Many different entities can be used to operate a business. The proper correct entity to utilize is dependent upon the various facts and circumstances of each business. You need to consider factors such as the nature of the business, the number and types of owners, the predicted profitability of the business, the type of assets that will be acquired and utilized in such business, and the potential liabilities that could be generated through the operation of the business. Lavelle Law, Ltd. will assist any client in evaluating the various facts and circumstances and guide to the selection of the appropriate business entity. To learn more about choosing the right structure, click here.
A shareholder agreement is a contract that is entered into between the owners of a corporation whereby they decide how certain events will be handled in the future. A shareholder agreement will typically modify how these actions are normally handled under the Illinois Business Corporation Act (subject to certain minimum rights). A shareholder agreement is advisable in order to ensure the smooth transition and/or decision-making process in the face of difficult situations. Some issues that are commonly handled in shareholder agreements are: election of officers and directors of the company; how major decisions are made, and restrictions on transferability of shares in the corporation. Certainly, additional issues can be addressed in the shareholder agreement.
Individuals choosing to operate a business using a corporation or other entity do so, in part, to insulate their personal assets from the creditors of the business. This is known as limited liability. If a corporation fails to observe the corporate formalities, there is a possibility that a court of law could ignore the corporate structure and pierce the corporate veil, finding the individual owners of the corporation personally liable for its debts. The best way to minimize such risk is to be sure that such corporation follows all the corporate formalities, including holding annual meetings of shareholders and directors and memorializing those meeting in minutes. In addition, the corporation should always have a minute book maintained as well as stock certificates prepared and executed.
Potential borrowers are often informed that the commercial loan documents are non-negotiable. However, it is our experience that this is typically a ploy used in order for the lender to obtain the most favorable terms under the loan agreements. Provisions in any loan agreement can and are often negotiated and modified between the parties before the loan documents are executed. The ability to negotiate more favorable terms depends on the relative leverage between the parties in the particular negotiation. Moreover, requesting modifications to the loan documents rarely lead to the proposed offer being pulled off the table and typically leads to a concession of some or many of the requested modifications. Simply put, it is worthwhile for a potential borrower to have an attorney represent them in a commercial loan transaction.
Courts are reluctant to enforce any provision that can be viewed as a restraint in free enterprise. However, in certain situations a court will uphold a non-compete if they believe it protects legitimate business interests. In addition, before a court will enforce a non-compete agreement, they will verify that the terms of the non-compete provision are reasonable in scope and duration.
It is trendy to form businesses in Delaware, Nevada, Florida, or even Montana. Reasons vary from protection of private information, reduced taxes in states with no income tax, and statutes that better protect business in general. It is important to determine whether you will gain any real, tangible benefit before moving forward. Often costs can actually increase as states are constantly playing catch-up to see where taxes are avoided and plugging those holes. In addition, if you operate in your own local state, you will still need to register to do business in that state, pay tax in that state, and will actually become liable for filing fees, tax returns and other costs in both states. Foreign registration can definitely backfire. There are certainly situations where a foreign registration is appropriate, but be sure you are doing so for legally sound reasons and not just following the most recent trend in small business formation.
Not every investor will want control of your business. Other than simply maintaining a majority interest, you have two options. The first is to consider their financial investment a loan, and prepare a promissory note. The investor may also want to secure the loan with business assets, or even your personal guaranty. The options for repayment and other matters are truly endless, and you should seek advice on how best to structure your loan. Typically, a loan structure gives the investor no control over your day to day operations. You can also issue “non-voting” interests where the investor receives a share of the profits but has no voting control over the operation of the business except the minimum rights provided by state law. Before creating a non-voting class of ownership, seek advice to ensure you do not forfeit any pass-through taxation you may currently have.
Series LLCs are normally used to hold real estate, but can be used in a variety of creative ways. In theory, if you own five investment properties, it would be advisable to hold title to each property in a totally separate LLC. This way, if you incur liability on one property, you do not risk losing the other four. But forming and maintaining several separate LLCs is costly and cumbersome. In Illinois and some other states, you can accomplish the same protection by simply using a Series LLC and holding each property in a separate “series.” Forming a new series is simple and inexpensive. All series can be operated under a single tax ID number, and can be governed by a single operating agreement. Use caution if you operate in several states because not all states recognize the Series LLC structure. Get advice on important steps you need to take to ensure you do not accidentally forfeit the “separated liability” you’ve achieved through use of a Series LLC.
There are several online services offering to form a company for you for a very small fee when compared to the fee an attorney would charge. It is important to remember that the fee charged by an attorney goes well beyond the simple filing of a document with the state. Our office will advise you as to the best structure for your business, additional documentation required to ensure compliance with state law, selection of the proper state to form your new company, potential issues and proper structure for multiple partners or investors, important tax considerations and many other factors. We also properly file with the IRS, Illinois Department of Revenue and Illinois Department of Employment Security. Common issues our office is asked to correct from online filings are re-domestications to avoid unintended double taxation, documentation to avoid loss of pass-through taxation treatment, documentation of partner or investor agreements, correction of documents improperly prepared or incomplete, and many other issues. At its worst, our office is often called in to litigate matters which could have been avoided with proper structuring of the business up front.
Insurance is important because it can protect the business from incurring any loss at all in certain situations. Every business owner should get advice from a good business insurance broker. But there are two issues where insurance may fall short. First is a successful claim that exceeds policy limits. In this case, the claimant would be able to go after the business itself for the shortfall. Without a corporation or LLC, that shortfall would be assessed against the personal assets of the business owner. Secondly, there are certain liabilities that insurance simply doesn’t cover. A downturn in business may result in breach of a lease or other contract. Claims for unpaid bills or contractual disputes are almost never covered by insurance and corporate or LLC protection is very valuable in these situations. Finally, there are several potential tax benefits to operating your business through a corporation, LLC or other business entity.