chunk of our economy...
And personal small businesses are the trend of the future. It is important that all small business owners understand the rules of the game...
Rob Northrup
