Whoo Hoo! I just got done reading the latest economic studies covering the first quarter for Minnesota from St. Cloud State University and can’t wait to share: There were 10,406 new business filings in the metro alone through April 30, 2014. That’s almost 3/4 of a percent higher than last year. New businesses are still preferring (no surprise) to file as limited liability companies (LLC) under Minn. Stat. 322B rather than as business corporations (Inc.) under Minn. Stat. 302A. In fact, the preference is at a rate of about 3 to 1 this year so far. Also good news for not-for-profit formations. There were almost 9% more non-profits formed this year over 2013 at the same time. For more business nerd news, look to my source: Metropolitan Area and Business Conditions Report–First Quarter 2014 found here. p.s. I tried to post some cool graphs to show y’all this visually but they didn’t work out so well. Alas, the plain text post only.
“Whenever you see a successful business, someone once made a courageous decision.” ― Peter F. Drucker, Getting Started
Every new venture is as unique as the people trying to start it up and each new business has its own distinct needs and challenges. One thing they all have in common is the people who are willing to take risks.
There are few universal truths in anything , but one that runs through all businesses, is to make sure your personal assets are not at stake. In order for a new business to have the best chance of succeeding, it must start with a rock solid foundation that allows it to take risks and hopefully reap great rewards. In case the risk does what it is inclined to do, there must be built in protection for the risk-taking owners’ personal assets. The key to that protection is to form a business entity to run under before the first Open sign is hung.
Some for You & Some for Me
Most people that call me about starting up a new business already understand that running it as corporation (Inc.) or a limited liability company (LLC) is what they must do to protect their personal assets. If the business is organized as a corporation or LLC, the possibility of the owners being personally responsible for the business’s debts and liabilities is much diminished. The best way to build in this protection is to take advantage of the liability shields authorized under state law. These laws, usually statutory, authorize the creation of a separate legal entity to conduct business through that will bear the burdens that may befall. On the flip side, the Inc./LLC also bears the benefits, which the government is happy to see created since it gets to relieve you of some of the burdens of those benefits, i.e., taxes.
The owners of a corporation or LLC can be protected from personal liability for the business’s debts as long as the business is formally organized, operated and maintained under their state’s laws governing businesses. This personal liability protection is commonly called a “liability shield” or “corporate shield” and can be extremely valuable if the new business does not do well.
For instance, if a business has one deal go wrong at the worst time possible (when else does it happen?) it could be financially ruinous to the company. It may force the business to file for bankruptcy. Or if things are bad enough, two or more creditors could file petition for an involuntarily bankruptcy against your company, forcing your business into bankruptcy court so the creditors would have a better chance of recouping what they are owed (at least some). Under either of these scenarios, if the liability shield has been maintained so it is intact and enforceable, your business’s creditors would be unable to get a judgment against the you as the owner personally. This helps to encourage people to take chances and start businesses, something the government sees as a valuable to society.
Doing it for Themselves
A number of businesses I represent seem to be increasingly formed without a lawyer’s assistance. Especially by anyone who has been involved with the ownership of an incorporated/organized small business (or LLC) before. In law school, my Corp Prof explained how you only had to fill out a few lines on a postcard, check a couple of boxes and then pay a fee to form a Minnesota corporation, I was flabbergasted! (Yeah, I said a postcard. And flabbergasted. At the time, the form was the size of a large postcard. And the State didn’t have many decent or useful websites either. I don’t have any excuse for flabbergasted).
For a single owner just going out and doing her own thing, forming a corporation or LLC in Minnesota is easy and can be done without a lawyer. In fact, the page, “Starting a Business or Nonprofit” at the Minnesota Secretary of State’s website, that has some great information for startups, only mentions the word “lawyer” once, the same number of times it uses “accountant.” If you have the right forms from the Secretary of State, a link to the business filing website and a credit card that is about all you will need (You can use your checkbook, a stamp and a paper application, but it is on 81/2” X 11″ paper—larger than a postcard).
Multiples Need Counsel
If there is more than one owner, I always recommend getting an attorney involved. Usually to make sure the new business gets an operating agreement, control agreement or a buy-sell agreement in place right away that will define the owners’ mutual rights and responsibilities and address how any future disputes will be addressed and handles (a business prenup). After all, business partners get along great when they are broke and just opening the doors to an exciting, promising and unknown future. The fussing and feuding never starts until after they taste some success, want more and ain’t gonna share. Once that point is reached, it can be impossible to agree on anything, let alone how to resolve any disputes like the one going on now!
Here are some more resources to help you startup your Minnesota business so it has a solid foundation and you can feel a bit better about the risks you want to take.
Governmental Resources With More Information
Organizing. Planning. Financing. Licensing. Hiring. Managing. Growing.
The Minnesota Department of Employment & Economic Development’s Division’s Small Business Assistance’s website maintains a handy directory of license and permit information. SMALL BUSINESS ASSISTANCE” also puts put out numerous helpful publications for the new business, including an awesome book everyone thinking about starting a business in Minnesota should have, and it is even more awesome as a digital download: “A Guide to Starting a Business in Minnesota.” Simply essential.
The Three Ds:
DEPARTMENT OF LABOR & INDUSTRY affectionately called DOLI (pronounced “Dolly”)(Worker’s Compensation & Trades Licensing for Boiler operators, Building officials, Contractors, Electricians, Elevators and more!); and last but not least:
DEPARTMENT OF COMMERCE (Licensing info for Banks, Credit Unions, Insurance, Securities, you know “commerce” stuff).
Now go forth and start your own business! (and if you get sued, I know this guy that’s a business litigator . . . I think this is that lawyer’s website).
Over the past few months, I have had a few different cases where my client, an incorporated small business, either needed help with drafting (landlords) or negotiating (tenants) a commercial lease agreement. In each case I try to impose, or conversely prohibit, a personal guarantee being a condition in the lease. It is so standard to see a personal guarantee included in a lease that I am always amazed when it is absent. The exception, rather than the rule.
Most personal guarantees in commercial leases are the result of the landlord trying to minimize the inherent risks involved in renting property to a small business. Since most small businesses have few, if any, liquid assets, the personal guarantee creates an extra level of protection for the landlord and helps assure that the lease will be fulfilled. Quite simply, the landlord is trying to make the agreement as secure as possible.
When a personal guarantee is agreed to it makes the individual signing the guarantee personally liable under the lease. This is prudent for a landlord just in case the tenant goes out of business, files for bankruptcy or otherwise can’t meet its financial obligations. It is also a slick way to sidestep the personal liability shield that would otherwise insulate the owners of an incorporated business from this liability.
A savvy tenant, with something to offer (even services or labor) can sometimes negotiate its way out of the requisite personal guarantee. But a sophisticated landlord will insist upon something else of value be put at stake instead. You can use UCC filings that cover a tenant’s business equipment, other assets, or even personal property, and designate the landlord as the secured party. It is also possible to successfully omit personal guarantees under the right conditions. These situations may exist where the rental property is unique, yet fit for a tenant’s particular use, when the tenant has previously honored a lease with the same landlord and, of course, when the landlord has no concerns about the tenant’s solvency.
After all is said and done, a personal guarantee won’t be worth more than the paper it is printed on unless the guarantor is financially viable. This brings me to the “moral of the story” got from an article I read today. It demonstrated a perfect example of a landlord doing everything possible, albeit somewhat after the fact, to try to make sure he would be able to collect the losses allegedly suffered from a default in a commercial lease. This applicable law in the case is technically distinct from a personal guarantee and is due to the particularities of partnership law (and demonstrates a darn good reason to operate as a corporation or LLC rather than as a partnership).
So, yesterday, the Am Law Daily reported on a case where a landlord is currently suing 450 attorneys, who were formerly partners at a large Manhattan law firm. In the lawsuit, the landlord alleges all of the partners are personally liable for the default in a commercial lease involving six floors of a high-rise office tower.
The lease runs through 2020 and, at one point in time, the landlord believed the default resulted in a loss of more than $45.45 million. Although the landlord only claims about $1.6 million damages now, there is still a lesson to be learned. That lesson is that you can never go overboard when trying to tie people personally to a lease in order to secure it.
You can read more the whole article here: http://www.americanlawyer.com/PubArticleALD.jsp?id=1202621080749&Deweys_New_York_Landlord_Sues_450_Former_Partners#ixzz2g9PTUBqJ
- Rent Smart in Chi-Town: 4 Frequently Asked Tenant Questions (local.allstate.com)
- How Landlords Can Steer Clear of Bad Tenants (unclesamjia.wordpress.com)
- Kevan Carrick: Landlords must innovate to survive (thejournal.co.uk)
- The Basics of Commercial Lease Agreement (sonai0899.wordpress.com)
I am often asked why someone should form a corporation (Inc) or limited liability company (LLC) for their business. I usually tell them, “Because it is the cheapest insurance policy you can buy!” Why? Once you form an Inc or LLC, you, as the owner(s), are protecting yourself from personal liability for your business-related debts, obligations and liabilities. By forming an Inc or LLC, the government (your state) is now legally recognizing ABC, Inc. as a separate legal entity (a fictional legal person). Your new Inc or LLC can own and sell property, enter into contracts and sue or (hopefully not) be sued. As a result, if ABC, Inc. breaks a contract, ABC, Inc. must be sued rather than you (the owner(s)) personally. This can help protect your personal assets from being subject to any judgments against ABC, Inc.
Of course there are many exceptions to this legal rule (just like ALL legal rules). But if you keep ABC, Inc.’s finances completely separated from your personal dealings (proper accounting, payroll, follow all Inc/LLC legal governing formalities), you can usually keep ABC, Inc.’s “personal liability shield” intact and protect your personal assets.
One big exception that sometimes cannot be avoided is a creditor (or landlord) requiring you (as ABC, Inc.’s owner(s)) to sign a “personal guarantee” for ABC, Inc.’s obligations. This is a device many financial institutions (and savvy landlords) use to get around ABC, Inc.’s liability shield and to help guarantee the obligation will be fulfilled, even if ABC, Inc. goes bankrupt, but you (owner(s)) do not.
Nonetheless, many times you can (and should always try) to negotiate out of a personal guarantee requirement or alter its terms to be more favorable to you. So, as always, make sure you know what you are signing on behalf of your business and always make sure you are not (unless required) signing in your individual capacity, i.e. John Smith, as president of ABC, Inc.
I am here to help if you have business formation questions, contract questions or liability questions. Protect yourself, contact me today!