WHY YOU NEED A SHAREHOLDERS AGREEMENT

Newspapers and magazines frequently have splashy stories about all of the gory details of the latest divorce involving the rich or famous. Sometimes, they even publish the contents of a prenuptial agreement involving famous people. While it might seem that the only connection between these celebrities and small business partners is the latest edition of Money Magazine in their waiting rooms, there is a similar thread that runs through both.

Most small business owners would be wise to learn a lesson from their more rich and famous celebrity counterparts, and prepare the corporate equivalent of a prenuptial agreement, otherwise known as a Shareholder Agreement. Regardless of whether it is a limited liability company, corporation or a partnership, the same considerations apply.

The formation of a business, like a marriage, is intended at the outset to be a long term relationship, where the partners agree to subsume their personal goals, link their futures, and remain faithful to each other, till death (or dissolution) do them part. There is an understanding that the common goal of the partners to make the business successful will require sacrifices for the group. In other words, at this point of the relationship there is a clear delineation of the duties and responsibilities of each partner, as well as a single vision regarding the future of the business.

However, regardless of how well developed a business plan is, changes both externally (which includes relations with clients and competitors) and internally (relations among the partners and staff) are inevitable. The success of any business is based upon how well the business, and the partners, adapt to these changes. Not surprisingly, the roles, responsibilities, and expectations of the partners will also change.

As is the case in most marriages, money, or more probably the lack of capital tends to bring out the worst in partners. In such a setting, personal and family relationships between the partners may become liabilities rather than assets. Dealing with these changes, on a collective and personal basis is the primary cause of both small business and matrimonial failures within the first five years. A typical shareholder agreement will normally outline the duties, responsibilities, expectations, and benefits of each partner, and provide a formula to undo the relationship should the parties agree to divorce.

A typical shareholder agreement will set forth restrictions on the transfer of shares to a third party. Normally it will exempt transfers back to the corporation, to existing shareholders or members of the shareholders immediate family. This ensures ownership of the business will remain within the circle of the founding partners and require an exiting partner to sell his or her interest back to the remaining partners as opposed to someone new. A procedure is usually also established for a transfer of ownership should one of the partners die, which is an important estate planning concern. An important aspect of this is the use of insurance policies to supply the proceeds for a buy out, as opposed to forcing the remaining partner and the business to fund the purchase.

While a Shareholder agreement normally will not specify which shareholder has the right to buy out the other, by establishing a formula that controls the purchase, it indirectly establishes which partner will have the ability to be the purchaser as opposed to the seller. In many cases this same effect is accomplished by a clause that requires a sale of a partners interest upon terminating employment.

The failure to have such an agreement normally leads to litigation, which can be every bit as hostile as a divorce action. More importantly, litigation between partners may itself cripple and ultimately destroy the business. Having your attorney prepare a shareholder agreement can be an insignificant cost if it prevents or limits a dispute.

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The Last Four Digits

Open a new account, check out a new doctor, add a phone line or sign up at a website and you might be asked for the last four digits of your Social Security number to track your files or verify your identity. While revealing the final four digits of your social security number may not seem as unsafe as giving out the full nine, it’s riskier than you think. Armed with the first four digits and your name and address, unscrupulous folks can order credit reports (which list your whole SSN) from companies that act as liaisons to credit bureaus. Even if the ID thief doesn’t have access to the liaison companies, he may be able to guess the first five digits which are based on your place and date of birth. Both of which are pretty easy to find.

Demand an explanation whenever you’re asked for any part of your social security number. You’re only legally obliged to give it to financial institutions, employers and others who must report to the IRS. And shred any papers that list even the last four digits.

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SHAREHOLDER AGREEMENT BASICS

Where there are a relatively small number of shareholders it is common in practice for the shareholders to supplement the constitutional document. The following are several issues the shareholders may wish to address in a contract between them:

a company’s constitutional documents are normally available for public inspection, whereas the terms of a shareholders’ agreement, as a private contract are normally confidential between the parties. contractual arrangements are generally cheaper and less formal to form, administer, revise or terminate. the shareholders might wish to provide for disputes to be resolved by arbitration, or in the courts of a foreign state (meaning a state other than the state in which the company is incorporated).

In some states, corporate law does not permit such dispute resolution clauses to be included in the constitutional documents. greater flexibility; the shareholders may anticipate that the company’s business requires regular changes to their arrangements, and it may be unwieldy to repeatedly amend the corporate constitution.

Corporate law in the relevant state may not provide sufficient protection for minority shareholders, who may seek to better protect their position by using a shareholders’ agreement to provide mechanisms for removing minority shareholders which preserve the company as a going concern.

Shareholders’ agreements obviously vary enormously between different states and different commercial fields. However, in a characteristic joint venture or business start-up, a shareholders’ agreement would normally be expected to regulate the following matters:

regulating the ownership and voting rights of the shares in the company, including
Lock-down provisions restrictions on transferring shares, or granting security interests over shares pre-emption rights and rights of first refusal in relation to any shares issued by the company (often called a buy-sell agreement) “tag-along” and “drag-along” rights minority protection provisions control and management of the company, which may include power for certain shareholders to designate individual for election to the board of directors imposing super-majority voting requirements for “reserved matters” which are of key importance to the parties imposing requirements to provide shareholders with accounts or other information that they might not otherwise be entitled to by law making provision for the resolution of any future disputes between shareholders, including;

deadlock provisions
dispute resolution provisions
protecting the competitive interests of the company which may include
restrictions on a shareholder’s ability to be involved in a competing business to the company restrictions on a shareholder’s ability to poach key employees of the company key terms with suppliers or customers who are also shareholders
In addition, shareholders agreements will often make provision for the following:
the nature and amount of initial contribution (whether capital contribution or other) to the company the proposed nature of the business how any future capital contributions or financing arrangements are to be made the governing law of the shareholders’ agreement ethical practices or environmental practices allocation of key roles or responsibilities

In most states, registration of a shareholders’ agreement is not required for it to be effective. Indeed, it is the perceived greater flexibility of contract law over corporate law that provides much of the business reasoning behind shareholders’ agreements.

Shareholders agreements can be of enormous value in any corporation with 2 or more unrelated shareholders.

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CORPORATE RECORDS CAN MAKE OR BREAK YOU

Corporations and limited liability companies don’t really exist. They are legal fictions designed by our government and legislated into existence to encourage risk taking and the formation of capital. These entities exist only on paper and it is vital that the paper existence be maintained and kept up to date.

Maintaining the official records of a business entity is a meaningful way to protect the organization, its shareholders, board of directors, officers and employees.  Corporation and LLC records are important because they are required by law and they are vital to proving that the entity is different than oneself.

Maintaining proper corporate or LLC records makes it much harder for a plaintiff in litigation to pierce the corporate veil, thus shielding the owners and management from personal liability.  You or your business lawyer should prepare and maintain these records. These records could prove invaluable in the future and should be kept in a safe place and retained for at least 10 years after the entity no longer exists or you have sold it.

 

 

 

 

 

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ARE YOU OWED UNPAID COMMISSIONS BY AN ILLINOIS EMPLOYER?

Are you owed unpaid commissions from an Illinois employer or principal?

If so, you may be entitled to recover all of your unpaid commissions, substantial statutory penalties, attorney’s fees, costs, and interest.

You Have Legal Rights . . .

The State of Illinois has adopted special statutes to help employees recover unpaid commissions.
Independent contractor salespersons paid on a commission basis have similar rights to be paid commissions that are earned prior to termination of the independent contractor relationship.

Certain independent contractor sales representatives are protected under a separate statute entitled the Illinois Sales Representative Act.

We Can Help . . .

If you are paid on a commission basis in Illinois you need to know about the Illinois Sales Representative Act.

The Illinois Sales Representative Act, 820 ILCS 120, is a little known law which states that a principal who fails to pay commission to a sales representative is liable for the commissions due, plus punitive damages up to 3 times the amount of the commissions owed to the sales representative, plus the sales representative’s reasonable attorney’s fees and court costs.

Lustig & Associates is a law firm located in Northbrook, Illinois. We routinely help employees recover their earned but unpaid commissions.

We can help you prepare an effective demand letter for your unpaid commissions and if necessary, we can file a lawsuit to recover your unpaid commissions.

Do not assume that you are not owed any money just because your employer has refused to pay you or because “company policy” says you cannot recover post-termination commissions. In some cases, a commissioned salesperson may be entitled to commissions earned on sales made or closed following the last day of employment.

Before you walk away from your unpaid commissions take advantage of our free initial consultation to determine if you have a legal claim.

In appropriate cases, we will represent clients on a “contingency” basis, meaning that you will not be required to pay legal fees by the hour. In such cases, we will keep a percentage of any unpaid commissions and penalties recovered.

Established in 1978, Lustig & Associates is a Chicago based law firm with a core practice platform in business, corporate law and litigation. We serve our clients in the areas of general business law, corporations, limited liability companies, partnerships, business acquisitions and sales, family business interests, business disputes, debtor/creditor law, employment issues, personal and business bankruptcy, commercial litigation, financial services and marine interests.

For a free consultation call 847.509.9090 or visit us on the web at www.Lustiglaw.Com

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How A Corporation Can Protect You Even After Dissolution

Many corporations are involuntarily dissolved each year by administrative action of the Secretary of State.  Usually, such dissolutions are the result of the corporation failing to file its Annual Report and pay the requisite filing fees.  Sometimes, the principals of the corporation encounter hard economic times and simply don’t have the money to pay the filing fees when they become due.  As a result, the corporation is dissolved and ceases to exist.

Dissolution can have serious consequences for the owners and managers of the corporation, including personal liability for debts that pertain to the business. When the corporation ceases to provide protection from personal liability, people can lose their homes, savings, vehicles and more when something bad happens.

However, a relatively recent change in Illinois law now permits a corporation to be reinstated to good standing no matter how long it has been dissolved.  All it needs to do is file an Application For Reinstatement and pay the filing fees it would have paid had it not been dissolved.

That law even goes on to state that after the corporation has been reinstated, that its existence is bridged from the date of dissolution to the date of reinstatement as if it had never been dissolved.

The statute states in pertinent part that …. “Upon the filing of the application for reinstatement, the corporate existence shall be deemed to have continued without interruption from the date of the issuance of the certificate of dissolution, and the corporation shall stand revived with such powers, duties and obligations as if it had not been dissolved; and all acts and proceedings of its officers, directors and shareholders, acting or purporting to act as such, which would have been legal and valid but for such dissolution, shall stand ratified and confirmed.”

So for those of you out there who have had their corporations involuntarily dissolved by the Secretary of State and who now need the protection of their corporation, this is what you have been waiting for.  A cheap legal fix that may save your home and other assets from the boogeyman.

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Unpaid Sales Commissions And The Illinois Sales Representative Act

The Illinois Sales Representative Act is a little known law which states that a principal who fails to pay a commission to a sales representative is liable for the commissions due, plus punitive damages up to 3 times the amount of the commissions owed to the sales representative, plus the sales representative’s reasonable attorney’s fees and court costs.

Typical plaintiffs include real estate agents, real estate brokers, sales representatives and manufacturers representatives.  It doesn’t matter what product or service was sold, so long as the remuneration was commission based.

If you are a sales representative and are owed commissions, we are highly experienced and can help you collect any unpaid commissions and enforce the Act so as to recover any attorneys’ fees and punitive damages.

We also regularly represent employers and principals who have been threatened with litigation.  In our many years of practice in this area, we have successfully asserted defenses available under the Act for our clients.

If you are an employer or a principal under the Act, call us to see how you can benefit from our many years of experience in this area.

If you are owed commissions, the Illinois Sales Representative Act might be just what you need to level the playing field.

 

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UNPAID OVERTIME CAN LAND THE BOSS IN HOT WATER

Some employers commit the following violations of the Fair Labor Standards Act intentionally to avoid paying overtime, while other employers fail to understand the extent of the law:

An employer miscalculates an employee’s regular rate of pay by failing to include in calculations bonus or other incentive pay for specific shifts worked
An employer does not include in hours worked time spent traveling for job purposes, including work related overnight stays, travel on the weekends, travel between work sites, and work related duties performed while commuting to and from work
An employer misclassifies an employee as exempt
An employer pays employees cash off the books without filling out W-2 forms and believes the lack of records alleviates the duty to pay overtime
An employer requests that an employee who works in excess of 40 hours one week take time off the following week to obtain an average of 40 hours worked per week
An employer requires an employee to seek medical attention during the workday for job related injuries, but fails to include time spent waiting for and receiving treatment in hours worked
An employer shortchanges an employee’s hours by not paying for short 5-20 minute breaks or for lunches spent working
An employer establishes a Collective Bargaining Agreement between the company and its employees that waives employees’ rights, including what hours must be counted as hours worked
An employer knows or has reason to know that an employee is continuing to work after hours and the employer is benefiting from work performed, but does not include the time in hours worked
An employer does not treat time that an employee spends correcting errors or mistakes in his or her work as time worked
An employer does not include in hours worked time that an employee spends waiting for work and is without a task, but is still required and allowed to be on the job

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Sheldon Lustig Admitted To Practice Before U.S. Supreme Court

Sheldon Lustig is a member of an elite group of attorneys who has been admitted to practice before the United States Supreme Court in Washington, D.C.  Mr. Lustig is a principal of Lustig & Associates.

Established in 1978, Lustig & Associates is a Chicago based law firm with a core practice platform in business, corporate law and litigation. They serve clients in the areas of general business law, corporations, limited liability companies, partnerships, business acquisitions and sales, family business interests, business disputes, debtor/creditor law, employment issues, personal and business bankruptcy, commercial litigation, financial services and marine interests.

For further information call Lustig & Associates at (847) 509-9090 or visit them on the web at www.Lustiglaw.Com.

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Minimizing Business Startup Risks – Part 1

No business entreupeneur envisions a new business being chased by bill collectors or the tax man.  Yet, that’s exactly what happens to a large number of start up companies.

The business starts to experience turbulence, runs into problems paying its bills as they fall due and begins to falter.  The reasons are legion, but the results are predictably the same.

The failing business either goes out of business or becomes uncollectible. When that happens, the business creditors and the IRS sometimes look to the owners of the business.  If the business was not incorporated, it is likely that the owners will be personally liable for the obligations of the business.

However, this inherent entreupeneur liability can be minimized if the owners organize the business as a corporation or limited liability company at the outset.  The general rule is that the owners of corporations and limited liability companies are not personally liable for the general obligations of the business enterprise.

Consult with your legal adviser to determine whether one of these types of entities would be appropriate for your business.

For more information, please visit Lustig & Associates on the web at www.lustiglaw.com

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