Stock Basics

Stock 101

Business owners and potential purchasers of businesses tend to have a number of questions about corporate stock and how it works. This post is a basic 101 tutorial, which answers some common questions about stock in a corporation and how it works.

What is stock?

A corporation’s capital stock represents ownership of the company and usually governance rights, although a corporation can issue stock that is non-voting.

A share of stock represents a percentage of ownership of the corporation. How much? It depends on how much stock is outstanding. To determine the percent ownership a shareholder has, divide the total number of shares the shareholder owns by the number of issued and outstanding shares. If, for example, a shareholder has five shares and there are 100 shares of issued and outstanding shares, the shareholder owns five percent of the company. Continue Reading

Which Flavor is Your LLC?

types of LLCs

Limited liability companies come in two flavors. What’s the difference between them? It’s who is authorized to make the company’s decisions. In member-managed companies the members have this authority; in manager-managed companies the managers have it. It’s important to know which type of LLC your company is so that important decisions will be authorized by the correct people and that contracts will be signed by the people who actually have authority.

This distinction is so important that it’s one of the few pieces of information that are required to be included in every LLC’s articles of organization. But it’s often overlooked — or misunderstood — by business owners.

First of all, what are “members” and what are “managers”? Members are an LLC’s owners. I see a lot of contracts signed by the “owner,” but this is an incorrect description of the “owner’s” true role. LLCs don’t have owners — technically speaking — although we often use the term colloquially. In fact, the word “owner” didn’t appear in the Missouri Limited Liability Company Act until it was amended in 2013 to provide for series LLCs. Now the word occurs a single time and is used colloquially and not in a technical sense.

The people who own an LLC’s equity are its members. Members are roughly analogous to the shareholders of a corporation. In a member-managed LLC, the members are what the Limited Liability Company Act refers to as the “authorized persons” who have authority to make all the company’s decisions and sign the company’s legal documents. So if you check the “member-managed” box in your company’s articles of organization when you’re creating the company, the company’s members have authority to make decisions and bind the company.

If an LLC is manager-managed, the “authorized persons” who have authority to make decisions for the company and sign its legal documents are its managers. Unless they are specifically authorized under the company’s operating agreement or in some other way, the LLC’s members don’t have this authority. So if your LLC is manager-managed, its manager or managers will make important decisions, and they are the appropriate people to sign the company’s contracts.

The term “manager” sounds like the person’s status is less of a big deal than it actually is. Right now, for example, I’m sitting in a St. Louis Bread Company restaurant (known as Panera Bread to the world outside of St. Louis). When I think of a company’s “manager,” I think of the shift manager who’s behind the counter making sure everything runs smoothly through the morning rush. But in fact, an LLC’s managers are more similar to the company’s board of directors and c-suite officers combined. They have a lot of authority.

Why is this important? For one thing, when a company is manager-managed, its members don’t have authority to bind the company unless they are specifically given authority. In fact, the Missouri Limited Liability Company Act says of manager-managed LLCs, “No member, acting solely in his capacity as a member, is an agent of the limited liability company.” So if your company is a manager-managed LLC, you don’t have the authority to sign a contract on behalf of the company as its “member.” If you do so, that could call into question whether the contract is actually binding. If you are in fact the company’s manager, you should sign the contract as “manager,” not as “member” or “owner” or “founder.” See my post How to Sign a Contract for more detail and example signature blocks.

So, to sum up, LLC’s come in two flavors. Whether your company is member-managed or manager-managed determines who can make the company’s important decisions and sign its legal documents. It’s prudent to make sure the appropriate people make decisions and sign documents for your company.

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Certificate of Tax Clearance vs. Certificate of No Tax Due

Tax Clearance

In Tax Clearance Basics I discuss the importance of obtaining a tax clearance certificate when buying a business. I also provide instructions on how to obtain such a certificate in Missouri.

In short, when you buy a business, state taxing authorities can assess the seller’s unpaid state taxes against you. This is true even if your purchase agreement states that the seller is responsible for paying the taxes.

The good news is that many states have a process through which buyers can protect themselves. This is called tax clearance.

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Trademarks and Naming Your Company

Naming a Business

What you name your company is an important decision, and it can have consequences far into the future. I have discussions with entrepreneurs all the time about how trademark law affects their companies’ names. In this post I’ve collected some of the information entrepreneurs need to consider when they are deciding on what to name their companies.

Legal Names

When you organize your LLC or incorporate, you file articles of organization or incorporation with the secretary of state under a particular name. This name appears on the face of the certificate of organization or incorporation, and it’s your company’s legal name.

In each state only one company can have a particular legal name. So if a company of that name (or one very similar) already exists in the state of your choice, you can’t organize under that name. But that doesn’t mean that you can’t operate your business under that name. That’s where fictitious names come in.
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An Open Memo about Confidentiality

Confidentiality

There are a few things that I want my clients to know about confidentiality when they deal with my law firm. This post is an open memo collecting those thoughts in one place.

First, your attorney has an ethical obligation to keep your information confidential. That’s why I don’t sign many nondisclosure agreements. It’s not so much that I don’t want to be on the hook contractually for safeguarding information that is disclosed to me. Rather, my license to practice law–my very livelihood–is on the line. Most people feel like that is enough protection.

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Getting Paid

Getting Paid

I recently made a short presentation at Experts 4 Entrepreneurs about making sure customers pay what they owe. I had a lot of fun with it and thought it might be worthwhile to share here. I’ve embedded the PowerPoint slides below, but slides to my presentations often don’t tell the whole story, so here’s a little detail.

The presentation starts with an illustration about my not-so-pleasant experiences donating blood. (Apparently, my body needs all its blood.) How is that relevant to making sure you get paid? Because cash is a business’s life-blood. When customers don’t pay their invoices, they starve a business of a critical resource that it needs to stay healthy.

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Why I don’t Use Automatic Email Disclaimers

email disclaimer

It’s standard fare for law firm emails to have lengthy disclaimers at the end. It’s also standard for the disclaimers to be automatically inserted by the firm’s email system. And the disclaimers are inserted into ALL emails, whether or not they’re meaningful given the context of individual emails.

When I started Blue Maven Law a couple of years ago, I decided not to have disclaimers inserted automatically into my emails. Here’s why.

Automatic email disclaimers don’t really do anything

The main reason I don’t use automatic email disclaimers is that they’re ineffective. Most law firm disclaimers have one or more of these components: (1) a notice that the email is confidential; (2) a request for help with misdirected emails; (3) a warning that email isn’t a secure method of communication; and (4) a notice required by IRS Circular 230 that disclaims tax advice.

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Blog Review: Startup Law Blog

blog and book reviews

Blogging has been one of the most satisfying endeavors I’ve undertaken business-wise since leaving a corporate firm in 2010 to help build a business law practice at an insurance defense firm. Seeing how valuable the corporate firm brand had been for business development — a benefit I no longer enjoyed — I decided that blogging would be a good way to enhance my reputation as someone who knew what he was talking about. I wanted to focus my business development efforts on providing contract review and negotiation services to corporations, so I blogged as theContractsGuy.

One of the wonderful side effects of blogging that I didn’t foresee was making friends in the blogosphere. One fellow blogger I met while on a business trip to Seattle a couple of years ago was Joe Wallin, who blogged for a number of years at the Startup Law Blog (Joe has since left the firm that hosts the blog and he now blogs at thestartuplawblog.com). I met a few other awesome fellow bloggers on that trip and wrote about it in Making Friends Through Blogging.

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How to Make Your Noncompete Unenforceable

noncompetition agreement

I’ve had a number of clients over the years comment that noncompetition agreements aren’t enforceable. As a blanket statement, that’s simply not true, although some states — most notably California — severely restrict them.

It is true that courts aren’t big fans of restrictive covenants. And it’s not unusual for a court to refuse to enforce a noncompetition agreement. However, it’s often the case the problem lies in the noncompetition agreement itself when considered in the context of applicable law.

A case in point is the noncompetition agreement at issue in NanoMech v. Suresh, an 8th Circuit case which was filed last month. In that case, NanoMech tried to enforce a noncompetition agreement against a former employee who went to work for a competitor. Applying Arkansas law, the federal district court refused to enforce the noncompetition agreement, and the 8th Circuit affirmed the decision.

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Meet the Team — Bill Ellis

Bill Ellis - Branding Expert

It takes a team to build a quality business. Partly because no single person has all the expertise that’s required. And partly because no one has the time to do everything that needs to be done.

According to Michael Gerber in The E-Myth Revisited, most businesses are started by technicians, not business people. Technicians are people who make stuff or provide services. For example, someone works at a company baking pies and decides to open a bakery. That person might be a great baker, but he or she might not have what it takes to build a good business.

In my case, I’ve spent a career helping people with their business deals — buying or selling businesses, negotiating contracts with key suppliers, setting up new businesses. All these are the work of technicians. For over a decade, I’ve spent my days involved in business as a trusted advisor helping my clients make informed business decisions, but I haven’t been responsible for developing and executing a business strategy.

When I decided to pursue the business idea that has become Blue Maven Law, I knew I needed help. The first person I called was Bill Ellis. It was a great move.

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