By: Arend J. Abel, Attorney
Many times, business owners will set up one or more corporations, or other entities such as LLCs, to conduct business. Typically, the entities are created to limit the owner’s liability for the business’s debts, or to protect one business from the liabilities of another business. However, often the owner does not go beyond formation of the entity to take the additional steps needed to maximize the chance that having one or more entities will fulfill those goals. Absent those steps, Courts sometimes disregard the existence of the entities by “piercing the corporate veil” and hold the owners liable for the business’s debts, or hold one entity liable for the debts of another. Here are some steps that can help avoid such a result.
Keep Finances Separate and Document Transfers
The most important step in making sure the entity is recognized as separate from its owner is to keep the owner’s and the entity’s financial affairs strictly separate. Among other things, this requires a good set of books for the entity, and a separate bank account. Multiple entities each should have a separate set of books. Any transfers between owner and entity should be scrupulously documented as loans, capital contributions, distributions, or salary, depending on the nature of the transfer. Transfers between the entities should be avoided, if possible, unless one entity is a subsidiary of another. If one entity is a subsidiary of the other, then transfers from the subsidiary should be documented as distributions or dividends. Transfers from parent to subsidiary should be avoided, but if necessary should be documented as loans or capital contributions. Other inter-entity transfers should ordinarily be documented as loans and, again, should ordinarily be avoided.
Adequately Capitalize the Entity When Formed
One factor Courts look at in deciding whether to pierce the corporate veil is whether the entity was adequately capitalized when formed. Many business owners don’t contribute substantial working capital to an entity at the outset, instead simply moving money in and out of the entity as needed. But the lack of capitalization, and shuffling funds in and out, creates a risk a court will disregard the entity. Given that a business will inevitably have expenses and need working capital, the owner should put in an amount large enough to sustain the business’s expenses for several months, at least. A year’s worth of expenses is even better. The money should be put into the entity when it is formed, in exchange for shares the entity issues to the owner.
Create and Issue Share Certificates
Another step that owners should take is to actually issue share certificates, in exchange for the capital contributions made when the entity is formed. It is surprising how many business owners fail to take this basic step. The absence of share certificates suggests that the owner is doing business in his personal capacity, rather than through the entity. This creates an unnecessary risk of personal liability.
Have Separate Phone Numbers, Addresses and Letterhead
The owner and the business should have separate phone numbers, even if the business number is forwarded to the owner’s line. They should also have separate addresses. If the business is run out of the owner’s home, even a P.O. box as a corporate address helps reinforce the fact that the business is separate from the owner. Multiple entities should also have separate phone numbers and addresses. The entity should have letterhead for correspondence, and if there are multiple entities, each should have its own letterhead.
Use Distinct Names for Multiple Entities
Another factor courts sometimes look at in piercing the veil between multiple entities is whether they share similar names. Avoiding similar names is another way to reinforce corporate separateness between entities.
Have a Management Structure and Regular Meetings
If the entity is a corporation, it should have a Board of Directors. If there is only one shareholder, trusted advisors can act as members. The Board should meet at least once a year. If there are multiple shareholders, they should also meet at least once a year. Even a single shareholder can have a “meeting” at which corporate action is taken. No Board of Directors is required for an LLC, but if there are multiple members, they should have regular meetings. The entity should issue notices before the meetings, and a corporate secretary should document all meetings with minutes. Minutes, notices, and corporate resolutions should be kept in a minute book.
To maximize the chance that entities formed for businesses will effectively shield the owner from personal liability, and will shield the assets of one entity from the debts of another, business owners should consult with an experienced attorney to guide them through the process.
By: Arend J. Abel, Attorney
Sometimes businesses face a situation where an employee has departed and taken key information that can be used to hurt the business competitively. This article focusses on steps a business can take to minimize that risk, and if information is nevertheless stolen, to seek redress under the Uniform Trade Secrets Act. The Act has been adopted in Indiana and most other States.
Identify the Information to be Protected
The first step a business should take is identifying the specific information to be protected. Customer lists may be some of the most valuable information a business has, and their theft and use by competing businesses may cause severe harm. Other information, including formulas, business processes and technology, can also be valuable trade secrets. A trade secret can be any information that derives independent economic value from not being generally known and not being readily ascertainable by other parties through proper means, i.e., means other than stealing the information from the business.
Take Reasonable Steps to Maintain Secrecy
Information does not qualify as a trade secret unless the business has made reasonable efforts to keep the information secret. These efforts can and should include physical and electronic security measures. The business should keep paper information in locked offices and filing cabinets. Electronic information should be protected through the use of computer security that limits access to the information to only those employees who need to know the information to do their jobs. In some cases, the business should require employees with access to confidential information to use only company-provided computers, phones, and portable devices to conduct company business and store company information.
A business should also maintain the secrecy of its confidential information by requiring employees with access to the information to sign non-disclosure agreements. The agreements should list the types of information the employee is barred from disclosing.
Non-competition agreements are also an important tool to maintain the secrecy of confidential information. However, non-competition agreements must be reasonable in scope. This means that the geographic area in which the employee is barred from competing must be well defined , and no broader than necessary to protect the employer’s legitimate interests. The agreement must also be limited in time, barring the employee from competing for only as long as necessary. Finally, the agreement must be limited in terms of the activities prohibited. Typically, agreements should prohibit the employee only from working for a competing business in the same or a similar capacity as the employee worked for the business with which the employee signed the agreement.
Sometimes, despite the business’s best efforts, an employee may steal confidential information and use it to compete. In such cases, the only recourse may be litigation against the employee. A business might obtain a court order requiring the employee to stop using the information and return it. If there is a non-competition agreement, a court may prohibit the employee from competing in violation of the agreement’s time, geographic and activity limitations. If the business has been harmed, damages may be available.
To protect confidential business information, a business owner should consult with an attorney experienced in such matters, including litigation. Cohen & Malad, LLP’s business and litigation attorneys can assist with this process.
by: Richard M. Malad, Attorney
For those that thought an easement was just something to allow you to drive through someone’s property or to allow utilities to go through your property, listen up! While an easement can do these things it can also do so much more. The basic definition of an easement is a property right that a landowner extends to another for a limited purpose, which could be just about anything.
One creative use of an easement is the preservation of natural resources and wildlife. If you, or a client, have a piece of land that is loved “as-is” and you want to keep it that way for your kids, grandkids, and the animals who call it home, a conservation easement may be something to consider.