Suttons Bay Law

Beginning in 2008, the Michigan state legislature passed a large tax reduction for personal property classified as Industrial Property. As a result, personal property classified as Industrial Property receives an approximate 50% tax reduction when compared to personal property classified as Commercial Property. Thus, some assessing jurisdictions are reviewing the personal property tax reports of taxpaying businesses and are re-classifying tax-favored Industrial Property as Commercial Property on the assessors’ internal records.

Dan A. Penning

Tags: Asset Protection, Business Management/Law, Estate Planning, Know it Now by Dan Penning
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In today’s difficult economic climate, businesses and their owners face increase risk of being sued. Given this risk, business owners should do all they can to minimize exposure of their personal assets with respect to possible liability resulting from these lawsuits.

Typically, incorporating a business is an effective means of protecting a business owner’s personal assets from exposure to claims against his/her business. However, simply incorporating the business alone will not protect personal assets if the business has not complied with the formalities and requirements that the law requires of a corporation. When a business owner neglects those requirements, courts sometimes “pierce the corporate veil” allowing a business owner’s personal assets to be exposed in satisfying claims against the business. Essentially, when the courts allow piercing of a corporate veil, the business owner has lost all protection of the corporation entity form.

The term “piercing the corporate veil” basically means that the law treats the business owner and the business owner’s assets as one complete entity, making the owners personal assets subject to liabilities incurred by the company. In those situations, the corporation is basically seen as a mere alter ego of the business owner.

Michigan courts look to three elements needed to pierce a company’s corporate veil:

1. Is the corporate entity operating as a mere alter ego of another entity or individual, meaning the business is being used in furtherance of another purpose rather than its stated mission?
2. Is the corporate entity being used to commit fraud or wrong doing?
3. A plaintiff in a lawsuit suffered an unjust loss or injury if recovery is limited only to the business and cannot extend to a business owner’s personal assets.

Fortunately, under Michigan law, only extraordinary circumstances justify a disregarding of a corporate entity exposing the owner to personal liability; however, that is not to say that a business owner will never be subjected to such a claim, especially in these unprecedented economic times.

Historically, Michigan courts in evaluating the aforementioned prerequisites look to a number of factors to decide whether these factors have been met and a corporate veil should be pierced.

The court looks to whether:

• the corporation is under capitalized (lacks sufficient funds to pay its bills);
• corporate books have, or have not, been maintained;
• there is a separation between individual and corporate finances;
• the corporation is used to support fraud or illegality;
• the corporation formalities have been honored especially with respect to complying with the terms and conditions of the Michigan Corporation Act, and
• the corporation has paid excessive dividends to its shareholders.

Where the court decides that a plaintiff’s claim meets the prerequisites to pierce the corporation, the court will find an abuse of the corporate form and allow a claim against the corporation to pass through and attach to a business owner’s personal assets.

A business owner, in order to protect himself/herself from potential claims to pierce a corporate veil, can initiate steps to protect themselves.

First, a business owner should always keep personal and business assets separate from one another. This can be accomplished by using separate bank accounts and books for personal expenses and for the separate expenses of the business.

Secondly, always observe and follow corporate legal formalities such as holding the required number of meetings, keeping track of meeting minutes and maintaining a comprehensive stock ledger regarding the ownership of the corporation.

Third, usually an owner of a business will be an officer, agent or employee of the corporation. In business dealings on behalf of the corporation with third parties, business owners should always portray himself/herself as acting in the role of as an officer, agent or employee on behalf of the business as opposed to dealing with third parties on an individual basis. When the business enters into transactions or agreements with any outside party, that person must be aware and understand that he or she is transacting business with the corporation and not with the business owner personally. This can be accomplished when the business owner executes contracts, the business owner should list the name of the business and the business owner should sign in the capacity as an officer on behalf of the business.

In this difficult economic environment, people with claims against businesses are often more willing to make the extra effort to make a claim for piercing the corporation to obtain a judgment against the business owner’s personal assets. If you have questions regarding this issue or would like assistance with conducting an audit of your corporation’s records to assess your risk of the possibility of a plaintiff being able to pierce your corporate veil, please do not hesitate to contact us.

Dan A. Penning

Tags: Asset Protection, Business Management/Law, Know it Now by Dan Penning
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I’m pleased to announce that one of Michigan’s premier business journals, DBUSINESS, recently announced its 2010 “Top Lawyers” in metropolitan Detroit - and three of the principals with Wright Penning & Beamer made the list.

DBUSINESS compiles its list as a resource and reference guide for its readers. Selection criteria include:

• legal knowledge
• analytical capabilities
• judgment
• communication ability, and,
• legal experience.

The list was published in the journal’s November/December 2009 edition.

According to the publication, selected lawyers “possess the highest professional ability and ethical standards.”

Dirk Beamer, Lee Flaherty and I were selected this year. Beamer for his expertise in business and commercial litigation; Flaherty for her work with non-profits and charitable organizations, and I was recognized for business and estate planning.

As a founding shareholder of the firm I’ve focused my practice areas primarily in planning for business entities including family businesses, estate planning for business owners, individuals, families with special needs children, and succession planning for family cottages and farms. Through these practice areas our firm has become a leading resource for individual and business clients.

Beamer oversees our firm’s diverse litigation practice, focusing primarily on business and commercial litigation. He spearheads the firm’s efforts in insurance law, unfair competition, trademark infringement, employment matters and contract disputes. Dirk has litigated in state and federal courts across the country. He also counsels business owners and managers concerning employment practices and management.

In addition to her work with non-profits, Lee Flaherty is well versed in real estate, business law, estate planning and probate. Lee’s business expertise encompasses the support of ongoing businesses, business purchases and sales, and representation in commercial real estate transactions. Her estate planning practice focuses on the preparation of a wide variety of trusts and other documents to assist clients in avoiding probate, preserving assets and minimizing taxes.

I take pride in my colleagues’ accomplishments and wanted to share this good news with you. As a firm we continue to strive daily to deliver the highest quality legal services to our clients throughout Michigan and beyond.

Dan A. Penning

Tags: Agribusiness, Business Management/Law, Business Succession, Cottage Law, Employment Law, Estate Planning, Know it Now, Personal Management, Special Needs Children, Suttons Bay Depot by Dan Penning
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What happens to your business if you suddenly do not show up one day and are unable to come to work for an extended period of time, such as a month or longer? Being prepared for an unexpected event may seem overwhelming, but according to the book, Being Prepared*, it can be easily broken down into two categories: things that happen to your stuff and things that happen to you. If something happens to your stuff, you call people—the IT consultant for computer problems or the disaster specialist for flooding, fire, etc. When something happens to you, however, a plan is necessary for the continued management of your business, particularly if you are the sole owner or sole employee. Being Prepared lists 5 practical principles that you can implement right away to put yourself and your business on track if you find yourself unexpectedly absent due to, for example, disability or incapacity from an unfortunate accident or illness.

1. Define who will be involved and the roles each will play. Include a contact list with emails and telephone numbers, including those of your attorney and accountant.
2. Enable your team by gathering together a manual that contains procedures necessary to run your business and serve your clients.
3. Empower your people by giving them the appropriate background information and direction; and also the authority to pay bills and collect payments.
4. Keep you manual in a safe place, but also in an available place so that it is accessible in an emergency.
5. Inform your team that you have devised a plan and organized a manual in the unfortunate event that you are unable, due to incapacity, disability or death, to run your business. Inform them who the “go-to” person is—who is responsible for safekeeping the manual.

A few questions to ask yourself: Who will be responsible for determining what my obligations are that day? How will they know? Do they have access to my calendar and password? Who is someone I trust to act on my behalf? Should I consider leaving a “trail”—such as journal entries that track important client/customer matters that may be ongoing?

The degree to which your personal affairs and your business affairs are intertwined may determine whether you need a well-drafted power of attorney and additional documents that may assist your team with the ongoing management of your business should you become incapacitated.

*authors: Lloyd D. Cohen and Debra Hart Cohen, 2008.

Dan A. Penning

Tags: Business Management/Law, Know it Now by Dan Penning
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Businesses wishing to raise capital by issuing and selling securities (typically “stock”) face a complex maze of laws, rules and regulations, both at the federal level and in each state where the securities are to be offered and sold. These laws govern the process for the registration of the securities, set forth the criteria which must be met in order for the securities to be exempt from registration, regulate the conduct of those involved in the offer and sale, provide for enforcement and set forth fines, penalties, and both civil and criminal liability for violations.

This regulatory landscape changed in Michigan on October 1, 2009 when the new Michigan Uniform Securities Act became effective (”MUSA” for short.) MUSA replaces former Michigan law dating back to 1965. In enacting MUSA, Michigan became one of 17 states that have so far revamped their securities laws based upon the Model Uniform Security Act issued in 2002 by the National Conference of Commissioners on Uniform State Laws. One of the purposes of the model act is to provide a more efficient system of regulatory and enforcement authority that more closely follows federal law, all with the intent of protecting investors. Some of the key changes found in MUSA pertain to the registration of “investment adviser representatives,” changes pertaining to exempt securities and exempt transactions, enhanced enforcement powers and enhanced penalties for violations, particularly where violations involve individuals over 60 years of age or individuals who are deemed unable to protect their own interests due to such things as disability or illiteracy.

The Michigan Office of Financial and Insurance Regulation (”OFIR”) is charged with the responsibility of administering MUSA, including enforcement. Although MUSA went into effect on October 1, 2009, the exhaustive rules and regulations that OFIR will use in interpreting, applying and enforcing MUSA are not expected to be finalized until sometime in 2010.

Any business seeking to raise capital or attract investors, and any person involved in the offer and sale of securities, needs to be aware that this activity raises securities laws considerations under the new Michigan Uniform Securities Act.

Tags: Asset Protection, Business Management/Law, Know it Now by Dan Penning
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Michigan recently enacted legislation adopting a new “hybrid” business entity—the “L3C,” a low-profit limited liability company. The L3C is designed to promote private investment and philanthropy/social welfare through a single corporate entity.

Individuals and institutions with the means to invest traditionally look either to private enterprise or to charitable giving. If investing for-profit, the investor typically seeks an expected rate of return over 5%; if giving to a non-profit, the donor expects a flat 0% (or negative) rate of return. The Low-Profit Limited Liability Company is able to bring together a variety of entities, such as foundations, trusts, endowments, pension plans, individuals, corporations, other nonprofits and governmental entities to achieve social aims while working pursuant to for-profit status within the 0% to 5% gap. Like the basic LLC, an L3C enjoys the liability protection of a corporation and the organizational flexibility of a partnership. Another advantage is its qualification as a Program Related Investment (PRI) for non-profit entities. Non-profits are permitted to invest in for-profit projects if the project qualifies as a PRI under the tax code. So as not to impair its non-profit status, however, the entity must obtain a costly private letter ruling from the IRS to determine whether its investment qualifies as a PRI; thus, very few non-profits undertake the risk of investing in PRIs. The L3C’s operating agreement, on the other hand, can specifically provide for its qualification as a PRI, thereby protecting its tax exempt status.

Furthermore, an L3C allows access to more investment resources due to the ability of the members to establish layered investing. For example, if a local business determines that it is moving its operations overseas because its current rate of return is 3.5% and it could be more profitable if it invested its resources elsewhere for a rate of return of 7%, the local community loses jobs. A foundation could decide to organize an L3C and attract outside investors to partner with the L3C to purchase the physical plant and operate a business that saves the community those jobs that would have been lost. The Operating Agreement could provide that the foundation has a very low rate of return and its interest is subordinate to all the other investors. The foundation may agree to invest 60% of the capital but receive only 30% of the membership share, and further subordinate its membership to the other investors, allowing the other investors to be paid first, before the foundation. The ability of the foundation to provide capital to the L3C at less than a market rate of return and at a higher risk, lowers the investment risk of other investors while increasing their prospective rate of return.

Layered investing offers flexibility based upon the requirements of the investor. This opens an entire new arena from which nonprofits can engage and partner with an abundance of other entities to achieve important social objectives while permitting profits, within limitations, and attracting investors who may have been previously constrained by fiduciary responsibilities from pursuing philanthropic goals.

Tags: Business Management/Law, Know it Now by Dan Penning
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Renewable energy, green building, and sustainable design largely require initial capital expenditures that may exceed available resources of businesses just trying to survive this challenging economy. What options are available to businesses that do not require significant capital outlays and provide the opportunity to significantly control energy costs thereby gaining profits and positioning your company competitively?

This summer, the German American Chamber of Commerce of the Midwest held a conference in Southfield, Michigan, on industrial energy efficiency featuring German and US industry and policy experts. One of the experts is a mechanical engineer from the University of Michigan who heads up the Industrial Assessment Center (IAC), one of thirty such centers in the nation. The U-M Industrial Assessment Center conducts, at no-charge, confidential assessments of manufacturing plants, the results of which are used to provide the business owner with solid suggestions on ways to reduce utility costs and eliminate waste throughout the manufacturing process. Funding is provided by the U.S. Department of Energy. “There are no costs whatsoever for the company and there are no hidden strings attached,” said Arvind Atreya, director of the U-M center and professor of mechanical engineering.

According to the Department of Energy, the average cost savings per plant that implements the recommendation of an IAC audit is $40,000 per year. The cost of recommended renovations or new equipment is recovered, on average, in 18 months.

Go to http://interpro-academics.engin.umich.edu/mfgeng_prog/IAC/ to learn more.

Tags: Business Management/Law, Know it Now by Dan Penning
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Most nonprofit organizations are required to file an annual information return with the IRS known as Form 990. The IRS uses Form 990 as the primary tax compliance and reporting tool for tax exempt organizations. Unlike all other tax returns, once filed, Form 990 is open to public inspection. The IRS has completely revised Form 990 for filings beginning in 2009. The first filings using the new form began this past May 15, 2009, for tax year 2008.

The new form consists of an 11-page, 11-part core form that is required to be completed by all organizations that file Form 990. Depending upon the type of organization, one or more of 16 additional schedules may also need to be filed.

One of the primary changes involves new and extensive reporting requirements pertaining to the organization’s governance and management (Part VI, Sections A, B and C.) For example, Part VI, Section B, Policies, requires the organization to disclose whether or not it has adopted, and follows, policies pertaining to such things as compliance issues, conflicts of interest, whistleblower, document retention and destruction and compensation. Nonprofits, and their boards, need to be aware of these requirements well in advance of the due date for filing because of the potential need to update, adopt and implement any number of these policies and procedures.

Further, whereas previously the preparation and filing of Form 990 was likely left to the organization’s accountant or treasurer, a final version of the form must now be provided to each member of the organization’s governing board, must be reviewed by that board before filing, and the process for that review must be disclosed in Schedule O (see Part VI, Section A, question 10.)

An extensive amount of information concerning these new filing requirements can be found on the IRS website (www.irs.gov) by clicking on the tab “Charities & Nonprofits.”

Tags: Business Management/Law, Know it Now by Dan Penning
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Tool and die makers – and the manufacturers who use their products – need to be familiar with special lien rights that can be created and enforced under the Michigan Special Tools Lien Act. The Act was passed by the Michigan legislature to give toolmakers greater protection than the traditional mechanic’s lien alone provides.

The Act sets forth procedures allowing toolmakers to create a lien on any tool they fabricate or improve. Among other things, toolmakers need to be marking the tool itself to reflect the lien and also making sure to provide notice of the lien, including UCC Financing Statements, to both their customers and the end-users of the tool. Additionally, the Act sets forth certain procedures by which toolmakers can claim possession of the tool, which offers considerable leverage when negotiating unpaid balances for work performed.

Protections under the Act are not automatic. Rather, toolmakers must make sure they comply with certain statutory requirements to avail themselves of the rights available to them. Similarly, those dealing with toolmakers need to make sure they understand the exposure they face by risk of the provisions of the Act. You can find the Act at www.legislative.mi.gov (MCL 570.541-.571).

Feel free to contact Wright Penning & Beamer with questions about how it works or about how your business may be impacted.

Dirk A. Beamer

Tags: Business Management/Law by Dan Penning
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A few days ago I was talking to a friend whose business is struggling badly. I knew that he had been talking to a new, potential customer and that the work he hoped to get would pretty much determine whether or not his company would survive. Turns out he was about to sign a contract. Money for him is tight, so, in light of our longstanding relationship, I offered to take a few minutes to look at the contract for him. In doing so I was struck by a number of things that concerned me, not the least of which was a clause that would prohibit him from rendering similar services to any other customer in that particular industry segment. Problem is, that industry segment makes up the bulk of my friend’s business.

I pointed out the ramifications of this clause in an email, assuming that this was something that his new, potential customer was insisting upon and that it was probably not negotiable. That email prompted a quick return phone call. Turns out that the contract was prepared not by the potential customer, but by my friend. The clause was merely part of a contract template he had found on the internet; he had no idea that it was there. Once I pointed it out to him he agreed that he wasn’t all that clear about what it meant or its implications. He does now. Since the new work would not be sufficient in and of itself to sustain his business, he stood to lose everything. At a minimum, he would have certainly found himself embroiled in costly litigation.

My point? There are a whole lot of people out there making a whole lot of money trying to convince you that all you need is a “one-size-fits-all”, generic template for every conceivable legal situation, and that you can easily find them on the internet. After all “who needs a lawyer” anyway? I’ve seen situations like this many times in my career and I have seen a lot of people hurt. In every situation the fees I would have charged had I gotten involved at the outset pale in comparison to the fees that were later incurred in an effort to try to straighten things out after the damage was done. The timing was fortuitous on this one and I was able to help keep a friend from potentially losing his business. It’s been a good day.

Duane L. Reynolds

Know Your Business. Grow Your Business. Protect Your Business.

Tags: Business Management/Law by Dan Penning
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