The Importance of Strategy Prior to Exiting a Business Venture

What is your plan for exiting your business?   At some point, a business owner or group of partners will want to retire, work on other ventures,  recoup their investment or “Cash out” their business interest. Sometimes there instances when an individual’s participation or ability to run the business can be affected by financial problems, illness, divorce, disability, and/or death.  It is, therefore, crucial to develop an exit strategy for your business so that you have a plan in place to “move on” while maximizing any financial benefits and limiting any ongoing liability.    

There are several options for successful business succession planning.  These options include an all asset purchase and sale to a third party; a stock / interest purchase and sale to a third party or employees or other partners / shareholders; private equity acquisition; employee / key management stock and interest purchase programs; and intra-family transfer of business interests.  The best option for a successful business succession plan depends on your objectives, and nature and character of your business. 

The business law attorneys at the Law Office of Stefan Cencarik, PLLC provide business succession planning services, and can work with you to ensure that your ends goals for your business are met when the time comes.

The Importance of Corporate Formalities for Any Massachusetts Corporation

One of the foundations of the law of corporations is limited personal liability for the officers and shareholders. In other words, the liabilities of a corporation are treated as separate and distinct from the personal liabilities of the officers and shareholders.   However, in Massachusetts, there is an exception to the rule of limited liability.  In the context of litigation, a reviewing Court may “disregard the corporate entity,” and hold the officers and shareholders liable for the debts and claims against the corporate entity under certain special circumstances.  These circumstances are reviewing together as a whole, rather than on an individual basis, and, it is therefore important to undertake responsibility to ensure that your Massachusetts Corporation complies with existing law and does not meet the criteria for disregarding a corporate entity.  

One of the twelve circumstances that a Court may take into account when disregarding a corporate entity is examining whether the corporation has complied with and observed corporate formalities. The lesson here is that a Corporation must strictly observe corporate formalities. What exactly are corporate formalities? A corporate is required to maintain, keep, and observe certain records and formal procedures that indicate that the corporation maintain a separate existence from the shareholders’ personal business affairs.  Some of the necessary corporate formalities include the following:

·       Stock Register (Ledger): A written record that states the names and addresses, as well as the amount of shares, owned by each shareholder of the corporation.

·       By-Laws: This is an established set of rules and procedures that state how the corporation will be operated, and how the corporation will deal with certain factual scenarios affecting its business affairs.

·       Board of Director Meetings: The Board of Directors must meet frequently, as specified by the Corporate By-Laws, and a record (meeting minutes) must be maintained and kept on file.

·       Shareholder Meetings: Shareholder meetings must occur at least once per year, and a record (meeting minutes) must be maintained and kept of file.

·       Meeting Minutes: A record that states the date, time (time of commencement of meeting, time of conclusion of meeting, time of significant event, decision, vote, etc. at meeting).

·       Bank Accounts: The corporation must maintain a separate bank account from the individual shareholders.

·       Tax returns: The Corporation must file all of its income tax returns with the Massachusetts Department of Revenue and Internal Revenue Service, and pay all taxes due on such returns.

·       Annual Reports: The Corporation must file current annual reports with the Massachusetts Secretary of State, and maintain a resident agent for service of process inside the Commonwealth at all times.

·       Permits / Licenses / Certificates: The Corporation should maintain current and active licenses, permits and certificates requires for its type of business, including a DBA certificate filed with the proper town or city.

The above is not a conclusive list of corporate formalities that must be observed by all Massachusetts corporation. Compliance with observation of corporate formalities is essential for maintaining the corporate status and limited personal liability for corporate officers and shareholders. There may be other formalities that should be observed including, evidencing that assets are titled in the name of the corporation, all business transacted occurs in the name of the corporation, rather than the shareholders, etc. Typically, the corporate Secretary undertakes the responsibility for maintain compliance.

New small businesses can begin to maintain corporate formalities by ordering a “corporation kit” from most well-known office product suppliers.  These kits will contain templates for meeting minutes, stock registers, shares of stock, notices required for board of director meetings, notices required for shareholder meetings, as well as a corporate seal necessary to execute these documents.

If you are an established business, please feel free to contact me at 617-669-9780 to verify whether you are in compliance with observing corporate formalities. 

Those Internet Forms Can Be the End (of You and your future)

Fiscal discipline and use of legal forms downloaded from the Internet from a (supposedly) reputable online retailer seems to be a growing trend among Massachusetts individuals and businesses. Rather than enter the painstaking process of finding an experienced business or real estate attorney that will charge a fair rate, return phone calls and e-mails, and deliver a result; many people turn to the Internet for help.  There are dozens of on-line retailers that sell "legal forms" for the price of $79.00, and sometimes less.  The Web-sites are often advertised throughout the Web and television, and typically have "famous" lawyers, celebrities, and major publications endorse the product. These Web-sites allow a client to purchase and download a "legal form" for issues concerning business law, real estate, and estate planning that follows the "one size fits all" methodology of approaching legal issues.  

Here, the old cliche rings true: "You get what you pay for." When you download "legal forms" off the Internet, what exactly are you getting and what are you paying for?

Cost Savings - How much are you really saving, and what is the potential cost to your financial future and peace of mind? Many of these "legal form" sites provide package deals and an array of "value added" benefits at different price levels.  Compared to the cost of hiring legal counsel, the cost savings of using the Internet to practice law can be substantial for very simple legal matters, and, on the other hand, the costs can be the identical for more complex matters. Cutting a few corners when  planning for the succession of your family business or assets is not a prudent decision.  If you are making decision involving thousands (or millions) of dollars, why would you trust a legal form provided to you on the Web by an unknown author? Legal services from a qualified and experienced business, real estate, and estate planning attorney cannot be substituted by fillable forms when making life and game changing decisions. 

Accountability - Who authored the form that you just downloaded? What are their qualifications, and what type of experiences did that person have that caused them to draft that document a certain way?  Was the form created based on your individual circumstances, or are you buying a template? Who do you speak to if you have legal questions when you need to make decisions in filling out the form? Who do you speak to when an issue arises after the form becomes important, or ends up being reviewed by a Judge or Jury?  The accountability issues concerning online legal forms are endless.  You can be assured that a qualified Boston area business, real estate, or estate planning attorney will be able to answer all of these questions, and fulfill any legal service and consulting need.  When you download and use a "legal form," you will not have a local attorney with verified qualifications that will remain accountable to you and the state bar.  

Advice & Counsel - A form is just a form.  You may receive a brief synopsis of Massachusetts State law that was copied from public information, or some instructions on how to fill out the form. However, you cannot expect an advice on best practices, shared experiences, or any planning or recommendations from an attorney.  You are essentially on your own. Many of these legal form Web-site try appear to be helpful and make promises that a qualified "legal expert" may be available to assist, for an additional (hidden and not so up front) fee. (And in this instance, who is this "legal expert" or "top attorney"? Are they qualified to advise and do they have experience with Massachusetts law? Where is this person located?). 

Confidentiality - Not all "legal form" web-sites allow instant download of forms.  For more complicated business, real estate and estate planning documents, you will be required to submit information via an online form, and you wait up to thirty (30) days for the entire process to be finalized.  In other words, you are submitting confidential information via the Internet to a company (that you met on the Internet) that is tasked with securely storing your information, and performing legal work (by someone that you have never met).  When you hire a local Boston area attorney, your confidential information is protected.  You can assured that it will not be submitted via the Web, or stored by an unknown company.  Additionally, what are the legal form company's duties of confidentiality to you?  They may state that they retain or treat all information as confidential, however, those companies have no legal duty (or accountability) to you as opposed to a local attorney.  

Personalized Needs and Service - The digital age has removed the old fashioned, personalized service from professional services that our parents grew up with.  Legal form web-sites are no different from any other impersonal, digital experience. You rarely deal with a live human being, and when you do it is with a complete stranger outside of Massachusetts.  Depending on whether you select the right attorney, doing business with an attorney will enable you to receive a more intimate level of service with a local professional who will be responsive to your questions, concerns, and overall legal needs. Web-sites cannot substitute real human interactions, and the many benefits that personalized service will provide you in terms of making you feel at ease with any legal process. 

I have heard numerous tales of horror from existing and prospective clients, colleagues, and friends about Internet "legal forms."  Some of these accounts have resulted in  costly, time consuming, and nerve wracking court battles where no party ever truly wins.  When Massachusetts business or individual seeking legal services turn to the Internet to solve a legal need in areas of business law, real estate, or estate planning, they are taking a substantial amount of risk, and making a very expensive  bet that a standardized form will provide a long term, ironclad legal solution.   Take this article as a tale of caution because those Internet Forms Can Be the End (of you and your future). 

What types of entity are available for my business?

In addition to making a decision on what your business name will be, one of the most important decisions that any new entrepreneur must make is to decide their business entity type.  It is very important to properly select the type of business entity structure that suits your business needs.  By doing so, you will maximize the tax, liability, and other benefits that flow from each type of entity. It is, therefore, essential that you contact one of our Massachusetts business lawyers to provide legal guidance as to the best entity for your business.   

The most commonly used types of business entities available in Massachusetts comprise the following:

Sole Proprietorship (D/B/A; personal name)

Also, frequently referred to as a D/B/A company, a sole proprietorship is the simplest form of a business entity.  A sole proprietorship is an unincorporated business and does not offer the limited liability protections of a corporation or partnership.  Some small business owners begin their business as a sole proprietorship and then seek to incorporate their business once they achieve success in their business. Sole proprietorships avoid the administrative requirements and fees associated with an incorporated business.  However, due to the casual structure of the sole proprietorship and liability issues that a business owner can potentially face when problems arise, a sole proprietorship is not the best type of entity structure.

Corporation (Corp.; Inc.; Co.)

A Massachusetts Corporation is an independent business entity from the business owners (shareholders).  The Corporation will provide a limited liability for the shareholders, and that entity will be responsible for the debts, expenses, and civil claims against the corporation. A Corporation can either taxed as either a C Corporation or S Corporation.  A Corporation must abide by numerous procedural formalities and follow certain rules in order to maintain its legal status in Massachusetts.

Professional Corporation (P.C.)

A Professional Corporations is just like a Massachusetts Corporations, however, this type of entity structure is limited to a group licensed professionals only.  This means that the shareholders must be licensed to practice some type of lawful professional in Massachusetts.  These profession include, but are not limited to: attorneys, certified public accountants, dentists, engineers, physicians and surgeons, veterinarians, chiropractors, podiatrists, physical therapists, psychologists, optometrists, and registered nurses. The P.C. provides limited liability for the shareholders, however, the corporation will not protect a professional from being held liable for their own malpractice / negligence in performing services and their duties as a professional.  

Limited Liability Company (LLC)

Massachusetts law provides for the use of the Limited Liability Company (LLC) type of entity.  An LLC provides its members with the substantial benefits of limited liability for debts and claims against the LLC.  The LLC also provides the passed through tax advantages to the business owners – in other words, the profits and losses are passed through to the owners, and taxation will not occur at both the entity and individual level. Many business owners prefer to establish an LLC due to these substantial benefit and also take advantage of the flexibility and ease of administering the entity.   

Partnerships (Partnership; GP; LP; LLP)

In Massachusetts, the significant business law allows several types of partnership entities:  A general partnership, a Limited Partnership; and Limited liability Partnership. 

A general partnership is similar to a sole proprietorship, however, this unincorporated business involves at least two persons who own the business and share in its profits and losses.  This type of business structure has the same disadvantages as the sole proprietorship and also can lead to a very acrimonious “business divorce” when the basic structure of the partnership is not established.

A Limited Partnership (LP) will involve at least one general partner and one limited partner.  The general partner will make day to day and operational decisions.  The limited partner will not participate in the day to day and operational decisions, and typically take the role as an investor in the business.  The limited partner’s liability is limited to the amounts contributed (capital contribution) to the partnership as long as that partner does not exercise control over the business. The general partner, on the other hand, will assume full liability for the L.P.’s debts and other claims, provided, however, a Corporation or LLC can be a general partner of an L.P.

A Limited Liability Partnership (LLP) is a partnership and allows each partner to take limited liability for the other partner’s negligence, malpractice, errors or omissions. LLPs effectively function similar to a general partnership.  An LLP is frequently used by (but not limited to) attorneys and accountants.

If you or a colleague have any questions about what type of business entity that would be best for a particular business, please contact your local Massachusetts business attorney, Stefan Cencarik, at 617-669-9780.

Issues for Business Founders to Address When Starting a New Partnership / Business Venture

When one or more like-minded persons decide to engage in any type of Massachusetts business venture, it is crucial to perform proper planning at the inception of the business.  At the outset, the founders (or partners) in the new business venture can avoid costly, time consuming, and frustrating issues that plague many small businesses in Massachusetts. The downside of improper planning and preparing for the different contingencies that may arise during the formation and operation of business is that some of these issues turn into a dispute, and some others into litigation.

It is crucial at the outset to select the correct business entity for your organizational structure and business objectives. It is equally important to set out each founder’s status, influence, participation, and financial interest in the organization.  It is recommended that, at a very early stage, that business founders discuss several issues, including the following:

What role and status will each founder have in the organization?

Will each founder participate in the day to day affairs of the organization? Will each found work full time?

Who will own certain percentages of the business interests?

What are the restrictions on the transfer and sale of the business interests?

What are the conditions for raising capital, sell business interests, and/or brining on new partners?

Will the founders contribute additional capital to the business if necessary to operate the business?

What happens if one of the founders contributes additional capital to the business and the other founder is unable/unwilling to do so?

What happens to the business if a founder becomes disabled, ill, or dies?

What are the conditions for removal of a founder from the operations of the business?

How can the founders separate their personal assets and liabilities from those of the business entity?

What is the desired business succession plan for the business entity?

Who will own the intellectual property of the business? (This is particularly important if one partner carries over certain patents, trademarks, Copyrights, customer lists, trade secrets, and the like to the business).

This list may be used to generate a discussion prior to meeting with one of our business law attorneys. These are some of the issues that we can address in the planning stage for your business.

Are you an entrepreneur or business setting up, or expanding in the north shore, including Lynnfield, Wakefield, Reading, Andover, Danvers, Peabody, Beverly, Woburn, or Saugus? Contact Attorney Stefan for a free consultation at 617-669-9780.