Business Law Notes
Summer 2003 Edition
Sometimes seemingly trivial mistakes can have huge consequences. When it comes to corporate housekeeping and contract management, obsessivecompulsive behavior can be a virtue. Here is a short list of some seemingly trivial details that must be given careful attention.
- Always use the full corporate name, especially “Inc.,” “Company,” “Ltd.,” “LLC,” or similar endings that show the corporate and limited liability character of your company. When signing on behalf of the company, always, always use your title. The safest way to sign is as follows:
FULL COMPANY NAME, INCLUDING “Inc.,” “Company,” “Ltd.,” “LLC,” etc.
Signature, Title (president, vice-president, manager, etc.)
Business owners can be sued personally for a corporate debt on the ground that “Inc.” was left off the contract and the plaintiff thought it was dealing with an individual doing business under a trade name. These things really do happen, and attention must always be paid to this detail.
- Make sure that your registered office and/or registered agent and principal office are current on the records of the Secretary of State. Your company must do this in every state that it has an office. If a plaintiff’s attorney is unable to find your company, he can serve his lawsuit on the Secretary of State, and you may find that a default judgment has been entered against your company in a suit that you never knew about.
- The same care should be given to assumed name filings. In N. C., if you are doing business under a trade name, you must file a certificate of assumed name in each county where you maintain a place of business. The requirements in other states vary significantly, and you should consult with local counsel if you have an office in another state.
- Keep a copy of every contract, FRONT AND BACK! More than one lawyer has had the unfortunate experience of trying to advise a client about his legal rights without the fine print on the back page of the contract or without a copy of the contract at all. Frequently in equipment lease contracts, service contracts and many other situations, you sign the form agreement and mail it off and never get a copy back signed by the other party.
- Under N. C. law, corporations must file an annual report with the N.C. Department of Revenue; limited liability companies must file an annual report with the North Carolina Secretary of State. Failure to file the annual report could result in the administrative dissolution of your company . The annual report for a corporation is due on by the fifteenth day of the third month following the close of the corporation’s fiscal year, usually March 15; for limited liability companies, it is due on by the fifteenth day of the fourth month following the close of the fiscal year, usually April 15. Forms may be obtained from the N. C. Department of Revenue at 919-733-8510 or the Corporations Division of the North Carolina Secretary of State at 919-807- 2225. Other states will have similar requirements.
So, you receive an envelope from the U.S. Bankruptcy Court, open it and there is this Notice and a form called a “Proof of Claim” on which is the name and address of a person or business that owes you money. Well, you think, the Bankruptcy Court must know that I am a creditor or it would not have sent me this form. I’ll receive the dividend on the debt that I am owed, won’t I???
When a creditor receives a notice of a bankruptcy, it will usually tells to file or not file a Proof of Claim and gives a deadline by which to do it. Do not assume that this notice you have received in the mail is just a perfunctory form and that you will get paid money when the time comes. Read the notice. Know your deadlines.
Depending on how much a creditor is owed, a business decision may be made about how active one wants to be in the bankruptcy. The first things a creditor should do is determine how much money it is owed and if the debt is secured or unsecured. If it is a small amount of money, one may assume that it is not worth worrying about. But I would encourage any creditor to file a proof of claim if he is told to file one. One may be instructed that it is a “no asset Chapter 7 case and no claim shall be filed.” If in fact that is what the notice of bankruptcy says, file it away and you will be notified if in fact you need to file a proof of claim at any time. But if you have a secured claim in a Chapter 7, a security is being held for you. Protect your security interest by filing a claim to notify the Trustee.
The services of a bankruptcy attorney can be a smart investment. Trying to navigate the rough waters of bankruptcy can be perilous. Some of the rocks and shoals include knowing what pre-Petition claims, administrative claims and unsecured and secured claims are, and in certain instances, like a claim for rent, what you may claim. If the debt is a significant amount of money and the Proof of Claim is not properly filled out or is not timely filed, or if the claim is not classified appropriately and the appropriate documentation provided, your claim will be denied. The burden is on the creditor to prove his claim, to timely file and be prepared to prove that you did so.
Some pitfalls in bankruptcies include a creditor failing to file a proof of claim (or filing it after the deadline), a landlord incorrectly filed for his damages, not sending appropriate proof, failing to assert a guarantee — all of which will lead to a denial of your claim. Filing a proof of claim is the equivalent of filing a lawsuit to obtain money owed you. Even the filing of a proof of claim for a mechanics lien in a bankruptcy case qualifies as the filing of a lawsuit to perfect a notice of lien. In short, proofs of claim are important. They are technical, and it may be difficult for a layman to fill it out. A creditor will not receive his dividend if the proof of claim is not accurately and timely filed. Consult an attorney and file your proof of claim if you want to receive a dividend on the debt owed you.
If you intend to eventually sell your closely held business, some long term planning can substantially reduce problems at the time of sale and increase the money in your pocket. Here are a few planning tips:
Making the “S” election. Under the current federal tax law, if your corporation is a “C corporation,” the profits on the sale of your business will be taxed twice, once at the corporate level and again at the shareholder level. Long term planning is required to avoid this problem. The effect of C corporation earning can continue for ten years after making the S elections. The “double taxation” problem disappears ten years after making the “S” election. Another possibility is to obtain a formal valuation of your business. Then make the “S” election. The increase in value of your company after you make the “S” election will escape the double tax. Caution is advised, however; making the “S” election can sometimes trigger tax consequences, especially if you rely heavily on LIFO (Last In First Out) accounting and have a large LIFO reserve.
Environmental Audit. If you are going to sell your real estate along with your business, it may be prudent to have an environmental audit conducted by a reputable environmental firm of your choice. Presenting a recent environmental audit to a perspective buyer can frequently streamline negotiations. Note, however, that any environmental issues found by your consultant will likely have to be reported to authorities and remedial action would be required.
Buy Equipment Rather than Lease. Arranging for the assumption of equipment leases can frequently be cumbersome and the lessor frequently requires that your company remain secondarily liable on the lease. If you have purchased the equipment and are paying on a promissory note, the note can simply be paid off from closing proceeds and your liability is extinguished.
Minority Owners. Occasionally a five or ten percent shareholder can be an obstacle to a sale, sometimes demanding more than his fair share in order to approve a sale. A well drafted agreement clarifying the parties’ rights in the event of a sale could greatly streamline the sales process. If the opportunity to buy out the minority owner arises, it may be appropriate to do so. Note, however, that the controlling owners of a company always have a high duty of loyalty and trust to the minority owners in such transactions. For example, if you have an attractive offer to buy your company which you fail to disclose to the minority owner, this could easily lead to an ugly litigation.
Corporate Housekeeping. It’s the day before the closing and the buyer’s attorney asks to see your corporate minute book. If your stock ledger, minutes, and by-laws are all up-to-date, things will go smoothly. If not, expect delays, especially if you are selling corporate stock instead of corporate assets.
SAMUEL H. JOHNSON TO CELEBRATE HALF CENTURY OF DISTINGUISHED LAW PRACTICE AND EXEMPLARY PUBLIC SERVICE.
On September 3, 2003, Samuel H. Johnson, founder and senior member of our firm, will celebrate fifty years of a most distinguished law practice.
Sam Johnson was born September 13,1927 in Sampson County, N.C. He attended Pfeiffer College and following service in the Navy at the Naval Research Laboratory (1946-1948), he attended Mexico City College and graduated from the University of North Carolina (A.B.) In 1950, and the U.N.C. School of Law (J.D.) He was admitted to the N.C. bar on September 3, 1953. He is admitted to practice in the U.S. District Court, Eastern District of N.C. and U.S. Supreme Court.
He served in the N.C. House of Representatives from 1965 to 1974. He has also served as a Trustee, University of North Carolina, 1967-1972; Chairman, N. C. Local Government Study Commission, 1967-1973. N.C. Joint Select Commission on Fiscal Trends and Reform, 1992-1993; Advisory Budget Commission of N.C., 1969-1971; and Special Counsel to Speaker of House of Representatives and Lt. Governor, 1975-1977.
Mr. Johnson’s professional and civic memberships and accomplishments are to numerous to mention here. He was a general practitioner in the early part of his career; his current practice areas are legislative practice; estate Planning; business law; and trade association law.
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