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Communicating With Your Business Partners

communicating in contracts

A New Year, A New Business, and A New Of Hope Of Communication

Aloha and Hau’oli Makahiki Hou!

I hope this finds you all well, and I thank you for visiting our legal blog or blawg. How has your first week of 2017? Ready to dive into new projects?  For those of you thinking this is the year or the time to start a business, well then today’s post and the couple of posts that will follow are for you. Specifically for those of you interested in starting a business, especially with business partners who will own the business with you. The overall theme of these posts is about communicating.  The source of this inspiration for the theme? My own partnership with Trejur launched last year my lecturing for a communications class at HPU, and I always get this question: Can my business partner do that?

Part I, Communicating With Your Business Partners

So today’s post is on communicating with your business partners, the one following this post will be on communicating with third-parties outside of the business entity you form with said partners, such as clients, customers, vendors, suppliers, contractors, etc …, and finally, the last post shall be about communicating with the government and various agencies.

Where it All Begins: Communicating, Not the Paperwork

So many of you that know me or have followed me, know that I started out as a solo practice working with small and medium-sized business clients on contracts and compliance work, such as forming limited liability companies. Over the years, as my workload increased I took on other contract attorneys to assist with the workload. Along the way, I met my commercial litigation partner, Trejur P. Bordenave. Trejur and I worked well together, and a lot of it was based on effective communication. This is the foundation that led us to the partnership we have today. In fact, he and I spent a good portion of the early part of 2016 discussing the partnership before formally launching the partnership itself.

Why am I telling you this?

One of the biggest issues I see when clients come to me to form a LLC or a corporation is they just want the documents. Yes, as a business attorney, absolutely I can draft your Operating Agreements or Corporate Resolutions, file your Articles of Incorporation, and/or obtain your Federal Employment Identification Number, and so forth, but typically, when someone like Trejur is called up to represent someone the dispute stems from a breakdown in communication and trust, amongst the business partners. There is not necessarily anything wrong with the paperwork, but the business partners did something, not necessarily maliciously or with intent to deceive, but their expectations about how the business would work, how they would get paid, reimbursed, when that would happen were all at different levels.  Let me use two examples of how this can play out to illustrate.

Example Stories

So these following examples are fictional, but they are issues I have seen before in a wide-variety of starting businesses or in the midst of a business dispute. Again, the point here is to illustrate that good communication is the foundation of a good business relationship, which in turn drives the drafting of the legal documentation.

Example One: Majority Member and Unfair Distributions

Kai and Russell open a new restaurant business. They organize a LLC. The LLC Membership Interest (or Ownership Interest) is divided 60% for Kai and 40% for Russell that is because Kai has contributed more cash and equipment (valued at $60,000.00) into the LLC as his Initial Capital Contribution than Russell. Russell just agrees that he will bring some of his old recipes from a prior business with him and agrees to work for the LLC for the value of his Initial Capital Contribution because they are in a rush to open the restaurant they draw up a generic Operating Agreement that recognizes the 60/40 split and that everything from that, including voting, profit/loss allocation, distributions, etc . . . will be 60/40.

Five months later, after the restaurant has been up and running, Russell quits and wants to terminate the LLC. Why? Well, he feels that Kai treats him more as an employee because he feels he owns the majority of the LLC and that Russell needs to work off $40,000.00 or what Kai believes Russell’s fair share of the contribution should be. Further, due to the majority position Kai takes his cash distributions at the beginning of the month, and gives Russell his distributions at the end of the month and if there is not enough for budgeting purposes states the LLC will just owe him later.

Example Two: Discussing Officer Duties Prior to Incorporating

Lisa and Jessie want to start a solar design and installation business. They intend to incorporate a corporation, which shall issue 1000 shares, where Lisa would own 550 shares and Jessie would have 450 shares. Lisa would like to be President as she has more local connections and is the one who can bring in more clients whereas Jessie will likely do the grunt work. However, Jessie is concerned that Lisa is President and has more shares so as a minority shareholder she fees unprotected. Lisa and Jessie meet and discuss this issue.

They decide that through their Articles of Incorporation, Bylaws, and Resolutions that the corporation shall only have the offices of President, Secretary, and Treasurer and that Jessie shall be both Secretary and Treasurer. Further, that Lisa as President must submit a marketing budget for the next fiscal year to Jessie as Treasurer on the June 20th before Jessie will cut checks from the corporation’s expense account to where she will have sole authority to cut checks from. They also agree that all 1000 shares (unanimous consent) must vote in favor of declaring dividends before money is paid out as such.  Finally, both agree to sign Employee Agreements stipulating to what their compensation, benefits, work hours, etc . . . on top of their rights and obligations as shareholders of the corporation.  Both are satisfied with this arrangement and move forward to incorporate.

So What Happened? What Should You Consider for your Business Partnership?

In my first example, the business partners were in a rush, failed to communicate expectations, and felt that once they had the paperwork everything would resolve itself. But as trite as it may seem, they did not talk about their feelings and by signing an Operating Agreement that just split everything according the Ownership Interest percentage it did not really reflect on how they were going to do business with one another. In the my second example, discussing how Jessie felt about her worries and concerns allowed them to create a process, a mechanism of a check and accountability that they discussed and agreed to.

At this point, I’d like to put in your mind a lot of people think that once the file their Articles of Organization or they come up with the Bylaws these are set in stone. That is not necessarily the case, the owners of the business can always amend them if they are in agreement. Also consider if you and your partners are not sure what the final arrangement will look like, that is you are in an ongoing negotiations, but you have stipulated to some terms or have an inkling about where your arrangement is heading, you can always use a Memorandum of Understanding or Letter of Intent or whatever document applies to stipulate to what has already been discussed or agreed to, and agree to return to the matter at a later time to finalize. Communicate and trust each other, but keep a record of it.

Often times, people do not slow down to consider how they want to structure their decision making processes, their rights and duties to each other, to the business. Their feeling is that making money will resolve all that, but then the issues come up overtime like . . . Why do you get reimbursed for parking when I take the bus? I bring in all the clients and you do all the work, and marketing and networking is work. The recipes I brought with me are the value of the food company so I should get a majority interest. I’m the older brother so I dictate the operations just like the way our father and grandfather did it. And so on and so forth . . . if you thing your dispute is ridiculous with your business partners, I’m pretty sure there are ones even more crazy.

Sit Down and Discuss Expectations

What isn’t crazy is sitting down and discussing what you expect out of the business relationship and what you expect out of your business partners before forming the business entity and doing business. In many ways having a business partner is like getting married it is for better or worst, and business divorces are ugly affairs like regular divorces. Therefore, it is worth the time to sit-down and talk it out, and then if you are wondering can we arrange our business partnership according to what was discussed that’s when you can give me a call and we can work out . . .

What is the difference between a Member-Managed and Managed-Managed LLC? Can I contribute services in exchange for stock ownership? What are the differences in liabilities for a General Partner versus a Limited Partner? Can we have percentages of Ownership Interests that do not match Distributional Interests? What about having two-levels of Ownership Interests? Should we limit the powers and authority of the President?

Mahalo for reading this post. I hope you have a Happy and Fortuitous New Year! See you next time!

-RKH

DISCLAIMER: This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in this post without seeking the advice of  an attorney in their relevant jurisdiction.  Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s with All this Paperwork V: Corporate Records

In last week’s post I covered some unique features of an operating agreement.  This week, continuing on our tour of paperwork that startups and small business owners should be familiar with, we go back to corporate paperwork.  Today, I will talk about three general documents that you will repeatedly see running a corporation.  They are Notice, Minutes, and Consent documents.

The Purpose of Creating These Documents

Recall that bylaws are a series of rules that the owners of the corporation, the shareholders, agree to be bound to when running the corporation.  Among these various rules you will discover how meetings are to be announced, what can or cannot be done in a meeting, what constitutes quorum, and a variety of other matters that shareholders and directors must know being a part of the corporation.  For instance, recall that shareholders are not directors.  The shareholders select directors to run the company.  In this vein, the delegated powers between shareholders, directors, and officers may be different from corporation to corporation, and the only way you would know is by reading the bylaws.

Therefore, the bylaws become important for what is considered Notice for Shareholders’ Meetings and Directors’ Meetings.  Further, minutes are used to record the meetings.  Lastly, sometimes instead of holding meetings may be the group will decide to act through signed consent forms.

Sticking to the rules is important because if you remember way back when I started talking about limited liability these documents are a part of the separate entity feature that shows that the people running the corporation are separate from the entity.  The lack of good corporate records and following your bylaws could make the shareholders’ personal assets vulnerable to a creditor or subject to IRS challenges to the legitimacy of the corporation or transactions.

For brevity purposes I will mainly focus on corporate records from the viewpoint of shareholders, as typically in a small startup these shareholders are also the directors that run the company. Let me take each one in turn now.

Giving Notice

So bylaws, dictated by state law, will tell you how to give proper notice of a shareholders meeting.  Why is it important for you to do this correctly?  If proper notice isn’t given to a shareholder, that affected shareholder may have a claim and further the actions taken at the meeting may be null.  Meaning you will have to redo the meeting all over again to take the same action.  Many small corporations like to play politics when a fellow founder and shareholder is not living up expectations by not giving them notice.  This is a big mistake. Like it or not, as a shareholder they are entitled to proper notice of a meeting.

Further, notice that Notice means something particular in corporate law.  Generally, it is in writing, and can be delivered through a variety of means, and finally the manner of delivery will change the timing of effectiveness.

Minutes

At a shareholders meeting the minutes serve to memorialize the actions taken at the meeting. Usually, if there is a position of Secretary, it is their role to record what was said and decided upon so that it serves as a record.  What should be noted is what your bylaws say about quorum, if they default to what the law says, then a majority of shares is considered quorum.  This need not always be the case, but you want to be familiar with your own bylaws and especially quorum.  You may have given proper notice to all the shareholders, but due to unique bylaws the shareholders that show up may not be enough for quorum or to take action.  It all depends.

*This is not legal advice, just for practical purposes: For my minutes, for smaller corporations, I like to put the names of the shareholders at the top, how they appeared for the meeting (in-person, phone, or if you allow via internet), and sometimes their share amounts to see if you have quorum. The main thing is accurately recording what took place, which is why the minutes are usually never approved right then and there, as the secretary preps them for a following meeting for approval.  Once the minutes are approved they are kept with the other corporate records.

Written Consent

Sometimes, you don’t want to hold a meeting for everything.  Thus written consents step in to save your time.  This is especially important for startup corporations, where the founders cannot be burdened to call a meeting for every non-controversial issue to act.  Moreover, with the advent of Internet and tech companies, there may be shareholders in Hawaii, California, and Washington of a single company.  Therefore, it is best to act through written consent, especially when there is agreement among all the shareholders.

However, even if all the shareholders do agree, going back to what I mentioned earlier in this post, you still want to record your acts to be in corporate compliance.  Also they are great tools to deal with after the fact that you messed up on Notice, and did not have a proper annual meeting.  Having all the shareholders sign a consent form will serve to fill the gap of the messed meeting.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

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FAQ: Should My Startup Issue Stock Certificates?

Sorry, no Draw the Law this week (or next week), as I am working on a something important.  I will announce what it is tomorrow.
As for today, this is a follow-up on a FAQ that a lot of founders and startup corporations ask me.  Should they issue stock certificates?

Is It Required by Law?

As I said last week, no. In Hawaii, a corporation, through its board of directors (under the authority of the articles of incorporation or bylaws) may issue shares without certificates.  In general, most, if not all jurisdictions, have done away with the requirement of a piece of paper signifying ownership in a corporation.

Even social media giant, Facebook, scrapped its plans earlier this year to issue paper stock certificate to its shareholders.  More and more companies are turning to electronic registration as a way to keep track of shares.

What about the Startups?

It’s true large, publicly traded corporations are moving away from the traditions of paper, but does that mean you should.  There are some attorneys who feel you should as it signifies ownership and allows a small group of founders to have a check on each other given the fluidic nature of startups.  Others embrace the digital and just say keep good electronic records and documentation.  Not to mention paper certificates are actually costly to print, which is an added cost your young corporation may not need.

For startups, the founding owners should discuss whether or not they want to issue paper certificates or not.  It really is a personal preference, as some people enjoy having the tangible proof of ownership and nostalgia of the paper.  In fact, Scripophily.com buys an sells original paper stocks for people interested in collecting.  Still others prefer the cheaper method, and just keep an electronic spreadsheet to keep track and just send updates.

If My Startup Decides to Issue Stock Certificates What Does it Require?

Hawaii Revised Statute §414-86 states the following required items to be on a stock certificate if you choose to issue them:

 (b)  At a minimum each share certificate must state on its face:

(1)  The name of the issuing corporation and that it is organized under the law of this State;

(2)  The name of the person to whom issued; and

(3)  The number and class of shares and the designation of the series, if any, the certificate represents.

(c)  If the issuing corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the board of directors to determine variations for future series) must be summarized on the front or back of each certificate.  Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge.

(d)  Each share certificate:

(1)  Must be signed (either manually or in facsimile) by two officers designated in the bylaws or by the board of directors; and

(2)  May bear the corporate seal or its facsimile.

Last Word

Personally, on a practical level, I do not think you need them, but that isn’t a legal opinion.  It just has to do with startup expenses and printing out specialized paper may not be necessary and would only drive up your costs at the beginning when you need to focus on your business model.  However, in some cases it may be warranted, but everyone’s situation is different.  Therefore, consider speaking to an attorney to provide advice and their thoughts given your situation on this matter and all that other paperwork that you need!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

What’s with all this Paperwork? Part III Corporate Bylaws

Last week’s post was about the differences between the internal documents of bylaws and operating agreements, and what their purpose is as opposed to the Articles documents.  This week and next, I will take a closer look at the in-depth documents, bylaws and operating agreements, separately and mention a couple things that startups and small businesses should know about bylaws.

Adopting Bylaws are Required along with Certain Provisions

Recall last week that I mentioned as opposed to a LLC’s operating agreement, that a corporation’s incorporators or board of directors MUST adopt initial bylaws for the corporation.  However, what is also required are certain provisions that control how shareholders and directors behave with regard to the corporation.  Further, there are provisions that the owners of the company may consider.

*The Difference Between “May” and “Shall”

I don’t normally give grammar lessons on my blog, but when it comes to business law, especially corporate documents, many people get bored, confused, (sometimes angry), at the tedium of the words we use.  Thus the need for clarity in the matter.

Without getting into the mechanical linguistics of it all, when “shall” is used it is something that you MUST do, whereas “may” gives you the option of doing the act.  I am going to use an example when it comes to Annual Meetings.

You Must Have Annual Meetings, but You May or May Not State the Place of the Meetings

What does that mean?  Let me show you the relevant statute and break it down:

(a)  A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws.

(b)  Annual shareholders’ meetings may be held in or out of this State at the place stated in or fixed in accordance with the bylaws.  If no place is stated in or fixed in accordance with the bylaws, annual meetings shall be held at the corporation’s principal office.  Notwithstanding the foregoing, the bylaws may authorize the board of directors, in its sole discretion, to determine that the annual meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized under subsection (c).

So notice in section (a) it states that a corporation shall hold a meeting of shareholders each yeah and that the bylaws shall state that time.   However, notice in section (b) it states that these shareholders’ annual meetings may be in Hawaii or not, and that the bylaws may state this place. However, if you do not state a place it shall be the corporation’s principal office.

Please note that is just part of the “Meetings” statute as it is to the Hawaii Business Corporation Act.   What you should take away from it is that there are some provisions required in bylaws and there are others that you have flexibility with.

Why is this Relevant for People Starting a Business?

Yes, paperwork is tedious, but it also creates accountability and a method of controlling your business.  More often than not with a start-up there is the idea person, the money person, and the person who can engineer/produce/implement the idea.  With three people involved there has to be a way to control how the interact.  Further, once the business develops, the goal may be to seek more investment, and thus new additional owners of the corporation (shareholders) join the entity.  Thus the need for bylaws to dictate how this all operates.

Some Other Typical Provisions that Appear in the Bylaws

These other provisions are in no particular order, and some may or may not appear in the bylaws.  Further some of them may be required, and others just appear as it is customary.  The point for a business owner using a corporation should know that some of these things appear in your bylaws, the way you govern your business.

Sample Subjects of Bylaw Provisions:

  1. Special Meetings (as opposed to the Annual Meetings)
  2. Required Officers, Duties of Officers
  3. Record Date (this refers to what date a record reflects what shareholders are entitled to notice of a shareholders’ meeting)
  4. Number if Directors, Director qualifications and Duties
  5. Notice (how notice is given for certain circumstances)
  6. Stock Certificate Signatures
  7. Restriction on Transfer of Stock
  8. Shareholder Agreements

There are other provisions that more often than not appear in bylaws, but this is just meant as a sample.  Finally, please take heed you should consider seeking an expert’s help when drafting your bylaws, as this is a foundational document of your corporation.  I have seen many founders wanting to start fast and adopting poor or wrong bylaws, and then requiring “cleanup” work, which is often more costly and time-consuming after the fact of initial adoption.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

 

Business Entity Formation Talk at ING Direct Cafe in Waikiki

Business Entity Formation Talk at ING Direct Cafe in Waikiki

August 1st – I will be holding my Business Entity Formation Talk from 6:00 – 7:00 pm. Come learn the differences between the entities at ING Direct Cafe.

Law and Legal Info in the Brief: Act 141, No Resolutions for LLCs, and the HSBA’s PBN Insert on Regulatory Compliance

Hey everyone, today’s Law in the Brief will be really brief!  I got some other interesting information to share as well.

Act 141:  Relating to Small Claims Court; Monetary Limit increased from $3,500 to $5,000

The Hawaii State Legislature was keen on access to justice issues this past session. The big one was ILAF (which I wrote a Civil Beat article urging passage of the bill) and at this past week’s Hawaii State Bar Convention the two attorneys responsible, Mihoko Ito and Gary Slovin, both with the law firm of Goodsill, Anderson, Quinn and Stifel, were recognized with the Ki’e Ki’e Award for their outstanding pro bono work (congratulations).

Anyway, another law making it easier for people to access justice is Act 141. This bill increased the maximum monetary claim that may be filed in small claims court; the prior maximum was $3,500 and with Act 141 it is now $5,000.

This is great for people seeking redress on a smaller level, but had disputes with a monetary value over $3,500.  If you were above that amount you would have to file a claim in another court, which had much higher filing fees. Right now, Small Claims Court has $35.00, whereas Regular Claims it is a $120.00. The advantage of filing in Small Claims as well is that it is typically simple, informal, and the cases resolved more quickly. Many business owners and landlords/property managers use Small Claims Court to resolve problems with damage to or repossession of stolen business property (i.e. shopping carts) and leased or rental properties.

For more information on Small Claims Court click here.

No Resolutions for LLCs

While at the bar convention last week Friday (9/23) I attended both the Corporations and LLC seminars. After all I had just conducted a talk on Business Entity Formation at Hawaii’s first coworking space, The Box Jelly. So I like to keep myself updated, so I can update clients as well. During my seminar, I discussed the difference in terminology between a LLC and Corporation. I also mentioned how important it is to understand those differences. One of the panelists at the LLC seminar proved the point.

Many of the formalities needed in a Corporation, are not needed in a LLC. One of those unneeded formalities are resolutions. The panelist bemoaned how many local bank personnel keep requesting her to draft resolutions for her client LLCs to authorize a loan. Her response, as would be mine to the bank is:

LLCs DO NOT NEED RESOLUTIONS TO AUTHORIZE ACTIONS.

This is one of the things I covered at my talk.  So if you missed my Business Entity Formations seminar not to worry I will be doing one again probably in a month (so Subscribe to this Blawg to find out when).

In the meantime, do not forget to sign up for my next talk on Social Media and the Law this Wed. (9/28) at The Box Jelly, starting 6:00 p.m. It will be $10 for The Box Jelly members and $15 for non-members. Materials are included.

Go to my Facebook page for info and invite. Also I would be happy to do a legal seminar for a gathering of more than 10 people. Contact me for details.

HSBA’s Pacific Business News Road to Regulatory Compliance Insert

Also at the bar convention Pacific Business News was handing out its current issue of (Vol. 49, No. 30). In it (right after the article on Hawaii’s awesome social media stars Toby Tamaye and Melissa Chang!) is the Hawaii State Bar Association’s insert Path to Regulatory Compliance. In it are several brief articles on new laws affecting Hawaii businesses. I recommend checking it out, especially the one on Protecting Gender Expression or Identity in the Workplace on page 11.

You might find that the author and the topic are familiar if you read this blawg regularly.

See you all Friday for Draw the Law wrapping up those worker privacy issues I have been discussing.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.