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4 Simple Tips to Protect Personal Assets from Business Creditors

“Pierced” - that term doesn’t sound good, does it?  And it isn’t if we are talking about your business.   The point of setting up a business entity like an LLC or a corporation is to shield your personal assets (the boat, cabin, toys and more) from being reached by a creditor who has obtained a judgment through the court against your company.  In a perfect world, the creditor can only get what your company owns rather then also being able to reach what you own personally too.

BUT your creditor will likely ask the court to allow them to reach your personal assets too to satisfy the debt.  And the court may very well say yes if you haven’t operate your business separate from yourself as an individual.  This is called “piercing the corporate veil.”

The Law:
A court may pierce the corporate veil and hold a party liable for the acts of a corporate entity if the entity is used for a fraudulent purpose or the party is the alter ego of the entity.   When using the alter ego theory to pierce the corporate veil, courts look to the reality and not form, with how the corporation operated and the individual defendant's relationship to that operation.  Several factors are relevant to the inquiry, including: insufficient capitalization for purposes of corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation at time of transaction in question, siphoning of funds by dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and existence of corporation as merely facade for individual dealings. If the corporation or limited liability company is found to be an “alter ego” or mere “instrumentality,” a court may pierce the corporate veil if there is an “element of injustice or fundamental unfairness.”

Tips to avoid Veil Piercing:

1)    Don’t use your business to conduct fraudulent activities.  Don’t do something that is a little too close to illegal, even if not quite, in the name of the Company-if you wouldn’t do it in your individual name, don’t do it in the name of the LLC or Corporation.

2)    Follow corporate formalities – write bylaws, operating agreements and/or member control agreements; conduct regular shareholder meetings; record minutes of those meetings, have written actions signed by the shareholders and officers when important decisions are made; if your bylaws say members vote then have them vote and give the notices required under your bylaws; file your annual renewal with the Minnesota Secretary of State’s office.

3)    Don’t comingle your business assets with your personal assets – Don’t pay your personal automobile loan with the company funds, don’t use the company credit card to buy gas for your personal use because you can get more miles, use formal expense reports as though you were an employee, don’t spend money out of the business account for your personal needs-instead, enter an owner draw or distribution properly in your accounting software; have a separate business checking account; utilize accounting software to record expenses of the business.

4)    Make sure your business is capitalized properly – Make sure you have invested an appropriate amount into getting the business off the ground; have tort liability and/or malpractice insurance to cover your business’s unexpected mishaps.

References:
Minn.Stat. § 322B.303, subd. 2 (2006) (stating that veil piercing also applies to limited liability companies). Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn.1979).
Hoyt Properties, Inc. v. Prod. Res. Group, L.L.C., 736 N.W.2d 313, 318 (Minn.2007) (quotation omitted).
Victoria Elevator, 283 N.W.2d at 512.

Authored by Kristi Weikel - Attorney

Building Your Best Defense to an Employment Lawsuit BEFORE it Happens!

Let’s face it, when contemplating whether to terminate an employee, you can’t help but cross your fingers and hope your decision doesn’t result in your company being slapped with a lawsuit. The reality of employment lawsuits is that some employees will sue no matter how perfectly you handled the situation. When such litigation arises, the actions you take during the employment relationship with the yet-to-be-fired employee’s can make all the difference in whether you win or lose the lawsuit.
 
•     Get in the practice of keeping GREAT written records during the course of every employees employment and not just hire paperwork and termination paperwork.
•     Conduct quarterly employee reviews not associated with a raise – i.e. not just once/year
•     Make sure you communicate your concerns to employees on a regular basis and that you write those concerns up and place them in their employment file
•     Be sure to discipline employees making sure the punishment fits the crime
•     Utilize a written performance improvement plan to document the issues along with proposed solutions and a time frame in which the employee must remedy their poor performance or behaviors.
•     Let employees know what to expect from you and what you expect from them before there is a problem – who doesn’t love to say “I told you so!”
•     Don’t keep good records on only the “bad” employees because good employees can turn into bad employees overnight.
•     Have a written termination procedure policy that will work well in your organization. For example if your company has customer lists or trade secrets that must be protected from a to-be-terminated employee, you might not consider a 3 strikes and you are out policy because the employee would know that their fate is near and might access the protected information.
•     Provide training to employees annually on workplace policies; especially on sexual harassment.
•     Take complaints seriously of ALL employees and conduct an investigation commensurate with the level of concern expressed by the employee.
•     Remove managers and supervisors who contribute to a hostile work environment
•     Conduct background checks to make sure you aren’t negligently hiring new employees that would put your current employees at risk.


By Kristi M. Weikel, Principal Attorney and David L. Monroy, Of Counsel
 
 

Do I Need a "Will"

What Is A Will?

A will is a legal document that allows you to transfer your property at your death.  A will is a simple way to ensure that your money, property and personal belongings will be distributed as you wish after your death.  A will also allows you to have full use of your property while you are alive. It identifies guardians of your minor children and can even designate how their inherited assets will be managed.
 
Does Everyone Need A Will?
The law does not require that you have a will.  However, a will is a useful tool that provides you with the ability to control how your estate will be divided.  If you die without a will, Minnesota's inheritance laws will control how your estate will be divided.  Your property will go to your closest relatives.  If you have a spouse and children, the property will go to them by a set formula.  If not, the property will descend in the following order: grandchildren, parents, brothers and sisters, or more distance relatives if there are no closer ones.  You may not need a will if you have made provisions so that your assets will pass without one, for example, by establishing trusts, life insurance policies with named beneficiaries, or joint property interests such as real estate or bank accounts. 
 
What Rules Apply To Wills?
In Minnesota you must be 18 years old and of sound mind to make a will. The will must be in writing. It must be signed by you, or by another person at your direction and in your presence (including the testator’s conservator pursuant to a court order). The will must be witnessed by at least two people, both of whom must also sign the will. And last, you must intend for the document to operate as a will.
 
Can I Leave My Spouse Or My Children Out Of My will?
In Minnesota, your spouse may claim up to one half of the estate, even if he or she is left out of the will.  The amount of money your spouse would get depends on how long your spouse and you were married.  Your spouse has an option of whether or not to take this amount.  Unlike a spouse, you may disinherit a child in your will. 
 
What Is A Personal Representative?
A personal representative (also known as an executor or administrator) is the person who oversees payment of your debts and distribution of your assets according to your will.  A personal representative is considered a fiduciary.  This means that he or she must observe a high standard of care when dealing with the estate.  You should identify a personal representative by name in your will.  Most people choose their spouse, an adult child, a relative, a friend, a trust company or an attorney to fulfill this duty, but anyone can be named personal representative in a will.  Since your personal representative will handle your assets, you should always pick someone you trust. 
 
You may also appoint more than one personal representative. When there is more than one personal representative, all representatives must agree on any decision regarding the estate unless the will provides otherwise. 
 
If no personal representative is named in a will, a judge will appoint one for you to oversee the distribution of your assets.  Responsibilities usually undertaken by a personal representative include: 1) filing your will, an inventory of your assets, and other documents with the court; 2) paying valid creditors; 3) paying taxes; 4) notifying Social Security and other agencies and companies of the death; 5) canceling credit cards, magazine subscriptions, and similar consumer items; and 6) distributing assets according to your will. 
 
What Is A Guardian?
A guardian is also nominated through a will.  In most cases, a surviving parent assumes the role of sole guardian of your minor children.  However, if neither parent survives, or if neither is willing and able to act, it is very important to name a guardian in your will.  The guardian you choose should be over 18 and willing to assume the responsibility.  Talk to the potential guardian about what you are asking before naming that person in your will.  You can name a couple as co-guardians, but that may not be advisable.  It is always possible the guardians may choose to separate at some later date; is of, a custody battle could ensue.  If you do not name a guardian for your children, a judge will appoint one. 
 
How Do I Prepare A Will?
You should outline your objectives, inventory your assets, estimate your outstanding debts and prepare a list of family members and other beneficiaries.  You should then use this information to consider how you want to distribute your assets.  Some questions include the following:
1) is it important to pass my property to my heirs in the most tax-efficient manner?
2) Should I establish a trust to provide for my spouse or other beneficiaries?
3) How much money will my grandchildren need for college?
4) Do I need to provide for a child who has a disability? 
 
Assets that you do not specifically address in your will may fall into a "catch-all" clause in your will.  This catch all provision is often called a "residuary clause" since it generally states, "I give the residue of my estate to..." Without this clause, the items you do not specifically mention will be distributed in accordance with state law.
 
This information has been excerpted in part from the publication entitled "Probate and Planning" produced by the Minnesota Attorney General's Office.

 

MN Foreclosure Law Update: Postponing the Sheriff's Sale

Effective June 15, 2009, Minnesota state law allows a homeowner to delay the sheriff’s sale on their foreclosed property. If a homeowner is facing foreclosure and a sheriff’s sale date has been set, the filing of an affidavit postpones the sale date by five months. This temporary delay allows the homeowner additional time in which to work with their lender for a possible loan modification; more time to short-sale the property; or, more time to catch up on the payments to make the loan current. Postponement can only be done once regardless of whether the homeowner brings the mortgage current or not. In addition, the lender and the attorney conducting the foreclosure are not required to publish notice or serve the homeowner with additional information about the change in the Sheriff’s Sale or the date the redemption period ends.
 
While the postponement of the sheriff’s sale does allow a homeowner five months in which to bring their loan current, the redemption period is shortened from six months to five weeks. This means that in order to retain the property, the homeowner must, within five weeks of the sheriff’s sale, payoff the bid amount. If the homeowner is unable to bring the mortgage current or redeem the mortgage, the homeowner must vacate the property at the end of the five week redemption period. 
 
Another critical component of the law is that there is only a small window of time in which to postpone the sheriff’s sale. From the date of the first sheriff’s publication notice and at least 15 days prior to the sheriff’s sale date, the homeowner is required to:
 
1)       Complete and have notarized four copies of the required affidavit and attach to each a copy the Notice of Mortgage Foreclosure Sale
2)       Record the affidavit at the county recorder or registrar of titles where the mortgage was recorded (recording fees are required and additional fees may apply as well)
3)      File with the sheriff conducting the sale a copy of the affidavit showing the date and office in which it was recorded
4)      Deliver to the attorney conducting the foreclosure a copy of the affidavit showing the date and office in which it was recorded
5)      Confirm receipt of the copies and the actual new sale date with the sheriff’s office and foreclosure attorney.
 
By David Monroy, Kristi Weikel and Julie Kellen

 

What Happens to Child Support if the Obligor Dies?

A parent’s obligation to pay child support does not terminate with that parent’s death “when a parent obligated to support dies, the amount of money of support may be modified, revoked or commute  to a lump sum payment, to the extent just and appropriate in the circumstances (Minn. Stat. § 518.64, subd.4).
 
The absence of a child support order at the time of the respondent’s death does not preclude the court from ordering future support or a lump-sum payment, if appropriate, in light of the particular circumstances of the case. Berg v. D.D.M., 603 N.W.2d 361 (Minn.App.1999).
 
Even if the parents have a written agreement, and the obligor has been making payments, a claim for additional support obligations may exist. A written agreement between presumed father and mother “other than agreement approved by the court” does not bar an action to establish paternity and support in a probate action. (Minn. Stat. § 257.57 subd.2, 3 and 4, Minn. Stat. § 257.52 subd. 1). In a probate matter the court has discretion to review and award pas support against the estate if appropriate. Berg v. D.D.M., 603 N.W.2d 361 (Minn.App.1999).
 
If a child receives social security benefits as a result of the obligor’s death those “benefits should be credited against any duty imposed on the obligor’s estate” Berg v. D.D.M., 603 N.W.2d 361 (Minn.App.1999).
 
by Kelly A. Boyd, Attorney