Summer 2001 Issue no. 3
Hello again to all my friends and colleagues now and to be. First let me apologize for having taken so long to generate my second newsletter. I leave my inaugural newsletter on my website for historical purposes but it now appears fairly certain that the fears of technological calamity commonly referred to as Y2K have not and probably will not be realized so it is high time we moved on to other interesting topics. The theme of this newsletter is something near and dear to my heart and an emphasis in my practice- Organization of the Small Business. I enjoy my profession even though it has not fulfilled all of my financial dreams. The latter limitation is more due to my proclivity toward giving my time and the benefit of my legal knowledge and intellect to the community with emphasis on the giving more so then with continual adherence to demanding proper payment for the advice and discussion given. It is the "intangible" benefits of community recognition and freedom of movement and expression and the attributes of networking where benefits given oftimes result in benefits received in return, that drive me not to beat up on myself too badly for my giving nature when in involves business matters. This approach is not necessarily the best route to financial success and I do not recommend such direction as a focal point for business endeavors but as the old expression goes "do as I say not as I do". Charitable giving should be in one''s business repertoire but one must set realistic preconditions to offers of service in a business context and one must never lose sight of the fact that it is business for profit that is being conducted, or, as I as a matter of course in my counseling of prospective clients seeking to enter business ventures advise: Family is Family, Friends are Friends, but Business is Business. If you cannot relate to potential clients and customers, and specifically to a prospective partner on a business level without an inclination to perceive such relationship as an affront to one of the other types of relationship you may also be involved in with such persons, in my opinion do not enter the business relationship with those persons. If there does not appear to be a problem of this nature then the prospective business partners should have no problem with entering into an agreement between themselves establishing rights, obligations, and restrictions and division of authority as between the partners . The partners should enter early on what is commonly referred to in the legal profession as an operating agreement in addition to the other entity level organizational documents. We always recommend a shareholders agreement between corporate ownership participants. Without such agreement the corporate organization would follow the "default" provisions of the applicable state statute governing corporate organization which in general calls for "majority rule" and no restrictions on transfer of ownership interest. Among other provisions in our most commonly utilized shareholder agreements provided for are higher percentage voting requirements ( and in many cases "unanimous consent") to effectuate certain business decisions such as expenditures of corporate funds and transfer of corporate assets, and restrictions on interest transfers usually provided for by giving the entity and/or other owners a right of first refusal for a buy out of the ownership interest of persons seeking to transfer. It is only after indications of comfort in this area of the business relationship between participants that we proceed to discuss ways of protecting yourselves and your business venture against interference from other independent third party sources.
The best protective device in my opinion is good organizational planning. Good organizational planning starts with the type of organization envisioned. We have for the last several years been suggesting and utilizing a fairly recent developed organizational structure legally designated as the "limited liability company" entity format (the "LLC"). In years past and continuing to a great extent to the present the vast majority of our business clients have organized themselves as "corporations" and often times where they were qualified to do so they have formed such corporations as "Sub-Chapter S" corporations to obtain the benefits of tax pass through allowances. Such type organization appears to remain the organization of choice concerning business clientele but the benefits gained through such organizational planning are also available in the LLC format with the addition of other flexibility not present in the corporation structure, which is why we are now recommending to many of our business clients the LLC format where such additional flexibility could be advantageous to them.
To appreciate the LLC advantages one must first understand the general benefits of incorporation which benefits are also available in the LLC context. In our opinion the two most commonly viewed benefits of incorporating a business are the corporation level shield against personal liability and the ease of management and transfer of ownership interest in the business as incorporated. In Sub-Chapter S context of corporate organization there is also the elimination of corporate level income tax (corporate income being taxed to the individual shareholders and added to and reported on their individual income tax returns). Corporations have officers and directors who manage the daily business activities of the corporation and shareholders who hold the ownership interests of the corporation through issued stock which may mechanically be easily transferred without interrupting business operations of the corporation during the stock transfer process. Each of these persons are shielded from liabilities resulting from corporation business activities where the liabilities are incurred in the normal courses of business for which the corporation has been authorized. Where the corporation is organized, where qualified, as a Sub-Chapter S organization, income derived from corporate business activities is not taxed on a corporate level but rather is passed through to the shareholder to be taxed on their individual personal level where they also gain the benefits of deductible corporate business expenses which could offset other personal income. This structure together with the ability utilizing such structure to divide different businesses into different corporate organizations allows for ease of management utilizing an entity level organization, such as a corporation.
The same benefits may be gained utilizing an LLC format with certain additional flexibility not available in the corporate format. Those additional benefits which come to mind in general involve allowance for division of profit and/or loss incurred by the LLC to its owners (legally referred to as "members") in other than relative to their ownership interests. There can also be a distinction and division made between financial interest and management interest as to participants in the LLC on an ownership level. In addition an LLC may be managed directly by its members with no separate management level participants. LLC format also allows provision for classes or groups of members distinguishing between them as to relative rights, powers and duties. A Sub-Chapter S corporation can only have one class of ownership and must maintain the "normal" corporate management structure. Certain persons and organizations not allowed as shareholders in a Sub-Chapter S corporation are allowed as LLC members, examples being foreign persons, and other entity level participants (e.g. other corporations, trusts, partnerships and LLCs).
As one can see in this brief and generalized description of the LLC form of organization flexibility allows for and for the most part dictates that a specialized operating agreement , which can become quite involved, be drawn between the participants and such can add to the cost and confusion generated by the LLC format, which is why in many cases the tried and trusted corporate format does just fine for the ordinary businessman who does not necessarily need the benefits of the LLC format flexibility. From a lawyers standpoint the LLC is a draftsman''s paradise. I pride myself in the artistry I bring to my formation of agreements and I love the challenge of the LLC flexibility format. One significant drawback which I envision however is in the marketability of LLC member interests when an entity and business organization consider entry into the "public" realm. Ideally, as I always coach my business clients, the organization should set a goal of someday seeking the advantages of the public forum as an adjunct route of seeking financial returns for its owner participants. Presently, in my perception, there is little opportunity for selling LLC member interests into the public marketplace similar to the public arena for sale of corporate stock interests. Not to worry, however, because there is provision within the law applicable to both the corporate and LLC organization structures which allows for transition of one to the other as a change in organizational structure.
We wish you good business planning and we welcome your business in the areas herein discussed and in the many other areas of business law practice where we concentrate. Please remember our motto: No business too large or too small to service-come join our family of clients.
THE INFORMATION PROVIDED HEREIN IS NOT NOR IS INTENDED TO BE LEGAL ADIVCE. YOU SHOULD CONSULT AN ATTORNEY FOR INDIVIDUAL ADVICE REGARDING YOUR OWN SITUATION.
Thanks again to our family of clients for their continuing support. Not to the exclusion of others we note the continuing support of Synergy Brands Inc., a public entity organized and administered by a quality management team who have been members of our business client family for over ten years. We also specifically acknowledge the loyalty of our friends at Gregory Medical and Gregory Surgical, Management Partners and affiliated parties, among whom we render respect to and thankfulness for the efforts of Dr. Jose Sanchez-Pena and Hesham Eltrhonny. We are also appreciative of the many efforts and time committed to our well being by Amro Aly and his affiliated companies. We thank John J. Becz, Esq. for his friendship in the profession in which we both participate and we recognize the many others of our profession lending their assistance. We are truly a fraternity (thank you Dean Despotovitch, Jim Fox, John Milling, Joe Colbassani, Kevin Roe...) and let us not forget the blessings bestowed upon us by our so many other wonderful clients too numerous to mention but of whom mention is made specifically to some but not all in the summary of existing clients made part of our website to which we suggest you refer, any and all of whom we are confident visitors to our website may contact for further reference regarding the quality of our services. Let me not forget the loving support of my staff-Kellie, Victoria and Leonor. Lastly, but certainly not least I am thankful for the love and support of my family and I would like to welcome the addition of my son, Randall Joseph "Joe" Perry Jr., who has joined my wife Beth and myself, and our daughters Erica and Emily to form the core of my existence, without whom I am not certain I could proceed successfully.
We also look forward to a successful collegiate football season at my alma mater, Penn State. WE ARE!