Thursday, February 11, 2010

Why You Must Keep Good Records For Your LLC

One of the reasons many people start a limited liability company (LLC) is to avoid the paperwork required of a corporation - annual meetings, amendments, board records, etc.  But being an LLC is not a free ride, as far as records go.  Many states require limited liability companies to keep specific records, and failure to do so can cause you to put your limited liability status at risk.
Piercing the (Corporate) LLC Veil. 
There is a concept in corporate law called “piercing the corporate veil," which refers to the ability of a court to personally charge corporate executives with liability for their actions on behalf of the corporation, including liability for corporate debts.  Within the last few years courts have also held LLC members liable for the debts of the LLC.  Starting with a case in Utah in 1997, (Ditty v. CheckRite), courts have found that piercing the corporate veil is appropriate in the context of LLCs, citing factors such as " failure to respect corporate formalities."*
Tricia Davis of the Bernstein Law Firm (Pittsburgh, PA)  warns,  "...courts all over the country have begun to apply the traditional corporate veil piercing to LLCs to create personal liability on the members for debts of the LLC." And they are using poor record keeping to apply this rule.  So keeping good records for your LLC isn't just good, it is absolutely necessary.
What LLC Records Must Be Kept?
 I looked through record keeping requirements of many states, and created a list of the most common:
·      Names and addresses of all members and of all managers.
·      A copy of the Articles or Organization and all amendments (Certificate of Organization in some states)
·      Federal, state, and local tax returns, for up to 6 years (this was the longest time)
·      A copy of the LLC Operating Agreement and all amendments
·      Copies of LLC financial statements for up to 6 years
·      Copies of all LLC books and records for up to 4 years
·      A record of all Member capital contributions, agreements to contribute capital, and dissolution events
·      Records of all proceedings of Members for the past 3 years
·      A copy of all agreements and contracts of the LLC
·      Reports to Members for the last 3 years

These records should be kept in the office of the Registered Agent.  Much of this list you are probably already doing, but if not, get busy and put them together.  Many LLCs get their Articles of Organization filed and forget to have an Operating Agreement signed.  Even a single-member LLC needs an operating agreement, which should include a clause stipulating who will manage the LLC if the Member is unable to do so.
Source:  Tricia Davis, Esq.
If you have any questions about maintaining your LLC, please feel free to contact me at The Out-House General Counsel.

California Employment Discrimination Law: Two Systems, Separate And Unequal

Los Angeles, California - Civil rights disputes resolved through the dual system of private representation and public enforcement in California have created a disparity that is neither fair nor nondiscriminatory, according to a report by the UCLA–RAND Center for Law and Public Policy.
This is one of many conclusions reached by researchers at the center as the result of the most comprehensive study yet conducted of the enforcement of a state antidiscrimination law, California's 50-year old Fair Employment and Housing Act.  
According to the report, "California Employment Discrimination Law and Its Enforcement: The Fair Employment and Housing Act at 50," California has two separate but far from equal systems for enforcing its employment discrimination laws: a civil litigation system for employees able to obtain an attorney, (about half of all complainants) and an administrative enforcement system operated by the state's Department of Fair Employment and Housing (DFEH) and Fair Employment and Housing Commission (FEHC). The federal Equal Employment Opportunity Commission (EEOC) handles only about one-fourth of complaints in California. 
Access to the two state systems is determined primarily by lawyers who accept employment discrimination cases on a contingency-fee basis. About half of the approximately 18,000 employment complaints filed with the DFEH each year are immediately removed to the civil litigation system. The study found that these lawyers were much less likely to accept certain kinds of cases, primarily based on expectations about the potential monetary value of the case.
The result of this system produces dramatic disparities in access to the two systems. For example, controlling for a wide range of other variables:
  • Compared with whites, African Americans have half the chance of obtaining a lawyer, and other people of color fare only slightly better.
  • Women are 20 percent less likely than men to obtain a lawyer.
  • Employees in lower-wage occupations and particular industries have a much lower chance of obtaining a lawyer. For example, workers in the construction and wholesale trade industries have one-sixth the chance of obtaining a lawyer of those in the government sector.  

The remaining half of employment discrimination complaints are processed by an administrative system with dramatically fewer resources. The DFEH has 16 attorneys to process accusations with the FEHC. By comparison, well over 1,000 attorneys prosecute employment discrimination complaints in court. The DFEH operates with a budget equal to 81 cents per year per California employee. Past budget cuts have resulted in the elimination of training and management positions. Those investigating complaints in the administrative systems are often minimally educated — a high school diploma and four years of service in any state agency satisfy the education and experience requirement — yet they are expected to deal with a complex set of legal rules. In 2009, the FEHC had only one administrative law judge to hear cases. 
The study indicates that important reforms adopted by the Schwarzenegger administration have increased the effectiveness and efficiency of the DFEH. Looking at the enforcement structure more broadly, however, the study documents dramatic differences in outcomes between the two systems:
  • In the civil litigation system, most cases settle. Of those that go to trial, plaintiffs win 50 percent of the time, receiving a median jury award of $205,000 (in 2007–08).
  • In the administrative enforcement system, cases begin with the filing of a complaint with the DFEH and can conclude with a settlement or a decision by the FEHC. Of those cases closed from 2004 to 2008:
    • One in 14 obtained a monetary benefit, the median value of which was $4,000.
    • One in 69 resulted in an accusation being filed with the FEHC, which has in recent years issued an average of only five published decisions per year.
    • Of the cases settled after filing an accusation with the FEHC, the median settlement was $14,842. 

"While our findings regarding the inability of individuals to gain access to the civil justice system are troubling, the inequality in the two systems is clearly the product of the legal systems that have evolved over the past half-century rather than the performance of individuals, many of whom work very hard with inadequate resources," said UCLA School of Law professor Gary Blasi, who co-authored the report.
"A truly effective administrative enforcement system would benefit both employees and employers, and the DFEH has already made progress toward allocating its resources more efficiently," said Joseph Doherty, director of UCLA Law's Empirical Research Group and co-author of the report. "Our recommendations are designed to minimize both the costs on employers and the use of DFEH resources, but we are mindful that some require additional financial support. For example, imposing a fair employment practices regulatory fee of 10 cents per month on both employers and employees would triple the current budget of the DFEH."
The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world.
The UCLA School of Law, founded in 1949, is the youngest major law school in the nation and has established a tradition of innovation in its approach to teaching, research and scholarship. With approximately 100 faculty and 970 students, the school pioneered clinical teaching, is a leader in interdisciplinary research and training, and is at the forefront of efforts to link research to its effects on society and the legal profession.  

On a side note, The Out-House General Counsel is a proud graduate of UCLA School of Law.  This is a great report, you can find it at the link below.

For a copy of the Report go to California Employment Discrimination Law and Its Enforcement

Wednesday, February 10, 2010

2010 Employment Law Updates, by Jerry Bloch

Here is some great information from Jerry Bloch at The General Counsel's Blog.

Here are the most significant legislative changes applicable to California employers:

A. FMLA (included in the 2010 National Defense Authorization Act):

1. Military Caregiver Leave –Time off to care for injured or ill or active service members has been expanded to include injured or ill veterans (honorably discharged former members of the armed services) if they were discharged within the past 5 years.

2. Qualifying Exigency Leave – provides time off to care for a parent, child or spouse, including registered domestic partners (“Close Relative”) of a member of the military reserve force or National Guard called to service or on active duty has been expanded to include time off to care for a Close Relative of a member of the armed services deployed to a foreign country.

Applies to employers with 50 or more employees.

Recommended Action: Change FLMA policy in handbook to comply.

Reference: 29 USC 2601, 29 CFR 825.100

B. Civil Air Patrol Leaves –the employer must provide up to 10 days a year of leave to employees who are members of the California Wing of the Civil Air Patrol if;
- they are called away in response to an emergency, and
- have completed at least 90 days of employment.
The employee may use accrued leave benefits but cannot be made to do so.

Applies to employers with 15 or more employees.

Recommended Action: Change leave policies and handbook to include.

Reference: AB 485, Labor Code Sections 1500 – 1507)

C. Alternative Work Week

Under existing California law, an employer is required to conduct a secret vote with at least 2/3rds of the affected employees voting in favor of adopting an alternative work week (other than 8 hrs/day – 40 hrs/wk). The vote was difficult to achieve because it would have eliminated every employees’ ability to continue working the standard shift. A recently adopted amendment to the law allows for the standard shift to be included in a menu of work schedule options that is voted on, increasing the likelihood that the 2/3rd vote will be achieved. Employees may, with the employer’s consent, shift between different work schedules from week to week, providing even greater flexibility to both employees and the employer.

Reference: CA Labor Code Section 511, AB 5.

If you have any questions or concerns about any of these issues, please contact me at Out-House General Counsel.

Sunday, February 7, 2010

Preparing to Meet with Your Business Law Attorney

As you prepare for your first meeting with your business law attorney, you should gather certain documents and information to bring with you. The information you provide will help your attorney to analyze your business needs and create a plan that will best meet your business goals. The following list can help you decide what information to bring. Not all items listed may apply to your situation, and your attorney may ask you for additional documents that are not on this list. If you do not have some of these documents, your attorney can assist you to obtain them. 

Business Information

·        Business plan including business model

·        Business name registration documents

·        Any existing business organization documents

·        Licensing and permits

·        Marketing plans and samples

Financial Information

·        Business accounting books

·        Individual income tax returns for the past three to five years (state and federal)

·        Business income tax returns for the past three to five years (state and federal)

·        List of business debts and assets

·        Business bank statements

Property Information

·        Leases for business space or equipment

·        Deeds and titles to business real property and business assets

·        Property insurance documents

Bills and Outstanding Debt

·        Business credit card statements

·        Loan documents

·        Utility bills

·        Monthly budget worksheet

Legal Agreements

·        Supplier contracts

·        Contracts with customers

Finally, you will also want to start thinking about other issues that may affect your business. You may wish to speak with your attorney about the following:

·        Tax considerations for the business

·        Tax considerations for you as an individual

·        Your comfort level with business and legal risks 

 If you think you need to speak to a business law attorney, don't wait until its too late.  Find one in your local area, explain your situation and meet with him or her.  If you are in California, you can always contact me at Email Daniel J. Alexander II (The Out-House General Counsel).

Wednesday, February 3, 2010

The Pros and Cons of Attorneys Fees Provisions

Despite your best intentions, you could find yourself in a situation where you are forced to sue another company - or worse yet, a situation in which another company or client is suing you. To add insult to injury, the practicality of the lawsuit could boil down to one, little clause in the contract: The attorney fee clause.

An attorney fee clause is a small clause in a contract that something to the effect of, "In the event of litigation relating to the subject matter of this Agreement, the non-prevailing party shall reimburse the prevailing party for all reasonable attorney fees and costs resulting therefrom."

In plain English, this means that should a lawsuit occur, the loser is responsible for paying all of the legal fees - for both parties.

Not all contracts have attorney fee clauses and in most cases, the omission of an attorneys' fee clause is intentional. In the end, the decision about whether or not to include this clause depends a lot on which party is most eager to achieve an advantage.

The Argument for Attorney Fee Clauses

Attorney fee clauses are ultimately an economic issue one party uses as leverage to dissuade the other party from following through with a lawsuit.

In certain situations, this clause can be used to your advantage. For example, suppose someone is harassing you with a frivolous lawsuit and you know they can't afford proper legal counsel. The risk you assume in defending the lawsuit is minimal compared to the risk that is being assumed by the other guy, especially if you stand a good chance of coming out on top.

In some cases, attorney fee clauses may actually prevent lawsuits from ever being filed in the first place.

This is particularly true in cases where the potential gain from a lawsuit is dwarfed in comparison to the potential liability created by the legal process. If your company sells widgets for $250, it's unlikely that a customer will sue you for the price of your product once he discovers that he may be responsible for thousands of dollars in attorney fees and other legal costs.

The Argument against Attorney Fee Clauses

Attorney fee clauses do not always work to your advantage. No matter how big your company is, there is always someone bigger out there.

Should your relationship with a larger company run afoul, the larger company will not be intimidated by the inclusion of an attorney fee clause in your contract. In fact, since an attorney fee clause works to their advantage, they will most likely welcome it and use it to run your business into the ground through legal fees.

Another situation in which an attorney fee clause can hurt you is if you lose the lawsuit - regardless of the financial state of the other party. Your cleverness in including this clause in your contracts could potentially backfire on you and leave you holding the bag for everyone's legal bill.

If you decide to include attorney fee clauses in your contracts, you should know that under some circumstances they may not be legally enforceable. If you are in California consult your Out-House General Counsel to determine the specific language you will need to maximize its enforceability.  If you are operating in another jurisdiction, contact a local qualified business attorney.