In last week’s bLAWg: Throwing in the Towel: Legal Issues to Closing Your Business – Part 1, I discussed the duties and obligations of closing a business. If you have recently decided to close your business or are looking for alternative options to closing; the below checklist should provide a basic map of what you need to consider. Remember each business is unique and do not consider the below checklist a substitute for professional advice or as a definitive, exhaustive list.

What steps should I consider to Close my Business?

When closing your business, you want to take time to plan things, and a checklist helps organize that process. In general, the goal is to account for assets and liabilities, and make sure you are using the business assets to pay off its liabilities. You want to eliminate liabilities, prior to dissolving the corporation or terminating the LLC. Consider the following:

  1. If you have advisers, you should talk to them as they can assist or offer advice
    • Attorneys, accountants, Bankers, HR specialists, Financial Advisers, Business Mentors
  2. Sell off your inventory and collect on your accounts receivables – consider during this pandemic you may have to discount or negotiate as cash for others is also tight
    • Finish off your obligations to your clients/customers
  3. Provide notice to the major creditors or those businesses that support your operations;
    • Bank, lenders, suppliers, service providers, and utilities
      • Time your cancellation of credit cards and subscription services
      • Prepare to close your bank accounts
    • Landlord – in this case you may wish to review your commercial lease as these tend to be lengthy conversations depending on the terms
  4. Discuss with your employees and pay them out, and remember payroll deposits
  5. Liquidate everything else possible*
  6. Settle and paying off your debt, as much as possible**
  7. Do Accounting and Recordkeeping
  8. Pay off ALL taxes or prepare what you will need to file for returns
    • For example, in Hawaii, if you sell off all your inventory or certain other assets there is a Bulk Sales Tax Form
  9. Cancel permits and licenses with appropriate government agencies
  10. Consider providing contact information for forwarding purposes related to the closing business so people may contact you if you miss taking care of something
  11. If there is any money or other assets leftover review the internal governance documents (like an Operating Agreement for LLCs) and divvy up accordingly to the business partners – yes, this comes toward the end
    • Overpaying yourself to the detriment of creditors or taxes you owe is again subjugating yourself to personal liability
  12. Dissolve the Corporation or Terminate the LLC – ideally, after this you should be done with your business

What’s with the asterisks? Are there other options?*

Strategically, the decision by a business owner to close just means they are personally done with the business. However, consider just because they do not see value in continuing operations that doesn’t mean there is not value in the business. Consider that you could sell the business or its assets to another. For example, maybe a new restaurant owner wants a deal on kitchen hardware, or the landlord is willing to assign the lease to someone who wants to take over the space. Or consider a budding entrepreneur that sees an opportunity to take an established business and rebrand, so selling off the intellectual property and brand to them.

The bottom line is just closing, selling off assets, and squaring away liabilities, does not have to be the only route. While it is likely the case during COVID-19’s economic downturn that your business will not be as valuable as you want, sometimes you being done with your business does not mean its assets, operations, or brand cannot be of value to another.

What if my Debts and Liabilities are More than My Assets? What about Bankruptcy? **

According to the U.S. Bankruptcy Court in Hawaii, 151 residents and businesses filed for bankruptcy protection in June (up 22%). In July, Hawaii bankruptcies flattened to 140 which is just two fewer than the previous year’s findings. Although, federal and state assistance programs have helped during the shutdown, filings may continue to rise during the next few months and even into the next years as aid slows down and ends.

In instances, where you are truly underwater and the debts and liabilities appear to be insurmountable and/or the creditors are not budging in negotiations where they are demanding the full amount and you cannot pay, then yes, the other option is bankruptcy. If this is something you are considering, then understand that this is an even more significant decision than just closing your business.

Some of the steps to filing for bankruptcy include compiling financial records, credit counseling and filing the petition. Consider working with a bankruptcy attorney to make sure you understand what is required to file for bankruptcy, and feel free to contact us for referrals in the Honolulu area.

Anything Else to Consider?

None of the foregoing comments and lists are exhaustive. Every business, and its business owners are unique and may sometimes have special circumstances. If you have a situation that needs specific legal advice, then consult with an attorney, as soon as possible.

However, if you are still considering your options or want to learn more about the steps to close a business and alternative options, then consider joining our upcoming webinar – Throwing in the Towel: Legal Issues to Consider for Closing Your Business on Thursday, September 3, at 12 pm HST. Register here!

DISCLAIMER: This post provides general information, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained in the post without seeking the advice of an attorney in the 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.

Are you a business owner thinking of closing your store, restaurant, or bar? You are not the only one who has thought about it. In fact, many already have.

In Honolulu, walk around any neighborhood whether it is Downtown, Kalihi, Haleiwa, or Mōʻiliʻili and you will see that some businesses are gone. In some cases, for good. Surveys conducted indicate that approximately 900 businesses in Honolulu have closed either permanently or temporarily since the COVID-19 pandemic has started. Additionally, we know that the pandemic is not subsiding prompting the government to step up its regulations. Just recently bars on Oahu have been forced to close for an additional three weeks due to Mayor Caldwell’s Emergency Order 2020-23.

This post is for those thinking that it might be best to get out of the business they are currently in and some of the legal issues they must consider before “throwing in the towel.”  

The decision to close your business is not something to take lightly. While, you may have been one of those people that woke up one day and said, “I’m going to start a business,” while learning how to run the business along the journey. This wisdom and experience should have also taught you that the process of closing a business is not necessarily easy or straightforward. It is a process.

The worst decision to make is running and hiding from responsibility or closing too quickly without wrapping up your duties and obligations.

What are my Duties and Obligations?

If you’ve been running a business for several years, especially one that has some physicality to it, such as a storefront, inventory, or employees that report to you, then you realize all the responsibilities you have. First, you should make a checklist of the relationships that you as the business owner and the business itself has with others. This will help you map out all the people you will need to deal with as you wind down operations and move to closing the business. Especially, if you have an LLC or corporation that exist, then understand that your limited liability protection comes from the fact these entities are separate legal persons from the owners. The entity is on the hook for some of the contractual obligations and duties set at law.

Ask yourself about these relationships and what contractual and/or legal obligations and duties you have to:

  1. Business Owners – who needs to decide to go through with closing the business? Consider business entities that require votes by the partners, members, or shareholders to formally begin the process.
  2. Customers/Clients
  3. Vendors/Suppliers
  4. Landlord
  5. Financial Institutions, Banks, and Credit Card Companies
  6. Utilities and Service Providers
  7. Other Lenders (e.g. friends and family give you a loan?)
  8. Employees and Contractors
  9. Federal, State and County Governments (e.g. your taxes, licenses, and permits)
  10. Outstanding Lawsuits (if your business is currently in a lawsuit you may have to delay your plans of closing the business till this is resolved)
  11. Business Owners (e.g. if you are Managing-Member of an LLC members group, you have certain obligations to them prior to closing the LLC)
  12. Anyone other creditors

Consider that anyone of these may have a cause of action (lawsuit) against you or the business if you do not properly deal with them. Many of them are creditors and in some instances if you don’t pay or do what you are supposed, they will sue you to attempt collect their money. Did you give your customers coupons to use? Did you buy inventory on credit? Is the credit card paid off? How long is left on the term lease? Do you have enough money to cover payroll? And so forth.

The business owner is responsible to figure out how to end these relationships and the outstanding liabilities on them. However, what you should not do is run to dissolve the business entity first just because the liabilities are so big and onerous.

Why is Proper Notice so important?

Too many times I have seen LLC members think it is a good idea to terminate their LLC when they have not notified their creditors. They don’t understand doing the “hard stuff,” that is notifying creditors is really saving them from personal liability. They have a duty to notify creditors that they are closing to limit debt, not terminate the LLC and run and hide. This latter choice creates personal liability – in effect, you are causing the business entity to cease to exist without taking proper steps, thus eliminating the limited liability shield.

Anything Else to Consider?

None of the foregoing comments and lists are exhaustive. Each business, and its owners are unique and may sometimes have special circumstances. If you have a situation that needs specific legal advice, then consult with an attorney, the sooner the better.

However, if you are still considering your options or want to learn more about how to close a business, then consider joining our upcoming webinar – Throwing in the Towel: Legal Issues to Consider for Closing Your Business on Thursday, September 3, at 12 p.m. Register here!

Also, stay tuned for our bLAWg next week, that will cover: (i) a checklist of steps to consider when closing your business; (ii) other options instead of closing your business; and (iii) what to do when the business’s debts and liabilities vastly exceed its assets.

DISCLAIMER: This post provides general information, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained in the post without seeking the advice of an attorney in the 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.

I just wanted to recap my seminar on business partnerships from last week at the Entrepreneurs Sandbox. Entitled All is Fair in Love and War: Navigating Business Partnerships, and playing off of Valentine’s Day, my panel and I discussed the ins and outs of business partnerships. We touched upon of course my focus, business law, as well as estate and financial planning, and marketing issues. I’d like to thank John Roth, esq. of Hawai’i Trust and Estate Counsel, Kai Ohashi, AAMS of Edward Jones, and Thomas Obungen of Slug Media LLC for their participation. Further their insight, knowledge, and personal experiences helping clients in business partnerships proved to be invaluable to the audience. A thorough discussion took place on the issues facing business partners inside and out of their business. Some of the topics included:

  1. Due Diligence of Potential Partner
  2. Choice/Forming Business Entity
  3. Operating Agreements
  4. Restrictive Covenants
  5. Goals & Metrics
  6. Succession Planning
  7. Departing Partners, Death & Disability
  8. Financing a Partnership
  9. Buy-Sell Agreements
  10. Differing Generations of Partners
  11. Partners that Have Competing Marketing/Branding Visions
  12. Communicating Internally and Externally
  13. Change of Business Partners
  14. and many more!

What I Had to Say on Having Business Partners

Attorney Ryan K. Hew enjoying hosting the seminar with a doughnut!
All is fair in love and war, including eating a doughnut while presenting on business partnerships, while the litigation partner is at the office!

Talk it Out

For this recap I am not going over the whole presentation, but instead I would highlight a couple of items. I myself have a business partner, he handles the commercial litigation. So we see a lot of business partnership breakups; it says something when the transaction attorney and commercial litigator both feel the two biggest factors for business divorce:

  1. Lack of communication
  2. Differing Expectations

If you think about it, number 2 is an off-shoot of number 1. If you and your partner have differing goals and fail to talk about those issues, then over time the gap in goals widens. This gap is sometimes too wide to overcome. For example, money issues tend to be the biggest source of complaint. Of course they are, as profit is the nature of what a partnership. If you don’t know what the law defines as a “partnership” check my other post here. Frequently, partners that contribute different amounts of capital have differing exit strategies. Also know that even when the company is making money partners fight. Yes, I’ve seen arguments over profitable businesses because the partners failed to talk about what they would with their success. Distribute? Reinvest?

Then Write it Down

Even if you and your partner have discussed the issues, if you fail to formalize those discussions that is still a lack of communication. The reason being is memories fade, goals change, and in general life happens. What happens is the partners remember conversations differently. Then law firms, like mine, spend countless hours sifting through emails, texts, and images, trying to piece together what could’ve been the agreement. So the next thing to do after discussing and agreeing is writing it down. One of the activities that separates us from other animals is our desire (some more than others) to record things. Mark Kurlansky an author that focuses on interesting history topics, talks about this in his book Paper: Paging Through History.

Not every documentation needs to be a book, but having the formalities is crucial for a healthy business partnership. This is especially true for big ticket items. Consider items such as capital contributions, members’ interest, distributions, profit/loss allocation, and member’ responsibilities and duties. With a professional’s assistance, partners can discuss what they want and then document in a legally, binding enforceable agreement. For LLCs and their members, that is an Operating Agreement. Note: I am mostly sticking to limited liability company (LLC) language just due to the nature of my practice. For partners forming a corporation these items will be discussed, but will have differing terms and restrictions due to the choice of entity.

Operating Agreements & Employment Agreements: Separated or Incorporated

One other thing about why using a professional to assist in drafting your formal agreements is best. The advice on whether to separate or incorporate several relationships and arrangements in one document as opposed to several. The reason I bring this up as an audience member had an excellent question. Their question was:

Should an Operating Agreement contain the members’ employment duties and obligations?

Generally, an Operating Agreement is used to outline the LLC’s financial and functions processes as it relates to the LLC and its members (the owners of the LLC). It acts an internal governance document of the operations with respect to the way the owners interact with each other and the entity as a whole. Yes, in an Operating Agreement duties and obligations can be placed on the members, such as a restrictive covenant for non-competition. However, employment duties and benefits, such as position/title and duties under that position, compensation, vacation may be considered in a separate arrangement, an Employment Agreement. Why?

Consider a partnership were there are multiple members, the membership may elect one of them to be the Manager in a Manager-Managed LLC. Therefore, management authority would reside in the Manager and would be spelled out in the Operating Agreement. However, for their day-to-day tasks, compensation package and benefits, and termination provisions, those may be considered under an Employment Agreement. The reason for this separation is what if the membership wants to “fire” the Manager under the Employment Agreement, but there is an understanding that individual remains a member under the terms of the Operating Agreement. Having one giant document where duties and rights are confused or entangled may be problematic in enforcement or trying to carry out, especially in tense situations. Separation sometimes provides flexibility. Obviously, the trade-off is more documentation.

Last Words: Get it Signed

That was a brief recap of some of the interesting discussions that took place at the seminar. Hopefully, this will prompt you to consider your own business partnerships and what you need to do to improve their health. One last consideration: if you get a formal agreement, then get it signed! There is no point in engaging a professional to draw up a mutually agreed upon contract to then not execute it. It is worst, to then later to get into a dispute over the very subject matter in that formal agreement. Obviously, please speak to your advisers, including an attorney in your relevant jurisdiction. While, it may be costly, consider the costs of miscommunication, then the potentiality of lawsuits due to your business partnership dispute.

I know somber last words, but cheerfully check back for future seminars and similar content.

Thanks for reading!

DISCLAIMER: This post provides general information, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in the post without seeking the advice of  an attorney in the 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.

Hey everyone, Happy Lunar New Year!

Lunar New Year and New Seminar

Yes, there’s a delay on my traditional post on laws related to the animal of the year. However, check out last year’s How Can I Hunt Boar in Hawaii? or 2018’s Can a Landlord Charge a Tenant Extra for a Dog? In the meantime, I’ve been busy with a number of projects. First, I’ve been putting together another seminar and panel similar to last year’s Non-Profit November: Formation & Compliance. For this February, it is All is Fair In Love and War: Navigating Business Partnerships.

This seminar will be on dealing with business partnerships, such as formation issues, estate planning and finance, and in general what it is like having a business partner. Joining me will be a panel of subject matter experts. John Roth of Hawaiʻi Trust and Estate Counsel, Kai Ohashi of Edward Jones, and Thomas Obungen of Slug Media LLC. If you are in Honolulu the day before Valentine’s Day, February 13th, 11:30 AM – 1:30 PM HST, then come to Kakaʻako’s Entrepreneur Sandbox. For more information and to buy tickets for this seminar go to Eventbrite.

Web Search Autocomplete Questions Video

So that’s one project. The other project is my staff and social media consulting friends and clients all have been urging me to do more video content. So the staff came up with this fun project.

In the video below, I answer questions to a web search’s autocomplete function. If you’ve ever started typing into an internet search bar, then there are suggestions on what the most common web searches for the word or phrase. In this case, to plug the seminar my, the staff gave me the following web search autocomplete questions:

  1. how are business partnerships |
    • how are business partnerships formed
    • what are business partnerships
    • how business partnerships work
    • how do business partnerships work
  2. why are business partnerships |
    • why are business partnerships important
    • what are business partnerships
    • why business partnerships fail
    • why business partnerships don’t work
    • why do business partnerships fail

For my answers watch the video:

HRS Definition of “Partnership”

By the way, in the video you see me try and quote what the Hawaii Revised Statutes (HRS) definition of the word “partnership.” Well, here is the specific definition in the law:

“Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under section 425-109, a predecessor law, or comparable law of another jurisdiction.

HRS §425-101

Obviously, that is the legal definition of partnership, but as you may know (or maybe not, thus the seminar and video) is business people use the term “partnership” very loosely as opposed to the legalese. For instance, someone may say, ” My partner in my LLC.” Technically, “members” is the term for a multi-member limited liability company, that is the owners of the LLC. However, the person would be indicating “partner” as their business partner within the LLC. This is just one example how legal definitions differ from everyday use of words and terms. This post, the seminar, and the video is concentrated dealing with the many issues associated with business partnerships, including definition/use, forming them, and of course, when an attorney is involved, fighting in them!

Thanks for watching and reading. Until next time!

DISCLAIMER: This post provides general information, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in the post without seeking the advice of  an attorney in the 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.

Your Personal Resolutions vs. Corporate Resolutions

So we are midway through January 2019 as of this post. How are your New Year’s Resolutions coming along? Are you preparing for your 2018 tax returns? Government shutdown or no the IRS will still be collecting taxes, so that’s always a struggle. In particular keeping your accounting and records in order to help yourself or your accountant.  So working on your taxes and helping out your accountant, whether you own a business or not, may be a personal resolution.

If you are responsible for a corporation’s records you probably want to make it a personal goal to make it the corporation’s goals to be prepared and organized for corporate meetings and docs.

For businesses though, another issue they may struggle in trying to do better each year is in their record keeping. Particularly, a problem acute to corporations, is documenting a corporate board’s decision-making process. Sometimes for corporate compliance concerns documenting the board’s decisions is crucial. It might be what is at issue in an IRS audit or an investigation by a licensing/permitting government agency.

From following the Articles of Incorporation, By-laws, calling meetings, setting agendas, sending notice, etc … there is a lot of keep track of for corporate formalities. One of the important documents in the corporate governance and record keeping process is the corporate resolution.

Understanding Corporate Resolutions

Corporate resolutions should be stored with other records like minutes.

Good record keeping, including documenting resolutions is key for corporate governance and compliance.

So what is a corporate resolution exactly? Corporations are legal persons. While, they are not living, breathing people like you and me they are persons under the law. They can own property, sue others, and be sued themselves. However, in order to do something, that is take action, corporation’s have boards that make decisions. In that way, corporate resolutions are like personal resolutions. Where you are resolved to accomplish something, like eat better or exercise more, a corporation is resolved to take out a loan or buy a piece of property.

For more information on corporate resolutions download and read the following One-Sheet. It is meant to answer the basic questions of corporate resolutions: ONE-SHEET: WHAT ARE CORPORATE RESOLUTIONS?

Many corporations spend a lot of money on their corporate formalities and governance items, such as:

  1. Proper notice and running of meetings;
  2. Timely annual filings and tax returns;
  3. Well-draft resolutions and minutes; and
  4. Documenting decision-making processes.

With so many stakeholders interested in corporate actions, such as shareholders, directors, officers, executives, IRS agents, licensing boards, regulators, environmentalists, and social activists corporate resolutions are just one of the many records that need to be maintained.

Resolutions Used in Other Organizations

Other organizations also use resolutions.

A variety of organizations and associations also use resolutions. They just do not call theirs “corporate resolutions”.

Finally, realize that for-profit corporations’ boards are not the only boards that should be documenting their actions and decision-making. That is resolutions are not only for them. Consider these situations:

  1. legislative bodies, their committees, and boards/agencies showing how they met and discussed the passing of laws or changing of regulations;
  2. nonprofit boards should avoid self-dealing, conflicts of interests, and the like as certain actions may be perceived abusing their charitable and tax exemption status for 501(c)(3) corporations, thus answering inquiries by the IRS and state regulators;
  3. homeowners’ and condo association boards where the decision to implement house rules, policies, and/or improvements could be challenged by owners or by injured parties for liability purposes; and
  4. yes, even LLCs and partnerships may use resolutions, they just do not call them “corporate resolutions”.

Resolutions in general are just a document of an action to be taken. Whether they pass or not a corporate board is something else. Corporate resolutions is just one of the tools in the corporate governance and compliance process. So anyone forming a corporation, serving as an officer/director, or becoming a shareholder should familiarize themselves with corporate records.  If your new to proper corporate governance and drafting of resolutions, then you may want to consider a lawyer’s help.

Finally, for your personal resolutions good luck!

-RKH

DISCLAIMER: This post provides general information, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in the post without seeking the advice of  an attorney in the 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.

Ryan Responds trade name vs trademark

What Should go in your Operating Agreement?

In this Ryan Responds video, I go over some of the more important items that an Operating Agreement should cover. While, not an exhaustive list, it is illustrative of the conversations LLC members and managers should have with one another. Business partners should strive to have this organizational document meet their expectations. It is a contract after all.

We also provide a one-sheet if you would like to read more about Operating Agreements. Finally, if you have any questions about reviewing, drafting, or even disputing an operating agreement please contact us or an attorney in your relevant jurisdiction for an initial consultation.

If You have a Question for Future Ryan Responds Videos …

We launched this on a YouTube channel, as we hope to publish educational videos on other topics in the future. Finally, if there is a short question you want the answer to submit them to admin@hewbordenave.com with the Subject line “Ryan Responds”. Please keep your questions short, general, and related to a business topic. Please do not provide specific details of  your matter or attempt to seek direct and specific legal advice through this format. If you need assistance and legal services, then please schedule a consultation with an attorney in your relevant jurisdiction.

Thanks and Cheers!

RKH

Disclaimer: The content of this video is for general information purposes only. Nothing should be taken as legal advice for an individual cases or situations. The viewing of this video does not create an attorney-client relationship. If you need legal advice, please contact an attorney in your relevant jurisdiction.

“Why do I have to pay taxes on money that did not get distributed?!”

This is a question that many LLC owners (know as “members”) ask me. The confusion (and obviously frustration) of paying out taxes on money that you never received is real, but much of it stems from the lack of understanding that in the realm of LLCs there are “allocations”, which handles how profits and losses are allocated among the members and there are “distributions” the actual distributing of cash or property from the LLC. Many business owners like to conflate the two concepts together, which is not the case, and thus creates their confusion.

I provide an informational sheet for readers to take a look and get the basic understanding of the difference between allocations and distributions (see below).  The tax matter aside, the divvying up of allocations and distributions that is a discussion that business owners should have prior to organizing a LLC and then having an operating agreement drafted for them because of not just the tax issue, but due to the flexibility of LLCs of having allocations and distributions not match ownership interest, and the timing of distributions.

Again, communication is fundamental for business owners and a lot of discussion and pre-planning goes a long way to avoid the deterioration of the relationship because these were not hashed out prior to the formation of the business. As discussed in previous posts, LLC owners starting out would want these agreed upon terms on allocations and distributions reduced to writing, and is usually found in the Operating Agreement.

If you would like to see the information sheet, click here and then look for the downloadable pdf entitled, “For LLC Owners: Difference between Allocation and Distribution”.

Mahalo for stopping by and reading my blawg!

-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 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.

So I am going start this post with one of my favorite movie villain’s quote: “You may dispense with the pleasantries, Commander. I am here to put you back on schedule.”

Except instead of building a space station, I am here to help you build your business by recognizing that while you can skip the pleasantries in business, you should NOT ignore the legal formalities.  I realize some of you business owners find your attorney, CPA, compliance officer, and the like as pains in the butt by sometimes being overly cautious, but please understand that these advisors suggest caution because they see how bad it can get when you don’t follow their advice.  So this post and several that will follow shall focus on legal formalities that I have seen business owners fail to follow.  By failing to observing these simple formalities these owners spent great time and expense trying to fix them, and some of them are unfixable.

Sign Your Papers

So today’s post what am I talking about?  Well, for this post I am talking about something so basic.  Namely, don’t forget to sign your agreements.   Before you laugh, consider how many times some asks you to do something so simple, you procrastinate on it to the last minute because you think it is so simple take care of later.  Consider in that in today’s technological world it is easy to text, email, etc . . . so some people feel, why bother signing a piece of paper?  Let me share a story that I see constantly among current and past clients: the unsigned Operating Agreement/Bylaws/Partnership Agreement.

I have had clients who have gotten into disputes with their business partners.  It might be suspicions, poor communications, changed expectations, but in general the relationship is deteriorating and these former allies, now want the other side out of the business or they want their share bought out.

So by the time the distressed business partner comes to me I will ask, “Where is your Operating Agreement?” I will be using a LLC as an example, but this applies to corporations, partnerships, and in general many relationships.  They usually have an Operating Agreement and aside from the host of other problems, such as lack of adequate protection, incorrect names or usage of terms, etc . . . I get to the end of the document and find it is unsigned.

What’s an Operating Agreement?

Before I continue, let me explain something about an Operating Agreement. This document acts as internal document that sets up the rules and procedures among the members (the owners) of a LLC, and may dictate how one becomes a member, sells their ownership interest, and handles voting, profit-sharing, etc . . . Suffice it to say, you should have an Operating Agreement if you have a LLC, regardless if it is member-managed or manager-managed.  It gives you the rules of interaction.  I have even seen problems where clients did not even bother having an Operating Agreement drafted, which is just worst than not even having one unsigned.

The Problem with Unexecuted Paperwork

Anyway, when your Operating Agreement remains unexecuted (unsigned) or any paperwork for that matter, it would indicate to an attorney that the parties had no intent to be bound by the document.  After all, “why didn’t you sign it?” is the question that comes to mind.

Unsigned documents are just paper with pretty words.  In the law we expect you to take an active act to be bound by those pretty words, and that active act is signing the documents.  The signature serves as evidence.  Consider for a moment that is why even in our electronic world, we make you go through hoops to “click”, “check the box”, or “electronically sign”, basically showing that you “read” the terms and by your action you agree to be bound to them.

So getting back to this situation where the parties have a dispute, but have unsigned paperwork the question remains what were the terms of the contract.  It is true in a lawsuit you can prove there was intent to be bound under the agreement by showing that the parties took active steps to be bound by the unsigned document.

However, don’t you think it is easier just to produce a signed document as evidence rather than cobbling together various pieces of evidence to demonstrate that the parties meant to sign it?

With an unsigned Operating Agreement, you may find yourself stuck with the default rules at law to guide your dispute with regard to fellow members in a LLC.  The defaults rule set at law are very broad and offer very little help in resolving a dispute among members.  So if you are going to take time to prepare a proper Operating Agreement that covers all your bases in a LLC relationship, don’t forget to get it signed by your business partners and sign it yourself, that way at least you know what to look at for guidance when problems start.

Stop back and I will talk about some of the problems you may face forgetting to do your Annual Filings or missing a renewal date!  Mahalo for reading!