There are times when disputes among members of a limited liability company can reach the point where continuing the business becomes impossible. When the conflicts are intractable, a lawsuit for judicial dissolution is a way for the owners to find a remedy .
The remedies available to LLC members in a judicial dissolution action vary from state to state, and it is critical to owners to have a clear understanding of what is and is not possible Some states, such as New York and Delaware, are narrow in the remedies available, assuming that the members are best able to manage their affairs through contracts between them. This “strict approach” permits judicial dissolution only when it is “not reasonably practicable” to continue operations in compliance with the LLC’s operating agreement.
Other states, particularly those that have enacted the Uniform Limited Liability Company Act (ULLCA), offer a more flexible framework. In these states, members can pursue judicial dissolution on broader grounds, including minority oppression, illegality, and fraudulent behavior.
Advances made by a member to a limited liability company can lead to disputes among the owners. Is the payment a capital contribution, an advance, or an interest-bearing loan? Was it authorized?
Payments made by one member in a three-brother limited liability company were at the core of a dispute over control of the finances of two LLCs that led to the expulsion of one brother and forfeiture of nearly $300,000 in unilateral payments made by the dissociated member.
Cropped image of lawyer showing evidence he found in papers to coworker
The payments were not the subject of any agreement, the court held, and therefore were neither capital contributions nor loans or advances. And therefore, the court held there was no basis to find that the companies simply keeping the money was inequitable.
The court applied much the same approach to approximately $125,000 that was claimed by the dissociated member for unpaid compensation, again reasoning that there was no contract in force and that the dissociated member was not entitled to be paid during the time that he was in breach of his fiduciary duties.
This case, decided by the Vermont Supreme Court, is interesting not so much for its take on the law of limited liability governance—it breaks no new ground here—but for the way in which it applied basic principles of contract and agency law.
It’s a cautionary tale for any member that puts money into a jointly owned business. Make sure there is agreement among the owners on how it is to be treated—preferably in writing—and do not act unilaterally.
Shareholder disputes are often disruptive, emotional, and, if left unresolved, devastating to the closely held corporations that are the backbone of New Jersey’s economy. When these disagreements arise in a closely held business with only a handful of key stakeholders, they can escalate quickly, placing the company’s operations — and the personal futures of the owners — at risk.
Shareholder disputes aren’t just about financial disagreements. They often stem from deeply personal frustrations, competing visions, or the inherent complexity of running a business in which power and resources are shared by a few individuals.
Whether the conflict involves voting deadlocks, allegations of unfair treatment, or disagreements over financial management, the stakes are high for all involved.
Understanding the common causes of these disputes—and the legal remedies available—can make the difference between a resolution that preserves the business and a breakdown that leads to its dissolution.
Every closely held corporation is unique, but the disputes they face tend to follow familiar patterns. Recognizing these common issues is the first step in addressing them effectively. Continue reading
Transfers of business interests routinely seek to benefit from the discounts that accompany lack or control and marketability. Reducing the assets in an estate obviously reduces estate tax liability and the application of discounts in the transfer made during one’s life can result in significant tax savings.
The IRS, howevechallenges these “inter vivos” transactions, and a common issue r, often is whether there was a bona fide business purpose or if it was simply a pretext to avoid taxes.
On this issue, timing may be everything. And the price if missteps is significant.
The Tax Court’s decision in Estate of Fields v. Commissioner of Internal Revenue, illustrates how timing, retained interests, and procedural missteps in estate planning can lead to significant tax liabilities.
The opinion is discussed in detail in my post on the
The case also underscores the potential financial consequences through accuracy-related penalties, which were assessed here against the estate for underpayment of tax. We take a look here at the facts, procedural history, legal principles, the 20 percent penalty assessment, and the key takeaways for estate planning professionals.
As the Tax Court judge noted, if the strategy is too good to be true, it probably is.
Anne Milner Fields, a Texas resident, built considerable wealth managing an oil business she inherited from her late husband. By 2016, Ms. Fields was 91 years old, battling Alzheimer’s, and reliant on her great-nephew Bryan Milner to manage her financial affairs. Mr. Milner held a power of attorney and implemented an estate planning strategy just a month before Ms. Fields passed away.
You own a business. You’re deeply familiar with your company’s day-to-day operations, challenges, and triumphs. You have invested your time, energy, and resources into its success.
You may have a rough estimate of what it is worth, guided by your years of experience, what you know of your industry, what you hear on the grapevine and your gut instincts. (Stastics tell us that more often than not, your beliefs are pretty inaccuate.)
The business owner who really wants to understand the value of a business and make informed decisions, you need an objective, data-driven analysis. This is where a formal business valuation is usually indispensable.
A formal valuation tells you the value today, of course. But to the the owners of the business, it is, or should be, much more than that number. A formal valuation conducted by a Certified Valuation Analyst (CVA) or other qualified professional is a full diagnostic exam for your business. It yields information you won’t get anywhere else.
I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.
Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.
Here’s an example. A valuation focuses on comparisons to other similarly situation companies. Here is a snippet of analysis of key financial data from a calclulation report. It compares the performance of the company being valued with its competitors in the same industry in key areas using a percentage-based analysis.
A good, formal valuation drills down into a company’s financial and operational health, revealing insights that might otherwise remain hidden. This particular report tells us that this business is lagging on its ability to generate gross profits and that in other areas it is the middle of the pack.
Exceptional value in a business isn’t driven by mediocrity, and if and when the owners of this business try to find a buyer, these numbers will be reflected in a business that either cannot be sold or that is being sold at a much lower value than it could have brought.
I sometimes ask closely held business owners if they lock the doors to their business when they leave. The answer is ‘of course.’ I may push further. Do you have an alarm system? What about at home?
No surprises here. Everyone locks the door. Most have alarms. My follow-up question is ‘for what?’ The answer, again, is obvious. We lock doors to prevent thieves from stealing our stuff. Then why do so many of us do nothing to stop thieves from stealing what is commonly the most valuable asset of our businesses?
So many closely held business owners protect themselves against the theft of office equipment, but leave the doors wide open and invite thieves to help themselves to their most valuable property—those intangible assets that drive sales and efficiency.
The value of these assets is rarely reflected on our company’s balance sheet. Instead, the value is found in the knowledge and skills of our employees, the relationships we have with customers, and the reputation we have built in the market.
I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.
Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.
Many closely held business owners have no clear idea of the value of their intangible assets and are badly misinformed about what can be protected and how that is done. I am surprised how often my clients think they there is nothing they can do, and how little importance they give to writing down what they have. Continue reading
“Hope is not a strategy.” Vince Lombardi
If you own a business, you know that ‘winging it’” is not much of a business plan; it’s a recipe for disaster. Exit and succession planning isn’t a luxury; it’s a necessity. It’s not about if you’ll exit your business, but how and when. Lombardi during his career went from assistant coach at St. Cecilia’s High School in Englewood, New Jersey, to leading the Green Packers to two Superbowl victories. Lombardi always had a plan. He wasn’t talking about guiding a closely held business, but the thinking fits. And here is why.
Let’s start with the cold, hard truth of mortality. No matter how invincible we feel today, there will come a time when we will no longer lead our business. We know that to be the truth. We are all leaving the job. Planning helps us avoid the potential that we leave feet first.
In much the same way, we know that we need the income from our business to support our lifestyle and the people that matter to us. Yet, if we are like most closely held business owners, we are all in on the company and the business is the largest single asset we own — in many cases, 75% of our net worth.
I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.
Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.
We might envision a graceful retirement, maybe golden years on a beach somewhere. Or maybe from our status as entrepreneur emeritus, watching approvingly as the next generation carries on our legacy. It’s fuzzy and warm. But without a plan, the chances of that happening are like winning the lottery.
Without a well-defined exit plan, our business faces a chaotic and uncertain future. Our families and our employees, could be forced to make hasty, ill-informed decisions about the fate of the company.
The closely held business of many owners represents not just a source of income ,but also the largest portion of their personal wealth. Yet, a common issue is that much of this wealth remains tied up in the business, making it difficult to access without a well-thought-out exit strategy. Without proper planning, owners may find themselves struggling to realize the full value of their company when it’s time to sell, transition, or retire.
I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.
Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.
I see it in my law practice. Owners reach retirement and discover that they own a job, not a business. In many cases, there is no choice but to liquidate or simply close.
The statistics revealed through surveys of the Exit Planning Institute suggest that for many owners without an exit strategy, that wealth may stay trapped there forever.
This is where the Exit Planning Institute’s (EPI) guiding principles of exit planning come into play. The EPI’s approach focuses on maximizing the value of a business while aligning it with the owner’s personal financial goals. Working with a Certified Exit Planning Advisor (CEPA) can help business owners navigate the complexities of exiting, allowing them to unlock the personal wealth trapped in their business. Continue reading
Business owners thinking about exiting their companies tend to focus on financial and operational considerations. However, an often-overlooked, yet crucial component is the personal leg of the exit planning stool, a framework popularized by the Exit Planning Institute (EPI). Effective exit planning, as outlined by the EPI, involves balancing three critical legs of an exit planning stool: business, personal, and financial. This more-holistic approach ensures that all aspects of the owner’s life are considered to achieve a successful transition.
The personal leg, which encompasses the owner’s personal goals, well-being, and plans for life after the business, is frequently neglected in favor of more tangible financial or business concerns. However, the EPI’s 2019 and 2023 surveys show that business owners who fail to plan personally for life after the transition are at risk of dissatisfaction post-exit, potentially leading to “seller’s remorse.” Continue reading
