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New York LLC Transparency Act

New York LLC Transparency Act

By: Ted Sutton, Esq.

Marissa was an aspiring barista who lived in New York City. After she graduated high school, she started her own coffee shop in Brooklyn. She properly formed a New York LLC. However, she forgot to report her beneficial ownership information to FinCen and the New York Department of State (NYDS).

After two years of making coffee, her business took off. Her new coffee shop became the top gathering place in her Brooklyn neighborhood. Everyone raved about not only the coffee, but also the shop’s ambience.

Although Marissa’s coffee shop was successful, she was hit with legal trouble. Because she failed to report her information to FinCen, she was slapped with a $10,000 fine. On top of this, she faced a separate $250 fine from NYDS for failing to report the same information to them.

The New York LLC Transparency Act

As many of you may know, the Corporate Transparency Act (CTA) requires companies and their owners to report certain information to the Financial Crimes and Enforcement Network (or Fincen) under the Department of the Treasury. You can read a separate article covering these requirements here.

However, some states will require you to report this same information to them a second time. New York Assembly Bill 3484A, also known as the “LLC Transparency Act,” will require New York LLCs to report the same beneficial ownership information to the NYDS. This bill requires LLC owners to disclose a list of beneficial owners, and any formation and registration documents.

Just when you think that wasn’t enough. This new LLC Transparency Act is even more transparent than the CTA. While the FinCen database is only available to governmental authorities and financial institutions, the LLC Transparency Act requires the NYDS to maintain a publicly searchable business entity database on their website. With this database, anyone can view the entity name, business street address, the county where the business is located, and the full names of each beneficial owner. However, beneficial owners may be able to apply for confidentiality waivers in limited circumstances.


Because Marissa failed to report any of this information, she faced fines from both the State of New York and the federal government. If she doesn’t cough up the $10,250 worth of fines, she could face jail time. Once she properly registers with the NYDS, her private information will be made available to the public.

Could other states follow suit and pass similar legislation? Only time will tell. This is why business owners must be on the lookout. If they don’t, they could end up like Marissa.

Piercing the Corporate Veil – How to Avoid It

50% of piercing the veil court cases nationwide succeed because owners are failing to properly follow corporate formalities. This exposes business owners to personal liability – meaning they can lose their possessions.

What is the Corporate Veil?

What is the corporate veil? How can it protect me and what does it mean when it is pierced? We’ll cover these ideas critical to liability, wealth and asset protection. By properly forming a corporation, LLC or Limited Partnership (LP) and taking the steps required of corporate formalities, a corporate veil is raised that may protect shareholders, officers and directors from personal liability and provide tax benefits. However, to ensure that the corporate veil remains intact and business meets its potential, all persons involved in the corporation must follow certain corporate formalities. (While we refer to corporations in this article, the concepts and issues apply to LLCs and LPs as well. Don’t be misled by those who claim that the need for following formalities only applies to corporations.)

If you fail to follow the requirements of corporate formalities, you could be vulnerable to court decisions which pierce the corporate veil. Today, 50% of piercing the veil court cases succeed because owners are failing to properly follow corporate formality requirements.

This topic is so important, I wrote a book on it!

Veil Not Fail

Upcoming book!

When protective entities like LLCs and corporations fail and businesses risk piercing of the corporate veil, experienced legal guidance is imperative. In Veil Not Fail, the author explores potential risks and weak spots in LLCs and corporations and helps readers better prepare for what he considers an inevitability in a sue happy society ― it isn’t if you’ll be sued…it’s when.

Ebook prelaunch, April 2022 at


Definition of Piercing the Corporate Veil

A situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Veil piercing is most common in close corporations. While the law varies by state, generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been misconduct like abuse of the corporate form (e.g. intermingling of personal and corporate assets) or undercapatitalization at the time of incorporation. (Undercapatitalization would apply if the corporation never had enough funds to operate, and was not really a separate entity that could stand on its own).

If corporate formalities such as annual corporate filings and meeting minutes are not maintained in a timely and proper manner, courts can hold YOU, the entity’s owner, personally responsible for claims filed against the company. You need to keep your corporation filings current, and your legal protections intact.

How to Prevent Piercing the Corporate Veil

Limited liability and tax benefits are not a right granted to every business person, but privileges earned by following corporate formalities. The following nine rules provide general guidance for maintaining the corporate veil while conducting business through a corporation:

  • Perform all annual filings;
  • Maintain internal formalities, including having a resident agent in their state of formation and in any state the company qualifies to do business in;
  • Maintain a written record of corporate decisions;
  • Provide the world with corporate notice;
  • Ensure the corporation is sufficiently capitalized;
  • Maintain the distinction between corporate assets and personal assets;
  • Use caution when distributing corporate profits;
  • Separate bank accounts; and
  • Separate tax returns

Although the burden of maintaining corporate formalities may not be appealing, the consequences of neglecting corporate formalities are great. Whether the corporation has followed the foregoing rules becomes important when a creditor seek to receive payment through the assets of the corporation’s individual shareholder, director or officer. Each rule and its various implications are discussed more in depth below.

If you are unsure if you are in compliance or would like hire Corporate Direct to ensure that you are, we offer a service to assist.

Get Our Corporate Clean-Up Service

  • We prepare your first Corporate Minutes.
  • We perform the research and analyze if you are current in all areas of the corporate formalities and whether or not your entity is positioned for full protection.
  • We do all the work necessary to bring your affairs current to verify you are legally compliant and you save time.

We have helped clients become compliant after as much as 23 years of improper record keeping. But remember, it’s important to have the corporate veil properly maintained before a lawsuit or claim is brought against a corporation. Once that happens, its too late and personal assets can be jeopardized.

How to Raise the Corporate Veil

Once you have decided that a corporation, LLC or Limited Partnership (LP) is the right entity for your business or asset holding purpose and you have decided which state to incorporate in, corporate formalities begin. Events occurring immediately after formation must be performed properly to maintain the corporate veil and ensure the corporation’s longevity and flexibility.

A corporation is born when the Articles of Incorporation are properly filed. The corporate veil provided Shareholders with limited liability and is raised and maintained by management and ownership that treats the corporation like a corporation. As indicated above, a corporation is considered to be a legally distinct entity, capable of incurring its own debts and obligations. This protection is frequently referred to as the corporate veil. When creditors or others seek to obtain a judgement from a court that makes the corporations shareholders, directors or officers personally liable, they are seeking to pierce the corporate veil. This article will focus mostly on maintaining the corporate veil once it has been established, but briefly here are the requirements needed to set it up:

  • File the Articles of Incorporation
  • Hold organizational meetings to empower the corporation to conduct business and provide limited liability.
  • Provide the corporation with competent initial management
  • Issue the corporation’s shares of stock

Maintaining the Veil by Maintaining Corporate Formalities

Performing Annual Filings

Annual filings are required to protect and ensure the longevity of the corporation. In addition to the permits, licenses, or approvals that are unique to the corporation’s business, every corporation must obtain and maintain a corporate charter in good standing. In many states, a corporation must file an annual report, providing the names and addresses of Officers and Directors, and annual fees. If such filings are not completed in a timely fashion, the state may revoke the corporate charter and the corporation will cease to exist. The time, energy, and expense expended organizing the corporation will be wasted if the state revokes the corporate charter. While it may be possible to have the charter reinstated, the best way to maintain the corporate veil and ensure that the corporation serves its purpose is to simply perform annual filings in a timely manner.

Maintaining Internal Formalities

Bylaws adopted by the Directors in their organizational meeting provide the guidelines for the corporation’s future actions and corporate policy. Specifically, the Bylaws should provide the following:
1. Notice requirements for Directors meetings;
2. The minimum number of annual Directors meetings;
3. The date for annual Shareholders meetings;
4. The requirements for special Shareholders meetings;
5. The responsibilities of each Officer and Director; The procedures for removing Officers or Directors;
6. The procedures for Shareholders’ inspection of the corporation’s records; and
8. The name and address of the corporation’s resident agent.

Although they shape the internal operations of the corporation, Bylaws should not be complicated or provide intricate procedures. Necessity determines the extent and detail provided in the corporation’s Bylaws, which may be amended, altered, or repealed by the Board of Directors.

All decisions the corporation makes and all actions the corporation takes should be in compliance with the rules established by the Bylaws. Compliance with the Bylaws indicates that the corporation’s Directors, Officers, and Shareholders treat the corporation as a separate entity with its own rights and limitations. If the Directors, Officers, and Shareholders treat the corporation as a separate entity, courts will be less likely to ignore the division between corporate property and the rights of the individual Directors, Officers, and Shareholders. The corporate veil will be maintained.

As well, in most states it is imperative to have a current resident agent to accept service of process. Failure to have a resident agent in place can lead to arguments that the corporate veil should be pierced.

Maintain a Written Record of Corporate Decisions

Even if a small group of people or a single person controls the corporation, it should conduct meetings and prepare records of such meetings. Shareholders and Directors conduct three types of meetings, which should each be recorded through minutes of meetings. As provided above, immediately following incorporation, organizational meetings should be conducted. During the corporation’s life, regular meetings must be conducted annually pursuant to the corporation’s Bylaws to reflect elections and the corporation’s other decisions. Additionally, a corporation may hold special meetings when called by the Directors or Shareholders. Special meetings are held to discuss urgent items of business or to approve any legal or tax issues. The general procedure for conducting Directors or Shareholders meetings is provided below.

Prior to a meeting of Shareholders, all Shareholders must receive or waive notice of the meeting. Prior to a Directors’ meeting, all Directors must receive or waive notice of the meeting. In meetings of Shareholders or Directors, corporate formalities require voting and an official record of actions taken at the meeting. The official record of actions taken in regular meetings, as well as the organizational meetings, is provided as the minutes of the meeting. Minutes provide a record of the corporation’s resolutions. A resolution is a document that records actions that the Directors or Shareholders “resolve” to take on the corporation’s behalf. The nature and timing of the corporation’s decisions dictate whether a resolution or minutes of a meeting provide an appropriate record of a decision.

An alternative in most states to conducting actual meetings and preparing minutes for those meetings is for the corporation to authorize action by written consent. This is the quickest and easiest way to document formal corporate action. Directors and/or Shareholders sign a document that contains the language of the corporation’s decision or resolution. By signing the document, the Directors and/or Shareholders approve the decision or resolution. To ensure that an action by written consent is adequately documented, all Directors and/or Shareholders must sign the consent form. The corporation should keep signed consent forms in the corporate minute book.

By conducting the necessary meetings and preparing adequate records, a corporation provides documentation to protect the corporate veil. Should a creditor seek to pierce the corporate veil at a later date, the corporation’s records will serve as evidence of its separate existence. In addition, maintaining proper records may help to avoid future miscommunications and misunderstandings within the corporation.

Although many people believe that preparing annual meeting minutes is difficult, the minor inconvenience is greatly outweighed by the potential problems that failing to prepare such records could cause. If necessary, a service provider may prepare the required minutes for the corporation for a reasonable fee. Our firm charges $150 per year to prepare minutes. You may call toll free 1-800-700-1430 for more information.

Provide the World with Corporate Notice

Whenever the corporation enters into a contract or engages in any business activity whatsoever, it must do so clearly as a corporation. Individual Officers or Directors may be subject to personal liability if they act on the corporation’s behalf, but fail to clearly indicate that they are acting in their capacity as the corporation’s Officer or Director. To avoid creditors or others from piercing the corporate veil and attacking individual members of the corporation’s management or Shareholders, it must be clear that the corporation, and not an individual, is acting. Business cards, letterhead, invoices, company checks, brochures, etc … must identify the corporation. The full name of the corporation should be provided (not XYZ, but XYZ, Inc.). All contracts and correspondences signed by Directors or Officers for the corporation should be signed with reference to their corporate designation. If the corporation takes steps to ensure that others know that the corporation, and not an individual Officer or Director is acting, the corporate veil will be more resistant to attack.

Avoid Under-Capitalization

Although most jurisdictions will not allow creditors to pierce the corporate veil solely because the corporation had insufficient assets, the risk of veil piercing provides reason to ensure that the corporation is sufficiently capitalized. California and few other states have relied on under¬capitalization in piercing corporate veils. A corporation should have sufficient resources to meet its short-term obligations whether it is just starting, is part of a cooperative project, or is merely one element in a greater corporate strategy. If the corporation is undercapitalized, a creditor may argue, and a court could accept the argument, that the corporation exists simply to help its owners shelter their assets. As is discussed further below, this may be enough reason for a court to pierce the corporate veil and find personal liability for Officers, Directors, and/or Shareholders.

Maintain the Distinction between Corporate and Personal Assets

A common but fatal mistake for developing corporations occurs when its management and/or Shareholders fail to maintain the distinction between corporate and personal assets. Whether arising from loans from the corporation to individuals, shared bank accounts, shared tax returns, or individual use of corporation property, failure to separate corporate assets from personal assets negates the corporation’s separate identity. To prevent creditors from piercing the corporate veil, the corporation must maintain a separate bank account, file separate tax returns, and use corporate assets only for corporate purposes.

The corporation should not be used as a lender for its Officers, Directors or Shareholders. An air of impropriety is created when a corporation loans money to members of management, even if management genuinely intends to repay the loan. The infamous chain of corporate scandals in spring and summer 2002 highlighted the dangers involved in loaning to management, as such loans were often cited in allegations that a Director or Officer breached their fiduciary duties. The best way for the corporation to avoid potential problems is to refuse to lend money to its Directors and Officers.

Regardless of their personal interest or role in the corporation, nobody should treat the corporation’s property as personal property. By clearly distinguishing between corporate and personal assets, the corporation may indicate and retain its separate identity. By reporting and maintaining the corporate assets separately from management’s or Shareholders’ personal assets, the corporation will reduce the potential for successful lawsuits against Officers, Directors, and individual Shareholders.

Cautiously Distribute Corporate Profits

Whether a corporation distributes its profits through dividends paid to shareholders or compensation paid to employees, the corporation’s distribution of profits may provide a basis for creditors to pierce the corporate veil. The veil that limits the liability of Shareholders, Directors, and Officers also creates limitations on the corporation’s ability to pay such corporate actors from the corporation’s profits. If the corporation fails to obey established rules for the distribution of corporate profits, a creditor may use such failure as an indication that the corporate actors are not treating the corporation as a separate legal entity. To reduce creditors’ ability to pierce the corporate veil, the corporation must exercise caution in distributing its profits.

Every state authorizes a corporation’s Board of Directors to issue dividends to its Shareholders. However, the Directors’ decision to declare dividends may result in substantial fines assessed against the individual Directors if the dividend is found to be illegal. Dividends from surplus cannot exceed limits established by reference to the corporation’s assets. “Nimble” dividends, or dividends paid from profits, may be issued when the corporation’s surplus is insufficient. However, such dividends may only be paid when such payment does not impair the capital representing preferred stock. Directors must determine whether the corporation has sufficient funds legally available to pay dividends to protect themselves from potential liability. To avoid liability arising from the issuance of dividends, corporations should consult with legal counsel before deciding to issue dividends.

Keep a Separate Bank Account

A corporate veil will be pierced in cases where the company founders use a personal bank account for business affairs. You cannot consistently pay business expenses from a personal account and, conversely, you cannot pay personal expenses from a company bank account. Failure to follow these simple guidelines can be catastrophic, so as soon as you incorporate obtain an EIN (Employer Identification Number) from the IRS and use it to open a corporate bank account.

Prepare a Separate Tax Return

Because you have obtained an EIN for your entity you must now file a separate tax return with the IRS. Fear not, this is your chance to take all the deductions you may be entitled to take. But failure to file a separate return can lead to claims that you are not following corporate formalities. So file – and take advantage of the tax benefits you are entitled to in the first place.

Many developing corporations do not have sufficient assets or profits to distribute dividends to Shareholders, but they must compensate Officers, Directors, or other employees for their services. Especially in start-up businesses, the compensation a corporation pays to Officers, Directors, and other employees may determine the corporation’s ability to succeed. Equity compensation (using shares of the corporation’s stock, stock options, or other alternative forms of compensation) may be attractive. Compensation based in part on the corporation’s profits may also be appealing. However, all forms of compensation should be based primarily upon the market value of the employee’s services. The Internal Revenue Service may scrutinize excessive compensation paid to Directors, Officers, or employees and decide to tax excessive compensation as dividends.
Corporations that over-compensate their employees may create liability for the Directors based on Shareholders’ claims of mismanagement, breach of fiduciary duties, self-dealing, or waste of corporate assets. Through a derivative action, the Shareholders may regain control of the corporation and its assets. The corporation may then assert legal claims against former Directors, creating personal liability for such Directors. To avoid potential liability based on employee compensation and excessive tax liability, Directors must ensure that compensation paid by the corporation is reasonable.

All decisions regarding the distribution of a corporation’s profits or compensation for employees is subject to the discretion of the Board of Directors. However, to avoid potential liability for the corporation and for themselves, Directors must carefully consider the effects of every use of the corporation’s assets. Caution and the advice of legal counsel may be necessary to prevent the Board’s distribution decisions from creating unwanted liability.

State Differences

Some states are more likely to pierce the corporate veil than others. As well, in some states veild piercing cases are brought more often. The top five states in order of most cases filed are:

  1. New York,
  2. California,
  3. Texas,
  4. Ohio and
  5. Pennsylvania.

As you would expect, the filings reflect population density. But they also reflect the states in which the strategy may be successful.

On a national basis, nearly 50% of veil piercing cases were successful, which is all the more reason to be cautious when dealing with corporate formalities.

Mom’s Mistake is No Excuse – You Need a Professional Registered Agent

Mom’s Mistake Is No Excuse!

Do you have your registered agent service properly in place?

A recent Ohio case illustrated the significant pitfalls of lax procedures.

Your registered agent’s job is to accept service process, meaning notice of a lawsuit. If you don’t receive that notice the persons suing you can get a default judgment – meaning, since you didn’t respond to the charge in time, they win by default. You’ve just lost a case you had no idea was even brought against you!

The new case is John W. Judge Co. v. USA Freight, L.L.C, 2018-Ohio-2658 (Ohio App., July 6, 2018). The facts are that Judge alleged USA Freight owed them $4,405.05. They served their complaint by certified mail upon the registered agent and service was accepted by the mother of USA Freight’s owner. The mother didn’t speak much English, didn’t know the U.S. legal system and didn’t give the lawsuit papers to anyone.

By not responding to the lawsuit USA Freight had a default judgment entered against them. This is when they first learn of Mom’s mistake. They immediately tried to vacate (set aside) the judgment on the basis of “excusable neglect.”

But the Court concluded that when a company is required by law to maintain a statutory agent for service of process, and when certified mail service is successful at the statutory agent’s address that is on record with the Ohio Secretary of State, then the subsequent mishandling of the served documents by the person who signed for and received the documents at the statutory agent’s listed address did not amount to “excusable neglect.”

A full discussion of the case follows. Know that the lesson here is that you want a professional resident agent service to accept important notices for you. Excuses for not responding – even an excuse involving dear ol’ Mom – will not pass muster in the courts.

The Facts of Judge

Judge filed a complaint against USA Freight for money damages arising from alleged unpaid engineering services in the amount of $4,405.05. Judge requested that the complaint and summons be served upon USA Freight via certified mail at the address of USA Freight’s registered statutory agent, Mukhabbat Vasfieva. The trial court received the certified mail receipt, showing that the complaint and summons had been delivered and signed for by “Mukhabbat Koch” on March 24, 2016. USA Freight failed to file a response to Judge’s complaint; accordingly, Judge moved the trial court to enter a default judgment in its favor. The trial court granted Judge’s motion and entered a default judgment against USA Freight for the amount requested plus interest and costs.

After obtaining a certificate of judgment, Judge obtained a writ of execution ordering the court bailiff to levy on the goods and chattels owned by USA Freight.

Three weeks after the writ of execution was filed, USA Freight filed a Rule 60(B) motion to vacate the default judgment on grounds that it never received the complaint and summons, and was otherwise unaware of who signed for the certified mail service. USA Freight attached a supporting affidavit from Baris Koch, who averred that he was the General Manager of USA Freight and that his father was the owner. Koch also averred that he did not receive notice of Judge’s complaint until the court’s bailiff contacted him regarding the writ of execution. Koch further averred that he spoke with the members and employees of USA Freight to ascertain if anyone affiliated with the company had signed for service of the complaint and that he was unaware of anyone who had. Lastly, Koch averred that USA Freight had meritorious defenses to Judge’s lawsuit, which included a claim that USA Freight had paid Judge in full for its services and that any unpaid amounts were owed by Garrett Day, LLC, and/or Mike Heitz. In addition to the affidavit, USA Freight attached several invoices from Judge and copies of checks that USA Freight made payable to Judge. USA Freight also attached a written description and map of the property on which Judge provided its engineering services, indication that Garrett Day, LLC owned part of the property on which Judge’s services were rendered.

Judge filed a response opposing the motion to vacate on grounds that USA Freight failed to establish the necessary elements for such relief under Rule 60(B). The trial court then held an evidentiary hearing on the motion to vacate. At the hearing, the parties submitted no additional evidence, but simply gave oral arguments.

During that time, USA Freight explained that the certified mail receipt was signed by the mother of USA Freight’s owner. USA Freight explained that the owner’s mother was not part of the company or involved in its day-to-day operations, but that she happened to be present when the complaint was served and did not provide it to any of the members of the family who were involved in the business. USA Freight further explained that the owner’s mother understood and spoke very little English, and had very little knowledge of the legal system. USA Freight therefore claimed it was entitled to relief under Rule 60 (B)(1) for excusable neglect.

At the close of the hearing, the trial court invited the parties to submit post-hearing memoranda in support of their position. After receiving the parties’ memoranda, the trial court issued a decision and entry granting USA Freight’s motion to vacate. In granting the motion, the trial court found “excusable neglect,” noting that USA Freight’s conduct was not willful and that it did not exhibit a disregard for the judicial system. The trial court further found that USA Freight had demonstrated that it had a meritorious defense to Judge’s claim for money damages. Judge appealed from the trial court’s decision granting USA Freight’s motion to vacate.

The Decision in Judge

On appeal, Judge argues that the trial court erred in granting USA Freight’s motion to vacate the default judgment under Rule 60(B), because USA Freight failed to establish that it was entitled to relief under Rule 60(B). More specifically, Judge claimed that USA Freight failed to establish that it did not respond to Judge’s complaint due to excusable neglect.

After reviewing the necessary requirements for USA Freight to obtain relief from a final judgment under Rule 60(B), the Ohio Court of Appeals noted that, because Judge did not dispute the existence of a meritorious defense or that USA Freight filed its motion to vacate within a reasonable time, the only issue before the Court was whether it was an abuse of discretion for the trial court to conclude that USA Freight was entitled to relief under Rule 60(B)(1) on grounds of “excusable neglect.” The Court noted that, in considering whether neglect is excusable under Rule 60(B)(1), a court must consider all the surrounding facts and circumstances. The Court pointed out that the phrase, “excusable neglect” in Rule 60(B)(1) is an elusive concept which has been difficult to define and to apply.

The Court observed that the Ohio Supreme Court had determined that neglect is inexcusable when the movant’s inaction revealed a complete disregard for the judicial system and the right of the appellee. The Court also observed that the Ohio Supreme Court had held that “excusable neglect” in the context of a Rule 60(B)(1) motion generally means the failure to take the proper steps at the proper time, not in consequence of the part’s own carelessness, inattention, or willful disregard of the processes of the court, but in consequence of some unavoidable or unexpected hindrance or accident, or reliance on the care and vigilance of his counsel or no promises made by the adverse party. The Court explained that courts generally find “excusable neglect” in those instances where there are unusual or special circumstances that justify the neglect of a party or the party’s attorney. That said, the Court cautioned that the concept of “excusable neglect” must be construed in keeping with the proposition that Rule 60(B)(1) is a remedial rule to be liberally construed, while bearing in mind that Rule 60(B) constitutes an attempt to strike a proper balance between the conflicting principles that litigation must be brought to an end and justice should be done.

After discussing the conflicting principles that must be borne in mind in ruling upon a Rule 60(B) motion, the Court pointed out that the supporting affidavit signed by USA Freight’s General Manager, Baris Koch, averred that he first learned of Judge’s lawsuit against USA Freight when he trial court’s bailiff notified him that a writ of execution had been filed against the company. The Court noted that the record indicated that the bailiff was ordered to levy execution against USA Freight, and that USA Freight filed its motion to vacate approximately three weeks later. The Court further noted that Koch has averred in his affidavit that he was unaware of any member or employee of USA Freight who had signed for or received service of the complaint; and that, as of the date he signed the affidavit, Koch claimed he did not know who signed for the complaint; and that it was not until the hearing on the motion to vacate that USA Freight explained, through counsel, that service of the complaint and summons was signed for by the mother of the owner of USA Freight. USA Freight explained that the owner’s mother had no role within the company and that she happened to be present when the complaint was delivered by certified mail. USA Freight further explained that the owner’s mother understood and spoke very little English, and that she did not provide the complaint to any of the family member who were involved in USA Freight’s business operations. Although no testimony or affidavits were submitted to verify this information, the trial court found USA Freight’s explanation credible and that it constituted “excusable neglect” under Rule 60(B)(1).

Judge argued that the trial court’s decision was an abuse of discretion because USA Freight failed to provide any evidence establishing that the person who received and signed for the complaint was the non-English speaking mother of USA Freight’s owner. The Court noted that the owner’s mother did not appear at the hearing; that her name was never disclosed on the record; and that USA Freight also never disclosed what the owner’s mother did with the complaint after she received it. In an effort to establish that the person who signed for the complaint was not the owner’s mother, Judge provided the trial court with two prior certified mail receipts with signatures that matched the signature on the receipt at issue. Judge pointed out that one of the prior receipts indicated that the signatory was an “Agent” of USA Freight.

Judge further argued that it was USA Freight’s responsibility to maintain a valid statutory agent who is designated to receive service of process at the agent’s listed address; that it was indeed neglectful for USA Freight to use an address where certified mail could be received and mishandled by a non-English-speaking individual who was not affiliated with USA Freight’s business; and that such conduct did not constitute “excusable neglect.” In support of this claim, Judge cited the following three unpublished decision, providing that insufficient or negligent internal procedures in an organization may not comprise “excusable neglect” and that, therefore, may not support vacation of a default judgment: (1) Middleton v. Luna’s Resturant & Deli, L.L.C., 201-Ohio-4388, 2011 WL 3847184 (Ohio App., Aug. 29, 2011) (unpublished decision); (2) LaKing Trucking, Inc. v. Coastal Tank Lines, Inc., 1984 WL 6241 (Ohio App., Feb. 9, 1984) (unpublished decision) (summons received in a corporate mail room but lost before being brought to the attention of the proper office does not rise to excusable neglect); and (3) Miller v. Sybert, 1975 WL 7351 (July 25. 1985) (unpublished decision)(ordinary mail delivered to defendant when mail is accessible to other persons and where it was never picked up by defendant’s friends while he was out of the state does not constitute “excusable neglect”). The Ohio Court of Appeals noted that the above-cited three unpublished decisions were in accord with the following two decisions: (1) Andrew Bihl Sons, Inc. v. Trembly, 67 Ohio App.3d 664, 667, 588 N.E2d 172 (Ohio App. 1990) (ignoring mail for more than three months due to illness and failing to delegate a competent agent to handle business affairs does not constitute “excusable neglect”); and (2) Meyer v. GMAC mtge., 2007-Ohio-5009, 2007 WL 2773653 (Ohio App., Sept. 25, 2007) (unpublished decision) (employee’s failure to forward the complaint to the appropriate corporate department does not constitute “excusable neglect”).

Finally, Judge argued that the mother’s ignorance of the legal process did not amount to “excusable neglect.”

The Rationale of Judge

Having reviewed the record, the Ohio Court of Appeals found that Judge had presented strong arguments in support of its position that the trial court had abused its discretion in finding “excusable neglect,” especially with regard to USA Freight’s responsibility to maintain a valid statutory agent. The Court cited the Ohio Revised Code for the proposition that “[e]ach limited liability company [such as USA Freight] shall maintain continuously in this state an agent for service of process on the company.” See, R.C. 1705.06(A). The Court pointed out that a limited liability company is required to provide the Ohio Secretary of State with a written appointment of its statutory agent that sets forth the name of the agent and the agent’s address in this state. See, R.C. 1705.06(B)(1)(a), (C); and that the Ohio Secretary of State then kept a record of the statutory agent’s name and address. See, R.C. 1705.06(C). The Court noted that Rule 4.2(g) of the Ohio Rules of Civil Procedure provided that, to serve a limited liability company, a plaintiff may direct service of process to “ the agent authorized by appointment or by law to receive service of process”’ that [c]ertified mail service upon such an agent is effective upon delivery, if evidenced by a signed return receipt”; and that Rule 4.1 (A)(1)(a) provided that “[s]ervice is valid if ‘any person’ at the address signs for the certified mail, whether or not the recipient is the defendant’s agent.”

Applying these principles to the facts and circumstances of Judge, the Ohio Court of Appeals noted that Judge had served its complaint on USA Freight’s statutory agent via certified mail at the address on record with the Ohio Secretary of State and that the certified mail was received at the address of USA Freight’s statutory agent and signed for by the mother of the owner of USA Freight. Under these circumstances, the Court concluded that service of the complaint, because the mother of USA Freight’s owner mishandled the complaint, this type of scenario had not been found to constitute “excusable neglect.”

In support of its conclusion, the Court cited the following decision of the United States District Court for the Northern District of Ohio: Chicago Sweetners, Inc. v. Kantner Group, Inc., 2009 WL 1707927 (N.D. Ohio, June 17, 2009) (unpublished decision) (finding no “excusable neglect” where a defendant company was properly served with a complaint via certified mail to its statutory agent’s address, the certified mail was received and signed for by an administrative assistant of the defendant company, who was also the mother of the defendant company’s president, and the mother thereafter mishandled the complaint so that the defendant company never received the notice of it).

In reaching its decision, the Ohio Court of Appeals agree with Judge, that insufficient or negligent internal procedures in an organization may not compromise excusable neglect and that, therefore, they may not support the vacation of a default judgment,” citing, Middleton, supra, and Denittis v. Aaron Costr., Inc., 2012-Ohio-6213, 2012 WL 6738472 (Ohio App., Dec. 31, 2012) (unpublished decision). In so agreeing, the Court stressed that USA Freight was, by law, responsible for maintaining a valid statutory agent that was calculated to receive service of process at the agent’s listed address; that USA Freight has chosen a statutory agent address where it was possible for a non-English-speaking person who was unaffiliated with the company to receive important documentation that was served at the address; and that, due to USA Freight’s negligence in choosing its statutory agent and/or failure to implement internal procedures to ensure that documentation served at the statutory agent’s address was directed to the appropriate person, the complaint at issue was mishandled by the owner’s mother.

The Court emphasized that “excusable neglect” does not result from the party’s own carelessness, inattention, or willful disregard of the processes of the court, but in consequence of some unavoidable or unexpected hindrance or accident; and that, had USA Freight chosen a better statutory agent, or had better procedures in place for receiving service of process at the statutory agent’s address, then the mishandling of the complaint would likely have been avoided.

Accordingly, the Ohio Court of Appeals concluded that the circumstances in Judge did not constitute an unavoidable or unexpected hindrance or accident. In addition, the Court pointed out that, while abuse of discretion was an extremely high standard of review that required the Court to find the trial court’s “excusable neglect” decision unreasonable, the Court, nevertheless, had reached that conclusion. The Court reiterated that the trial court’s decision was unreasonable, because the mishandling of the complaint was the result of USA Freight’s own negligence, and stated that, a company should be adequately prepared to receive service of process at the statutory agent’s address.

Although the Court recognized that Rule 60(B) motions are to be liberally construed in favor of the movant, the Court, nevertheless, found that USA Freight’s negligence in choosing its statutory agent and its procedures for receiving service of process was in willful disregard of the processes of the Court. Therefore, the Court narrowly held that, when a company is required by law to maintain a statutory agent to receive service of process, and when there is successful service of process via certified mail at the statutory agent’s address that is on record with the Ohio Secretary of State, the subsequent mishandling of served documents by the person who signed for and received the documents at the statutory agent’s listed address does not amount to “excusable neglect.”


The Ohio Court of Appeals decision in Judge should serve as a warning to companies and LLCs to check their statutory agent procedures in order to ensure that documents served at their statutory agent’s address are directed to the appropriate person(s); otherwise, they may by subject to enforceable default judgments against them in lawsuits of which they were entirely unaware.

Don’t let this happen to you!

Can Emails Create a Binding Contract?

Joe exchanged emails with Mary. They were investigating whether Joe wanted a consignment of Mary’s embroidered toilet seat covers for Joe’s hardware store. The email conversation trailed off and Joe went on to other things.

Two days later, to Joe’s surprise, the toilet seat covers arrived.

Instead of emailing, Joe immediately called Mary.

“Why did you send these over?”

Because we have a contract” said Mary.

“No we don’t,” said Joe. “We only have a string of emails

“Which created a contract,” said Mary. “Aren’t you up on the new laws?”

Joe ended his conversation with Mary and called Hank, his attorney. After laying out the scenario, Hank told Joe what was happening in the world of emails.

“To create a contract,” said Hank, “you need to meet four elements. You must have offer, acceptance, mutual obligation or valuable consideration and capacity to contract. While I haven’t read the emails, courts are now saying that you can piece together the strings of an email conversation to find all of those elements.”

“But,” said Joe, “I didn’t sign a contract.”

“You don’t need ink anymore,” said Hank. “There’s a recent Texas case saying that the name or email address in the ‘from’ field satisfies federal law for a signature under the Uniform Electronic Transactions Act.”

Joe was exasperated. “That’s enough to create a contract?”

“In that case it was. Do you put your stylized signature at the end of your emails?”

“Yes. My web guy says it makes the emails look more personal.”

“And more binding. Some cases have looked to that as a binding signature, even for real estate contracts.”

“What do I do?”

Hank laughed. “I’m not going to charge you $5,000 to settle a $1,500 dispute. Just sell the merchandise and never do business with Mary again.”

“But for the future?” asked Joe.

“Today,” said Hank, “talk to your web guy. Tell them to change your name to block letters, so that it looks less similar to a real signature.”

“Anything else?”

“Yes,” said Hank. “Tell them to add this disclaimer to the language at the end of your emails:

The content of any and all communications from this email address shall not be interpreted as an enforceable offer or acceptance and shall not form the basis for a binding contract.

“Okay,” said Joe. “Thanks. Seems like this has become an issue.”

“Exactly,” said Hank. “Especially for my real estate clients. In real estate transactions the Statute of Frauds requires a signature for an enforceable contract. Some courts are holding that a purposely typed email signature now satisfies that requirement.”

“It’s a brave new world.”

Hank agreed. “Everyone needs to be careful.”

The Lesson: Beware of email conversations that create a contract and use disclaimer language to prevent contract formation. When negotiating terms via email, make it clear in the beginning that the email exchange is for discussion purposes only and that all communications are non-binding until the parties fully execute a formal contract.

Beyond including disclaimers, there are a few other things that you should keep in mind when communicating by email. Along with piecing together emails and ruling that emails can constitute a contract, some courts have also deemed certain emails as amendments or waivers to an existing contract. It should be expressly stated in your contracts that emails are not qualified to amend or waive any terms of the contract. Also, be sure to stay away from contractual language in your email conversations. Avoid using words like “agree,” “accept” and/or “offer”.

It may be helpful to remember that a signature is not needed to create a valid contract – there need only be offer, acceptance, consideration and capacity. Although a signature is the most common form of acceptance, that element can be proven in other ways. If all of the four elements can be proven, the lack of a signature alone may not be a sufficient argument of non-acceptance.

On the other hand, emails can be a quicker and more efficient way to create and/or amend contract terms. If you are comfortable doing business in that manner, it is acceptable to do so. The most important thing either way is that you know from the outset how you would like to conduct business and immediately make that clear to all parties involved.

Black Swan Events and Force Majeure Clauses

Force Majeure is a French term meaning superior force. It is also a contract clause that relieves parties from performance when an extraordinary event occurs. Such challenges, known as ‘black swan’ events or generically ‘Acts of God’, may be mitigated by a force majeure clause acknowledging that contracts can’t be fulfilled when issues are outside of everyone’s control.

Did the Coronavirus arise from bat soup in a filthy, fetid wild animal market? Or was it accidentally leaked from China’s national biology lab in Wuhan? It doesn’t really matter. It is a superior force that was not foreseeable. (Although some would argue that with so many novel infectious diseases arising over the last 20 years, epidemics should now be expected).

With that last thought in mind, going forward, you should work with your attorney to include specific force majeure provisions in your contracts. A well drafted clause may excuse performance during events that are beyond the reasonable control of the parties. These can include acts of terrorism, labor shortages and strikes, new government regulations, fire and floods. Events such as epidemics, pandemics, biological outbreaks and wide spread illness should now also be incorporated into force majeure clauses.

What if your current contract does not include such language or the event doesn’t trigger a force majeure clause? Your fall back position is the doctrine of “frustration of purpose.” This doctrine can excuse contractual performance if events have now made it impossible to perform, or the central purpose of the contract has been frustrated due to unforeseeable events. However, Courts do not favor upending contracts under this doctrine. You are better off relying on a well drafted force majeure clause.

It is interesting to note that a Chinese agency is issuing force majeure certificates to local companies unable to perform on their contracts due to the Coronavirus challenge. It would be nice to just wave a certificate and make all the issues go away. But in the United States and other common law countries, force majeure is a question of fact for the Court. Was the event reasonably foreseeable? Were any notice provisions complied with? Does prior case law shed any light on the current situation? These are all facts to be considered. A government certificate won’t work here.

Still, your Chinese counterpart is probably struggling even more than you are. Is litigation even advisable? And if so, could you even collect?

The bigger issue for everyone is to understand the nature and need for force majeure clauses in your contracts. Well, that and the need for alternate sources of supply outside of China.

The End-of-Year Legal Audit You Can’t Afford to Skip

“An ounce of prevention is worth a pound of cure” – Benjamin Franklin

Benjamin Franklin’s famous words were written to advance fire safety. Shortly thereafter, in December of 1736, the Union Fire Company was formed and Philadelphia became the safest city in the colonies.

Then, as now, survival does not allow for rest. The survival of any organization requires being prepared, organized and ready to respond. Set into this milieu comes the rise of the legal audit. As businesses look for ways to reduce their exposure to risk as well as comply with the onslaught of new regulations, an annual review with the company’s attorney and insurance broker is ever more a feature of proper corporate governance.

What is covered in an annual legal audit?

Some of the items will be specific to the company and the industry they are within. For example, the audit for a vegetarian restaurant will be different than that of a veterinarian practice. But the following common key areas should be reviewed by all businesses in an annual audit:

1. Structure

Corporations, LLCs and other business entities should hold annual meetings and memorialize the proceedings in the form of minutes. If you haven’t followed this important corporate formality, corporate cleanup services are available. The minute book containing key corporate documents should be kept up to date. This will be crucial in the event of a surprise IRS audit. It is also good practice for avoiding a piercing of the corporate veil and the imposition of personal lability for corporate debts.

2. Directors/Managers

The corporate directors or LLC managers should be properly listed with the state of formation (and qualification). Failure to stay current could mean that certain company decisions may be voidable. The lines of authority should be respected and maintained as a matter of proper governance.

3. Intellectual Property

An audit can uncover the need for trademark, patent, copyright and/or trade secret protection. Asserting and maintaining intellectual property rights is a key business strategy that can lead to the creation of valuable company assets. An annual review of these issues is not only prudent, but vital to the company’s future.

4. Employment

In the crush of commerce many things can slip by unnoticed. Did you hire a few new people this year? Did they sign employment agreements? Do you have the protections in place involving trade secrets, non-solicitation, non-competition and confidentiality? A legal audit will identify any gaps. If you need any standard legal templates, we offer 135 legal forms and contracts here.

An annual audit can also reveal if all the required postings and workplace paperwork is in order. Have you properly posted the EEO and minimum wage notices? These seemingly benign matters come with penalties for non-compliance.

If you have an employee handbook do any of the policies require revision? Your company attorney may not pursue this important issue. Likely, they are too busy to even ask. It is up to you to handle it.

5. Insurance

An annual insurance review is always recommended. Is your existing insurance adequate for your ever changing business and the market in which you operate? If your business is expanding is your current insurance at the right level to cover your increasing risks?

Since almost every business has some sort of internet presence nowadays you must analyze if you need the newest form of protection – cyber liability insurance. If you accept orders over the web, if you store any customer records electronically, or if you have any interface at all with the internet you must consider cyber liability insurance. With all the hacking and illegal activity associated with electronic records this issue must be discussed in your next insurance review.

The ounce of prevention a legal audit will provide can save many thousands of dollars in legal and other unnecessary costs when an identifiable issue becomes a major problem. Work with your attorney and insurance broker this year and every year to put out the fires before they harm the entire organization.

P.S. Not sure if your company is protecting you as it should? Get an evaluation by an expert. Get a Corporate Cleanup.

10 Rules for Asset Protection Planning

Asset protection planning defends your assets from future creditors, divorce, lawsuits or judgments. How can you best plan to protect your personal and business assets? Here are some guidelines to implement strong asset protection.

  1. Plan Your Asset Protection Strategy BEFORE You’re Sued
    Once a lawsuit has arrived, it’s too late to put protections in place and there is little you can do. Take action before a claim or liability arises. In fact, a strong asset protection structure can discourage lawsuits because the better protected your assets are, the stronger a deterrent it is.
  2. Keep Your Personal and Business Assets Separate
    If you don’t insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business.
  3. It’s Risky to Be A Sole Proprietor
    As an example, if you’re a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you.
  4. A Two-Man Partnership is Double the Risk
    Maybe you have thought about forming two-man partnership with your friend. This may perhaps be an even worse idea than operating as a sole proprietorship. What this means is that you are as liable for your friend’s errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner’s signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag.
  5. Use a Registered Corporate Entity for Asset Protection
    To protect yourself, use a registered corporate entity. Most people don’t realize there’s a risk in keeping assets and property in your name, which also means keeping the liability and the risk. To succeed in business, to protect your assets and to limit your liability, you want to select from one of the good entities / structures that are truly separate legal beings. They are:
    • C Corporations
    • S Corporations
    • Limited Liability Companies (LLCs)
    • Limited Partnerships (LPs)

    Each one has it’s own advantages and specific uses. Each one is utilized by the rich and knowledgeable in their business and personal financial affairs. And, depending on your state’s fees, each one can be formed for $800 or less so that you can achieve the same benefits and protections that sophisticated business people have enjoyed for centuries.

  6. Meet Annual Requirements so That Legal Protection Remains Intact
    You’ll need to keep your company’s registration up-to-date, hold annual meetings and keep annual minutes, keep business funds separate from your own, and avoid signing any business-related documentation in your name. This is known as maintaining the corporate veil and we provide this service to many of our clients. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business.
  7. Protect Your Business Assets in a Business Entity
    You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. (Learn how to become incorporated now.) For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business’s assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though.
  8. Ensure You Have a Comprehensive Commercial Insurance Policy
    A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for?
    • The liability insurance should cover injuries to third parties on your property.
    • It should cover trespassing, especially if you have undeveloped or vacant land.
    • If you have people working on your property as your employees, you should also have Worker’s Compensation insurance.
    • The insurance should also have “increased cost of construction” additions if your building should become damaged or require reconstruction. That means you’ll be covered at today’s construction prices instead of those of previous years.
    • If you are a landlord, “loss of rents” riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it’s being rebuilt to offset right losses.
    • A final consideration is a “higher limits” rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories.
  9. Use Entities as a Second Line of Defense
    It is extremely important to carry adequate and proper insurance coverage, but as we know, insurance companies have an economic incentive to avoid covering all claims. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims.
  10. Avoid Incorporation Scams
    You need to know that there are a number of other corporate information scams in the marketplace. A popular one is the $99 incorporation. For just $99, they claim you will be bulletproofed and asset-protected. “C’mon down. We’ll set you right up”, they say.

    We have tested such services to see how they could possibly do all the work necessary to completely and properly form and document a corporation or LLC for just $99. These providers fall into two camps.

    1. The first camp does the minimal work needed to form an entity. They file the articles. That’s it. Once you pay the $99 they will no longer take your phone calls or questions. Eventually you will be sent a document with a state seal on it indicating that you are incorporated. But you will not be sent the minutes, the bylaws, or any issued stock – all of the other components necessary to be a complete corporation. Of course, if you hadn’t read this article, you would probably think in your blissful ignorance that for just $99 you were protected. You are not.
    2. The second camp uses the $99 as a come-on. They offer an a la carte menu in which the $99 is just for the filing of the articles. The bylaws are another $350. The meeting minutes are $250, and so on. By the time you are done they have gained your confidence and that $99 has ballooned up to $2,000 to $3,000 for just one entity.

Are Individuals Protected Within Their LLC?

New Texas Case Sends Shock Waves

LLCs are set up to make personal assets inaccessible for any obligations of the entity. Protection may be lost, however, if you are not aware of your personal conduct when managing business through your LLC. The case below deals with water and environmental issues, an area where governments like to hold individuals liable.

In State v. Morello, the Texas Supreme Court recently found that an agent or a member of an LLC can be found personally liable for any violation of statutes or regulations.

In Morello, the State of Texas brought a civil action under the Texas Water Code against both Bernard Morello and his single member entity, White Lion Holdings, LLC (White Lion).

In 2004, Morello purchased a piece of property that was subject to a hazardous waste permit and compliance plan under the Texas Commission of Environmental Quality (TCEQ). After the purchase, Morello assigned the TCEQ compliance plan and all other property interests from his own name into White Lion.

In hindsight, Morello should have first taken title in the LLC, as he would have removed his individual name from the chain of title. Once your name is associated with the title to environmental problems, you can be held personally responsible for the remediation and cleanup.

Over time, the obligations were not performed, and the state decided to press charges against both White Lion and Morello for violating the TCEQ compliance plan.

The state’s argument for targeting Morello as an individual rested on section 7.102 of the Texas Water Code stating that any “person who codifies, suffers, allows, or permits a violation of a statute…within the [TCEQ’s] jurisdiction…shall be assessed” civil penalties.

Morello’s argument depended on a section of the Texas Business Organizations Code which states that, “a member…is not liable for a debt, obligation, or liability of a limited liability company.”

Morello eventually worked its way up to the Texas Supreme Court. The high court ultimately ruled in favor of the State, writing that “the State’s position is not based on the Business Organizations Code; it is based on the Water Code.” The Texas Supreme Court also found Morello personally liable on three primary arguments.

First, the Court found no reason whatsoever to exclude an individual from the term “person” from section 7.102. Second, the Court found that White Lion being the sole owner and being solely responsible for the compliance plan was immaterial. Third, the Court cited cases stating that a corporate agent may not escape individual liability where that agent “personally participated in the wrongful conduct,” citing that Morello’s actions were in his capacity as an agent and member of White Lion.

The Court’s opinion stated that where a statute applies to any “person,” an “individual cannot use the corporate form as a shield when he or she has personally participated in conduct that violates the statute.”

Haven’t We Seen This Before?

Federal and state courts have consistently rejected the position that where an environmental statute applies to a “person,” corporate officers can avoid individual liability for violating a statute if they personally participated in the wrongful conduct:

Riverside Mkt. Dev. Corp. v. Int’l Bldg. Prods., Inc., 931 F.2d 327, 330 (5th Cor. 1991) (concluding that the federal act “prevents individuals from hiding behind the corporate shield” when they “actually participate in the wrongful conduct”)
U.S. v. Ne. Pharm. & Chem. Co., 810 F.2d 726, 745 (8th Cir. 1986), cert. denied, 484 U.S. 848 (1987) (“[I]mposing liability upon only the corporation, but not those corporate officers and employees who actually make corporate decisions, would be inconsistent with Congress’ intent to impose liability upon the persons who are involved in the handling and disposal of hazardous substances.”)
T.V. Spano Bldg. Corp. v. Dep’t pf Natural Res. & Envtl. Control, 628 A.2d 53,61 (Del. 1993) (concluding that the State could impose personal liability on an officer who “directed, ordered, ratified, approved, or consented to the improper disposal”)
People ex. Rel. Burris v. C.J.R. Processing, Inc., 647 N.E.2d 1035, 1039 (Ill. App. Ct. 1995) (“[C]orporate officers may be held liable for violations of the [state environmental act] when their active participation or personal involvement is shown.”).

While these cases involved different statutes than the one at issue here, it is important to know that under an environmental regulation applicable to a ‘person,’ an individual cannot use the corporate form as a shield when he or she has personally participated in conduct that violates the statute.

And Morello was not held liable for a debt, obligation, or liability of White Lion as he asserts is prohibited by the Business Organizations Code. See Tex. Bus. Orgs. Code § 101.114. Rather, he was held individually liable based on his individual, personal actions.

The Morello case is groundbreaking and could have a ripple effect across Courts in the United States. It is important for people to be aware of their behavior when acting as a member or an agent of an LLC, even before the entity is formed. This recent Texas case demonstrates that in certain specific circumstances individual persons may be found personally liable for any wrongdoing.

Ted Sutton is a graduate of the University of Utah. He will be attending Law School at the University of Wyoming in the Fall of 2019.

Ultimate Guide to Vetting a Business Partner

By Gerri Detweiler

After surviving several tumultuous business partnerships, Susan Nilon has learned to be more skeptical and cautious. In the past, she admits she was so excited about business possibilities that she “didn’t pay attention to red flags.”

She and her current business partner in a legal research firm, De Novo Law Services, not only have a formal partnership agreement, they’ve taken it one step further. She created an addendum to the agreement “writing out 10 steps on how to survive our partnership,” she says. This document spells out the things that are not normally called out in a contract, like how to handle disputes and what to do when the other partner is not pulling their weight.

Business partnerships can bring together individuals whose complementary skills and experience can help the venture succeed. And sometimes a partner can contribute valuable resources — including money — to help fund the business. But these arrangements can also result in headaches or heartache.

Here are nine ways to vet a potential business partner and (hopefully) avoid those headaches:

Do Your Own Recon

Spend some time researching your prospective partner online. Review their social media accounts. Do their tweets or Facebook posts jive with the person you think you’ll be working with? Do you want to be professionally associated with them? Be sure to go back a while in their timeline: there may be older information they forgot about that provides valuable insight into their thinking and character. And don’t overlook a social media platform just because you don’t use it yourself.

Similarly, when you conduct your online search into their background, don’t stick to one search engine. Dig a little deeper. “Different articles will be highlighted on different search engines,” says Nilon.

Have ‘The Talk’

“What do you really want out of this relationship?” It’s that awkward question that often comes up when dating. That question, along with “What do you really want out of this business?” can be just as awkward. But it’s essential you have that conversation.

It’s “truly like a marriage,” Nilon points out. Avoiding these difficult conversations can have long-term consequences. She compares it to a relationship where “you don’t talk about wanting children before you get married. If you find out your partner doesn’t want kids and you do, the relationship might not survive.” She adds: “Knowing how you see the future and communicating that to the other is a key step to avoiding disappointments.”

With more than twenty years of experience in human resources, Ben Martinez knows as well as anyone how crucial it is to find the right people to work with. But even he learned the hard way how challenging that can be. He runs two very different businesses — STS Talent (an HR and recruiting firm for high tech businesses) and Sumato Coffee Company.

When he founded Sumato Coffee, he brought in a business partner he had worked with in the past. She was smart and capable, but he discovered she was in a different phase of her life than he. It was soon apparent that she wanted to devote more time to building her corporate career. “We had to part ways,” he says. In hindsight, he wishes he had asked more questions about what she wanted out of the business and her life.

Another partner he brought in later loved the product but he discovered she wasn’t as excited about all the work that goes into building a business. “She was mainly in it for the money,” he observed. “She was passionate about coffee and ecommerce but the work ethic wasn’t there.” He parted ways with her, too.

Have a Money Talk

Figure out how to handle money up front. What do each of you bring the the table and how do you value that? How much do each of you get paid, and how long can each of you go without receiving a steady paycheck?

“In an LLC you can provide profits based not on the percentage of ownership but on the amount of time spent in the business,” explains Sutton. “And even with an S corp you could have a salary or bonus based on the amount of hours put in. The person that doesn’t contribute wouldn’t receive as much compensation. Then buy sell agreement could allow a partner to buy back the shares at low value” if one partner wants to get out.

Check Credit

You can check business credit on any business, so if your future partner is an entrepreneur, consider at least running a commercial credit check on their businesses. (This guide explains how to check business credit on another business.)

While there are dozens of places you can check your own credit for free, it’s not as easy to check someone else’s personal credit, and you’ll first need to get permission from your future business partner. In fact, unless your run a business that already obtains credit reports on job applicants, they will likely have to get their own report and share it with you.

Run a Background Check

Your local courthouse can be a source of information about lawsuits or other public record information. However, keep in mind this information will be limited to actions taken in that jurisdiction. And it may even be inaccurate. It’s not unusual for people with similar names to be mistaken for one another for example. (Millions of court judgments have been removed from credit reports recently because they couldn’t be thoroughly matched to the right person.) “Courts do not conduct criminal background checks,” warns the National Center for State Courts on its website.

For those reasons, purchasing a full background check that you both agree to review together may be a better bet. A background check that includes credit, criminal proceedings and other details will likely require the permission of the person on whom you request the report so be upfront with your request.

Every business owner interviewed for this article agreed that background checks can be useful. “Certain crimes could prevent you from raising money or obtaining government licenses,” points out Caton Hanson, cofounder and chief legal officer of Nav. And “IRS or states taxing authority problems could get you entangled with their problems,” he warns.

If you’re serious about the business and willing to spend the money, you may even want to hire a private investigator who can dig up more than you can likely find out on your own.

Do a Compatibility Check

Even if your partner is squeaky clean that doesn’t mean the two of you will work well together. Different personal and working styles can quickly drive a wedge in the relationship.

One big wedge driver: a partner who feels entitled because they came up with the idea for the business. “People put too much value on whose idea it was,” says Hanson. “Ideas are a dime a dozen. There are two things that matter: money and work. You can’t have a successful business without them.”

Hanson’s business partner Levi King and he have developed something they call the “St. George test.” It basically means asking themselves to imagine a 3-4 hour drive from Salt Lake City, where Nav’s primary office is based, to St. George, Utah with that person. “Could you do it and not go crazy?” Hanson laughs. “You need to really like your business partner.”

You can also use more formal assessments such as personality or work style tests. Consider springing to get them professionally administered and reviewed by an HR professional or someone trained to analyze and help interpret the results.

Hanson says King had him take a sales aptitude test and a personality quiz to “make sure we didn’t clash.” Martinez says these types of tools can be helpful to raise awareness of your partner’s styles or to find complementary work styles but it’s important to “get clear on what you are using it for.”

Try a Practice Run

If one of you has an existing business, consider hiring the other person for a project or limited period of time to see whether you work well together. It’s not foolproof, though, as Martinez learned. It’s probably more like dating than marriage — with both partners trying to make a good impression — but you will be able to get a better sense of how you might work together.

That’s what Hanson and King did. King hired him to work for him in a different company before they founded Nav together. “The work we did was almost like working together like business partners,” Hanson says. It gave them confidence that they could indeed succeed as partners.

Get it in Writing

If you’ve decided to proceed with a partnership, spring for a formal partnership agreement written by an attorney. Hanson shared the story of a business he knows that won an award that earned them a lot of attention, and eventually they were able to raise venture capital. The partners had no written partnership agreement, however.

“One of the partners was sitting at home playing video games,” he says. But because he owned shares in the company, the partners had to buy him out.

Even though you may still be in the starry-eyed stage, think through some worse case scenarios.

What happens if the partner dies, becomes incapacitated or needs to get a full-time job to support themselves or their family, for example. “You can create a buy sell agreement that says if one person abandons the projects they lose all their shares,” explains Sutton. “If they commit fraud they are out of the business. If they get divorced, only the person you entered the deal with can be an owner — the spouse can’t be granted those shares. A good attorney can prepare a buy sell agreement that can cover all these contingencies,” he advises.

About the Author — Gerri Detweiler serves as Head of Market Education for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs. She develops educational programs and content for small business owners, and works on advocacy initiatives. A prolific writer, her articles have been featured on popular websites such as Yahoo!, MSN Money,,,, Forbes, The Today Show website and many others.

Sales Taxes are a Big Issue in 2019

Businesses With E-Commerce, We’re Talking To You

What You Should Know About Internet Sales and the South Dakota v. Wayfair, Inc. Case

Sales tax policy has changed dramatically within the past year, thanks to the Supreme Court ruling of South Dakota v. Wayfair, Inc.  The Court overruled a ‘physical presence’ rule that prevented states from taxing remote sales, such as internet purchases. The standard now is ‘economic nexus’, or how much is sold into a state whether there is a physical presence (i.e. stores or employees) or not. Given the rapid increase of e-commerce within the past decade, this ruling will have a monumental impact on state sales tax revenue in the near future.  It will also require all online sellers to collect and remit sales taxes to states across the country.

In December of 2017, the U.S. Government Accountability Office (GAO) released a report which estimated that only 14%-33% of online marketplace transactions are subject to sales tax. Under the Wayfair ruling, states should see a large increase in their sales tax revenue once states start taxing online purchases.

The Wayfair ruling has resulted in a snowball effect, where state legislatures have acted quickly to implement remote sales taxation. In 2017, only nine states had remote taxation laws. By the end of 2019, that number will swell to 31 states. By 2020, there is a possibility that all 50 states will have remote taxation laws.

If you sell anything over the internet this new standard affects you and your business.  It is important to note that each state will allow exemptions to smaller out-of-state sellers, with most states exempting remote sellers with fewer than $100,000 in sales or fewer than 200 transactions in the previous calendar year.  But some states hold that once you cross their threshold you must start collecting their sales tax the very next day.

Given how technology has grown rapidly and sales tax collection has not, the Wayfair case will be a benchmark as it will inevitably bridge the gap between the two.

In other related developments, Ohio now allows taxpayers to pay any taxes with bitcoin, with other states considering cryptocurrency payment options. Chicago now taxes streaming services such as Netflix and Hulu. Iowa is beginning to tax digital products, such as digital audio, digital books, and pay television. Iowa also taxes personal transportation services such as Lyft and Uber.

As tax policy is ever changing, we will keep you updated on future developments.