Hidden Dangers of Representing Multi-Owner Businesses: Legal Pitfalls Accountants Must Avoid

1. Hidden Dangers of Representing Multi-Owner Businesses:Legal Pitfalls Accountants Must Avoid Presented by:David C. Roberts, Esq. Edward Kurowicki, MBA, CPA/CFF, CVA

2. Long Range Planning • New companies • Existing companies

3. Corp. vs. LLC vs. Partnership • Unintended consequences

4. Corporations • N.J.S.A. 14A:12-7 – Rights of minorities • “acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders” • Can’t be waived

5. LLC’s and Partnerships • No equivalent • Depends ENTIRELY on how creation documents are worded • LLC’s are creatures of contract • Accountant’s involvement in creation documents = BLAME when an issue arises • Tax status not determinative of legal status

6. Balance Between Helpful Business Advice and Subjecting Yourself to Liability • Disclaim in retainer agreement • Highlights issue spotting capabilities

7. Buy-Sell Aspects • Formula used is important, but so is the issue of whether valuation should even be addressed • Majority may want to know he can prevent minority withdrawal

8. Standards of Value • Fair market value vs. fair value

9. Shareholder perks Reasonable compensation Employment agreements Trade Secrets Unrecorded time Corporate governance issues Prior transfers of interests Rate of return – “Buying a job” Expectations Ignoring a provision in shareholders agreement that says to value every year Common Valuation Problems

10. Salary Normalization Issues • Can create liability • Affects damages • Affects value

11. Importance of Compliance Issues to Avoid Piercing the Corporate Veil • Informality of closely held companies can be a trap • Who really is the client? • Communication with minority owners should be permitted up front, and carried out

12. Importance of Compliance Issues to Avoid Piercing the Corporate Veil • Potential liability for the accountant? • N.J.S.A. 2A:53A-25 • Accountant must have knowledge of a non-client’s reliance • Reliance must be communicated back and forth • Pitfall – does NOT have to be in writing • Your word vs. minority shareholder’s • Conspiracy liability

13. Shareholder Oppression in More Depth • Lack of dividend • Paying personal expenses • Overcompensation • Lack of information • Termination of employment • Fictitious vendors/employees What if the accountant is aware of this?

14. The Case of the Company Where No One Takes a Salary – Only Distributions • Fine as long as everyone is working • What happens if someone leaves?

15. Remedies Available for Oppression • Buy-out – either way • Dissolution • Damages • Attorneys fees?

16. What Do You Do When You See the “Red Flags”? • Books have suddenly become “secret” – unavailable • Appears money is unaccounted for • Lifestyle changes • Family members suddenly on the payroll

17. Summary • Distinguish yourself by knowing these issues • Stick to issue spotting, rather than giving legal advice • Expand your retainer agreement to point out what you are NOT doing • Explain up front who the client is, and don't be lax about it • Get written permission to keep everyone informed, and then do it

18. Visit David Robert’s BlogShareholder Dispute NJat www.shareholderdisputenj.com

19. Question & Answer Session Thank you for coming!