Category: Partnerships

Partnership, Limited Partnership and related matters

Business Entities, Corporations, Limited Liability Company (LLC), Partnerships

Discuss Tax Issues For Your Entity Choice With Your Accountant [But Entity Formation And Planning Is Your Attorney’s Role]

marcsherman

Your Accountant’s role in helping you select the appropriate business entity is key. Depending upon the nature of your business, the business relationships that you expect with partners, and other factors, the accounting and taxation considerations are going to be important for selecting the appropriate form of business entity.

However, we often see that some clients have engaged their Accountant to accomplish the business formation steps with the Secretary of State. Perhaps the client and Accountant were thinking that there is a fee savings. Perhaps the Accountant encouraged this additional step to be more involved in the entity setup. For many clients, it was not the best or the most cost-effective decision.

Focusing on the legal aspects of business creation and guiding you through the issues for consideration is an important role for your Attorney. When the Accountant begins the entity creation process, this implies that the Attorney’s involvement is a lesser concern or, worse, is not necessary. The client loses out.

The Attorney’s experience and training in a variety of legal areas provides an opportunity to consider much more than taxes and accounting elements relevant to you and your new business. Some examples bring home the point:

Considerations Of Potential Claims Can Guide Entity Choice.

What is likely to happen if someone tries to enforce a claim against the business? The business entity choice can provide limited liability in many instances. Still, there are some types of claims and business obligations that can be brought against owners or managers despite trying to protect themselves with the “corporate veil of limited liability.” Industry laws and regulations, some business laws involving labor and operations, and vendor and customer agreements and activities may provide unique considerations for your business model and your personal decisions.

Discussing your business entity choice and your business plan with your Attorney should take into consideration your personal assets (and obligations), and your Estate Planning that has been created or can be developed for you, and consideration for options that may become important if the business doesn’t go as planned.

For many entrepreneurs, the first time being involved with a significant claim in or out of court is an eye opener; particularly when the legal claim prompts the question: “How could this affect me personally and my family?” There are planning opportunities that are purposeful and useful. Considering those opportunities early and adapting to changes in the business in a timely manner are important.

Consideration Of Business Partner Activities And Disputes Can Guide Entity Choice.

The relationship between you and your business partners will frequently have many layers — even if your business partners are family or friends.

What are your expectations of the amount of time you will each give to the business? What expectations do you each have for investing funds for the business or for willingly participating in financing the business with loans or with a personal guaranty? What happens if your business partner can no longer provide their time, guidance and financing?

Are there consequences of having to unwind the business entity if things do not go as hoped, and how is that done? Should you be concerned if your business partner becomes disabled and can no longer participate or passes away and their interest in the business may go to their spouse or children?

The Attorney’s role? Discussing entity selection and its impact on business relationships. Creating a Shareholder’s Agreement or incorporating terms of future transfer of the business ownership interest in a Partnership Agreement or LLC Operating Agreement. Helping the business owners create and express their expectations.

Get Your Attorney Involved Early And Often.

From a tax and accounting standpoint, your Accountant will surely be adding value. Including your Attorney in the business planning early and often is equally and sometimes more valuable. Engaging your Attorney to assist with your business entity planning and business entity creation not only adds value, but also helps you make good decisions to preserve that value and to accomplish your business goals.

If you have questions about the cost of Attorney time to assist with business planning and business entity creation, you can reach out to Marc D. Sherman & Colleagues PC. If you have already set up your business entity, but you have not reviewed the considerations discussed here with an Attorney, we can also assist you and your business partners.

Business Entities, Contracts, Corporations, Limited Liability Company (LLC), Partnerships

How You Draft Your Business Contracts Is Important; Speak With Your Attorney

marcsherman

A new decision from the Illinois Appellate Court reminds both attorneys and clients alike that attention to all aspects of business contract drafting should be a priority.

In the case of Nord v. Residential Alternatives of Illinois, Inc., 2023 IL App (4th) 220669, published on November 3, 2023, the Court was presented with a case asserting negligent nursing home care against Manor Court of Freeport Illinois. Naomi, a former resident of the nursing home passed away, and her Executor sought damages for the nursing home’s alleged treatment that the Executor insisted was the cause of or a contributing factor in Naomi’s death.

Manor Court moved to dismiss the case, directing the Judge’s attention to an arbitration agreement in the Manor Court contract materials. Businesses with potentially significant exposure to lawsuits will frequently include arbitration clauses in their contracts. These clauses require that claims be brought by disgruntled clients in an arbitration setting that is often less public and sometimes more favorable than state or federal court. There is a significant body of law outlining when and how those arbitration clauses can be enforced.

Considering Manor Court’s motion, the trial court held that the arbitration clause was unfair and unconscionable because it was buried in some 27 pages of documents included with the Manor Court resident admission materials. Also, reviewing the agreement to arbitrate, the court found that its terms essentially shifted all of the costs (potentially thousands of dollars) of the arbitration expenses to the resident. The trial court denied Manor Court’s motion to dismiss.

When the nursing home appealed, the Illinois Appellate Court considered another important aspect of the Resident Admission Agreement: Naomi’s Executor argued that all of the language of the resident contract should be read together, and here the agreement stated that the “term” of the contract terminates on the day that the resident is discharged from the facility. As a result, the resident contract, including the arbitration provision, terminated on the date of the resident’s death. The arbitration clause, Naomi’s Executor urged, was no longer enforceable. The Appellate Court agreed and the Court permitted the claim by Naomi’s Estate to continue in the Illinois court.

What should attorneys and business owners take away from the Court’s decision? 

Choose the language of your contracts carefully. The Appellate Court pointed to the fact that the arbitration clause did not state that it applied to claims filed after the termination of the resident contract. The Manor Court nursing home and its attorneys could have clarified the concept of termination, the definition of the “term” of the contract, and what provisions were intended by the parties to survive the conclusion of the contract — all important considerations that could have significant impact upon the enforcement of the contract. Eyes on the contract language can support the client’s enforcement of the contract later, both in and out of court.If you are concerned about the enforceability of your contracts, or are preparing for new or revised agreements for your business, Marc D. Sherman & Colleagues P.C. can help.