By William G. Fig
Published in The Accountant
As professionals, our livelihoods center around helping our clients find cost-effective solutions to address their needs. One of the core functions of the professional in this process is fully identifying the potential issues that could impact the client so that we can advise the client accordingly. In today's complex world, this is not a simple task, and it often requires a team of professionals – including lawyers and accountants – to ensure the client's needs are met. Over the years, we have developed a "top five" list of legal issues that we believe every accounting professional should be aware of:
1. Formation and Operation of Business Entities. The formation of closely-held / family entities is an area fraught with potentially unforeseen legal issues. Many non-attorney created entities do not have proper governance documents (bylaws, operating agreements, partnership agreements), nor do the owners contemplate the need for an agreement among them to limit and govern transfer of an ownership interest (buy-sell agreements, shareholder agreements). This may not be an issue in the beginning when everyone is getting along, but the lack of such documentation can present serious complications if relationships sour in the future. There are few things nastier than a "business divorce." The chaos that results from an unwanted in-law inheriting an ownership interest in a family business is significant. Thus, well-crafted buy out and dispute resolution provisions can be extremely important if a dispute arises among the owners (whether shareholders in the case of a corporation, members in the case of a limited liability company, or partners in the case of a limited partnership). A buy out provision should also help address what happens if an owner dies or becomes insolvent. This is particularly true with regard to LLCs where Oregon law governing these issues is not as well developed. By way of example, Oregon law does not specifically provide a mechanism for the removal of an unwanted member of an LLC. The only option under current Oregon statute is to dissolve the LLC.
2. Intellectual Property. The formation of a business entity does not mean that your client has the right to use the entity's name as its web address or use the name in its advertising. The laws (and procedures) governing the use of a web address and/or the use of a name (or logo) are different than the laws regarding the registration of an entity's name. Thus, prior to registering an entity, it is important to confirm that the web address is available and that there are no state or federal copyright or trademark restrictions associated with the proposed entity name. If the name is available, the client will want to undertake the required steps to secure the rights to use the desired web address and possibly seek protection under state, federal or international intellectual property law to use that name.
3. Contracts. If your client is operating a business (other than, perhaps, a retail shop), the client should have a basic form of contract that is signed by the client's customers. Contract terms and conditions can establish many important, beneficial rights for your client that are not otherwise available. For example, a contract may be use to limit the extent of a client's liability. Also, absent an agreed-to contract term, your client will get statutory interest (9 % in Oregon) on any unpaid balances owed to them and, generally speaking, the client will not have the right to recover attorneys or collection agency fees expended in collecting the amounts owed to them. Rather than allow for the default state statutory provisions to govern your client's relationships, these issues should be addressed in a fairly simple contract.
4. Estate Planning. Not only wealthy clients need a will. In fact, most people should have a will. The most basic function of a will is to identify the people who you want to be in charge of taking care of your affairs (including who will be a guardian and conservator for any minor children and take care of all final expenses associated with your death) and who will receive your worldly belongings. But it can also serve many other purposes, such as identifying who you would like to serve as a guardian and conservator should you become incapacitated, including spendthrift trust provisions to shield inheritances from your beneficiaries' current or future creditors, and waiving the bond requirement for the personal representative. It should also include state and federal tax planning if the client's wealth warrants that type of planning. Absent a will, a court must determine who is best suited to care for you, your children and your finances and state statute provides for distribution of your estate.
5. Loan Documents. Although loan documents, especially basic ones, may seem straight forward, there are numerous legal pitfalls in this area. For example, the content of a "simple" promissory note can have a significant impact on how the note may be enforced or even paid. An obligee may have the obligor waive certain cumbersome, but otherwise necessary, default notice requirements. Absent a statement allowing the obligor to pre-pay the note prior to the due date, in Oregon, the obligor does not have the legal right to do so. Any loan between an entity and an owner of the entity must be documented with, at a minimum, a promissory note and meeting minutes showing the owners and board of directors / managers consent to the loan – whether the funds are loaned or borrowed by the entity.
Clients often want results quickly and pressure professionals to keep their fees to a minimum. However, in the areas identified above, the phrase "penny wise, pound foolish" definitely applies. The best and most-sound professional advice a client could receive is not to cut corners in these five areas.
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