hidden dangers of representing multi-owner businesses: legal pitfalls accountants must avoid...
TRANSCRIPT
Hidden Dangers of Hidden Dangers of Representing Representing
Multi-Owner Businesses:Multi-Owner Businesses:Legal Pitfalls Accountants Legal Pitfalls Accountants
Must AvoidMust AvoidPresented by:David C. Roberts, Esq.
Edward Kurowicki, MBA, CPA/CFF, CVA
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Long Range PlanningLong Range Planning
• New companies• Existing companies
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Corp. vs. LLC vs. Corp. vs. LLC vs. PartnershipPartnership
• Unintended consequences
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CorporationsCorporations
• N.J.S.A. 14A:12-7 – Rights of minorities– “acted fraudulently or illegally,
mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders”
• Can’t be waived
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LLC’s and PartnershipsLLC’s and Partnerships
• No equivalent• Depends ENTIRELY on how creation
documents are worded• LLC’s are creatures of contract• Accountant’s involvement in creation
documents = BLAME when an issue arises• Tax status not determinative of legal status
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Balance Between Helpful Balance Between Helpful Business Advice and Business Advice and
Subjecting Yourself to Subjecting Yourself to LiabilityLiability
• Disclaim in retainer agreement• Highlights issue spotting
capabilities
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Buy-Sell AspectsBuy-Sell Aspects
• Formula used is important, but so is the issue of whether valuation should even be addressed
• Majority may want to know he can prevent minority withdrawal
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Standards of ValueStandards of Value
• Fair market value vs. fair value
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Common Valuation Common Valuation ProblemsProblems
• Shareholder perks• Reasonable
compensation• Employment
agreements• Trade Secrets• Unrecorded time• Corporate
governance issues
• Prior transfers of interests
• Rate of return – “Buying a job”
• Expectations• Ignoring a provision
in shareholders agreement that says to value every year
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Salary Normalization Salary Normalization IssuesIssues
• Can create liability• Affects damages• Affects value
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Importance of Compliance Importance of Compliance Issues to Avoid Piercing the Issues to Avoid Piercing the
Corporate VeilCorporate Veil• Informality of closely held
companies can be a trap• Who really is the client?• Communication with minority
owners should be permitted up front, and carried out
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Importance of Compliance Importance of Compliance Issues to Avoid Piercing the Issues to Avoid Piercing the
Corporate VeilCorporate Veil• Potential liability for the accountant?
– N.J.S.A. 2A:53A-25• Accountant must have knowledge of a non-
client’s reliance• Reliance must be communicated back and
forth– Pitfall – does NOT have to be in writing– Your word vs. minority shareholder’s
– Conspiracy liability
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Shareholder Oppression Shareholder Oppression in More Depthin More Depth
• Lack of dividend• Paying personal expenses• Overcompensation• Lack of information• Termination of employment• Fictitious vendors/employees
What if the accountant is aware of this?
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The Case of the Company The Case of the Company Where No One Takes a Where No One Takes a
Salary – Only Salary – Only DistributionsDistributions
• Fine as long as everyone is working
• What happens if someone leaves?
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Remedies Available for Remedies Available for OppressionOppression
• Buy-out – either way• Dissolution• Damages• Attorneys fees?
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What Do You Do When What Do You Do When You See the “Red Flags”?You See the “Red Flags”?
• Books have suddenly become “secret” – unavailable
• Appears money is unaccounted for• Lifestyle changes• Family members suddenly on the
payroll
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SummarySummary
• Distinguish yourself by knowing these issues
• Stick to issue spotting, rather than giving legal advice
• Expand your retainer agreement to point out what you are NOT doing
• Explain up front who the client is, and don't be lax about it
• Get written permission to keep everyone informed, and then do it
Visit David Robert’s BlogVisit David Robert’s BlogShareholder Dispute NJShareholder Dispute NJ
at at www.shareholderdisputenj.www.shareholderdisputenj.
comcom
Question & Question & Answer SessionAnswer Session
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