an essential business law handbook · 2020-04-11 · constitute legal advice. always consult with a...

A N E S S E N T I A L B U S I N E S S L A W H A N D B O O K

A G U I D E T O S T A R T I N G , G R O W I N G , P R O T E C T I N G , A N D S E L L I N G YO U R

B U S I N E S S :

WR I T TEN BY A BU S IN ES S LAWY ER FOR T HE BU S I N ES S OW NER

By

Dan V. Artaev

Attorney at Law [email protected]

www.fb-firm.com

mailto:[email protected]

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Copyright © 2020 All Rights Reserved. No portion of this e-book may be reproduced without the express written permission of the author. Nothing in this document constitutes or is intended to constitute legal advice. Always consult with a professional before taking any action related to your business.

DISCLAIMER: THE CONTENT WITHIN THIS DOCUMENT IS

FOR INFORMATIONAL AND PROMOTIONAL PURPOSES

ONLY. IT IS NOT INTENDED TO BE AND DOES NOT

CONSTITUTE LEGAL ADVICE. EACH COMPANY, BUSINESS

DEAL, AND TRANSACTION IS UNIQUE AND FACT-SPECIFIC.

ALWAYS CONSULT WITH A PROFESSIONAL BEFORE

TAKING ANY ACTION THAT MAY IMPACT YOUR BUSINESS

OR ANY RIGHTS AND OBLIGATIONS.

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HOW THIS BOOK CAN HELP YOUR BUSINESS:

Starting a business without legal guidance is like signing up for a triathlon without a training plan. I do triathlons. I also advise businesses as a corporate lawyer for my day job. Sure, you can do it. You can fill out the paperwork, pay the registration fee, post about it on Facebook, and buy all the gear – and who doesn’t love gear? That’s the easy part.

Then comes race day. The start gun goes off, and suddenly you’re swimming a mile in open water with hundreds of other athletes who are all jostling and elbowing for position around the buoys. Will you make it across the lake? Or will you take in a lungful of lake water and need a lifeguard to paddle you back to shore? If you happen to make it across open water without a training plan, will you be able to finish the bike and the run portions? A triathlon without a training plan could be disastrous. Starting a business without legal planning is likewise a bad idea. The Essential Business Law Guide will help you navigate the open waters of business law. While not a substitute for a full legal consultation, this book provides an outline of the business law basics that every entrepreneur should know. It will help you ask your advisors the right questions. For example, I’ll outline the basics of how to set up a new business correctly to minimize the chances of costly litigation down the road. I’ll also tell you how to protect your current business from risks like piercing the corporate veil and defamation in the age of social media. I’ve also included a few tips and tricks about business funding… because who doesn’t love free money? Finally, I’ll share some critical information for terminating or selling your business. The Essential Business Law Guide will provide you—the business owner—with a concise summary of the information you need. Best of all, you will find this book useful no matter what phase of life your business is in. This book is based on a series of blog articles that I have written. Visit my blog—ARTAEV@LAW--for articles on other useful and timely legal topics at www.artaevatlaw.com. Questions? Comments? Contact me at [email protected] or call the office at (248) 380-0000.

http://www.artaevatlaw.com/


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CONTENTS

How This Book Can Help Your Business:....................................................................................................................... 2

PART ONE: THE ESSENTIAL ESSENTIALS: SETTING UP YOUR COMPANY .................................................... 4

STARTING A BUSINESS? CHOOSE YOUR ORGANIZATIONAL STRUCTURE! .............................................. 5

4 MUST-HAVE LEGAL DOCUMENTS FOR NEW BUSINESS OWNERS ............................................................ 7

‘TIS THE SEASON FOR (CORPORATE) RESOLUTIONS! ...................................................................................... 9

DOES YOUR BUSINESS HAVE A PRE-NUP? THE IMPORTANCE OF PLANNING FOR LIFE'S UNEXPECTANCIES. ............................................................................................................................................ 11

PART TWO: FUNDING YOUR BUSINESS ...................................................................................................................... 13

WHAT CAN BROWNFIELDS DO FOR YOU? 9 ESSENTIAL QUESTIONS & ANSWERS ABOUT BROWNFIELD INCENTIVES ......................................................................................................................................... 14

ACT 198 TAX ABATEMENTS: HOW TO GET THE GOVERNMENT TO PAY FOR YOUR INDUSTRIAL PROPERTY IMPROVEMENTS ....................................................................................................................................... 16

PART THREE: PROTECTING YOUR BUSINESS .......................................................................................................... 18

DON’T SPIN OUT: 5 LESSONS FOR EVERY BUSINESS OWNER FROM THE PELOTON COPYRIGHT LAWSUIT .................................................................................................................................................... 19

DON’T PIERCE MY CORPORATE VEIL, BRO: AVOID LOSING YOUR CORPORATE PROTECTION .... 23

3 COMMON MISTAKES THAT COMPROMISE A BUSINESS'S CORPORATE PROTECTION AND EXPOSE YOUR PERSONAL ASSETS............................................................................................................................ 25

NON-COMPETE VS. NON-SOLICITATION: KEY DIFFERENCES THAT EVERY EMPLOYER MUST KNOW ....................................................................................................................................................................... 27

INTO THE FIRE: EFFECTIVE STRATEGIES FOR LITIGATION MANAGEMENT BEFORE GOING TO COURT ................................................................................................................................................................................... 29

PART FOUR: SELLING & TERMINATING YOUR BUSINESS .................................................................................. 32

5 OFTEN-OVERLOOKED ESSENTIALS WHEN SELLING YOUR BUSINESS ................................................ 33

TERROR FROM BEYOND THE GRAVE: 5 CRITICAL MISTAKES TO AVOID WHEN TERMINATING YOUR COMPANY ............................................................................................................................................................... 35

SMOKE ’EM IF YOU GOT ’EM: 4 QUESTIONS TO ASK WHEN SELLING COMMERCIAL REAL ESTATE IN THE MARIJUANA ERA ............................................................................................................................................... 37

ABOUT THE AUTHOR .......................................................................................................................................................... 39

CONTACT .................................................................................................................................................................................. 40

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PART ONE: THE ESSENTIAL ESSENTIALS: SETTING UP YOUR COMPANY

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STARTING A BUSINESS? CHOOSE YOUR ORGANIZATIONAL STRUCTURE!

Every business owner needs to incorporate. Forget about sole proprietorships or a partnership — running your business without formally organizing is like running that triathlon without a training plan.

Incorporation is “insurance” that may protect your personal assets (your house, car, bank accounts, 401k) from financial risks associated with running a business. The general rule with incorporation is that creditors and plaintiffs cannot come after your personal assets to satisfy a business debt or liability. There are of course exceptions to this rule, called “piercing the corporate veil.” But many business owners ask: Should I register as a corporation? Non-profit? LLC? PLLC?

As with all of legal questions, the answer is “it depends on the facts.” Your attorney and accountant will help you decide what works best in your particular situation. However, here is a basic overview of the four most common entity types in Michigan:

A. FOR-PROFIT CORPORATION – The Michigan Business Corporation Act sets out the rules for corporate formation and the default provisions for corporate governance. Usually, an attorney setting up the corporation will draft two documents: (A) Articles of Incorporation, which is the basic form filed with the State of Michigan creating the corporation and (B) the Corporate Bylaws, which is an internal corporate document that sets out the corporation’s management, number of shares, stockholders, Board of Directors governance, and various other provisions. There are also various sub-classes of corporations that differ for tax purposes -- for example an “S-Corp,” but you will need to consult with your accountant to determine eligibility. It is true that S-Corps provide the benefit of pass-through taxation (like an LLC) but do not offer the same flexibility in management like an LLC. Further, you risk losing the pass-through taxation benefit anytime you fail to comply with a vast morass of IRS regulations. Corporations have been around for a long time and are generally a good choice for business owners seeking to set up a tried-but-true business structure – one that is supported by decades of case law and statutory gap-filler provision – but at the same time, the more modern LLC approach often works even better, especially for smaller businesses.

B. NON-PROFIT CORPORATION – Michigan also has a Michigan Nonprofit Corporation Act that governs the creation of non-profit entities. Non-profit status should not be confused with “tax-exempt, however. Whether an entity is considered “non-profit” is a matter of Michigan law, while the federal

https://artaevatlaw.wordpress.com/2018/12/26/dont-pierce-my-corporate-veil-bro-avoid-losing-your-corporate-protection/


https://artaevatlaw.wordpress.com/2018/11/21/4-must-have-corporate-documents-for-the-small-business-owner/


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government and the IRS determine “tax-exempt” status. Consult with your accountant on all tax related matters! Generally, if your intent is to create a corporate entity for charitable or other non-commercial purposes, the non-profit corporation may be the best way to maximize the relevant tax advantages. From a legal standpoint, a non-profit is created in the same manner as a for-profit corporation, with certain exceptions. For example, a charity must be registered with the Michigan Attorney General. And again, if you seek tax-exempt status, you must file the appropriate paperwork with the IRS.

C. LIMITED LIABILITY COMPANY – An LLC is the preferred corporate form for

many small businesses due to its simplicity and modern approach to pass-through taxation. Indeed, a single-member LLC enjoys the same single taxation as a sole proprietorship, as well as the protection of the corporate form without some of the extraneous formalities of a corporation. While simple, an LLC must still file Articles of Incorporation with the State of Michigan and draft an Operating Agreement that sets forth the rules on how the LLC is run. Even when running an LLC, it is critical to observe the corporate forms to maintain limited liability and avoid the dreaded “piercing of the corporate veil.”

D. PROFESSIONAL CORPORATIONS AND PLLCS – Michigan Law requires

certain professionals (such as physicians, dentists, lawyers, and certified public accountants) to incorporate as professional entities. Generally, a professional corporation is similar to a regular for-profit corporation and a PLLC is similar to a regular LLC. The most important distinction for a professional corporation or PLLC is that the professional remains personally liable for his or her own misconduct or negligence. However, the other members of a PC or PLLC remain protected from liability for the misdeeds of a single member. Thus, while professional incorporation as a solo practitioner is not a given, multiple-member entities should definitely consider the advantages of statutory liability protection.

Choosing the right corporate form for your business requires the analysis of multiple factors as well as the facts specific to your personal situation. Contact me at (248)380-0000 or at [email protected] for assistance with setting up your business.





https://artaevatlaw.wordpress.com/


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4 MUST-HAVE LEGAL DOCUMENTS FOR NEW BUSINESS OWNERS

Whether you are a one-man computer whiz coding the next blockbuster app, or a five-employee manufacturer making parts for a Tier 1 auto supplier, you need basic corporate forms to protect your assets and investments. A limited liability company (or LLC) is the preferred way to organize and obtain this protection. Plus, if you ever apply for a business loan or decide to sell your business, having an organized and up-to-date corporate record book will do wonders to enhance your value. After all, when Google offers to buy your start-up for a couple million dollars, the transaction will go much smoother with an up-to-date Operating Agreement, corporate consents, assignment documents, and annual statements for the buyer to review.

I recommend the following 4 must-have corporate documents for every business owner:

1. ARTICLES OF ORGANIZATION – If you registered your LLC with the State of Michigan, you already filed the basic Articles as part of your initial paperwork. These Articles effectively form your LLC, set forth its name, purpose, duration, and designate a registered agent (or contact person) for your company. Even if you are a sole proprietor, it is worth spending the initial $50 filing fee (and the $25 renewal each subsequent year) to create an LLC. That way, your personal assets are separate from your business assets and are protected from both creditors and litigants.

2. OPERATING AGREEMENT – While all LLCs have Articles of Organization, not all

LLCs bother to have their attorney draft an Operating Agreement. An Operating Agreement sets the rules for how the company is run, including how many votes it takes to make a decision, who owns how many shares, and how shares are valued and transferred. This is a critical document that can prevent many disputes down the line, especially multiple owners are involved.

3. WRITTEN CONSENTS/RESOLUTIONS – Written consents, or resolution, are

records of the business’s decisions. The Operating Agreement will set forth the process for making decisions through written consents (as opposed to meetings). Even if you are the sole owner, it is critical that you draft and maintain written consents whenever the LLC acquires property, makes a distribution, sets a salary, has its annual meeting, or takes another material action. Written decision records help prevent future disputes and also ensure ongoing protection of the corporate form for the owners.

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4. ASSIGNMENTS – If you decide to transfer shares to another LLC member or give an investor an equity stake, the share sale must be documented in an Assignment. The typical assignment document will set out the purpose of the transaction, the value exchanged, the final distribution of shares, and will address the assumption of company liabilities (if any) by the transferee. It may be tempting to simply exchange cash for a promise of membership, but a formal assignment will clearly define the parties’ rights and responsibilities, which will prevent future disputes.

Establishing the proper corporate forms and drafting the paperwork need not be expensive. An attorney will generally be able to register your LLC and draft an operating agreement for a couple thousand dollars. Written consents and assignments can then be created on an as-needed basis. This up-front investment is well-worth the protection that it provides for your assets, as well as protection from disputes and even intra-company litigation down the road.

BONUS TIP – just as critical as a good attorney, a business owner should consult with a reputable insurance provider and a CPA. A solid insurance policy and a tax expert to review your financials will protect you from the unexpected and likely save you money in the process.

Contact me at [email protected] or (248)380-0000 for help with these corporate essentials. I can even recommend a great insurance expert and direct you to a CPA to assist with your tax questions.


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‘TIS THE SEASON FOR (CORPORATE) RESOLUTIONS!

What do you associate most with the start of a new year? I personally think of resolutions and how the gym gets crowded with all those who resolve to get in shape. So for many, the New Year is about a new start, a chance to set goals, and a chance to catch up on everything that has been neglected in the old year. For the busy business owner, the start of a new year is a great time to “resolve” to get their corporate resolutions “in shape.”

But what is a corporate resolution? A corporate resolution is a formal document that approves a company action. Despite the name “corporate resolution,” the term applies to limited liability companies too. For example, if you and your business partner decide to appoint John Smith as the new Manager, there needs to be a written record showing that the requisite number of shareholders voted to approve the appointment, and that the action is consistent with your bylaws. A sale of assets or a purchase of real estate must also be memorialized. Indeed, lenders and title companies often require a resolution to finalize a transaction as evidence that the particular party to the transaction has the necessary authority to close. Bylaws generally provide for decisions through meetings or by written consent in lieu of meeting. In either case, an actual written corporate resolution that evidences the decision is a must. As my law school business enterprises professor always said: “If it isn’t in writing, then it did not happen.” Corporate resolutions are that “writing” to prove the business action in question “did happen.”

Some common corporate actions that should be memorialized through a resolution include, but are not limited to, the following:

Occurrence of an annual meeting.

Appointment or removal of an officer, such as president, vice-president, or treasurer, including the terms of employment.

Issuance of new shares or membership interests.

Changes to the Board of Directors and any compensation packages for said Board members.

Calls for capital contribution.

Retention of a business attorney, accountant, or other third party professional.

Approval of any amendments to the bylaws.

Becoming a party to any real estate lease or equipment lease.

Corporate resolutions are an essential part of good business governance and best practices. A well-organized and up-to-date corporate book has many benefits — for example, when you finally sell your business. Or if a lender wants to see your corporate book before they approve the new line of credit or loan. Additionally, whether an entity adheres to formal corporate practices is one of the factors the courts consider when deciding whether

https://artaevatlaw.wordpress.com/2018/11/30/5-often-overlooked-essentials-when-selling-a-small-business/





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to pierce the corporate veil. Yet many business owners – especially busy up-and-coming entrepreneurs – neglect this relatively simple but critical task.

Finally, what about single-member LLCs or solo corporations? Do they still have to keep written records of their business decisions? YES. Corporate resolutions (as well as other formalities) are equally as important when you wear the many hats of the owner, manager, and sole employee of your business. Indeed, they may be more important in the single-owner context because it is not practical to hold a “shareholders meeting” with yourself or record meeting minutes with one person.

The New Year is a great opportunity to start fresh and resolve to get your corporate records in order. Contact me at [email protected] or at (248)380-0000 for a consultation regarding best practices for your business and what you can do to ensure that your corporate governance is off to the best start this year.



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DOES YOUR BUSINESS HAVE A PRE-NUP? THE IMPORTANCE OF PLANNING FOR LIFE'S UNEXPECTANCIES.

Nobody likes to plan for life’s unpleasantries, including divorce. While divorce remains an unfortunate fact of life, proper planning with your business attorney can help protect your business from the unexpected. This is particularly critical where a business has multiple owners, members, or partners.

In a recent case out of New York, a company’s three partners were shocked to learn that the fourth partner’s impending divorce would result in his ex-wife owning part of the business. Small businesses are particularly vulnerable to members’ interests becoming part of a divorce property dispute. And unlike blue-chip stock, who owns the shares of a small business has a direct impact on the day-to-day operations and decision making. In the New York case, the owners admittedly failed to plan for a divorce and ended up having to borrow $250,000 to buy out the divorcing partner.

However, with proper planning and consultation with a business lawyer, you can hedge against contingencies like divorce ahead of time. One such way is through a carefully-drafted Operating Agreement that expressly sets out what happens if a membership interest becomes subject to a divorce judgment. Common provisions grant the company a right of first refusal to buy out any sort of membership interest subject to transfer, and also set forth the rules for valuing such interest using either the Company’s books, a CPA, or an independent appraiser. Another common (and highly useful) provision prohibits a transferee of any membership interest from voting or otherwise participating in the Company’s affairs, until officially admitted as a “member” by the other members. Thus, even if a divorce decree awards a spouse part of the membership in the company, the spouse is limited to the economic benefit of such ownership until (and only if) the rest of the membership decides to allow the new member to participate in the actual business. Another planning tool is a separate buy-sell agreement, which sets forth the rules and conditions for each owners’ membership interest.

Divorce is not the only “D” word that a prudent business owner must plan for. Death of a member is another contingency that should be expressly addressed in a company’s documents. Disability or incapacity is another. Finally, a business should have specific provisions in place to address the potential of bankruptcy or insolvency.

The four “D”s–divorce, death, disability, and debt–are realities that no one likes to think about. However, planning for the bad as well as the good is a part of running a business. With a plan in place, a company will suffer much less disruption and uncertainty when the unthinkable happens. And that is good corporate governance.

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Contact business attorney Dan Artaev at [email protected] or at (248)380-0000 to discuss your company’s contingency plan and to get assistance in drafting the proper documents to protect your and your partners’ investment.


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PART TWO: FUNDING YOUR BUSINESS

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WHAT CAN BROWNFIELDS DO FOR YOU? 9 ESSENTIAL QUESTIONS & ANSWERS ABOUT BROWNFIELD INCENTIVES

Do you remember Matthew Lesko, the “FREE MONEY” guy who touted his books on late-night infomercials and wore a loud suit with question marks? Of course, as we all know, something like “free money” is too good to be true. And that is why Mr. Lesko got in trouble with the Federal Trade Commission.

But if you are a real estate developer looking to purchase and remediate some distressed property on the cheap, there actually is such a thing as “free money.” Sort of. The Michigan Brownfield Redevelopment Financing Act – also known as Act 381 – provides real estate developers throughout Michigan with a financial incentive to help remediate and develop certain contaminated properties.

Brownfield incentives are treated differently in each community and are not a simple grant where you file an application and get your check. The terminology and the mechanics of tax-increment financing (“TIF”) are also complex. It is definitely worthwhile to retain an expert attorney to assist, but the good news is that the incentives obtained through the Brownfield process will more than offset any legal fees that you may incur. In other words, Brownfield developments pay for themselves!

Here are 9 essential questions and answers about Brownfield incentives:

WHAT IS A BROWNFIELD ANYWAY? Brownfields are properties that have a level of environmental contamination. These properties may be old industrial sites that have contaminants leaking into the ground or simply old buildings that were built with asbestos.

SO DOES THE GOVERNMENT JUST GIVE ME MONEY FOR BROWNFIELD DEVELOPMENT? No. Under Act 381, the developer creates additional tax value by improving the target property. The tax value goes up, but that “increased” tax value is captured and used to reimburse the developer for eligible activities. This is called tax increment financing or “TIF”

WHAT ARE “ELIGIBLE ACTIVITIES”? Eligible activities are work related to improving the property and include preliminary items like a Phase I assessment, as well as costs of the actual remedial work like demolition. The full list is found in Act 381.

WHAT IS A BROWNFIELD AUTHORITY? The community where your target property is located may have established a Brownfield Redevelopment Authority, which is the contact entity for a developer seeking incentives. The Authority may establish a Revolving Fund, where the excess tax revenues are deposited and then disbursed to the developer.

http://legislature.mi.gov/doc.aspx?mcl-act-381-of-1996

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ARE THERE DIRECT GRANTS AVAILABLE AS WELL? Sometimes. The Authority may have funds available from the EPA or the Michigan DEQ as part of a grant for certain Brownfield Redevelopment Activities. For instance, St. Clair County received a $1 million grant from the EPA in 2010, 100% of which was spent to help with Brownfield redevelopment. In 2017, St. Clair County received another $400,000 in grant funds towards the same objective.

DOES TIF CAPTURE STATE-LEVEL TAXES FOR FASTER REIMBURSEMENT? Yes. A separate work plan must be submitted to the Michigan DEQ or the Michigan Strategic Fund for approval before tax capture can include state-administered school taxes. More tax basis to capture means faster reimbursement for the developer.

ARE THERE BROWNFIELDS NEAR ME? Probably! Brownfields are not confined to urban areas – there are numerous eligible properties in cities, townships, and rural areas. Check out the State of Michigan’s interactive map showing Brownfield success stories all over the state.

WHAT HAPPENS IF I DO NOT FINISH THE REDEVELOPMENT? You may owe money to the government. Be especially careful when entering into an agreement to receive grant money or for tax increment reimbursement. The community or Brownfield Authority will often insist on a reimbursement agreement, where the developer must return the money if they fail to complete the project, for whatever reason. The development may also have other conditions – another reason to have any agreement or Brownfield plan reviewed by a professional.

OTHER THAN AN ATTORNEY, WHO DO I NEED TO HIRE? Choose the right environmental engineers – some communities may have special ties or preferences with respect to certain environmental firms. It is important to select the right person for the job. You may also want to consult with your CPA about possible impacts to your taxes, especially about how TIF and grant money is treated for income tax purposes.

Michigan has some really great incentives for property owners who are willing to develop distressed properties. Contact Dan Artaev for a consultation about using Brownfield Incentives on your next project at [email protected] or at (248)380-0000. We can also put you in contact with expert environmental engineers, insurance providers, lenders, and CPAs to facilitate your next investment.

https://mdeq.maps.arcgis.com/apps/webappviewer/index.html?id=644203dfbd7a4e7ba5da59b3a3e91cf2


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ACT 198 TAX ABATEMENTS: HOW TO GET THE GOVERNMENT TO PAY FOR YOUR INDUSTRIAL PROPERTY IMPROVEMENTS

Do you want FREE MONEY to invest in your business? While this may sound like a late-night infomercial pitch, the reality is that both local and State governments want to stimulate investment in the community and will provide financial incentives for you to do so. Act 198 tax abatements are an opportunity to leverage public funds to subsidize capital improvements to an industrial facility.

In Michigan, Public Act 198 of 1974 gives a tax incentive to businesses who build new plants, expand existing facilities, renovate aging infrastructure, or add new machinery or equipment. High-technology operations, such as biotech, computing, robotics, etc., are also eligible. The incentive is a whole or partial tax abatement or a “tax freeze” for a period of up to 12 years. In other words, real AND property taxes are “frozen” at their current levels, and the improvements do not result in increased taxes until the end of the abatement period. Of course, at the end of the abatement period, the tax base is oftentimes lower due to depreciation, resulting in significant tax savings on the investment.

As an example, I recently represented a medical equipment manufacturer in the metro Detroit area. The manufacturer was investing nearly $10 million to upgrade three existing manufacturing and distribution buildings, as well as to build a new connector building with advanced facilities. Clearly the $10 million investment in property and equipment would have significantly increased the manufacturer’s property value and tax liability. However, I was able to secure an Act 198 resolution from the local government unit, and upon approval of the State Tax Commission, the manufacturer saved millions of dollars in abated taxes. Not only did the improvements pay for themselves–the legal fees were paid for as well!

Whether your facility is eligible and how much you will save, depend on your particular business and the municipality where your business is located. The Michigan Economic Development Corporation has a concise summary of the various requirements and the process on its website. In general, the process starts with the local government unit designating a special district for the investment through its normal legislative process. After that, the business can apply for the abatement by submitting a comprehensive application, which outlines the nature of the investment, the dollar value of the improvements, plans, timeline, and other details. There is then another hearing, where the local legislative body makes the decision whether to approve or disapprove the application and specifically determines the period of time for the abatement (a maximum of 12 years). Importantly, the application must be approved no later than 6 months after the start of the project, and in addition, the State Tax Commission must also approve the application.

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When considering tax incentives to help with financing, it is critical to retain an experienced attorney who not only knows the requirements of an Act 198 application, but is also familiar with the local municipality, its legislative body, and the relevant administrator in charge of designating the special district. When it comes to dealing with local government, relationships and familiarity with the process go a long way towards approval.

Dan Artaev is an experienced metro Detroit attorney who counsels business owner with respect to securing tax abatements and other governmental financial incentives for their facilities. Contact Dan at [email protected] or 248-380-0000.


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PART THREE: PROTECTING YOUR BUSINESS

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DON’T SPIN OUT: 5 LESSONS FOR EVERY BUSINESS OWNER FROM THE PELOTON COPYRIGHT LAWSUIT

Those of you who follow me on Instagram(@artaev_at_law) know that I am the #Trilawyer (basically, a lawyer whose hobby is doing triathlons). The cycling leg just happens to be my favorite; I love going to spin class at the gym, and I am also a big fan of watching pro cycling on TV. Anyone else watching Tour de France reruns on YouTube? So obviously when I saw the news featuring BOTH the law and indoor cycling training, I had to write about it. A group of music publishers are suing Peloton, the company behind those heavily advertised stationary bikes and on-demand spin classes, for allegedly using popular music in their on-demand videos without the proper licenses.

The Peloton situation actually provides some valuable lessons for every business owner, regardless of industry. But first, some background on what happened with Peloton, at least according to the plaintiffs’ one-sided view in the Complaint. For those who have not seen their advertising barrage, Peloton is a public company (PTON) that sells high-end stationary bikes and treadmills. How high end? A spin bike will set you back a couple thousand dollars, but luckily you can finance it with low low monthly payments over 36 months (just like your TV, couch, cell phone, pure-bred poodle, and anything else these days). The treadmills are even more expensive at something like $5k, but the lawsuit is about the spin bikes.

Why would someone pay $2000+ for a stationary bike when you can buy a great one for $300-400 on Amazon? I have no idea. But one of Peloton’s central marketing points is a subscription service (for a separate monthly fee) that will give you access to streaming fitness videos, spin instruction, competitions, and other content that simulates an in-studio workout from your mid-town high-rise apartment or summer chalet or weekend home in the Hamptons. At least according to the commercials.

If you have ever been to a spin class at the gym, you know that the instructor’s playlist is a big part of the experience. The instructor plays a list of songs for the workout session that are generally synchronized to the tempo of the current workout intervals. For example, if the instructor wants the class to sprint at 110 RPMs on a flat road (meaning easy resistance), then she may play something fast and upbeat to get the class going. If the session calls for hills at 60-70 RPMs and heavy resistance, then she may play something slower and heavier to match the workout. Peloton offers a library of pre-recorded workout sessions that it streams to subscribers, and like the in-gym spin classes, the recordings feature an instructor with a playlist taking the participants through a particular class. The problem – according to the lawsuit – is that Peloton does not have permission to use the musical content in its workout videos. In the world of copyright law, a company must have the proper license for commercial use before it can use music as part of its business. In the

https://www.instagram.com/artaev_at_law/?hl=en

https://www.scribd.com/document/388542826/Peloton-lawsuit

https://www.puppyspot.com/financing

https://www.boredpanda.com/twitter-peloton-bike-ads-memes/?utm_source=google&utm_medium=organic&utm_campaign=organic

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case of videos synchronized to music, the law requires what is called a “sync” license that permits that particular song to be used with a specific video. Apparently Peloton failed to secure those “sync” licenses for at least some of the videos that it broadcasts. Copyright law also provides for punitive damages for willful violation of copyright, and Peloton may be facing a steep price tag if the court determines that Peloton’s failure to secure licenses was a deliberate decision. Which it very well may have been, as it is surprising to think that a company that size missed a rather obvious music licensing issue.

Whatever the merits of the litigation, and whatever the outcome, there are some important takeaways for all business owners from this lawsuit. Even if you have never been inside a spin studio, even if you do not use music at your business, there are still valuable lessons to be keep in mind:

1. TRYING TO SAVE A FEW BUCKS AT THE BEGINNING MAY COST YOU BIG BUCKS LATER ON. The most common reaction online to the Peloton lawsuit is that “how could a $4 billion company not have seen this coming?” Peloton grew quickly, and it may be possible that the company deliberately skipped paying licensing fees at the beginning to save money, but this attempt to scrimp at the outset may end up costing millions down the road. This is why no matter your size, it is important to properly budget and anticipate all expenses. For example, talk to an insurance agent you can trust and get the right amount of insurance coverage for your business. Buy workers’ compensation insurance. Comply with MIOSHA regulations. Hire a lawyer to draft a proper business agreement between you and your partner to reflect your respective rights and obligations to the company. Do not co-mingle personal and business bank accounts. You get the picture – a cheap shortcut now can come back and cost you much more money in the future. It could even potentially sink your entire business.

2. WHAT MAY SEEM LIKE COMMON SENSE TO YOU MAY BE ILLEGAL. You may be thinking – “But if I buy a CD at the store or a song from iTunes, don’t I own the music? Can’t I play it for whoever and whereever I want?” It may be common sense that you own something that you buy, but it is not always true, especially in the modern age of digital media. With respect to music for example, you are often buying a license for personal, in-home use. Say you have a bar or a restaurant, and you decide to play your own iPod playlist over the speakers for atmosphere. Without a separate license, you just violated the music studio’s copyright and can be sued. Or, if you decide to start your own weekend DJ business using your old LPs, same thing – the CD you buy at the store to listen to in your car does not give you the right to play that same CD at a wedding for money. Sound confusing and counter-intuitive? It may be, but it also protects the

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rights of the music publisher and keeps the cost of CDs and iTunes singles accessible to the general public. The bottom line is that you need to consult with a professional about all aspects of your business to make sure you are doing it the right way, and to ensure compliance with all applicable laws. And the right professional will identify all the relevant issues, not just the obvious ones.

3. YOU ARE NEVER TOO BIG (OR TOO SMALL) TO BE SUED. You might also be thinking, “Oh who cares, I run a mom-and-pop gas station/grocery store/bar and no one is going to sue me for playing my CD collections over the speakers.” Or you might think, “My business partner is my friend, he will never sue me. My employees are all like family, right?” Wrong. Just one example is a string of lawsuits filed against nightclubs for playing songs without the proper commercial license in 2016. From my own experience as a business litigator, there are far too many cases where business partners break up and decide to sue each other because they never had a written agreement. Actually, one of the major reasons to create a separate legal entity for your business – like an LLC – is to anticipate lawsuits and to protect your personal home, car, and bank account in case of unanticipated trouble. Luckily, creating the right corporate entity and maintaining corporate formalities to ensure protection are not particularly complex or expensive endeavors, and should be done by all business owners.

4. ANTICIPATE AND BUDGET FOR LAWSUITS AS THE COST OF DOING BUSINESS. You can take all of the precautions in the world, hire the best attorneys, and run a flawless business. You are still going to get sued. That’s the reality of doing business. There may be a disagreement with a supplier over the quality of the product supplied. One of your workers may get injured on the job. Or, a vengeful ex-partner or employee may decide to use entirely frivolous litigation to harass and extort you. Thus, it is critical to budget for such eventualities just like you budget for utilities, rent, or salaries. I have counseled numerous businesses who think that they can handle a legal proceeding in-house, and end up creating more trouble for themselves that then costs MORE money to untangle down the road. It is a great idea to treat litigation as just a cost of doing business: set aside some funds each month and have a lawyer on retainer, so that when you have a legal question or legal issue, your attorney can jump on the case right away and minimize any damage.

5. HIRE THE RIGHT LAWYERS TO REVIEW ALL ASPECTS OF YOUR COMPANY. Of course, you have to have the right people for the job. Contact a knowledgeable and well-rounded business attorney like me to provide a

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https://www.ocregister.com/2016/04/12/huntington-beach-arcade-and-sports-bar-faces-copyright-charges/

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consultation for your business. That way you can make sure that you have all the right documents, that you have secured the necessary licenses, and that you are fully prepared in case something goes sideways. And remember, there is always someone willing to do it cheaper. Choose your professional wisely!

Dan Artaev is an experienced commercial litigator and business attorney who can help your growing business ensure things are done the right way to mitigate risk. Contact Dan today at (248)380-0000 or [email protected] to set up a meeting and discuss your needs. Don’t be like Peloton – do things the right way from the start!

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https://artaevatlaw.com/2019/02/21/4-must-have-corporate-documents-for-the-small-business-owner/



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DON’T PIERCE MY CORPORATE VEIL, BRO: AVOID LOSING YOUR CORPORATE PROTECTION

As a new and growing business owner, you read my articles on incorporation and essential corporate documents and took my advice to heart. You retained an attorney and accountant, drafted and filed the basic forms, and Small Business LLC is up-and-running. However, you are not done — there are important steps to take for you to maintain the benefits of the “corporate form” and keep your personal and business assets separate. Take special note if you are a single member LLCs or single-shareholder corporation. When you are busy running your business, it is easy to overlook corporate formalities — yet whether you are a solo shop or a 50 employee corporation, these formalities are equally as necessary and important to protect your investment.

The exception to the general rule that an owner’s personal assets are protected from a business’s creditors and litigious plaintiffs is called “piercing the corporate veil.” This term of art originated from one of those archaic law school cases that no one remembers, yet practitioners and courts frequently use this phrase today. The idea behind “piercing the veil” that a business owner cannot abuse the corporate form and use it to commit fraud. If a plaintiff convinces a court that the defendant corporation or LLC is a sham, the plaintiff gets to “pierce the veil” and proceed against the business owner directly and personally, as if the corporation or LLC never existed.

Of course, there is always the possibility that an unpaid creditor will accuse your company of fraud and abusing the corporate form even in instances of legitimate business insolvency. After all, everyone wants to get paid, and if there are significant personal assets shielded by the corporate form, it may just be worth the time and money to argue.

Here are some basic tips on how you can maximize the protections of the corporate form and mitigate the risk that a court will order “piercing the veil”:

1. SEPARATE BANK ACCOUNTS – This might seem basic, but it is astounding how many business owners co-mingle corporate and personal funds. It is absolutely critical that you maintain separate accounts and keep track of business income and expenses separate from your personal expenses. When examining whether the corporation is a sham, this is one of the first factors that a court will consider. In other words, pay your mortgage from your personal account, and buy inventory using the company credit card (as opposed to your personal VISA).

2. HAVE AN ANNUAL MEETING – If you are organized as a corporation, an annual meeting is required by law. While it is not required for LLCs, having an annual

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meeting (and keeping a written record that such a meeting was held) is another important factor that courts will consider when deciding whether the owner is entitled to continuing “corporate veil” protection.

3. KEEP A BINDER WITH WRITTEN CONSENTS AND MEETING MINUTES – Your bylaws or articles of organization likely provide for the ability to make corporate decisions through written consents. Your attorney can help you prepare these documents, but generally these “consents” are written evidence that a particular transaction, such as a sale of real estate, a purchase of assets, or an appointment of an officer, was authorized by the company. It is good practice to pick a shelf in your office and maintain a three-ring binder with all the consents arranged chronologically. If the company holds a meeting (whether annual or otherwise), it is best practice to record meeting minutes and keep them in the same binder as the written consents.

4. MAINTAIN GOOD STANDING WITH THE STATE OF MICHIGAN – This is the easiest requirement to observe, yet it is frequently overlooked. Each year, the State of Michigan requires business owners to file an annual statement form and a $25 fee. Failure to do so for a period of time is not only evidence that might cause you to lose corporate protection, but actually can cause your entity to be automatically dissolved. While it is possible to bring your company back into compliance through retroactive payments and filings, the process costs extra fines and needlessly exposes the business owner to losing the benefit of corporate entity protection.

These are just some of the most basic steps you need to take to preserve your corporate form and preemptively protect yourself from “piercing the corporate veil.” Contact me at [email protected] or at (248)380-0000 for a consultation regarding steps you can take to ensure corporate form protection.


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3 COMMON MISTAKES THAT COMPROMISE A BUSINESS'S CORPORATE PROTECTION AND EXPOSE YOUR PERSONAL ASSETS

Corporate formalities are important. Businesses that commingle assets, forgo record keeping, official minutes, and fail to keep their registration with the State of Michigan up to date risk losing their corporate protections. In most cases, the corporate form limits your personal liability and insulates your personal assets from business debt – unless a creditor successfully argues that the corporate form is a sham and used to perpetuate fraud. However, this protection is not an absolute and there are many situations where that protection may be set aside and personal assets (the owner’s house, boat, car, bank account, etc.) are at risk.

Even if you run a perfectly organized business with current paperwork and a separate bank account, there are still situations where you are at risk of personal liability for your business debts. The following three scenarios are most common:

1. DID YOU SIGN A PERSONAL GUARANTY FOR A BUSINESS LEASE OR A BUSINESS LOAN? Personal guaranties (or guarantys) are additional collateral that you may be asked to execute as a prerequisite to a business loan or even a business lease. A personal guaranty is effectively an agreement that waives your corporate protection and allows a creditor to go after your personal assets directly. Because a small business does not have many assets to collateralize a loan or assure a landlord that obligations will be paid, you may be asked to sign the personal guaranty. Whether you accept that risk is up to you, but at a minimum you should read the document carefully and discuss it with your attorney so that you understand the implications. You may also be able to negotiate for a lease or loan without a personal guaranty, but in most cases you will need to provide sufficient collateral or other assurances to secure your obligations.

2. ARE YOU KNOWINGLY BREACHING A CONTRACT OR A LEASE? Some business owners erroneously assume that because they have an LLC, they can ignore contracts or leases. For example, if your company signed a 3-year lease in a dying shopping center – what’s to stop the LLC from defaulting on the lease and walking away? A lawsuit can only reach the LLC, right? That’s not only wrong, but it is also a dangerous line of thinking that may put your personal assets at risk. A court will not allow the abuse of the corporate form to evade obligations or escape debts. Understand that corporations are created by statute – i.e. the law – to facilitate business. At the same time, the court system will not apply the law to facilitate a party’s evasion of its contractual obligations. If you are abusing the LLC to default on

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loans, other contracts, or lease obligations, a court may very well determine that you are abusing the system, pierce the corporate veil, and impose personal liability.

3. ARE YOU MOVING ASSETS AROUND TO ANOTHER COMPANY? You may also think that you can simply start over by forming a new LLC, transferring the assets of the old LLC to the new one, and leave the loans, contracts, and leases behind with the old shell of a company. But even if you declare bankruptcy for the old LLC, your assets are not immune from creditors. The bankruptcy proceedings allow aggrieved creditors to challenge any transfers made before bankruptcy as “fraudulent” and have them set aside for the creditor’s benefits. And even if your old business had no assets, a court may still impose personal liability and pierce the corporate veil if it is determined that your actions were for a fraudulent purpose – such as escaping a debt, contract, or lease obligation.

With so many potential pitfalls, what is a business owner to do? Hiring a business lawyer may be a good investment. Whether it is to advise you on the obligations of a personal guaranty, to conduct negotiations as to contract or lease terms on your behalf, or to advise you how to exit an unfavorable obligation such as a lease, a business lawyer can help.

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NON-COMPETE VS. NON-SOLICITATION: KEY DIFFERENCES THAT EVERY EMPLOYER MUST KNOW

No matter what industry you are in, you have probably encountered non-compete and non-solicitation agreements. In Michigan, standard pre-employment paperwork often contains obligations for the employee not to compete with the employer (non-compete) and not to solicit the employers existing customers or other employees (non-solicitation).

Although these obligations may be same boilerplate paragraph of the documents your employees signed before or on that first day of work, non-competes and non-solicitation covenants are very distinct in terms of their enforcement by the courts. As an employer, you should understand the different goals of these two types of covenants and the differences in the applicable law as well as understand that Michigan courts will not automatically enforce an agreement just because an employee signed it.

For the uninitiated, a non-compete agreement obligates the employee to not “compete” with the employer’s line of business for a set period of time after leaving employment. The non-compete not only prevents direct competition (for example, an employee starting his or her own rival company), but also prohibits an employee from working for a competitor located within a certain area. By way of example, an employee working as a sales rep for a medical supply store might agree not to work for any competing medical supply store located within 100 miles of their current employer for a period of 1 year after leaving. In essence, the non-compete seeks to preserve the employer’s competitive advantage by restricting its employees’ ability to go work for a rival or to start their own competitive enterprise.

Because the non-compete restricts the free labor market, the Michigan Antitrust Reform Act of 1984 (MCL 445.774a) requires non-competes to:

1. PROTECT A REASONABLE COMPETITIVE BUSINESS INTEREST;

2. BE REASONABLE IN TERMS OF DURATION;

3. BE REASONABLE IN TERMS OF GEOGRAPHICAL AREA; AND

4. BE REASONABLE IN TERMS OF THE TYPE OF EMPLOYMENT OR BUSINESS AFFECTED.

What is reasonable is a question of fact that depends on the facts of the non-compete and on the nature of the work to be restricted. For example, an agreement prohibiting a medical supply sales rep from competing for a year within 100 miles of his current territory is likely

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reasonable. However, the same agreement prohibiting the sales rep from working in the any medical-related field for 50 years anywhere in the world is probably not reasonable for a local employer.

Also, the non-compete must protect a “reasonable competitive business interest” – meaning that agreements targeting back-room employees like maintenance or unskilled workers may be vulnerable to challenge because restricting those employees furthers no legitimate business interest. Before drafting and mandating a non-compete, an employer should ask exactly what you they are trying to protect. If the answer is something concrete like “customers” or “sales contacts” – then the agreement is likely enforceable. If you struggle to come up with an answer or the answer is “I don’t want the employee -working somewhere else” – then the agreement is potentially invalid.

A non-solicitation agreement, on the other hand, is a promise not to interfere with the employer’s actual business by stealing their customers and employees. The non-solicitation is easier to enforce than a non-compete for several reasons. First, a non-solicitation agreement is NOT subject to MCL 445.774a because it does not “expressly prohibit[] an employee from engaging in employment or a line of business after termination of employment.” Thus, the statutory “reasonableness” requirements set forth above do not apply. Second, the non-solicitation by its nature is directly tied to legitimate competitive interests. There is little question that a business’s customers and employees are valuable assets. To prohibit an existing employee from interfering with those assets is not much different than prohibiting stealing on the job. Second, a non-solicitation agreement by its nature will not apply to a lower-level employee because they are not as likely to have no reason to or opportunity to steal customers or employees. After all, a maintenance tech working at a manufacturing plant is not likely to quit his or her job to start a rival manufacturing plant and steal customers and employees. But a C-suite executive may very well become a direct competitor.

As an employer, it is always a good plan to update your on-boarding documents and employee handbook to ensure that you know exactly to what your employees are agreeing. This area of law also varies widely from state to state. For instance, Michigan has very different laws than California.It is a grave mistake to simply print some forms from the internet and cobble together a policy that does not make sense in the context of your business. After all, it pays to have a solid, enforceable document. If there are problems, it is better to find out that the document is problematic before it is invalidated in the courts.

Contact me at [email protected] or (248)380-0000 to set up a consultation regarding your employment policies and a review of any non-compete or non-solicitation agreements in use by your organization.


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INTO THE FIRE: EFFECTIVE STRATEGIES FOR LITIGATION MANAGEMENT BEFORE GOING TO COURT

Are you a litigious business owner? Do you copy your attorney on correspondence to a non-paying client or a vendor? Have you ever threatened another business owner with “I’m going to sue you”? Is this something you do as part of your day-to-day business routine? Does your county’s local business judge know you by name? If so, you probably are not effectively managing the litigation aspect of running a business.

As a Metro Detroit business attorney, I frequently encounter clients who are always “ready to sue.” However, as an attorney, my job is to counsel the client regarding all possible approaches, and to the extent that litigation is the preferred route, I am always honest with the client regarding the judicial process. If your lawyer talks up your case, or uses terms like “sure thing” or “slam dunk” to describe the lawsuit, stop and ask questions. Litigation is not a “hammer” with which to punish someone who wronged you – rather, the justice system is designed to be a neutral process to achieve the correct result by applying the law to your specific facts.

But you may be thinking–come on Dan, this guy or girl totally screwed me! File the lawsuit tomorrow! I WANT BLOOD!!! I’ll pay you, whatever it takes!

But that approach is only likely to result in added time, expense, and headache for you. No matter how strongly you feel about your case, you absolutely must consider the following and discuss with your attorney:

1. LITIGATION IS A LENGTHY PROCESS – It may take years to reach a resolution at the trial court level, and then there is always the risk of appeal. Yes, years. Even if you think your case is “easy.” Remember the goal of the justice system is to reach the correct result, given certain facts and the law. Very rarely do the courts dispose of a case quickly, and it is especially so when you are the plaintiff (the side who initiates the lawsuit) because you will have the burden of proof. Most judges are also inclined to let cases drag on, in hopes that the case will settle and the judge won’t have to make a decision. If you file a lawsuit, be prepared for the long haul.

2. LITIGATION IS A DISRUPTIVE AND UNPLEASANT PROCESS – As a business owner, you should never approach litigation as a money-making scheme. Litigation will not only require a substantial financial investment (see below), but it will also be disruptive to your business. You and your staff will need to

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search for and provide all relevant documents, emails, texts, phone logs, etc. as part of the discovery (or fact-finding process) to your attorney. You and your staff will have to appear for depositions (to provide testimony in this case). Then there are motion hearings and trial. If there are electronic data storage issues, you will need to retain an IT expert. All of this takes time and resources away from your business and you must do a careful cost-benefit analysis before getting involved in litigation.

3. LITIGATION IS AN EXPENSIVE PROCESS – You may easily end up paying tens of thousands of dollars to your lawyers over the course of the case. The fact-finding process that is discovery is the most costly and lengthy. Paying your attorney to attend a 5 hour deposition, review the transcript, respond to discovery requests, and craft your own discovery requests adds up very quickly. And, even if you win, YOU DO NOT GET YOUR ATTORNEY FEES PAID BY THE OTHER SIDE. The only exception to this general rule in the business world is a contract provision that expressly provides that the loser pays the winner’s attorney fees in the event of litigation. Of course, such a provision is a double-edged sword that applies to both parties.

4. LITIGATION IS AN UNCERTAIN PROCESS – Cases are rarely black and white and no attorney can predict what a judge (or jury) will do with your claim. You may have an unpredictable or eccentric judge. You may have attorneys on the other side that will make life not only difficult through discovery, but also expensive by dragging out the process. Also, even if you go to trial or win on a motion, there is always a chance for the losing party to appeal. And, if the Court of Appeals “remands” the case–meaning sends it back to the trial court with instructions–the process could very well restart and drag on for years more.

So what’s a business owner supposed to do? What are some options to enforce your contracts short of going to court? You should consult an attorney about the following options:

Consider pre-suit facilitation, but be mindful of the applicable statute of limitations.

Consider using arbitration clauses in your contracts to mandate an alternative dispute resolution process between the parties.

The unpredictability and expense of litigation also highlights the need to retain an attorney to advise your business and review any contracts before signing them.

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The bottom line? A business does not make money litigating. Litigation is a huge drain on time and resources that could be spent growing market share. If you find yourself considering litigation or on the receiving end of a lawsuit, contact an experienced business law attorney immediately for a consultation.

Dan Artaev is an experienced business lawyer who can advise your business and help you decide whether a lawsuit is appropriate. Contact Dan at [email protected] or (248) 380-0000.


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PART FOUR: SELLING & TERMINATING YOUR BUSINESS

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5 OFTEN-OVERLOOKED ESSENTIALS WHEN SELLING YOUR BUSINESS

You finally got that phone call from the California venture capital firm that wants to buy your start-up for a couple of million dollars. You are eager to sell and use that money to pursue other projects and passions. The attorneys and accountants have been retained, and the Asset Purchase Agreement has been drafted.

But while the attorney drafted the proper asset descriptions and indemnification clauses, and the accountant has allocated the purchase price for the taxes, has your team addressed these five often-overlooked essentials? After all, the sale of a business is much more than just signing the papers and turning over the keys.

1. IS THE BUYER HIRING THE EXISTING EMPLOYEES? When transferring the assets of a business, one can easily overlook the employees who operate those assets and make the business run. Assuming that the buyer is buying the employees together with the business is a grave (and potentially costly) error. Most employees are at will and may walk out from their job if you spring a “surprise” acquisition on them one morning. This may especially be devastating in an industry like manufacturing, where qualified employees are difficult to find. To mitigate that risk, the buyer should provide offer packages to all current employees at least a few days before the sale. As a seller, it may benefit you to make a small monetary or personal gift to some of the long-time or more senior employees to thank them for their years of service and to throw a transition pizza party for the crew. Remember that the sale will be a personal and emotional event for those who work for you. While you are selling the machines and office furniture, the employees make the business run.

2. ARE ANY KEY SERVICES PERFORMED BY A FAMILY MEMBER OR BY THE SELLER HIM OR HERSELF? In small businesses, owners often rely on their family members (or themselves) to perform certain key services (like quoting prices or estimating inventory) without a formal employment relationship. The seller should disclose any key services done by family members so that the buyer can make adequate provisions to hire someone to perform those key services. After all, the goal is to keep the business going after the sale and to provide for as few delays as possible.

3. WHAT HAPPENS TO THE INVOICES AND RECEIVABLES RECEIVED AFTER

CLOSING? Continuing in the ordinary course of business, there will be both invoices and checks that the buyer receives post-closing. Who is responsible for the invoices for inventory received pre-closing? Who gets the checks for pre-

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closing product? And what about any open purchase orders – are those being assigned? To prevent future conflict, all of these topics should be addressed before the money is wired.

4. WHAT ABOUT THE BUILDING? If the seller owns the building and is selling

that building with the business, the transaction is relatively straight-forward. But if there is a lease, the seller must obtain landlord’s consent before assigning the lease. Alternatively, the buyer must enter into a new lease that starts on the day of the closing to ensure a smooth transition and continued operations.

5. HAVE THE CUSTOMERS BEEN INFORMED? It is a mistake to assume that the

business’s customers will simply continue doing business with the new owner. Business is as much about relationships as it is about the numbers. The buyer and seller should discuss a transition plan with respect to existing customers and ensure that these valuable relationships are preserved going forward.

Of course, these are just some examples, and there will be other key topics specific to the nature of your business and to the transaction.

Even where the business is small, you should consult with a business attorney who can not only draft the documents but also walk you through the “real world” nuances of the sale that may otherwise get overlooked. Contact me at [email protected] or (248)380-0000.


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TERROR FROM BEYOND THE GRAVE: 5 CRITICAL MISTAKES TO AVOID WHEN TERMINATING YOUR COMPANY

Consider the classic horror movie plot line. The good guy finally killed off that scary monster/evil janitor/gremlin. Hooray! Triumphant, the hero turns his back to celebrate with fellow survivors when SUDDENLY the monster/evil janitor/gremlin rises from the dead to take down that one final victim! In the business world, if you do not take the proper steps to terminate your corporate entity and ensure that it is “dead AND buried,” (which I swear is a real term of art) the entity can come back from the grave. The undead entity will then cause all kinds of problems and could even result in potential personal liability for the unwary business owner.

First, termination does not mean a business has failed. Even if your company grows and is successful, there may be a time that you need to terminate its existence. The most common example is when you sell your business. If it is an asset sale, the buyer purchases the real estate, equipment, customer lists, intellectual property, etc., but leaves the corporate entity for the seller to dispose of.

Second, before we get to termination, I assume you have read the previous chapters and have properly incorporated your business. You also should have had your attorney draft the initial corporate documents. These documents will often contain the rules and procedures for the terminating the corporate entity. Following these internal rules and procedures is critical to a successful dissolution and wind-up.

Finally, and without further ado, the following is a list of the 5 most common missteps to avoid when terminating your business

MISTAKE #1 – NOT CONSULTING WITH AN ATTORNEY AND AN ACCOUNTANT.

Termination is not as simple as filing a form with the State of Michigan. There are multiple considerations that control the process and are unique to your business. For example, what do your bylaws or articles of organization say about termination? Do you need unanimous consent of the equityholders or a majority vote enough? Are there tax implications and personal tax liabilities to consider? What about the timing of any liquidation distribution? Only a professional can provide fact-specific counsel for your particular situation.

MISTAKE #2 – CONFUSING “DISSOLUTION” AND “WINDING-UP.”

Although both terms refer to the termination of a corporate entity, the processes are different and controlled by different statutory provisions. Dissolution is something that is triggered by an event – for example, a unanimous vote of the LLC members or a bankruptcy as set forth in the bylaws. Winding up, on the other hand, refers to the process of

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liquidating the corporate entity. In other words, dissolution is the process of making the company “dead” – whereas winding-up is a process to ensure that it is “buried.”

MISTAKE #3 – ASSUMING THAT DISSOLUTION ALONE PROTECTS YOU FROM PERSONAL LIABILITY.

Dissolution alone is not enough to protect a business owner from creditors and litigants. In Michigan, the law permits a dissolved corporation to “sue and be sued in its corporate name.” MCL 450.1834(e). Same goes for a dissolved LLC. MCL 450.4805(3). Moreover, improper dissolution could lead a court to conclude that the corporate form was a sham designed to elude creditors and result in a court order to “pierce the corporate veil.“

MISTAKE #4 – FAILING TO FOLLOW THE STATUTORY REQUIREMENTS.

Whether your company is organized as a for-profit corporation, a non-profit, or an LLC, there are specific statutory requirements for the termination process. For example, Michigan law requires an LLC to provide specific information in its certificate of dissolution. MCL 450.4804. This is critical because proper dissolution is a statutory prerequisite to winding up the LLC’s affairs (meaning liquidation). See MCL 450.4805 and 450.4806. In other words, failure to carefully follow the dissolution process risks a subsequent argument that the wind-up process was invalid and the liquidation was illegal. Note also that there are separate laws that govern corporations and LLCs and it is imperative that you follow the correct procedure for your specific type of entity.

MISTAKE #5 – NEGLECTING CREDITORS FOR THE BENEFIT OF SHAREHOLDERS.

Terminating a company does not relieve the company or its equity holders from liability for debt obligations. If you are unable to pay your lender or cannot pay an adverse judgment, then you should consider filing for bankruptcy. In the process of a normal dissolution and liquidation, Michigan law presupposes solvency and mandates that creditors get paid first. MCL 450.4808(1)(a). And of course, government tax obligations must be paid even before the other creditors. MCL 450.4808(2).

Dissolving and winding-up your business is a complex process that requires consultation with a professional. Failure to ensure that the company is “dead AND buried” presents many risks going forward and can even lead to personal liability for the owners.

If you are selling your business’s assets or simply need to close down your current corporation or LLC

for a different reason, contact me for a consultation at [email protected] or (248)380-0000.

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SMOKE ’EM IF YOU GOT ’EM: 4 QUESTIONS TO ASK WHEN SELLING COMMERCIAL REAL ESTATE IN THE MARIJUANA ERA

In 2018, Michigan citizens overwhelmingly approved Proposition 1 to legalize recreational marijuana. While medicinal marijuana has been legal in Michigan for several years now, the recreational marijuana law will certainly expand the availability of the drug across the state. But what does that mean for the Michigan business community?

Legalization will impact your business, even if your business has NOTHING to do with the burgeoning marijuana industry. Recently, there have been a number of publications that counsel owners on the proper way to handle marijuana in the workplace. For instance, more access to marijuana means that you will need to revisit your drug policies and make sure everyone is aware of the rules. This impact is rather obvious – but there are other effects on your business that are not as intuitive yet just as important. These “hidden” impacts may surprise you.

For example, you might be surprised that legalization presents a whole host of unique issues when buying or selling real estate. Imagine you are a small auto parts manufacturer located in the city of Pontiac. One of your facilities is in an area that will be zoned for marijuana dispensaries. A weed entrepreneur approaches you and presents a buy-sell agreement offering a significant premium.

Warning – this is not like every other real estate buy-sell! Consult with your attorney and accountant to ensure that you are adequately protected. At a minimum, here are 4 fundamental questions to ask before signing off:

1. DO YOU HAVE ADEQUATE ASSURANCES FROM THE BUYER BEFORE ENTERING INTO THE “DUE DILIGENCE” PERIOD? Perhaps the biggest variable related to the marijuana industry is regulatory approval. The prospective weed entrepreneur must obtain licenses and approvals on both the state and local levels before they can open up shop. There may be local zoning hurdles to overcome as well. The licensing process may take 6-8 months or longer. Accordingly, as a seller – how long are you willing to wait? What are the risks to your ongoing operations during the due diligence period? Is the buyer depositing an adequate earnest money deposit to bind you to the sale? Increased uncertainty may warrant a greater down payment or non-refundable deposit to compensate the seller.

2. DOES THE CHOSEN TITLE COMPANY HANDLE MARIJUANA-RELATED

TRANSACTIONS? Not all title companies will issue a policy where the transaction involves a marijuana-related business. Right now, this is more of a

https://drive.google.com/file/d/1aFeybU_wRLCkmb75DFIN3dDknrytVBTO/view

https://drive.google.com/file/d/1aFeybU_wRLCkmb75DFIN3dDknrytVBTO/view

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matter of policy rather than the law. However, right now, Westcor appears to be

one of the few major insurers that will insure title in a marijuana business property sale. And even they have limits as to the amount of the policy. The worst thing that you can do is deceive your insurer on the nature of the buyer or fail to disclose this critical fact. Like any other kind of insurance, a misrepresentation will likely void any policy and may lead to conflict and even litigation down the road between the parties.

3. HOW ARE YOU GETTING YOUR PURCHASE PRICE? You probably already

know that federally-regulated banks (which is pretty much all of them) do not accept funds from marijuana-related businesses, at least for now. This is because while marijuana may be legal under state law, it is still a Schedule-1 prohibited substance (like heroin or cocaine) on a federal level. Accordingly, do not expect the typical wire transaction to work. Rather, your buyer might bring a cashier’s check for a large amount to the closing. Maybe they even want to pay in cash. Be sure to address exactly how the purchase price will be paid well in advance of closing.

4. ARE YOU VIOLATING ANY OTHER LEASE OR COVENANT? This is where it is

especially critical to involve your attorney. Imagine a situation where you own a strip mall with several tenants and a marijuana business approaches you to either purchase or lease on the units. Did you know that selling or leasing to them might violate your leases with the other tenants? Frequently leases for a unit in a strip mall have a covenant that prohibits a landlord from leasing or selling a unit to an entity engaged in “illegal” activity. Again, marijuana is still “illegal” as a matter of federal law. Further, do you have a mortgage on the property? Does the mortgage prohibit “illegal” activity? Last thing that you want in an inadvertent default on either your other leases or to your bank under some obscure provision in a financing document.

Marijuana legalization in Michigan is an emerging and developing legal area. Even if your business has nothing to do with marijuana, you will encounter it in the course of business. Contact me at [email protected] or (248)380-0000 for a consultation regarding the impact of legalized marijuana on your business.

http://wltic.com/


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ABOUT THE AUTHOR

Dan Artaev has extensive experience in the areas of business law, commercial litigation, real estate, regulatory & administrative law, licensing, and appeals. Prior to private practice, Dan was an Assistant Attorney General with the Michigan Department of Attorney General’s Labor Division, counseling state agencies on labor-related matters and both prosecuting and defending lawsuits on behalf of the State of Michigan.

Dan’s current practice focuses on business counseling, litigation, real estate transactions, and otherwise serving businesses both big and small throughout Metro Detroit.

Dan graduated summa cum laude from Michigan State University College of Law in 2010, where he was Senior Notes Editor and executive board member of the Law Review. In 2007, Dan received dual majors in Economics and German magna cum laude from Kalamazoo College, where Dan was also a four-year member of the NCAA Division III men’s tennis team.

Dan lives in Farmington Hills with his wife, their son, and their cat. When not at work, Dan enjoys training for and participating in triathlons throughout Michigan and golfing. Dan also is an avid musician and plays electric guitar, bass, and drums.

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CONTACT

DISCLAIMER: THE CONTENT WITHIN THIS DOCUMENT IS FOR

INFORMATIONAL AND PROMOTIONAL PURPOSES ONLY. IT IS NOT

INTENDED TO BE AND DOES NOT CONSTITUTE LEGAL ADVICE. EACH

BUSINESS DEAL AND TRANSACTION IS UNIQUE AND FACT-SPECIFIC.

ALWAYS CONSULT WITH A PROFESSIONAL BEFORE TAKING ANY

ACTION THAT MAY IMPACT YOUR BUSINESS, OR ANY RIGHTS AND

OBLIGATIONS.


an essential business law handbook · 2020-04-11 · constitute legal advice. always consult with a...

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