Wisconsin Business Law Blog : Waukesha, New Berlin, Oconomowoc Corporate & Real Estate Lawyer & Attorney

Murphy's Law, "If something can go wrong, it will," has picked in inopportune time to strike the IRS. Just as we head into year-end, trying to cram one last transaction into 2011, the IRS computers have gone down, making it impossible to obtain Federal Employer Identification Numbers (FEIN). Without such numbers, entities cannot open bank accounts and transfer monies into and out of such accounts.

This will cause many transaction to fail or fall into a "no man's land" as far as determining whether matters have closed for tax purposes.

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The Wisconsin Supreme Court, in the recent case of Bank Mutual v. S.J. Boyer Construction, Inc., et al, found that those who guaranty a note may remain liable on their guarantees, even when the lender releases the primary obligor in its quest to shorten the redemption period when foreclosing. The Supreme Court determined that when the statute says that all who are "personally liable for debt secured by the mortgage" are to be released, it means those on the note, and not those on the guarantee, which stems from a different obligation than the note.

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If you exclude attorneys fees for services (such as preparing an operating agreement and determining what additional filings, permits, etc. that the business will need to get up and running), the most basic cost to register or “organize” an LLC currently in Wisconsin online is $130.00 paid to the Wisconsin Department of Financial Institutions, which simply involves the registration of the LLC’s Articles of Organization. There may be additional non-attorney fee costs as well, such as if the LLC will be making sales subject to Wisconsin Sales/Use Tax which would require the current $20.00 fee to submit an Application for Business Tax Registration to the Wisconsin Department of Revenue whereby the entity applies for a Seller’s Permit and/or it’s Wisconsin Employment Identification Number among other reasons.   It is recommended that you also draft an operating agreement which among other things sets forth the percentage ownership interests among the members (owners) of the LLC as well as their capital contributions and how distributions will be made. In addition, in most cases the LLC should obtain a Federal Tax Identification Number from the IRS which can be done online at no cost.

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One item often overlooked by parties while negotiating or deciding to enter into an Operating Agreement for a limited liability company or (“LLC”) with more than one member is what is often times referred to as a “capital call.” Buried deep in what can be voluminous pages of “legalese” contained in many LLC operating agreements, may lurk a requirement that members of the LLC contribute additional capital to the LLC - that is, more than their original investment . This can be triggered by majority vote, or, if so provided in the Agreement, by demand of a single Managing Member if he or she is given such power. 

Many investors in an LLC assume that once they make their initial capital contribution, they will not be required to contribute more, even if the underlying business is performing badly, unless they specifically agree to do so, or if “everyone” agrees to do so. Many times quite the opposite is true, and the unsuspecting investor could be facing some rather negative consequences.

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A recent Wisconsin Supreme Court opinion filed June 25, 2010, Ehlinger v. Hauser and Evald Moulding, Inc., 2010 WI 54, is a candid reminder that co-owners of a business should not only take the important step of entering into a written Buy/Sell Agreement to determine how important issues such as death, disability, divorce, bankruptcy, etc. will be dealt with between them, but also in doing so, should take the important steps of discussing fully the ramifications of their agreement so that they have a clear understanding of its key terms and conditions.

In Ehlinger, the Wisconsin Supreme Court upheld the lower courts' rulings that, among other things, a Buy/Sell Agreement between the co-owners of a Wisconsin Corporation was unenforceable because the court determined that the undefined term "book value" rendered it so.  The buyout agreement stated that if one of the shareholders becomes totally disabled, the non-disabled shareholder is entitled to purchase his shares at "book value."  In this case, the contract did not define "book value" and because the records of the corporation were so deficient that a special magistrate skilled in accounting could not determine a value which accurately reflected the corporation's assets and liabilities.  From the court record, the Supreme Court noted that not only was "book value" not defined and not determinable due to deficient corporate records, but it was also clear that the parties did not really understand each other when they entered into the buyout agreement as to what "book value" would actually mean should one of them become totally disabled.  Ultimately, this decision, after over seven (7) years of protracted litigation, resulted in the appointment of a receiver for the assets of the business.

Ehlinger again highlights the need for  co-owners of a business to take the time to ask each other the hard questions with the guidance of their accounting and legal professionals and come to a well considered agreement among themselves before moving ahead too far with the business operations.

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For over 50 years, Wisconsin has been deciding cases related to covenants not to compete in working relationships under Wisconsin Stat. § 103.465. On July 14, 2009, in an opinion authored by Justice Michael J. Gableman, Wisconsin’s Supreme Court changed the way that statute will work, much to the benefit of employers. Here’s what they did.

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Think first before getting into an LLC. While the LLC has become the entity of choice, there are plenty of reasons to avoid them and consider the use of other forms within which to operate. This article will expose and arm you with the 10 best reasons for you to consider avoiding LLC’s.

1. LLC's are not unique. When LLC’s first came into vogue about 20 years ago, everyone – attorneys, accountants, bankers, insurance experts – all said that LLC’s would change the business world. In those 20 years I have attended dozens of business seminars related to the type of entity within which to do business. I’ve asked the experts what you can do with an LLC that you couldn’t have done with the already existing entities, such as an S corporation. I have never gotten a good answer

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1. How do I deal with problems?

Business is a chain of decisions. A good business person has to be able to make decisions. You don't always have to be perfect: the teams that make the World Series can win two and lose two, but they then win the critial next game to be at 60% for the season. The same is true in business: mistakes will be made, but you have to be right more than wrong, and on critical issues, you have to be right most of the time. So if you don't have the ability to deal with problems and make decisions, either pick a partner who does, or work for someone else who has that ability.

2. Am I a good  judge of people?

A good business person starts by selecting the right people. As Jim Collins says in Good to Great, you pick the right people to put on the bus, and then they will tell you what direction the bus should go. If I'm not willing or unable to be very focused on getting others who will work well in my business, then maybe I should see who has a business that I could help if I were on their team.

This goes beyond selecting good employees. It goes to selecting good customers and good vendors. If you have something to sell and only need to sell it to someone once, then maybe customer relations isn't important. But, most businesses grow based on  long term relationships and referrals. Seek customers who need you as much as you need them.

Seek vendors who want long term relationships, as well, so that as you start out or if things get tough, they will extend accommodations to you to assure your business remains strong and healthy.

3. Am I passionate about what I want to do?

There are hot dog vendors and cupcake makers that are awesomely successful. They are passionate about their products and have developed a "core concept" to make their customers just as passionate. For example, "the best deal on two dogs and a drink in America, for just $4."

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The 2009 Wisconsin Budget Bill contains proposed changes in condemnation law which may substantially impact on the ability of business property owners to successfully challenge condemnation or contest the amount of compensation awarded.

The Wisconsin Department of Transportation is sponsoring the proposed modifications.  Currently, an owner of land subject to condemnation may recover attorneys fees incurred in litigation with a condemnor.  The DOT's proposal would limit the amount of an owner's attorneys fees paid by the condemnor to 1/3 of any increase in the amount proposed as an award by the condemnor prior to an attorney's involvement.  For example, if an owner is offered $50,000 for property, and through litigation the award is increased by settlement or judgment to $200,000, resulting in an increase of $150,000, the amount of attorneys fees for which the condemnor is liable will be $50,000.

The DOT claims that this change in the law will not result in any decrease in the amount an owner receives for the property being taken.  However, the likely result will be that property owners will be less likely to contest condemnation and condemnation awards, and more willing to accept the amount they are initially offered.

The fact that the law currently allows the owners of business property to recover all their attorneys fees provides owners with a great deal of leverage in negotiating successful compensation awards when their property is taken by the state.  If the law is changed as proposed, the governmental entity seeking compensation will be placed in a much better position, and property owners will be much more inclined to accept the governments offer rather than contest the matter through litigation.

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In D.L. Anderson’s Lakeside Leisure Co. v. Anderson, 2008 WI 126 (filed 2 Dec. 2008) the Wisconsin Supreme Court addressed the interplay between tradenames, noncompete agreeements, and tort law. Anderson involved an asset purchase agreement whereby Seller agreed to sell certain assets, including seller’s tradename, to buyer and seller agreed to a noncompete agreement with buyer. The lower court found that the Seller breached the noncompete agreement and infringed on the tradename that Buyer purchased. On appeal, the Seller argued that the noncompete agreement restricted the tradename rights the buyer purchased; thus, any action against defendant must be controlled by contract law, not tort law. The Buyer argued that the noncompetition clause prohibited other commercial use of the tradename not covered by tradename protection. The Supreme Court found that it was not reasonable to read the noncompetition clause language as Seller wants; “to do so would mean that the expiration of the noncompetition clause after seven years would render the tradename purchase meaningless” and that “the tradename infringement claim arises under the contract only in the sense that the contract is the instrument by which the tradename was purchased. A separate tort may be perpetrated once the tradename belongs to the purchaser.”
 

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Businesses are rarely run by a single person.  Instead they are run by a team of persons, each bringing certain expertise which in combination with the other gathered talents create a unique mix that is designed to make the business succeed.  In the same fashion, the owner or owners of a small business often need the strength found in this teamwork approach to deal with the wide variety of business challenges each business owner faces.

There are some basic functions that each business must accomplish and some added functions unique to each business.  The most common functions include:  capital formation and management, risk management, marketing, legal issues, accounting and tax issues, and general advice.  Let's take these one at a time.

Each business will either raise capital from within its owner-investors or its creditors or both.  The stakeholders then become the owners and the lenders.  If the lender is an institutional bank, it often provides other services, as well, such as depository and lending services, financing inventory and receivables, factoring, and the like.  For that reason, it is often helpful to look for a banker as an adviser on the Business Advisory Team.  This person will provide a great perspective from the standpoint of a lender.

It is impossible to avoid all risks.  On the other hand, it is possible to manage the risks to which a business subjects itself so that it may succeed in the long run.  Commercial insurance agents who have dealt with clients facing all kinds of risks become well tuned to see which risks are manageable and which risks put the business in jeopardy.  Bringing such a person to the team will strengthen the team by helping the group assess how much coverage to carry, whether to enter into certain risks, and how to deal with claims when they arise.

The global economy has changed how business now must sell their goods or services.  It is important not only to have a plan, but to have someone able to help direct that plan in a new arena of websites, blogs and twitters.  Many things have now become commodities, and the only differentiating thing about the products are the way they are marketed.  Get a good marketer on your team.

Anyone can sue anyone.  To have a good defense, you need a good offense.  To do that, you need a good legal mind on your team.  Don't worry about whether that lawyer "does it all."  Just be sure they have enough experience to direct your group the right direction in the event of a legal problem.

Accounting and Tax are two very specialized areas.  Look for a CPA who is personable and willing to spend the time not only crunching the numbers, but meeting to explain what they mean and what result will most likely occur if certain changes are made.

Finally, consider who you would go for advice under certain very difficult situations, such as a discovery that a key employee was stealing from you.  That adviser may be someone as close to you as a spouse or a trusted clergy person or other intimate adviser. 

In summary, your Business Advisory Team would probably include at least your:

• Banker
• Insurance Agent
• Marketing Person
• Lawyer
• CPA
• Spouse or Trusted Friend

Such a team, coupled with advisers dealing with your business's special characteristics will lend a lot to insuring the success of your business.

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Once coupled to a development idea, every entrepreneur faces the challenge of deciding which business entity would best suit his or her needs.  While one would think that there is one right answer to this dilemma, in fact, the answer depends on a number of factors that are unique to each business, resulting in many different entities being the "right" choice, depending on the circumstances.

Factors affecting entity choice include:

• Liability Protection
• Owner Relations
• Income Tax Consequnces
• Other Tax Consequences
• What Others are Doing
• Cost

Considering these factors, the owner has the following choices:

• Corporation (S-corp or C-corp)
• Partnership
• Sole Proprietorship
• Limited Liability Company (LLC)
• Limited Partnership (LP)
• Limited Liability Partnership (LLP)
• Others, such as Joint Venture, etc.

Perhaps the best way to compare all these choices is through a table which sets forth some of the most common advantages and disadvantages of each type of entity in comparison to the above factors:

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