Do You Know What Your Bylaws Say?

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Austin headshotBy Austin K. Sweet.
If you own a business, you probably have a business entity. Maybe you heard that business entities provide some sort of liability protection, and someone mentioned that you should form an LLC, so you wen online, or better yet, to a lawyer, and formed and LLC. A few weeks later, you got a fancy looking book with your company’s name embossed in gold lettering. You played with the neat little company seal thingy for a few minutes, patted yourself on the back for being a responsible business owner with such an official looking book and seal, and then put to book on a shelf never to be touched again.

That is, of course, until your lawyer asked you to bring that book to his office because its contents will dramatically impact the outcome of the dispute you’ve recently entered into with your partner. Are you sure that book says what you want it to say? Do you even know what it says? How will this impact your business?

Read the full article featured in Northern Nevada Business Weekly Business Law Guide Here (page 7)

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Congratulations, Courtney!

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We are thrilled that our very own, Courtney G. Forster, was one of the recipients of the Reno Gazette Journal and Young Professionals Network sponsored, ‘Twenty Under 40 Awards’. Congratulations from all of us here at Gunderson Law Firm- we had so much fun watching you accept this award! For a full list of 2013 winners, click here.

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Inc.? Co.? P.C.? LLC?

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By Austin K Sweet

What Type of Business to Form

Nevada is a great place to do business for a number of reasons.  Notably, Nevada has favorable tax laws and flexible corporate restrictions to encourage business men and women from across the world to form their businesses under our laws.  Unfortunately, this flexibility leads to a wide range of options, which can be overwhelming for an entrepreneur trying to decide what type of business entity is right for them.

This article outlines the legal pros and cons of the most common types of business entities to help you determine the best fit for your business.  It is important to note, however, that different business entities are taxed differently.  For more information about how taxes might affect your decision, consult with your tax advisor.

The most common reason people form business entities is for liability protection.  In general terms, some business entities shield the company’s owners from personal liability from the company’s debts.  For example, if the company enters into a contract and the company breaks that contract, the owner is not necessarily personally liable for damages.

Not all entity types offer liability protection.  Those that do are generally more expensive to form and operate and business owners are required to comply with various rules and requirements to maintain that liability protection.  However, the benefits of doing so often vastly outweigh these costs and administrative burdens.

 

Sole Proprietorship.  The most basic form for a business is a sole proprietorship.  A sole proprietorship requires no paperwork (other than necessary licensing), no filing fees, and no annual maintenance.  It is very inexpensive but offers few benefits; most importantly, sole proprietorships offer no liability protection.  Unless your business consists of selling homemade pottery on http://www.etsy.com, a sole proprietorship is probably not your best choice.

 

General Partnership.  A general partnership is essentially a multi-person sole proprietorship.  It also requires no official paperwork and offers no liability protection.  Like sole proprietorships, the primary benefit of a general partnership is that it is an inexpensive way to legally operate a business.

Be aware that general partnerships can be created unintentionally.  If you have an “informal” business venture with another person, such as co-owning a rental property, a court of law might consider that to be a legal general partnership.  This can lead to problematic and unintended legal consequences results.  If you have an “informal” business relationship with another person, it is time to formalize your partnership into a legal entity and make sure you are protected.

 

Limited-Liability Company.  A limited-liability company (“LLC”) is probably the most common form of business entity used by small businesses in Nevada.  An LLC offers its owners liability protection, but is more expensive to form and operate than a sole proprietorship or general partnership.  The terms “LLC,” “Ltd.,” and “Co.” often identify limited-liability companies.

LLCs offer the most flexible corporate structures, allowing the entity to adapt and change as your business grows.  LLCs can be simple for owner-operated small businesses, complex for large businesses with multiple owners and officers, or anything in between.  However, LLCs do not lend themselves to businesses involving numerous owners in varying capacities and levels of involvement.

The LLC’s flexibility makes it a great option for companies owned and operated by a small group of people, regardless of the company’s revenue.  An LLC is a great fit for most businesses and tends to be an appropriate “default” choice unless you need the options presented by another business entity.

 

Corporation.  Like LLCs, corporations offer their shareholders liability protection at the price of increased costs of formation and maintenance.  The terms “Inc.” and “Corp.” generally refer to a corporation.  “C Corp” and “S Corp” identify different tax designations for corporations; they do not identify different types of legal entities.

Corporations are slightly less flexible than LLCs but provide more options for complex ownership schemes.  Corporations are ideal for business owners that intend to eventually take their business public or offer their employees stock options.  Business owners seeking to bring in equity investors with any range of ownership interest and/or management control will also benefit from a corporation.

 

Professional Entities.  Professional corporations and professional limited-liability companies are available for certain professions that are prohibited from conducting business through traditional corporate forms.  For example, lawyers, accountants, doctors, and architects are some of the professions who may not seek the liability protection offered by an LLC or a corporation.

Generally speaking, a “professional” may not use a liability shield to protect himself from liability for professional negligence.  However, professionals may still seek liability protection for the non-professional debts of the company, such as breaching a lease.  Professional corporations and professional limited-liability companies allows this balance.  Aside from this restriction on the liability shield, professional corporations and professional limited-liability companies operate much like standard corporations and LLCs.

 

Other Specialty Entities.  There are a number of other business entities available in Nevada for more limited purposes.  Non-profit corporations offer excellent tax benefits, but are strictly regulated to prevent abuse.  If your business qualifies as a non-profit, the tax benefits generaly outweigh the added administrative burdens.

Limited partnerships and limited-liability partnerships offer more liability protection than general partnerships but less flexibility than LLCs or corporations.  These business types can be enticing because they are generally cheaper to form than an LLC or corporation, but their ability to adapt and change is very limited.

Whatever business type you choose, put in the time and effort at the outset to ensure that your company is organized in a way that best fits your needs.  Start-ups are already time consuming and expensive, but the organization of your business entity is a critical element that will follow your business throughout its life.  Proper planning now will save you time and money down the road.

 

Austin Sweet is an attorney at Gunderson Law Firm, practicing business law directed at helping business owners stay protected and prosper.  He can be contacted at (775) 829-1222 or asweet@gundersonlaw.com

Using and Protecting Your Liability Shield

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By Courtney G. Forster

How your corporate entity can protect you – and how you can protect it

Clients regularly approach me wanting to create a liability shield to protect themselves from personal liability. Most people hear that the best way to protect against personal liability is by forming a corporate entity, but few understand how to go about creating this liability shield or how to use it.

The idea behind a liability shield is that a corporate entity will help protect you from being sued personally when something goes wrong. When used correctly, these entities are a great tool to help you launch a business without risking your personal assets. Unfortunately, all too often small business owners will inadvertently harm or destroy their liability shield through sloppy paperwork, financial errors, and inaccurate bookkeeping. Here are some key tips to keep in mind when forming and operating a corporate entity so you can ensure your corporate liability shield remains strong and intact.

1. Get your paperwork in order.

The first step to forming a corporate entity is creating the necessary paperwork. If you are forming a limited liability company, this will include an operating agreement; if it’s a corporation, it will include articles of incorporation and issuing stock. Either way, you will also need to register the company with the secretary of state. If your company needs a business license or any operating permits or licenses, be sure to obtain those in your company’s name as well. Make sure you have these in place before you do anything else with your company or you could end up liable for events that took place before your paperwork was finalized.

For a relatively low fee, an attorney can help make sure you’ve set up your company correctly and have all the necessary forms. Internet-based companies that offer to set up your company for you often charge the same – or more – as a local attorney and will give you one-size-fits-all paperwork that may not be right for you. You will also need to maintain these records on a yearly basis, including keeping company minutes and renewing your filings with the state. Again, an attorney can help make sure your paperwork stays current and you don’t end up with a gap in your protection.

2. Hold the asset or assets in the company.

Once your company has been formed, make sure you use it! A company is only as good as what’s in it, so make sure you keep the asset or assets in question in the company’s name. For example, if you are planning on renting an office building to tenants, make sure the office building is owned by your company (rather than you individually). However, always keep your personal assets out of the company – this is for business only.

3. Don’t commingle money.

The biggest, and most common, mistake people make is mixing their company’s income or expenses with their own personal income and expenses. You could be out at dinner and forgot your personal credit card, so you charge the meal to your company card. Or maybe you use the company card to fill up your gas tank from time to time – it’s okay because you sometimes run errands for the company, right? Unfortunately, these are classic examples of using the company’s assets for your own purposes. This is the fastest way to destroy your corporate shield and expose yourself to personal liability. Always, always, always keep your personal finances and your company finances separate.

If you have more than one company, the same lesson applies to them – the more you combine finances between the two companies, the greater risk you run of having a court treat the two companies as one entity. Especially in smaller or one-asset companies, the money is usually where the most action is: if your financial records show that you treated the company like your personal bank account, the courts are going to ignore the corporate liability shield.

4. Adequately fund the company.

This rule is basic, but vital: keep enough money in your company for it to operate. If you remove income from the company and leave it unable to pay its debts, the courts may ignore the corporate form. When you start your company, make sure it has enough assets or money to operate, and keep enough funds in its accounts to pay its debts. Don’t forget to also maintain sufficient insurance in the company’s name. Again, this will show the courts that the company is able to operate as its own independent entity and is not simply an empty shell.

5. Maintain accurate, up-to-date financial records.

Careful and thorough bookkeeping will reinforce the idea that your company is its own separate entity. If you borrow money from one company to fund another, make sure that loan is properly tracked, accounted for – and eventually repaid. Don’t forget to file tax returns for each company as appropriate. Again, courts will always look at the way your finances are when evaluating whether your company will protect you as a liability shield.

6. Notify business partners they are dealing with a company.

Another simple, but critical, point to remember is to always notify your business associates that they are dealing with your company rather than you personally. Always use your company’s name on all contracts, invoices, and the like.

7. Remember: a corporate liability shield can only do so much.

Even with the strongest corporate liability shield, no system is airtight. Many banks will require you to sign a personal guarantee when your company borrows money – if your company later defaults on that loan, you will be personally liable for any amounts covered by that personal guarantee. A corporate shield also won’t protect you if you commit fraud or other bad acts in the company’s name. However, if you stick with these basic rules and are careful about maintaining your company’s separate status, you can protect your company while it protects you.

 

Courtney Forster is an Associate at Gunderson Law Firm. She earned her Juris Doctorate from Notre Dame Law School, and can be contacted directly at cforster@gundersonlaw.com or 775-829-1222.

Creating Certainty with Clear Contracts

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By Catherine Anne Riechenberg

Honesty and excellent communication are the hallmarks of successful people and businesses.  As the saying goes, “say what you mean and mean what you say.”  The contracts you use to solidify your business deals should be no different.  It is commonly believed that lawyers make their money inserting excessive legalese, subparts and other confusing language into otherwise intelligible agreements. The truth is that confusing contracts lead to litigation.  A good attorney will work with you to draft precise, clear and succinct contracts to help your business succeed.

So, you’ve reached an agreement with another person or business.  What do you do now?  Use the steps below as a guideline to make certain your written agreement is helping you and your business.

1.     Make Sure You Have An Agreement

All contracts require that the parties have reached a “meeting of the minds” on the essential terms in order to be valid.  There must be a fundamental agreement as to who is entering into the contract, what they are each promising to do, and when they promise to perform.  From time to time the parties may think they have reached an agreement up until they begin to reduce it to writing.  Further, separate parties may have an understanding or belief that is not properly reflected in the contract itself.  Remember: If it isn’t in the contract, your understanding or belief may be incorrect or not shared by the other party.  Make sure that you have reached a precise agreement and that the agreement reached is specifically reflected in the contract as drafted.

2.     Use Clear Language

If you one day must enforce your contract in the courts, the judge will look to the contract as drafted to determine the parties rights.  Therefore, it is imperative that the contract be clear on its face.  Look for holes and fill them.  Define terms used.  Any ambiguity could be interpreted against you, so at the outset read through your contract critically to make sure a third party would understand the specific understanding and promises made by the contracting parties.

Remember though, the clarity of a contract is not reflected by its length.  It is important that the language used be precise and understood by the contracting parties, but it doesn’t mean that over-drafting will help you should things go side-ways.  As such, avoid using contracts with words like “insofar,” “whereas,” “hereby,” etc. or unnecessary boilerplate phrases. Generally, legalese terms and boilerplate language can be simply removed to make the contract more understandable and clear.

3.     Balancing Act

A good contract both reflects the parties mutual understanding of what is expected of both of them while providing the proper protections should anything go awry.  The more clear the expectations of each are laid out in the contract, the better.  Addressing concerns, questions and specifics up front will save you time and money later.

A more experienced lawyer once told me “when people enter into contracts, everybody is in love and they don’t think through what will happen when everything falls apart.”  Learn from other’s mistakes and think ahead to what you’ve agreed will happen when and if the other side doesn’t perform.  What penalties are there, if any?  Where have you agreed to handle your dispute (city, state, court, arbitration, etc.)?  What law will apply?  If there is a dispute, is the prevailing party entitled to attorney fees and costs?  Make sure you negotiate, understand and agree to these terms in the beginning as they may very well help you in the end.

4.     Review, Question, and Revise

Have an attorney review your contracts, ask questions and revise your agreement as necessary.  A well-drafted contract will save you money in the long run.  It also helps the parties communicate their expectations and understanding so that when they do perform, they’re doing what they agreed, not what they thought they agreed to.

5.      If It Doesn’t Come Together, It’s Ok

You can’t make good deals with bad people, and litigation is never a good business venture.  If you can’t agree on contract terms, in some instances it’s a sign of issues downstream.  Take the time to ensure everyone is in agreement, that everyone understands the contract, and that you are comfortable with its terms so you can move forward in a positive direction.  Also take the time to have both sides seek the advice of separate legal counsel.  In the long run, you and your business will be more successful because you took the time to do it right.

Catherine Reichenberg is a Senior Associate at Gunderson Law Firm, and represents a variety of local, regional and national clients from business owners, commercial and residential real estate brokers and agents, homeowners, professionals, developers, contractors and others. She can be contacted directly at creichenberg@gundersonlaw.com or 775-829-1222.

Navigating the NRS Chapter 40 Construction Defect Law from a Contractor’s Point of View

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Courtney

 By Courtney G. Forster

Nevada’s construction defect law was originally designed to help contractors and homeowners resolve their differences without resorting to litigation. Unfortunately, its real-world application has led to a confusing process full of traps for the unwary contractor. If you ignore them, short deadlines and strict notification requirements can leave you unable to defend yourself against a homeowner’s claims – even if you didn’t perform the defective work.

NRS Chapter 40 applies to general contractors and subcontractors, suppliers and design professionals, commercial buildings and residential. I’ve represented people on every side of the claim process, from general contractors to homeowners, and I have seen contractors make the same mistakes over and over again. This guide won’t prevent a baseless claim against you, but it will help ensure your rights are protected if and when a claim arrives.

Before a Claim Begins

As a contractor, your first defense against the pain of a construction defect claim is the right kind of insurance protection. Look over your insurance policy to verify your coverage for construction defect claims. Insurance companies have paid huge settlement amounts over the past several years in Northern Nevada, which has led to them being much more conservative in their policy writing. I have met many contractors who paid insurance premiums for years, only to discover after a claim was filed that they didn’t have coverage.

Review what types of claims your policy covers. Construction defect claims are often brought several years after the home was completed; does your current policy cover work that you did before it was in effect? For work that you are doing right now, make sure that your policy will also cover claims brought in the future. Insurance policies can ambush unsuspecting contractors, with your current policy denying coverage for work that you did years ago and your old policy denying claims brought after its coverage expired.

Be aware of the pitfalls that come with high deductibles. Insurance policies with high deductibles may seem more cost-effective right now, but you might be throwing your money away on insurance that doesn’t actually protect you from construction defect claims. Insurance companies will often treat each home in a construction defect claim as a separate claim, requiring you to meet the high deductible for each separate home before they will get involved. As construction defect cases frequently include multiple homes, you may be required to spend hundreds of thousands of dollars before your insurance will do anything to help you. Talk to your insurance broker and your attorney now, before there has been a claim filed, to make sure you aren’t paying for a policy that won’t protect you when you need it.

Maintain complete and accurate records of the work you do. Nevada law requires you, as a contractor, to notify your subcontractors or material suppliers of a construction defect claim very quickly after you receive it. Digging through unorganized and incomplete records, especially several years after a project was finished, can be very time-consuming for you and your employees. Even worse, if you are missing records from a previous job and can’t prove who did what on a certain house, you could be stuck paying for defective work performed by one of your subcontractors or suppliers. The best way to combat these problems is to keep your records complete and organized so you are prepared for any claim that might come your way.

Once a Claim is Filed

In Nevada, a construction defect claim begins when the property owner (or her attorney) mails a defect notice to a contractor; this notice will include a list of the defects claimed to exist at the property. When you receive this notice, there are a few key steps you should take right away.

Contact your insurance company and your attorney immediately. Insurance policies often require you to notify the company as soon as you receive a claim, and they could deny coverage if you wait too long. Your attorney will help you keep on track with deadlines and make sure that you don’t miss any important legal requirements.

Put together a list of all contractors, subcontractors, suppliers, or design professionals who may be responsible for the claimed defects. NRS 40.646 requires you to send the defect notice to them within thirty days of you receiving it from the property owner. This is a very strict and unforgiving deadline; if you miss it, you could be liable for defective work performed by someone else. Be sure to send notice to everyone who could have been involved with the claimed defective work, even if you don’t agree with the claim or know if the work was actually defective. Nevada law also has specific requirements about what is included in the notice you send to the subcontractors, suppliers, and design professionals and the way that it is mailed, so you will be much better off having your attorney send the notice for you instead of trying to do it on your own.

Inspect the property and think about repairing the claimed defects. After the notice is sent, you have the right to inspect the claimed defects and repair them if you choose to do so. Repairing the defects, if you are able to, is a good way for you to avoid the expense and headache of a lawsuit. However, make sure you talk to your insurance company before doing any work on the property and get written confirmation that they are okay with you performing repairs; insurance companies can be reluctant to approve repairs because they’re concerned about creating additional liability for the new work.

The key to dealing with a construction defect claim is to act quickly. Ignoring a claim won’t make it go away, but it will make it much harder for you to defend yourself later on.

Courtney Forster is an Associate at Gunderson Law Firm, and one of the few construction defect attorneys who has represented both homeowners and contractors giving her a unique perspective on the process. She earned her Juris Doctorate from Notre Dame Law School, and can be contacted directly at cforster@gundersonlaw.com or 775-829-1222.