Asked and Answered: In a corporation both board members and officers owe certain duties to the corporation. Members of a LLC have the same duties. Read on to know what your duties are and make sure you do not violate them.
Question: If a business is run by a board of directors and a board member is suspected of stealing money from the business, can the other board members be held accountable if they do not report it? Can the employees?
Answer: A director has two duties to the entity that he/she manages - duty of due care and duty of loyalty. Normally the entity is a corporation but there are other types of entities such as non-profits and LLCs. I will explain the duties in more detail later but these duties are imposed on each director and officer of the business entity, but not on employees that operate below an officer. How can you separate the officers from employees? Normally a board of directors appoints officers and officers hire employees. Although there are exceptions to this simple test it should provide you with a simple guideline. Now that you know that the duties only applies to directors and officers let me go over the two duties.
Duty of Due Care Defined: Officers and Directors owe a fiduciary duty to the corporation and must discharge their duties with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs.
Here the duty of due care applies because the individual is a director. So this Director must conduct his affairs with the entity with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs. Here the Director is suspected of stealing money from the entity and if that was the case then the Director would violate his duty of due care to the entity.
This duty would also applies to officers and other directors as well. If the officers and other directors knew of the Director’s actions and did nothing about it would they be discharging their duties with the same degree of diligence, care, and skill which the ordinary prudent person would exercise in the management of his own affairs? If these facts are true then the answer would be no and they have breached their duty of due care.
Duty of Loyalty Defined: Officers and directors are held to a fiduciary duty of loyalty in all of their dealings with the entity so as to promote the interests of the entity without regard for personal gain.
Here the duty of loyalty applies because the individual is a director. So this individual must conduct his affairs with the entity so as to promote the interests of the entity without regard for personal gain. Here the director is suspected of stealing money from the entity and if that was the case then the director would violate his duty of loyalty to the entity.
This duty would also applies to officers and other directors as well. If the officers and other directors knew of the Director’s actions and did nothing about it would their dealings with the entity promote the interests of the entity without regard for personal gain? If these facts are true then the answer would be no and they have breached their duty of loyalty.
In conclusion, if the facts as you presented were true, the Director breached his/her duties to the entity and so did the officers and other directors if they knew of the Director’s actions and did nothing about it.
A couple of comments here. The Director’s actions, if true, could also be the criminal act of embezzlement and the police should be notified. Finally the act of stealing by a director many times is not black and white. For example the Director could have done some work for the entity from which he/she expected to receive payment or that the board agreed to provide compensation to the Director. I strongly suggest that you meet with an attorney to discuss all of the facts of this matter as I have only given you general guidelines here.
Asked and Answered: Many times new business owners will want to take advantage of favorable LLC filing laws in another state while doing business in the state they live. If you do so remember to foreign file your LLC in your state.
Question: I formed an LLC in one state to provide software consulting services from my home in another state, do I need to register as a foreign LLC with my home state?
Answer: You will need to register as a foreign LLC in every state that you do business in. Each state defines "doing business" differently. However if you or an agent of your LLC physically perform any sort of business in the state or you have income from that state then it is likely that you are "doing business" in that state. Maintaining bank accounts, selling through independent contractors, holding shareholder meetings, or responding to lawsuits are example of activity that is not consider as "doing business". I have given you just some rough guidelines. Meet with a business attorney in your state for a more accurate answer.
Asked And Answered: The key document to a LLC is the operating agreement. Make sure your attorney writes that document and that all members agree to it. Read on to see how sticky things get when you are running in the blind.
Question: What to do about a member of an LLC making unauthorized distributions to themselves?
Facts: I made a cash capital contribution to become a 20% member of an LLC where the other members each own 40%. One of the members immediately wrote herself a check for several thousands of dollars from this contribution claiming it was salary for her hours worked in getting the business off the ground. What can me and the other partner do about this? We did not discover this until after the fact. She also took cash withdrawals from the bank for over $1k. Can we dissolve her from the LLC? Are her actions illegal?
Answer: The first place you need to look is in a document called the "Operating Agreement". Most LLCs are created with such an agreement that specifies how the business is to be operated. Moreover this agreement will take precedence over the "default" laws provided by your state. For example, your state likely has a default law that distributions are proportioned the same as each member's percentage of shares to the LLC. Your operating agreement could change that to some other percentage and override the default state law. A common term in this agreement is when and how distributions are to be made. Whatever is written into your operating agreement regarding distributions is what you will have to follow. If such an agreement does not exist or does not contain any terms related to distributions then you will have to look to the corporate laws of your state to find your state's default law. Here in California the default law holds that an LLC may only make a distribution from its profits, you cannot put creditors at risk by making a distribution, and that all members are entitled to the distribution.
From the facts you presented the member in question acts would not be in accordance with the laws of California as it was a distribution made only to one member without the agreement of the other members. You could sue for a court order to require her to return the money. As far as removing her from the LLC again look to your operating agreement as it should specify how members are removed, otherwise look to your state’s codes on this subject.
Asked and Answered: There are a few different ways to setup your business and for the best legal protection you will want to organize your business as either a Corporation or Limited Liability Company (LLC). Read on for some basic information on LLCs
Question: Is an LLC the best way to setup a non-profit?
Facts: I am in the process of starting a non-profit. From my research it seems an LLC would be the best to form it under. I would like to confirm this before filing.
Answer: There are three basic types of business structures - partnerships, LLCs, and corporations. For non-profits partnerships are not preferred as it is difficult to attract financial contributors and all of the principles are fully exposed to liability from those outside of the partnership and from each other. As between Corporations and LLCs, corporations have certain advantages: Ownership interests are freely transferable. Corporations are backed by years of legal cases and are better understood by the courts. As a result you may not have to go to trial in a lawsuit as compared to a LLC. However LLCs are catching up. In all other areas LLCs have advantages over corporations. Here are some: LLCs have great flexibility as to their structure. LLCs do not require as much record keeping as corporations LLCs have certain tax advantages over corporations when it comes to moving assets in and out of the LLC. LLCs are better protected as a business as to personal lawsuits against owners. So your research is correct. Moreover there are a number of websites that will assist you in filing the necessary paperwork with the Secretary of State where you will create your LLC. The one word of advice I will give you is to pay lots of attention to what is called your "Operating Agreement". Attempt to cover as many situations as possible such as member resignation, death, expulsion, retirement, transferring of interest, and more. Make a detailed list and take it to an attorney. Have the attorney write up the agreement. The rest you can take care of without much risk but not the operating agreement. Good luck with your non-profit
Asked and Answered: Going into business with a friend? Don't be an idiot, get advice from an attorney and an agreement in writing. This question gets replayed time and time again. Do you want to be next?
Question: If my husband has the business license under his name but the ex-business partner has the fictitious business name under his name, who is liable if sued?
Facts: My husband started a business and needed some backing so he had a ” friend” partner with him for the backing. They transferred the fictitious name to his ”friends” but never the business license. That remains under my husbands name. And now the ” friend” doesn't find the business important enough to pour into so had stopped paying on the services to supply the clients who have already paid. Therefore, they are unable to use the service. So my question is who is liable if sued?
Answer: There are a few different issues in your facts, three of them are important. There are two contracts and we have to ask if they are valid and enforceable. If the contracts are valid then the non breaching party can seek a remedy from the breaching party. The other issue is the type of business that was formed here between your husband and his friend. The type of business formed will determine the limits of liability. First let us look at the type of business that was formed.
There are two types of business models that may be supported by the facts – partnership and LLC (Limited Liability Company). A LLC must be registered by the state and must follow certain rules and pay certain fees mandated by the state you are in. A partnership has no such requirement. However LLC, as the name implies, has an important advantage over partnership in that liability is limited. In a partnership liability is unlimited. If the business were an LLC then the client must limit their recovery to the assets of the business itself. However it seems from the facts that the business in question was a partnership. If the contract between the clients and the business are valid and the contract is breached the clients may seek recovery from both business and personal assets in order to recover their losses. So assuming the business is a partnership then at this point in the analysis both your husband, and his friend’s, business and personal assets are at risk.
There are two contracts in your facts. The first contract is between the clients and the business. If the business breaches the contracts then the clients may seek recovery from the business. If the business is a partnership then the clients may seek recovery from the personal assets of the partners themselves. From the facts it seems that both your husband and his friend have an ownership interest in the business. Therefore the clients may seek to recover their losses first from the business. If that does not satisfy their losses then they may seek recovery the personal assets of your husband, or his friend, or both.
Up to this point things are not going well for you but the second contract may offer some hope. The second contract is between your husband and his friend. The agreement was that the friend would provide money to the business and in return your husband would give his friend an ownership interest. If your husband held up his side of the bargain then so must his friend, otherwise his friend has breached the contract/agreement. If the friend now refuses to provide the money that was agreed to then your husband may sue his friend to enforce the agreement. That may provide the funds necessary so that the first contract is not breached.
Fictitious Business Name
Finally let me deal with the license/fictitious name issue. It does not matter who has the license or name. You have to look at who has the authority to make contracts with the client. We call this agency law. It seems from the facts that both your husband and his friend had the actual authority to enter into contracts with clients. That is all that matters here.