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Separation of LLC and Personal Assets

(This is Part 4 of our LLC Series)

It is important for any company to respect the differences between the company’s bank accounts, property, equipment, and other assets and the personal assets owned by the company’s owners. An LLC, like a corporation or other legal “person,” is a separate legal entity with assets that are owned by the LLC. Any attempt by an LLC member to dispose of or use LLC property would be no more proper than an attempt by that member to dispose of or use another member’s personal property. Members must respect the fact that the LLC’s assets are the property of the LLC, not the members. Similarly, an LLC member should not intermingle such member’s personal assets with the company assets of the LLC.

The Company’s books, records, and financial statements should be maintained clearly to reflect the separation of the Company’s assets from the personal assets of the members. The Company must conduct business in its own name (not in the individual name of any manager or member).  All letterhead, business card, bills, checks, invoices, and other Company forms should show the Company’s full legal name (and fictitious business name, if any), and the Company’s current address, telephone number, and fax number.

As a statement of sound business practice the observations made about separation of personal assets from company assets are fairly obvious. There is an additional, less obvious reason to follow those rules.

The creation of an LLC shield from liability for LLC owners inevitably gives rise to attempts to pierce that shield by the company’s creditors. This has long been the case with respect to the liability shield of corporations. As long as there have been corporations, there have been attempts to “pierce the corporate veil.”  Published cases in which such attempts have been successful usually involve a recitation by the court of a dozen or so factors in support of the court’s ruling that the shareholders of the corporation should be held personally liable for the debts, obligations, or other liabilities of the corporation.  At the top of this list of factors are (i) failure by the shareholders to respect the corporation’s separate identity (by intermingling corporate and personal assets) and (ii) some other form of misconduct by the shareholders with respect to the corporation.

Although the LLC entity form has been generally accepted and widely used in the United States since the mid-1990’s, there is still little case law specifically addressing the relevant issues in this area.  Nonetheless, it should be pointed out that at least two specific statutory factors favor LLCs over corporations in this area.

First, the law expressly states that LLC members are not liable for LLC debts, obligations, and liabilities merely by virtue of being a member in the LLC. There is no such explicit statutory enunciation of the shield from liability for shareholders in corporations (instead, the corporate shield is based on many years of case law and common law corporate principles). Second, one of the many factors often listed in piercing-the-veil cases for corporations is that the share-holders did not respect corporate formalities specified in the relevant corporation’s statute, bylaws and other charter documents. With regard to LLCs the law makes it clear that the LLC need not respect corporate formalities. Failure of an LLC to respect corporate formalities cannot be considered a factor “tending to establish that the members have personal liability” for any LLC debt, obligation, or liability.

This is not to say that LLC members can ignore the many years of corporations law developments in this area.  The few California LLC piercing-the-veil cases decided to date have generally applied principles from cases involving corporate laws.  The emerging trend appears to be to treat LLC piercing-the-veil cases as a close relative to corporate piercing-the-veil cases and generally apply similar criteria in LLC cases.   Underlying most cases is a notion of unfair treatment, deception or fraud, so it is most important that LLC members and managers consistently conduct business on behalf of the LLC with a clear and unambiguous indication that the LLC is the entity involved, and not individual members or managers.

The information provided herein is not intended as legal advice and should not be acted upon. If you have additional questions about this subject matter or would like to consult with an attorney about this or related subject matters, please call or email Josef Cowan at the Cowan Law Group (949) 333-0919 or at jcowan@cowanlawgroup.com.

LLC Member Votes and Manager Actions

(This is Part 3 of our LLC Series)

MEMBER VOTES
Certain fundamental changes in the life of an LLC, such as a merger or liquidation of the LLC, require a vote by the members. These fundamental changes include the following:

Amendment of the articles of organization (requires at least a majority vote of the members; this requirement can be modified upward by the operating agreement).
 Amendment of the operating agreement (requires unanimous vote of the members; this requirement can be modified downward by the operating agreement).
Merger or consolidation of the LLC with or into any other LLC (requires at least a majority vote of the members; this requirement can be modified upward by the operating agreement).
Winding up and dissolution of the LLC (requires at least a majority vote of the members; this requirement can be modified upward by the operating agreement).
Conversion into another business entity or a foreign other business entity or a foreign LLC (requires at least a majority vote of the members).

MANAGER ACTION
Matters of general operating policy should be considered and authorized by the general manager or managers of the LLC. Although there is no statutory requirement with respect to how frequently the managers should act, it is advisable that the managers meet at least quarterly. In addition, a specially convened meeting of the managers may be called if action is required before the next regular meeting of the managers. Action by the managers may also be taken by the unanimous written consent of the managers. Although in most cases it is likely that most manager actions will be taken by unanimous written consent without a meeting, it may prove useful to schedule a regular managers’ meeting to address significant matters which have arisen on a quarterly or, at least, annual basis. Manager meetings can be held either in person or by conference telephone so long as all managers in attendance can hear each other simultaneously.

Matters appropriate for manager action, which can be immediately approved by written consent or which might arise and be accumulated, pending approval by the managers, include the following:

Appointment of officers, setting of salaries, and declaration of bonuses (at least annually, typically at a meeting of the managers immediately following the annual meeting of members).
Appointment of manager committees, if any.

Opening of LLC bank accounts and the designation and change of LLC managers and officers authorized as signatories. Any bank’s LLC account form will usually include a resolution which the party executing the form represents to have been adopted by the managers of the LLC.

LLC borrowing and delivery of collateral in connection with such borrowing.
Consummation of material contracts for the purchase or lease of significant assets or services or the disposition of LLC assets or for the rendering of services outside the ordinary course of the business of the LLC.
Policy decisions with respect to the construction of material assets or the investment of material amounts in research and development projects.
The adoption of pension, profit-sharing, bonus and other employee benefit plans.
The repurchase of LLC interests.
Amendment of LLC bylaws (if any).
Review of financial statements of the LLC.
Appointment of auditors, if any.
Any action that requires a member vote.
The issuance and sale by the LLC of additional interests in the LLC.
In the case of any such actions, the secretary of the LLC should prepare minutes of the meeting at which such actions were approved or prepare the form of written consent evidencing any such manager or member actions.

The information provided herein is not intended as legal advice and should not be acted upon. If you have additional questions about this subject matter or would like to consult with an attorney about this or related subject matters, please call or email Josef Cowan at the Cowan Law Group (949) 333-0919 or at jcowan@cowanlawgroup.com.

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The Roles of the Major Players in an LLC

(This is Part 2 of our LLC Series)

The following is a brief description of the roles of the major players in an LLC — the members and the managers. Although the following is written as if members and managers are separate persons, the same individuals could serve as members and managers.

MEMBERS
The members own the LLC and provide the capital with which the LLC commences its business.  In a member-managed LLC, members by definition manage the business of the LLC. In a manager-managed LLC, members as a group often do not take an active role in running the business.  Normally one or two members will be intimately involved in the day-to-day operations of the LLC, and other members will be passive, non-active investors. Beyond electing the managers and voting on certain key events in the LLC’s life, the members of a manager-managed LLC entrust management of the LLC to the managers (much like the shareholders of a corporation entrust management of the corporation to the directors and officers of the corporation).  Matters requiring member votes will be discussed in a later article.

MANAGERS
Managers are elected by the members. At the outset managers can simply be specified in the operating agreement, which is of course approved and signed by all members. Thereafter, if the operating agreement so permits, members can hold annual or other regularly scheduled meetings and elect the general manager and any other managers of the LLC. Managers manage the business and affairs of the LLC and exercise the LLC’s powers. Managers may either perform these responsibilities themselves or these responsibilities can be performed by officers and employees under the direction of the managers.

In performing these responsibilities, managers have the same fiduciary duty with respect to the LLC and its members that a general partner owes to a general partnership and the other partners of that partnership (there is no specified fiduciary duty for members). It is permissible to modify and otherwise refine the fiduciary duty of the manager in the operating agreement, and it is advisable to do so. Typically the operating agreement will specify fiduciary duties such as the “duty of loyalty” and the “duty of care” for LLC managers.

The duty of loyalty dictates that a manager must act in good faith and must not allow personal interests to prevail over interests of the LLC and the LLC’s members. A standard example that raises these issues is a proposal that the LLC enter into a transaction that benefits a manager, or involves the manager in a conflict of interest between the manager and the LLC or its members. Such transactions are often called “self-dealing” transactions. They are not prohibited, but such transactions must be predicated upon (i) full disclosure, (ii) proper approval from disinterested managers and members, and (iii) fairness to the LLC and its members.

The duty of care requires a manager to be diligent and prudent in managing the LLC’s affairs. This is sometimes referred to in corporate law as the “business judgment” rule. If a manager makes a decision, conscientiously and without fraud or conflict of interest, such manager will not be second-guessed by courts based on how that decision happens to work out for the LLC. A manager is not held liable merely because a carefully made decision turns out badly.

Like a corporation, the LLC members and managers can appoint officers for the LLC who serve at the pleasure of the managers. The officers perform the bulk of the day-to-day operation of the LLC’s business. Normally an LLC will want at least a general manager (or president), a chief financial officer, and a secretary. More than one of these offices can be held by the same individual. An LLC may have additional officers. These additional officers are either appointed by the general manager or another officer if such officer has been delegated authority to make such appointments.

The following is a brief summary of the standard duties of the following officers. All of these could be modified by the managers.

General Manager or President. The general manager is the chief executive officer and general manager of the LLC unless the LLC has a chairman of the board and has designated the chairman as chief executive officer. The general manager has general supervision, direction, and control over the LLC’s business and its officers. The general manager can also be called the president of the LLC.

Chief Financial Officer. The chief financial officer keeps the books and records of account of the properties and business transactions of the LLC. These duties include depositing corporate funds and other valuables in the name of the LLC and disbursing funds as directed by the managers.

Secretary. The secretary of an LLC keeps the LLC’s articles of organization, operating agreement, record of members’ addresses and holdings in the LLC, and written minutes (if any) of the proceedings of the LLC’s members and managers. The secretary usually has the duty of giving notices to members and managers of members’ and managers’ meetings.

#attorney   #orangecounty   #llc  

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Introduction to Limited Liability Companies

The responses to my series on mechanics liens have been very positive. A large number of you have expressed that you find the information helpful and that it gives you a deeper and clearer understanding of the complex world of mechanics liens.

Many of you have also asked that I do a similar series for other subjects, such as corporations and other business entities. After giving it some thought, I believe an introduction to limited liability companies could be very useful. Many people form them, but relatively few know the basic elements of LLCs or how they are operated. As a result, many, if not most, LLCs are seriously mis-managed, which creates a host of problems for the LLC and its members and managers, including potential legal liability and penalties.

The following is the first in a series of articles that will present a general introduction to LLCs. The articles are intended to provide an explanation of the basic elements of LLCs, how they are managed, and the roles of the following:

the owners of the LLC (called “members”);
the managers elected by the members to operate the LLC business (the “managers”); and
the governing agreement for the LLC (called the “operating agreement”).
I hope you find this information helpful and easy to understand.


PART 1 – Basic Structure of an LLC
An LLC is formed when its Articles of Organization have been executed and filed with the California Secretary of State’s office. An LLC may have one or more members at the time of formation and its members are required, either before or after filing the Articles of Organization, to enter into an operating agreement. This is the instrument that governs the LLC and it will typically contain pro-visions specifying capital contributions, profit sharing percentages, management and control, admission of new members, restrictions on transfers of membership interests, and perhaps special tax provisions such as specific allocations of gains and losses.

LLCs are but one of a number of forms of organization in which one or more persons can join together to conduct a business. The LLC is owned by the members who can either (i) manage the business of the LLC themselves, in which case the LLC would be a “member-managed LLC,” or (ii) elect a manager or managers to manage the business of the LLC, in which case the LLC would be a “manager-managed LLC.” One of the most important differences between a member-managed LLC and a manager-managed LLC concerns the authority of the members to bind the LLC to LLC obligations:

In a member-managed LLC, each member has the power to bind the member-managed LLC (like general partners in a partnership).
In a manager-managed LLC, no member has the power to bind the LLC (just as no shareholder of a corporation can bind the corporation); only a manager or authorized officer of the LLC can bind the manager-managed LLC.

Management duties include decisions about key policies, LLC transactions, and the establishment of guidelines within which the business of the LLC will be conducted. The managers can hire officers and employees to perform the LLC’s day-to-day business.

The principal distinguishing feature of an LLC is the limitation of liability the members of the LLC enjoy (like a corporation), as well as the pass-through income tax treatment enjoyed by the LLC and members (like a partnership). So long as the LLC is properly formed and in existence, and is properly operated, the members will not be personally liable for the LLC’s debts, obligations, and liabilities. In other words, if the LLC’s debts exceed the value of the LLC’s assets, the LLC’s creditors should not be entitled to seek repayment from the members’ personal assets.

Of course, a personal guarantee by an LLC member of an LLC obligation would give rise to personal liability of that member to the extent specified in the guarantee (as it would for a shareholder in a corporation). Failure by a member to remit employee with-holding taxes can provide another basis for personal liability of a member (as it would for a shareholder in a corporation). Liability based on the personal tortious behavior of a member would also provide the basis for personal tort liability of that member (as it would for a shareholder in a corporation). But generally the LLC liability shield, like the corporation’s liability shield, should protect individual members from LLC debts, obligations, and liabilities.
#attorney   #orangecounty   #llc  

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How is the Amount of a Mechanics Lien Calculated?

(This is Part 3 of our Mechanics Lien Series)

The amount of a mechancis lien is limited to the reasonable value of the work provided by the claimant, or the price agreed to by the claimant and the person that contracted for the work, whichever is less. Moreover, a direct contractor or subcontractor may enforce a lien only for the amount due pursuant to that claimant’s contract after deducting all lien claims of other claimants for work provided and embraced within that contract. In other words, the direct contractor or subcontractor’s claim is limited to the value of the labor equipment, materials and services actually supplied by the claimant, minus the value of all liens filed by the claimant’s subcontractors, laborers and material suppliers.

A claimant is entitled to include in its mechanics lien work per-formed under a written modification of a contract, or as a result of the rescission abandonment, or breach of a contract. A claimant is also able to include in its mechanics lien the reasonable value of labor, materials, equipment and services furnished in connection with an oral modification to a contract as long as the claimant is able to establish that the owner rescinded, abandoned or breached the contract. Typically an owner is deemed to have breached a contract if the owner refuses to pay for extra work the owner orally  requested or caused.

There is little reported law concerning “impact claims” such as delay, disruption, and acceleration. However, since a claimant is able to include costs resulting from a rescission, abandonment or breach of a contract, presumably a claimant could include costs relating to extended jobsite overhead, but only to the extent of the reasonable value of the labor, equipment, materials or services actually furnished. Costs relating to extended or unabsorbed home office overhead would likely not be allowed.

If a claimant is entitled to interest by contract or law, a claimant may recover interest on the principal amount owing in a foreclosure action. However, a claimant is not entitled to attorney’s fees.

The information provided herein is not intended as legal advice and should not be acted upon. If you have additional questions about this subject matter or would like to consult with an attorney about this or related subject matters, please call or email Josef Cowan at the Cowan Law Group (949) 333-0919 or at jcowan@cowanlawgroup.com.

#attorney   #orangecounty  

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Who is Entitled to a Mechanics Lien?

(This is Part 2 of our Mechanics Lien Series)

Generally, any person who provides work authorized for a work of improvement or site improvement on real property is entitled to a mechanics lien, including, but not limited to:

 Direct contractors;
 Subcontractors:
 Material suppliers;
 Equipment lessors;
 Laborers; and
 Design professionals.
The term “work” includes labor, services, materials, equipment, special skills, and other necessary services. Work is authorized if it is provided at the request of or agreed to by the owner, or if it is provided or authorized by a direct contractor, subcontractor, architect, project manager, or other person having charge of all or part of the work of improvement or site improvement.

A “direct contractor” is a contractor that has a direct relationship with an owner.

A “subcontractor” is a contractor that does not have a direct contractual relationship with an owner. The term includes a contractor that has a contractual relationship with a direct contractor or with another subcontractor.

A “material supplier” is a person that provides materials or supplies to be used or consumed in a work of improvement.

An “equipment lessor” is a person that provides equipment to be used on a work of improvement.

A “laborer” is a person who, acting as an employee, performs labor upon, or bestows skills or other necessary services on, a work of improvement.

A “design professional” is a person licensed as an architect, landscape architect, or land surveyor, or a person registered as a professional engineer. Design professionals are able to record liens prior to the commencement of the planned work of improvement. Please note there are certain requirements specific to design professional liens that are beyond the scope of this discussion. For more information, please refer to the California Civil Code, Sections 8300-8319.

The term “person” means an individual, corporation, public entity, business trust, estate, trust, partnership, limited liability company, association or other entity.

Although not specifically named in any statutes, California courts have held that house movers and persons that transport materials to a work of improvement have mechanics lien rights. On the other hand, California courts have held that money lenders, tenants, equipment vendors (as opposed to lessors), and purveyors to material suppliers do not have mechanics lien rights.

I hope you found this article to be helpful. Please feel free to forward it to anyone you believe would benefit from the information. Stay tuned for Part 3 – How is the Amount of the Mechanics Lien Determined?

The information provided herein is not intended as legal advice and should not be acted upon. If you have additional questions about this subject matter or would like to consult with an attorney about this or related subject matters, please call or email Josef Cowan at the Cowan Law Group (949) 333-0919 or at jcowan@cowanlawgroup.com.

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What is a Mechanics Lien?

(This is Part 1 of our Mechanics Lien Series)

When a contractor, subcontractor, material supplier, equipment lessor, laborer or design professional contributes to a private work of improvement and is not paid, one of its principal statutory remedies is a mechanics lien. A mechanics lien is an involuntary lien against the real property on which the claimant has provided labor, services, equipment or materials. The amount of the lien is the value of the items furnished or the contract value, whichever is less. A mechanics lien is not allowed on public property.

In order to enforce its rights, a claimant must timely record its mechanics lien and file a lawsuit to foreclose on the lien within 90 of its recordation. The time periods for recording the liens will be discussed in more detail in a later blog.

The information provided herein is not intended as legal advice and should not be acted upon. If you have additional questions about this subject matter or would like to consult with an attorney about this or related subject matters, please call or email Josef Cowan at the Cowan Law Group (949) 333-0919, jcowan@cowanlawgroup.com.
#attorney   #orangecounty   #mechanicslien  

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An introduction to California Mechanics Lien Laws

Mechanics liens are an extremely important and effective remedy for contractors, subcontractors, material suppliers and others in the construction industry. Often a mechanics lien will make the difference between being paid and not being paid for goods and services provided on a private work of improvement. However, the laws relating to mechanics liens are complex, and failure to follow them can result in a lien being defective and unenforceable.

Understandably, our clients contact us with questions about mechanics liens ranging from how and when to record them to how to enforce the liens and actually get paid. At the request of several clients, I have decided to provide an in-depth explanation of California’s mechanics lien laws that can be used as a general guide to clients and others as they navigate their way through the world of mechanics liens.

This is the first in a series of articles dealing with the most common and relevant issues clients face concerning mechanics liens. My hope is that you will find this information helpful and easy to understand.

Have additional questions?  Contact us or call 800-634-5260.

WHAT IS A MECHANICS LIEN? 
When a contractor, subcontractor, material supplier, equipment lessor, laborer or design professional contributes to a private work of improvement and is not paid, one of its principal statutory remedies is a mechanics lien. A mechanics lien is an involuntary lien against the real property on which the claimant has provided labor, services, equipment or materials. The amount of the lien is the value of the items furnished or the contract value, whichever is less. A mechanics lien is not allowed on public property.

In order to enforce its rights, a claimant must timely record its mechanics lien and file a lawsuit to foreclose on the lien within 90 of its recordation. The time periods for recording the liens will be discussed in more detail in a later blog. www.cowanlawgroup.com/blog

#mechanicslien  
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Alter Ego Liability – A Trap for the Unwary

If you formed a corporation or limited liability company, you probably did so to shield yourself and others from liability. Generally, shareholders, directors and officers are not personally liable for the debts of a corporation or LLC. However, under certain circumstances, California courts can “pierce the corporate veil” and allow creditors to go after individual corporate or LLC officials, holding them personally responsible for the debts and liabilities of the corporation or LLC.

A general understanding of the Alter Ego Doctrine and how the courts apply it is extremely important for anyone doing business through a corporation or LLC. Knowing what to do and not do in terms of corporate governance and finance can help you avoid many pitfalls and avoid financial catastrophe.

Two Elements
While there is no litmus test for applying the Alter Ego Doctrine, California courts have consistently stated that there are two general requirements necessary to pierce the corporate veil:

1. There must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder (or other corporate entity) do not in reality exist; and
2. There must be an inequitable result if the acts in question are treated as those of the corporation alone, or stated differently, the failure to disregard the corporate entity would sanction a fraud or promote an injustice.

Sufficient Unity of Interest
The first requirement – whether there is such a unity of interest that the separate personality of the corporation no longer exists – is often very fact intensive. The courts have stated that the following factors are relevant, though not necessarily conclusive, in determining whether the requisite unity of interest exists:

1. Commingling of funds and assets.
2. Failure to segregate funds.
3. Diversion of funds or assets.
4. Treatment by shareholder of corporate assets as own.
5. Failure to maintain minutes.
6. Identical equitable ownership in two entities.
7. Officers and directors of one entity same as controlled corporation.
8, Use of the same office or business location.
9. Employment of same employees.
10. Total absence of corporate assets.
11. Under-capitalization.
12. Use of corporation as mere shell.
13. Instrumentality or conduit for single venture of another corporation.
14. Concealment or misrepresentation of the responsible ownership, management and financial interests.
15. Concealment or misrepresentation of personal business activities.
16. Disregard of legal formalities.
17. Failure to maintain arms-length relationships among related equities.
18. The use of the corporate identity to procure labor, services or merchandise for another entity.
19. The diversion of assets from a corporation by or to a stockholder or other person or entity to the detriment of creditors.
20. The manipulation of corporate assets and liabilities in entities so as to concentrate the assets in one and the liabilities in another.
21. The contracting with another with the intent to avoid performance by use of the corporation entity as a shield against personal liability.
22. The use of the corporation as subterfuge for illegal transactions.
23. The formation and use of a corporation to transfer to it the existing liability.

In considering the factors on this list, not every factor needs to be shown, and there is no one factor that is conclusive. The analysis often comes down to whether the corporation at issue is treated as a separate entity generally and at all times, and not simply for the purpose of shielding its shareholders or corporate affiliates from liability.

Inequitable Result

Like the first requirement, the second element – that there would be an inequitable result if the acts in question were treated as those of the corporation alone – is often highly fact intensive. Courts frequently state that the corporate form will not be recognized if to do so would sanction a fraud or promote injustice. The alter ego doctrine does not depend upon the presence of actual fraud, but is designed to prevent what would be fraud or an injustice. Accordingly, bad faith, in one form or another, is usually an underlying consideration. A finding of wrongdoing, violation of statute or evidence of injustice, is almost always required to pierce the corporate veil.

The information provided herein is not intended as legal advice and should not be acted upon. If you have additional questions about this subject matter or would like to consult with an attorney about this or related subject matters, please call or email Josef Cowan at the Cowan Law Group (949) 333-0919, jcowan@cowanlawgroup.com.
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At Cowan Law Group we are well versed in many areas of law including employment law. We provide expert guidance to employees and employers facing these legal challenges. Here is an interesting article regarding employment law on a wrongful termination claim. 

#legalservicesorangecounty   #employmentlawadvice   #lawservices  

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