Month: July 2019

Community Engagement and the “Good Guy” Escape Hatch – Intrepid Law

Almost everyone wants to be the good guy. Engaging your business in the local community through volunteerism and charitable giving can have a positive impact both on your business and in your community.  The more public-facing your business is and the larger your staff grows, the more opportunities your business will have to be the good guy as employees and community members seek support from your business. When yet another adorable uniform-clad kid comes in selling popcorn or cookies, or a service-dog organization brings in the big brown puppy dog eyes to seek a donation, you may need an escape hatch. Having a community-engagement policy in place will benefit your business by promoting community engagement, supporting your employees, and making it easier to say “no.”

Community Engagement Can be Good for Your Business

Every time a customer or prospect sees your business name or logo, you reinforce your marketing efforts and increase your brand awareness. Being active in the community can provide “stealth” marketing and goodwill opportunities, and even position you and your business as a community leader. Seek out a charity you want to align your business with.  Look for a charity of a size that will meaningfully benefit from the amount or type of contribution the business will make. Here are some ideas to get you started:

  • Provide a volunteer team to a highway clean-up project and earn a roadside sign with your organization’s name on it.
  • Sponsor a table at a fundraising event and send employees to actively and enthusiastically participate in the event.
  • Provide a team of volunteer workers to an organization to help set up and run a fundraising event.
  • Donate leftover materials or excess product to an organization that can use them.

Community Engagement Can be Good for Employee Morale

Community engagement can mean supporting individual employees’ community efforts or organizing company-wide volunteer events in your local community. In either case, promoting community engagement can strengthen your team, provide an opportunity to be part of something good, reinforce individual values, and shine the spotlight on employees for “off the clock” achievements.  Ideas to support community engagement include:

  • Offering employees paid volunteer hours to promote community involvement.
  • Trading costly team-building retreats for a day of community service followed by a simple family-style dinner.
  • Providing a charity-giving matching program.
  • Recognizing employees who reach volunteer hours goals.
  • Encouraging your capable employees to seek board of director or other leadership roles with their chosen charity.

A Community Engagement Policy is Good Business Practice (It’s Okay to Say “No”)

The more successful your business is, the more requests you’ll receive. No one wants to be the one to say “no.” If you have a policy in place, it can say “no” on behalf of the business. When a community member solicits a donation, it’s much easier to say, “I’m sorry but our policy is to focus our giving efforts on our chosen charity (or cause).” An employee, perhaps the 10th in your organization seeking a walk-a-thon sponsorship, can be referred to the community-engagement policy in the employee handbook.

Additionally, a policy can prevent animosity among employees or community members by setting expectations for company giving. Having a written community-engagement policy in place and following it consistently establishes the opportunities available, the limits, and, in turn, a sense of fairness.

Finally, a policy can assist with financial planning. If you set an annual limit on community giving and stick to it, this item becomes a known expense each year rather than an unpredictable budget item. Be sure to work closely with your tax professional to properly account for the business’s charitable giving activities.

Policies are Flexible

One final word—it’s a policy, not a hard and fast rule. Business owners should have the authority to adjust the policy to meet emerging circumstances.  If an employee is stricken with cancer, a tornado rips through your community, or five employees have children in the same school play  . . . then go ahead and contribute.

Don’t Let Change Control Your Business: The Buy-Sell Agreement – Intrepid Law

Divorce. An unexpected death, disability, or retirement. An irreconcilable dispute. These triggering events may put your successful, stable business into a tailspin. Luckily, a buy-sell agreement can help you and your business be better prepared to handle these events.

What is a Buy-Sell Agreement?

A buy-sell agreement is a legally binding agreement between co-owners of a business that controls what happens if a co-owner leaves the business—think of it as a change management tool.

What Should a Buy-Sell Agreement Consider and Include?

We’ve created this checklist as a starting point for discussing business transition. These topics will help you identify the goals, needs, and commitment levels of individual business owners as well as the goals and needs of the business itself. Discussing these matters with your co-owners will help you identify planning opportunities and minimize the risk of future business disruption or, worse, business failure.

The Buy-Sell Checklist

  • Are there any non-owners on the management team?
  • Do all of the owners participate in management?
  • Are there procedures in place to help ensure continuity of management during a transition?
  • Do the transition procedures take into account key employees who are not owners?
  • Do any key employees have stock options, profit interests, or any instrument convertible to equity?
  • Is there a possibility of deadlock (for example, 50/50 ownership)?
  • Is there a workable mechanism to resolve a potential deadlock?
  • Does your buy-sell cover the nine common triggering events?
    • Death
    • Disability
    • Retirement
    • Bankruptcy
    • Termination of employment
    • Sale to a non-owner (right of first refusal)
    • Marital dissolution
    • Deadlock
    • Expulsion of an owner
  • If a triggering event occurs, will the buyout be mandatory or optional?
  • If a triggering event occurs, how will the value of an interest be determined? By formula? Appraised value? Predetermined price? Other (documented) method?
  • If a triggering event occurs, how will payment be made for the departing owner’s interest? May a promissory note be used to pay over time? What is the down payment, interest rate, and term of the note? Is the note secured or unsecured?
  • Will the parties use life insurance to fund the buyout obligation? Who will own the insurance policies? Who will be the beneficiaries?
  • What are the tax consequences of the buyout? Are there any gift and estate tax consequences? Will there be any basis step-up? Will the receipt be taxable? If so, will it be capital gains or ordinary income?
  • Are there any professional licensing considerations to ensure that the equity passes to a qualified owner?
  • Do the owners want to restrict the transfer of ownership interests? Are all transfers prohibited unless approved by the other owners? Or are certain transfers (such as to family or to a revocable trust) permitted without owner approval?
  • If the business is taxed as an S corporation, do the owners understand the importance of including provisions that restrict the transfer of equity to ensure that the business does not become disqualified from Sub-chapter S status?
  • Do the owners want to restrict issuing new equity?
  • Do the owners want to give preemptive rights when issuing new equity?
  • Do the owners want to provide drag-along rights to facilitate a sale of the entire business to a third party?
  • Do the owners want to provide tag-along rights to protect minority owners if the majority owner decides to sell to a third party?

Key Considerations

  • What type of business is this?
  • Do you currently have a signed buy-sell agreement?
  • Who manages the business?
  • How do the owners want to address employment issues, such as:
    • Compensation
    • Non-competition agreements
    • Non-disclosure agreements
    • Non-solicitation agreements
    • Protection of intellectual property and intangible assets

Here’s What to Do Next

Spend a few minutes going through the checklist and list of key considerations. If you want to protect your business, but your business doesn’t have a buy-sell agreement or you’re not sure the buy-sell agreement you currently have in place is adequate, give us a call.

We will review this checklist with you to either let you know whether you’re protected with your current buy-sell agreement or help you design and draft a comprehensive agreement that protects you and the business.

LLC Members: What You Need to Know about Your Fiduciary Duties – Intrepid Law

As a member of an LLC, you may owe a fiduciary duty to the company. The two key fiduciary duties are the duty of loyalty and the duty of care. Whether you have a fiduciary duty will depend on the LLC’s management structure and whether you have management responsibilities. Understanding your duties is essential to avoiding liability.

What is a fiduciary duty?

Fiduciary is from the Latin word, fiduciarius, which means confidence and trust. A person or entity (fiduciary) with the power and obligation to act for another person or entity (beneficiary) is required to be trustworthy, to act in good faith, and to be honest.

What is a fiduciary’s duty of loyalty?

Under the duty of loyalty, a fiduciary must put the success of and benefits to the LLC above individual gain. A fiduciary must act honestly in any dealings with the LLC and avoid any conflicts of interest between the LLC’s goals and his or her personal goals. In some instances, a member may be allowed to benefit from an LLC opportunity if the member provides prior full disclosure to the LLC and receives the LLC’s approval.

Examples of the duty of loyalty that may be imposed on a member:

  • To account to the LLC for any LLC property that the member holds.
  • To refrain from dealing with the LLC on behalf of an interest adverse to the LLC.
  • To refrain from competing with the LLC.

What is a fiduciary’s duty of care?

A fiduciary is held to a higher standard of conduct and trust than that required of a casual business person:

  • The duty of care requires that members or managers act in good faith and exercise a certain level of care in fulfilling their obligations to and directing the activities of the LLC.
  • For example, if the LLC is considering a major acquisition, a fiduciary must act responsibly and in a reasonably prudent manner in assessing the terms and in advising the LLC about the potential transaction.
  • Under the business judgment rule, a fiduciary is typically not liable for business decisions made in good faith and with a certain level of care, even if they eventually adversely impact the LLC.

The duty of care imposed on a member may be one of the following standards:

  • Ordinary Negligence – to act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the LLC.
  • Gross Negligence – to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
  • Intentional Acts – to refrain from intentional misconduct or a knowing violation of law.

Where, exactly, do these fiduciary duties come from?

The state law governing the LLC’s formation may include statutes and case law imposing fiduciary duties on members and managers. Some states allow these duties to be reduced, expanded, or excluded in the operating agreement or by a separate agreement, but other states do not permit modification of fiduciary duties by agreement.

What to do next

When it comes to LLCs, the “rules of the road” can be complex and unique to each situation. We’ll complete a comprehensive review of your LLC operating agreement and the governing state law to help you understand any fiduciary duties you may owe to the LLC — and don’t worry; we’ll help you navigate those laws and duties.