THE DAVIS BROWN LAW FIRM ISSUES OF ......THE DAVIS BROWN LAW FIRM BEST BUSINESS MODELS WEDNESDAY, APRIL 8, 2009 HOTEL FORT DES MOINES ISSUES OF IMPORTANCE FOR BUSINESSES IN 2009 #1668528

THE DAVIS BROWN LAW FIRM

BEST BUSINESS MODELS

WEDNESDAY, APRIL 8, 2009

HOTEL FORT DES MOINES

ISSUES OF IMPORTANCE FOR BUSINESSES IN 2009

#1668528

#1674822 ©2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C.

EXECUTIVE SUMMARY:

KEY TOPICS OF DISCUSSION FROM

THE BEST BUSINESS MODELS SEMINAR

APRIL 7, 2009

CHOICE OF ENTITY AND COMPANY FORMATION Recent trends have shown that Limited Liability Companies (LLC) have grown in popularity and are surpassing common C Corporations and S Corporations in numbers. LLCs have a great flexibility in their organizational structure and the ability to select whether it is taxed as a partnership, corporation, or in instances of a single member LLC, a disregarded flow-through entity. Frank Carroll's guide to entity choice made excellent comparison of the different entity structures to each other. When electing to be taxed as an S Corporation, LLCs should be aware of the many qualifications of an S Corporation and how their LLCs structure may or may not disqualify them from S Status. In setting up a Limited Liability Company, the checklist provided by Jason Stone provided an opportunity to address many of the future issues and roadblock ahead of time and draft and Operating Agreement accordingly. Some of the issues that may arise between members include: Capital contributions, loyalty provisions, management rights, profit distributions, dispute resolution, exit strategies, future capital calls and setting parameters in case of a 50/50 tiebreak. BJ Miller outlined the different liability issues that new companies, particularly LLCs, face and how to avoid making individual members, partners and shareholders personally liable for a company's actions. Kelly Deters and Kent Herink provided quick how-to guide's for getting new businesses properly registered with the necessary government entities and avoiding trademark and trade name issues. BEST PRACTICES FOR OPERATING YOUR BUSINESS

Our attorneys provided a number of checklists for companies to review and get going on the right path to avoid the common pitfalls of failing business:

• Julie Johnson McLean and Beverly Evans - guides to obtaining financing, both privately and through public offering.

• Scott Mikkelsen - a list of the SBA qualified lenders for our clients. • Jason Ross - quick guide to the different types of insurance a company might need,

when a company may need the insurance, and what to look for in an insurance provider.

• Jason Ross - tips on standardizes contracts and forms to avoid problems and future litigation.

• Scott Mikkelsen - checklist for holding Annual Meeting or consent minutes in lieu of a meeting.

• Julie Johnson McLean - list of several considerations Companies should be aware of as both debtors and creditors to avoid problems in bankruptcy proceedings.

We listed some of the key opportunities for businesses to be aware of in the Federal Economic Stimulus Plan. Many of the regulations and qualifications for the programs have not yet been released. We have provided a number of websites to follow the information. Please also be alert to any emails from Davis Brown Law regarding the Stimulus bill as our attorneys become aware of specific opportunities for our clients.

BUSINESS SUCCESSION ISSUES As noted in Business Entities, the structure of an organization can change over time and Companies should adapt to the individual issues they face. Companies should address their issues with management succession, gifting and estate planning with their advisors as soon as possible. In addition to a Company's counsel, business owners should consult with their accountants, financial planners, estate lawyer, and family members in setting a long-term plan in place. Each set of advisors will have a different knowledge on the law, estate taxes, corporate and capital gains taxes and the personal relationships necessary to carry out the plan. It is much easier to plan ahead of time than to make one's wishes a reality than to attempt to handle them upon one's death. Many succession plans and ownership transitions are best handled over time and addressed on a periodic or annual basis.

©2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C.

insert

number

tab

here

CHOICE OF ENTITY AND FORMATION

FRANK CARROLL, JASON STONE, KENT HERINK,

B.J. MILLER, AND KELLY DETERS

1:15 p.m. to 2:15 p.m.

• Choice of Entity Limited liability issues Intellectual property matters, including names, trade names, trade secrets • Checklists to use when forming your company • Composition of Board of Directors, Managers and Managing Partners • Business licenses and permits • Authority of Board of Directors, Managers and Managing Partners

ATTORNEY BIO

FRANK J. CARROLL

CONCENTRATION

Frank is a senior shareholder in the Davis Brown Law Firm Business Division. He has a general practice in but not limited to Business Organizations and Transactions, Mergers & Acquisitions, and Tax.

PROFESSIONAL RECOGNITIONS

• AV rated by Martindale-Hubbell. An AV® certification mark is a significant rating accomplishment - a testament to the fact that a lawyer's peers rank him or her at the highest level of professional excellence. A lawyer must be admitted to the bar for 10 years or more to receive an AV® rating. • Chambers USA, Corporate/M&A Band 1 • Super Lawyers, Business/Corporate • Best Lawyers in America® Corporate Law, Mergers & Acquisitions Law, Tax Law

SUMMARY

Frank’s broad corporate experience includes negotiating acquisitions, joint venture relationships and investments made by venture capital firms. He drafts, reviews and analyzes contracts for businesses in various industries and of various sizes. His practice also includes planning tax consequences for taxable and tax-free acquisitions and other numerous and varied business transactions.

REPRESENTATIVE ENGAGMENTS

His clients include Life Care Services and Newton Manufacturing. “Personable, reliable, knowledgeable and commendable in communicating with the layperson,” he recently represented Heidi Cessford Krabbe in the sale of Cessford Construction, as well as dealing with other asset sales and takeovers. MEMBERSHIPS

• Member of the American Bar Association in the Business Law and Taxation Sections • Iowa State Bar Association, Vice President • Iowa State Bar Association, Board of Governors • Past chair the Iowa State Bar Association Business Law Section and the Corporate Counsel Section •He was highly involved in the Limited Liability Company Committee in 1993 wherein the Iowa Limited Liability Company Act was drafted. • For Profit Corporation Committee which reviewed amendments to the Iowa Business Corporation Act (2001-2002)

BORN ALBUQUERQUE, NEW MEXICO, 1947

EDUCATION ST. LOUIS UNIVERSITY (B.S., CUM LAUDE, 1969) UNIVERSITY OF ILLINOIS (J.D., 1973) ADMITTED TO BAR 1973, IOWA

AREAS OF LAW AGRICULTURAL LAW BUSINESS ORGANIZATIONS AND

TRANSACTIONS

MERGERS & ACQUISITIONS TAX

MEMBERSHIPS AMERICAN BAR ASSOCIATION IOWA STATE BAR ASSOCIATION

POLK COUNTY BAR ASSOCIATION

#1511600

OF NOTE

Between undergrad and law school, Frank was a C.P.A. with Arthur Young. He is an Adjunct Professor at Drake University College of Law, Business Planning. He also taught in the Masters of Tax Program at Drake University College of Law for six years.

PERSONAL

Frank and his wife, Marilyn, have three adult daughters. He was a member of the St. Louis University Golf team and still enjoys golf and tennis.

ATTORNEY BIO

JASON M. STONE

CONCENTRATION

Jason Stone is a shareholder of the Davis Brown Law Firm in the Business Law Division. His practice concentrates on the formation, acquisition, disposition, operation, and liquidation of business entities of all types and sizes and he has served clients in the fields of real estate, advanced technologies, health care, agriculture, manufacturing and finance.

REPRESENTATIVE ENGAGEMENTS

• Advising one of the nation's largest federated cooperatives on tax-free reorganizations, liquidations and joint ventures;

• Advising a publicly traded diversified financial services company on tax-free reorganizations, debt offerings and compensation matters;

• Advising a publicly traded manufacturing company on critical federal income tax issues;

• Advising a publicly traded media company on tax-free exchanges of personal property;

• Advising leading real estate companies on various corporate and tax matters including, but not limited to, state and federal income and property tax matters, with a special emphasis on state and federal income tax credits;

• Advising buyers and sellers on acquisitions and dispositions in transactions of various sizes;

• Advising numerous non-profit corporations on compliance matters including federal income tax exemption, intermediate sanctions, and joint-ventures;

• Advising various business entities on state income, sales and use tax disputes; and

• Advising a community development entity on matters related to the deployment of its $45,000,000 new market tax credit allocation.

SPEAKING, PUBLICATIONS AND SEMINARS

Jason is an active speaker and has given presentations on advanced like-kind exchange techniques, distributions from partnerships and limited liability companies, structuring and drafting partnership, LLP, LLLP and LLC agreements, and international taxation.

BORN DES MOINES, IOWA, 1973

EDUCATION UNIVERSITY OF IOWA (B.S., 1996); WASHBURN UNIVERSITY (J.D., MAGNA CUM LAUDE, 2000); WASHBURN LAW JOURNAL; NEW YORK UNIVERSITY (LL.M., 2001) ADMITTED TO BAR 2000, IOWA

AREAS OF LAW • AGRICULTURAL LAW • BUSINESS ORGANIZATIONS AND

TRANSACTIONS

• MERGERS & ACQUISITIONS • TAX

MEMBERSHIPS • AMERICAN BAR ASSOCIATION -

BUSINESS LAW SECTION

• IOWA STATE BAR ASSOCIATION, TAX

SECTION COUNCIL

#1533327

In 2008, Jason presented at the University of Iowa Spring Tax Seminar, Lorman Drafting Partnership and LLC Operating Agreements, University of Iowa/Iowa State Bar Association Tax Seminar, and the Iowa State Bar Association’s 69th Annual Tax School.

Jason served as an Adjunct Professor of Law at Drake University, where he taught business entity taxation.

MEMBERSHIPS Jason is active in the American Bar Association, Section of Taxation, where he is a member of the Partnership and Real Estate Committees and the Young Lawyer's Forum. He is also active in the Iowa Bar Association, Section of Taxation, and is a member of the Tax Section Council. Jason has served as a member of the Planning Committee for the December Tax School and Spring Tax Institute and as the Chair of the 2005 Spring Tax Institute Planning Committee.

COMMUNITY

Jason currently serves as a director for the Iowa Wellness Council, a non-profit organization dedicated to the promotion of health and wellness in the workplace.

PERSONAL

Outside of work, Jason enjoys spending time with his family and playing golf.

#1533327

ATTORNEY BIO

KENT A. HERINK

CONCENTRATION

Kent is a senior shareholder in the Davis Brown Law Firm’s Intellectual Property Practice. He practices primarily in the area of Intellectual Property, thereby protecting the innovations of the Firm’s clients.

PROFESSIONAL RECOGNITION

Best Lawyers in America®, Intellectual Property Law

SUMMARY

Kent has worked extensively in the biological sciences, with a particular emphasis in the corn and soybean seed industry, tracking its dramatic evolution from largely conventional cross-breeding and little or no statutory protections, through the first utility patents on plants, to present day genetic transformation techniques and the novel plants that are produced by those techniques. Kent’s other areas of expertise include protecting inventions involving human food and animal feed products and dietary supplements. In this area, inventions focus on extracting natural materials from plants and other organisms, novel chemical synthesis methodologies resulting in compounds having human drug applications, and the bio-engineering of organisms to produce food and dietary supplement ingredients. Kent has also worked a great deal in the area of mechanical inventions, including agricultural harvesting and processing equipment, building and construction systems, and medical devices. In addition to patent application work, Kent also works to protect the trademark, copyright and other intellectual property of the firm’s clients, including litigation in the federal courts on intellectual property matters.

MEMBERSHIPS

Kent is a past president of the Iowa Intellectual Property Association, and has served for many years on the Biosciences subcommittee of the American Bar Association.

BORN MARSHALLTOWN, IOWA, 1955

EDUCATION COE COLLEGE (B.A., MAGNA CUM LAUDE, 1976); UNIVERSITY OF IOWA (M.S., PHYSICS, 1979); UNIVERSITY OF IOWA (J.D., WITH DISTINCTION, 1982) ADMITTED TO BAR 1982, IOWA AREAS OF LAW INTELLECTUAL PROPERTY (PATENTS,

TRADEMARKS, COPYRIGHTS) PATENTS, TRADEMARKS AND

COPYRIGHT LAW

MEMBERSHIPS AMERICAN BAR ASSOCIATION

IOWA INTELLECTUAL PROPERTY LAW

ASSOCIATION IOWA STATE BAR ASSOCIATION


#1511658

#1553593

ATTORNEY BIO

B.J MILLER

CONCENTRATION

B. J. is a shareholder of the Davis Brown Law Firm. He joined the Business Division in 2007 in the areas of Business Organizations and Transactions and Real Estate Transactions

ACADEMICS

He graduated with high honors from Drake University Law School in 2002. He received a Bachelor’s degree in History from the University of Northern Iowa in 1998.

PERSONAL

B. J.’s wife, Amy, is a registered nurse with Heartland Dermatology in Clive. In his spare time, B. J. enjoys traveling, golf, and Iowa Hawkeye athletics. An Iowa native, he was born in Buffalo Center and is a 1994 graduate of North Iowa High School.

BORN BUFFALO CENTER, IOWA EDUCATION UNIVERSITY OF NORTHERN IOWA (B.A., 1998);

DRAKE UNIVERSITY (J.D., WITH HIGH

HONORS, 2002) ADMITTED TO BAR 2002, IOWA AREAS OF LAW HHBUSINESS ORGANIZATIONS AND

TRANSACTIONSHH HHREAL ESTATEHH TRANSACTIONS

ATTORNEY BIO

KELLY DETERS

CONCENTRATION

Kelly is an associate of the Davis Brown Law Firm. She joined the Business Division in August 2007 in the area of Business Organizations and Transactions and Telecommunications.

ACADEMIC

In 2007, Kelly received her law degree from the University of Iowa College of Law, graduating with highest distinction. At Iowa, Kelly was a Merit Scholar Fellowship recipient and was elected to the Order of the Coif. She was also a research assistant for Professor James Tomkovicz and a member of the Iowa Law Review.

OF NOTE

In July 2007 her note “The ‘Evaporation Point’: State vs. Sykes and the Erosion of the Fourth Amendment Through the Search-Incident-to-Arrest Exception” was published in the Iowa Law Review.

She earned her bachelor's degree in history with a minor in political science from Northwestern University in 2004, graduating summa cum laude, Phi Beta Kappa. Kelly grew up in Waterloo, Iowa and graduated valedictorian from Waterloo West High School.

PERSONAL

Kelly and her husband, Tony, currently reside in West Des Moines.

BORN WATERLOO, IOWA EDUCATION NORTHWESTERN UNIVERSITY (B.A., SUMMA CUM LAUDE, 2004), PHI BETA KAPPA; UNIVERSITY OF IOWA (J.D., WITH HIGHEST DISTINCTION, 2007), ORDER OF THE COIF, IOWA LAW REVIEW ADMITTED TO BAR 2007, IOWA AREAS OF LAW BUSINESS ORGANIZATIONS AND

TRANSACTIONS

TELECOMMUNICATIONS MEMBERSHIPS IOWA STATE BAR ASSOCIATION


POLK COUNTY WOMEN ATTORNEYS

#1550623

http://www.davisbrownlaw.com/areas/view/index.cfm/business_organizations_and_transactions


insert

letter

tab

here

THE DAVIS BROWN TOWER

215 10TH

STREET, SUITE 1300

DES MOINES, IA 50309

515.288.2500

© 2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C. #1665881 v.2


FRANK J. CARROLL

[email protected]

I. TYPES OF ENTITIES AND ISSUES TO BE CONSIDERED IN SELECTING AN ENTITY.

1.1 Iowa Entities. The number of entities in Iowa that are available to conduct

general business activities seems to be ever expanding and always changing. Currently, the types of business entities available to a business entrepreneur are the following:

• General partnership, (including a limited liability partnership). • Limited partnership, (including a limited liability limited partnership). • Limited liability company. • Corporation (either a “C” corporation or an “S” corporation)

This outline addresses the factors to be considered in deciding which entity to use with a specific business venture.

1.2 Pass Through Entities. The following types of business organizations are pass-through entities:

• General partnerships • Limited partnerships • “S” corporations • Limited liability companies

A pass-through entity is not subject to income tax at the entity level. Instead, the income or loss of the entity is passed on to the individual owners for tax purposes.

1.3 Check the Box Regulations. As a result of “check the box” regulations,

unincorporated entities can choose whether to be treated as a partnership or a corporation for tax purposes. The check the box regulations basically provide that an unincorporated entity will be treated as a partnership for tax purposes and will not be treated as a corporation unless a special election is made by the entity.


1.4 Number of Entities. Attached to this outline as Exhibit “A” is a chart showing the number and type of entities that were formed in each year from 1990 to 2007.

1.5 Factors in Choosing an Entity. In deciding the appropriate entity, the

following is a list of some of the factors that should be addressed or considered:

• Cost and simplicity of formation. • Liability of owners. • Number, nature and age of owners. • Type of business. • Capital structure. • Projected profits or losses and tax consequences. • Projected distribution to owners (how much and when) and tax

consequences. • Compensation. • Management structure.

II. GENERAL PARTNERSHIP 2.1 State Law Issues - Chapter 486A. Chapter 486A of the Iowa Code entitled the “Iowa Uniform Partnership Act” (“IUPA”) governs the formation and operation of a general partnership. Chapter 486A provides, in part, as follows:

2.1.1 Formation. A partnership is an association of two or more persons

to carry on as co-owners a business for profit, regardless of whether or not the persons intend to form a partnership IC §486A.201. The association can be written or oral.

2.1.2 Purpose. The partnership must carry on a business. IC

§ 486A.201. 2.1.3 Ownership Interest. A partner, as a partner, is entitled to certain

management rights and access to information as well as certain economic rights. The only transferable interest of a partner is the partner’s interest in profits and losses and rights to distributions. IC § 486A.502. The transfer of a transferable interest does not cause the dissociation of the partner or dissolution of the partnership. The transferor retains the rights and duties of a partner.

FRANK J. CARROLL

515.288.2500

[email protected]

© 2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C.

2


2.1.4 Authority to bind. An act of a partner conducted for the purpose of carrying on the business of the partnership binds the partnership unless the partner had no authority to act and the other party had knowledge or notice of this lack of authority. IC § 486A.301(1).

2.1.5 Management. Unless the partnership agreement provides

otherwise, each partner has equal rights in the management and conduct of the partnership business. IC § 486A.401(6).

2.1.6 Ability to Modify Statute. The partnership agreement governs the

relationship among the partners and by and between the partners and the partnership which can override the IUPA except in certain specific areas. IC § 486A.103.

2.1.7 Fiduciary Duties. Each partner owes the duty of care and duty of

loyalty to the partnership and each partner. IC § 486A.404. The duty of loyalty and duty of care can be “modified” but not eliminated in the partnership agreement. IC § 486A.103.

2.1.8 Right to Withdraw. A partner has the power to dissociate at any

time, rightfully or wrongfully, by providing notice to the partnership. IC § 486A.601(1). This right cannot be removed by the partnership agreement but the partnership agreement can limit the right of such partner to demand a distribution on dissociation. IC § 486A.103(2)(6).

2.1.9 Dissolution. A general partnership is not perpetual. The

partnership dissolves upon the occurrence of certain events. IC § 486A.801.

2.1.10 Liability of owners. All partners are jointly and severally liable for

the obligations of the partnership. IC § 486A.306. The partnership may elect to be a limited liability partnership. IC § 486A.1001. If the election is made, the partners are not personally liable for the obligation of the partnership. IC § 486A.306(3).

2.2 Tax Issues. The tax issues that need to be considered in connection with

a general partnership:

FRANK J. CARROLL

515.288.2500

[email protected]


2.2.1 Operation of Partnership - Tax Consequences to a Partner. The profits and losses of the partnership are allocated to the partners pursuant to the partnership agreement. Treas. Reg. 1.704-1(b)(1). Profits allocated to a partner are taxable to the partner regardless of the receipt of any cash. Losses allocated to a partner may be

3


deducted by the partner against other income of the partner subject to certain limitations.

2.2.2 Operation of Partnership - Tax Consequences to Partnership. The

partnership does not pay tax with respect to its operating profit.

III. LIMITED PARTNERSHIP.

3.1 State Law Issues - Chapter 488. Chapter 488 of the Iowa Code entitled “Iowa Uniform Partnership Act (“IULPA”) governs the formation and operation of a limited partnership. Chapter 488 provides, in part, as follows:

3.1.1 Formation. In order to form a limited partnership, a certificate of

limited partnership must be filed with the Secretary of State. IC § 408.201(1).

3.1.2 Purpose. A limited partnership may be organized for any lawful

purpose. IC § 488.104(2). Note that a limited partnership may be formed for both business and non-business purposes.

3.1.3 Ownership Interest. A limited partnership interest consists of a

partner’s right to manage the partnership and have access to limited partnership information as well as the right to receive distributions. The right to receive distributions is the only transferable interest. IC § 488.701. The transfer of a transferable interest does not cause the limited partnership to dissolve and does not entitle the transferee to participate in the management of the limited partnership. The transferor retains all of the rights (except to distribution), duties and obligations of a partner.

3.1.4 Authority to Bind. Only the general partner has the authority to bind

the limited partnership. IC § 488.302, 488.402.

3.1.5 Management. The general partner has the sole management rights of the limited partnership. IC § 488.404. A limited partner can participate in management without becoming liable for the obligations of the Limited Partnership. IC § 488.303.

3.1.6 Modification of Statute. The partnership agreement governs the

relations among the partners and between the partners and the partnership. IC § 488.110. The partnership agreement can modify

FRANK J. CARROLL

515.288.2500

[email protected]


4


the statute in all respects except as specifically set forth in IC § 488.110(2).

3.1.7 Fiduciary Duty. The general partner owes a duty of loyalty and duty

of care to the partnership and the other partners. IC § 488.408. Each of the duties may be modified in the partnership agreement. IC § 488.110(2)(d) and (e). A limited partner does not owe any fiduciary duty to the partnership or partners. IC § 488.305(l).

3.1.8 Right to Withdraw. A person does not have the right to withdraw as

a limited partner of the partnership before the termination of the limited partnership. IC § 488.601(1).

3.1.9 Dissolution. A limited partnership can have a perpetual existence.

IC § 488.104(3). Unless otherwise provided in the partnership agreement, the limited partnership is dissolved upon the occurrence of certain events set forth in IC § 488.801.

3.1.10 Liability of Owners. A limited partner is not liable for the obligations

of a limited partnership (whether in contract, tort or otherwise) regardless of whether the limited partner participates in the management or control of the limited partnership. IC § 488.303. The general partners are liable for all of the obligations of the limited partnership. IC § 488.404. The general partner may avoid such liability if the limited partnership elects to be a limited liability limited partnership.

3.2 Tax Issues. The tax issued associated with a limited partnership are

substantially similar to the tax issues set forth in Section 2.2 relating to general partnership.

IV. LIMITED LIABILITY COMPANY (“LLC”).

4.1 State Law Issues - Chapter 489. The Iowa legislature enacted a new

limited liability company act, entitled “Revised Uniform Limited Liability Company Act” (“RULLCA”), effective January 1, 2009. The RULLCA currently governs the formation and operation of all limited liability companies formed on or after January 1, 2009. The RULLCA will govern all limited liability companies, including those formed prior to January 1, 2009, beginning January 1, 2011, but companies formed prior to the effective date of the new act can elect to be governed by the new law before 2011. Chapter 489 provides, in part, as follows:

FRANK J. CARROLL

515.288.2500

[email protected]


5


4.1.1 Formation. One or more persons may form a limited liability company by filing a certificate of organization with the Secretary of State. IC § 489.201.

4.1.2 Purpose. The limited liability company may be formed for any

lawful purpose, regardless of whether for profit, unless a more limited definition is set forth in the operating agreement. IC § 489.104.

4.1.3 Ownership Interest. An ownership interest in a limited liability

company is personal property. IC § 489.501. An ownership interest in a limited liability company is assignable in whole or in part. An assignment of a membership interest entitles the assignee to receive only distributions to which the assignor would be entitled. IC § 489.502. Assignment does not entitle the assignee to participate in the management and affairs of the limited liability company or to exercise any rights of a member. IC § 489.502.

4.1.4 Management. Unless the operating agreement provides for

management of a limited liability company by a manager or managers, management of a limited liability company is vested in its members. IC § 489.407. Thus, a limited liability company may be member-managed or may be manager managed. The distinction can be very significant.

4.1.5 Authority to Bind. A member does not have the authority to bind

the LLC solely by reason of being a member. IC § 489.301. The operating agreement will generally designate who can bind the company.

4.1.6 Modification. The operating agreement governs the relations

among the members and between the members and the company. The operating agreement can modify the statute in all respects except as specifically set forth in IC § 489.110.

4.1.7 Fiduciary Duties. Each member in a member-managed LLC and

each manager in a manager-managed LLC owes the duty of care and duty of loyalty to the company and each member. IC § 489.409. The duty of loyalty and duty of care can be “modified” but not eliminated in the operating agreement. IC § 489.110.

FRANK J. CARROLL

515.288.2500

[email protected]


4.1.8 Right to Withdraw. A member has the right to withdraw from a limited liability company at any time, rightfully or wrongfully, by providing notice to the company. IC § 489.601.

6


4.1.9 Liability of Owners. Generally, a member or manager of an LLC is

not personally liable solely by reason of being a member or manager of the limited liability company. IC § 489.304. A member of a limited liability company is personally liable under a judgment or for any debt obligation or liability of the limited liability company (whether in contract, tort or otherwise) under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable for any debt obligation or liability a corporation.

4.2 Tax Issues. The tax consequences associated with a limited liability

company are substantially similar to those set forth in Sections 2.2 of this outline relating to general partnerships.

V. CORPORATIONS OPERATED AS A “C” CORPORATION. 5.1 State Law Issues - Chapter 490. Chapter 490 entitled “Iowa Business Corporation Act” (“IBCA”) of the Iowa Code governs the formation and operation of corporations. Chapter 490 provides, in part, as follows:

5.1.1 Formation. One or more persons may act as an incorporator or incorporators of a corporation by executing and delivering articles of incorporation to the Secretary of State for filing. IC § 490.201.

5.1.2 Purpose. A corporation can engage in any lawful business. IC §

490.301. 5.1.3 Ownership Interest. The articles of incorporation must prescribe

the classes of shares and the number of shares of each class that a corporation is authorized to issue. If more than one class of shares is authorized, the articles of incorporation must prescribe the distinguishing designation for each class and the preferences, limitations and relative rights of each class. IC § 490.601.

5.1.4 Authority to Bind. The bylaws or action by the board of directors

will generally designate who can bind the corporation. 5.1.5 Management. The business and affairs of the corporation are

managed by or under the direction of the Board of Directors. IC § 490.801. The Board of Directors elect officers who shall have the authority and shall perform the duties set forth in the bylaws to

FRANK J. CARROLL

515.288.2500

[email protected]


7


the extent consistent with the direction of the Board of Directors. IC § 490.841.

5.1.6 Modification of Statute. Each of the sections of Iowa Business

Corporation Act indicates whether that section can be modified by the articles of incorporation or bylaws.

5.1.7 Fiduciary Duties. Each member of the Board of Directors in

discharging the duties of a director must act in good faith and in a manner that a director reasonably believes to be in the best interest of the corporation. IC § 490.830(I). In exercising its decision-making function, the Board of Directors must discharge its duties with care that a person in a like position would reasonably believe appropriate under the circumstances. IC § 490.830(2).

5.1.8 Right to Withdraw. A shareholder does not have any right to

withdraw from the corporation, unless provided in the articles of incorporation, bylaws or agreement among the shareholders.

5.1.9 Liability of Owners. A shareholder of a corporation is not personally

liable for the acts or debts of the corporation. IC § 490.622. 5.1.10 Dissolution. A corporation may dissolve upon a proposal by the

Board of Directors and the approval by the shareholders at a meeting in which a quorum consisting of at least a majority of the votes entitled to be cast exist. IC § 490.1402.

5.2 Tax Issues - Tax consequences associated with “C” corporations.

5.2.1 Taxation of Operating Profits. The operating profits of the corporation are taxed at the corporate level. IRC § 11. Operating profits do not pass through to shareholders. Any distributions made by the corporation to the shareholder are taxed to the shareholder whether the distribution is in the form of the dividend, redemption or liquidation.

VI. “S” CORPORATION.

6.1 State Law Issues - Chapter 490. An “S” corporation is subject to the provisions of Chapter 490.

6.2 Tax consequences associated with “S” corporations.

FRANK J. CARROLL

515.288.2500

[email protected]


8


6.2.1 Qualifications. A corporation may elect to be treated as an “S” corporation with the consent of all of its shareholders and filing IRS form 2553 with the Internal Revenue Service. An “S” corporation is defined as a domestic corporation and is not an ineligible corporation (as described in IRC § 1361(b)(2)) and which (i) has no more than 100 shareholders, all of whom are individuals who are citizens of the United States or certain trusts, estates, charities and qualified retirement plans and (ii) has only one class of stock.

The American Jobs Creation Act of 2004 not only increased the

number of shareholders from 75 to 100, but also provided that all “family” members can elect to be treated as one shareholder for purposes of determining the number of shares in a corporation. A family is defined as lineal descendants of a “common ancestor” (and their spouses). The “common ancestor” cannot be more than six generations removed from the youngest generation of shareholders at the time the “S” election is made.

6.2.2 Taxation of Operating Profits and Losses. The profits and losses of

the “S” corporation are passed through to its shareholders. IRC § 1366. The income or loss passed through to the shareholder is taxed at the shareholder level. Losses passed through to the shareholder may be used by the shareholder to offset other income of the shareholder subject to certain limitations.

VII. COMPARISON OF “C” CORPORATIONS WITH PASS-THROUGH ENTITIES

(“S” CORPORATION, GENERAL PARTNERSHIP, LIMITED PARTNERSHIP AND LIMITED LIABILITY COMPANY).

7.1 Advantages of using a pass through entity. The following are some of the

benefits associated with using a pass through entity (“S” corporation, general partnership, limited partnership or limited liability company) as opposed to a “C” corporation: 7.1.1 Avoid Double Taxation. A pass through entity avoids double

taxation. Unlike a “C” corporation in which the earnings of the “C” corporation are taxed at the corporate level and then taxed again at the shareholder level when the earnings are distributed to the shareholder, a pass through entity has only one level of tax with respect to the earnings of the entity.

FRANK J. CARROLL

515.288.2500

[email protected]


7.1.2 Use of Losses. Losses of a “C” corporation can only be used against the income of the “C” corporation. A pass-through entity

9


allows the losses to be used by the investors, subject to certain limitations.

7.1.3 Penalty Taxes. Pass-through entities are not subject to certain

penalty taxes, such as the accumulated earnings tax or personal holding tax, which “C” corporations are subject to.

7.1.4 Cash Method of Accounting. Generally, “C” corporations are

required to use accrual method of accounting unless their gross receipts are less than $5,000,000. Pass-through entities generally have greater ability to use the cash method of accounting which allows the taxpayer to have greater control over the timing of income and expenses.

7.2 Advantages of a “C” corporation over a pass through entity:

7.2.1 Marginal Tax Rates. If the taxable income of the entity is projected to be less than $50,000 and the entity is not a personal service corporation, the use of a “C” corporation may result in a lower tax rate. The tax rate for a corporation on its first $50,000 of income is 15% whereas an individual having $50,000 of pass through income will be taxed at a marginal tax rate of 25%.

7.2.2 Tax Years. A “C” corporation can generally use any fiscal year that

it desires. A pass through entity has limitations on fiscal year to avoid any deferral of income.

7.2.3 Fringe Benefits. Shareholder employees of a “C” corporation are

entitled to greater “fringe benefits” in that shareholder employees are not required to include in income the cost of group health, group life, accident and health insurance. Such fringe benefits are generally not available to owner employees of a pass through entity.

7.2.4 Raising Capital. A “C” corporation is generally used if the entity is

intending to raise capital from a number of equity investors or if it is contemplated that it could “go public”.

VIII. COMPARISON OF AN “S” CORPORATION WITH PARTNERSHIP TYPE ENTITIES, (GENERAL PARTNERSHIP, LIMITED PARTNERSHIP AND LIMITED LIABILITY COMPANY).

FRANK J. CARROLL

515.288.2500

[email protected]


8.1 Status Advantages of Partnership Type Entities As Compared to “S” Corporations

10


8.1.1 Qualification. An “S” corporation is required to make a timely

election in order to be treated as an “S” corporation and an “S” corporation must continue to meet certain requirements in order to maintain its status as an “S” corporation (i.e. number of shareholders, nature of shareholders and class of stock). As a result, an “S” corporation is exposed to the possibility of losing its “S” corporation status. Therefore, it is extremely important that the shareholders of the “S” corporation enter into a stockholder buy-sell agreement.

The partnership type entity is not required to make any special

election as a result of the “check the box” regulations. Likewise, partnership type entities do not have any ongoing eligibility requirements.

8.1.2 Entity Tax. An “S” corporation is generally not subject to income

tax except under certain exceptions. Partnership type entities similarly have no entity level taxes. 8.1.3 Nature and Number of Shareholders. An “S” corporation has

limitations with respect to the number of shareholders and the type of shareholders. An “S” corporation cannot have more than 100 shareholders. An “S” corporation shareholder must be either an individual, estate, certain trusts, tax exempt organization or qualified retirement plan. An “S” corporation cannot have a corporation or partnership as a shareholder.

Partnership type entities do not have any limitation on the number or type of investors.

8.1.4 Investment Limitations. An “S” corporation may only have one class

of stock outstanding. The stock of an “S” corporation must provide that all of the shareholders participate equally and proportionately with respect to dividend and liquidation distributions. This may not meet the needs of specific investors. A partnership type entity on the other hand may have several classes of equity. This provides much greater flexibility in structuring the financial interests of its members.

FRANK J. CARROLL

515.288.2500

[email protected]


11


8.1.5 Allocation of Profits and Losses. Since an “S” corporation can only have one class of stock, it is prohibited from having any type of special allocations of profits and losses to its investors.

A partnership type entity, on the other hand, may have preferred returns and special allocation profits and losses to its investors in order to meet the special financial needs of its investors provided that such allocations of profits and losses have “substantial economic effect.”

8.3 Advantages of an “S” Corporation. 8.3.1 Simplicity and Cost. An “S” corporation is generally simpler and

less expensive to form because the articles of incorporation and bylaws are generally standard for such entities and the limited liability protection is relatively more certain than the limited liability protection for partnership type entities.

8.3.2 Technical Termination. A partnership type entity will be deemed to

terminate for tax purposes if 50% or more of the interests are sold or exchanged within a 12 month period. Such a deemed liquidation may be taxable to the investors and may cause the entity to lose some of its tax elections.

No such deemed liquidation exists for “S” corporations.

IX. COMPARISON OF PARTNERSHIP TYPE ENTITIES.

9.1 Tax Matters. Generally, the tax consequences associated with general partnerships, limited liability partnerships, limited partnerships, and limited liability companies are relatively similar.

9.2 General Partnerships. A general partnership tends to be used less

frequently due to the fact that each of the general partners is personally liable for the debts and obligations of the general partnership. As a result, general partnerships will generally elect to be treated as a limited liability partnership in order to avoid personal liability for the general partners.

FRANK J. CARROLL

515.288.2500

[email protected]


9.3 Limited Liability Partnerships Compared to Limited Liability Companies. A limited liability partnership is essentially a general partnership in which the partnership and partners have elected to have limited liability protection. As a result, a limited liability partnership and a limited liability company may seem like substantially similar entities. However, there are several

12


unique issues that need to be taken into account before electing to use a limited liability partnership or a limited liability company, such as:

9.3.1 Agency Status. The IUPA treats every partner of a limited liability

partnership as an agent of the partnership for purposes of conducting partnership business. Consequently, even if an individual partner has no actual authority to bind the partnership, agency law deems the partner to have apparent authority with respect to partnership business. For parties having no notice to the contrary, they can rely on the apparent authority even if the partnership agreement limits the partner’s authority to act.

The RULLCA provides that a member is not an agent of an LLC solely by reason of being a member. Consequently, members do not have apparent authority to bind the LLC.

9.3.2 Default Matters. Both the limited liability partnerships and the limited liability companies have “default” provisions that need to be addressed in the partnership agreement in the case of a limited liability partnership or the operating agreement in the case of the limited liability company. Failure to address these default matters in the partnership agreement or operating agreement results in the statute controlling activities of the partners or members as the case may be. The default rules under the IUPA and the default under the RULLCA are different and need to be reviewed with each entity formation.

9.3.3 Fiduciary Duties. Limited liability partnership partners and limited

liability company members of a member-managed limited liability company have similar fiduciary duties to each other and to the respective entity. However, in a manager-managed limited liability company, it may be possible to transfer most if not all of these fiduciary duties to the managers. If the business is intended to be operated more like a corporation with centralized management and with the investors having little authority to act on behalf of the business or as agents for the business, a manager-managed limited liability may be the entity of choice.

FRANK J. CARROLL

515.288.2500

[email protected]


9.4 Limited Partnerships. As is evident from the Exhibit “A”, the use of limited partnerships has been drastically reduced since the introduction of limited liability companies in Iowa. A limited partnership still may be the vehicle of choice for many real estate investors where the entity has a number of passive investors and the general partner wants to maintain absolute control over operations. Likewise, the limited partnership has

13


been used more frequently in family partnerships since it has historically been the entity of choice for this estate planning technique.

X. SINGLE MEMBER LIMITED LIABILITY COMPANIES. 10.1 Status. While the check the box regulations provided certainty regarding

entity classifications for unincorporated entities, the regulations also provided for single member limited liability companies. Unlike a general partnership or a limited partnership, an LLC may have only one member. According to the check the box regulations, while a single member LLC is recognized as an entity for state law purposes, it is treated as a disregarded entity for federal tax purposes.

10.2 Formation. For the single member limited liability company to be treated

as an entity for state law purposes, all of the formalities relating to the formation and operation of a limited liability company must be complied with in order for the single member limited liability company to be recognized for state tax purposes. These items should include:

• Filing a certificate of organization. • Establishing an operating agreement. • Obtaining separate bank accounts. • Obtaining reasonable capital. • Segregating activities and accounts of the entity and the owner. • Using the corporate name for all permits and contracts. • Conducting all business actions of the limited liability company.

10.3 Limited Liability Protection. It is important to recognize that while a single

member limited liability company provides limited liability protection to the owner it does not protect the owner from liability for its own acts and deeds operating the single member limited liability company.

10.4 Tax Treatment. As a disregarded entity for federal tax purposes, the

activities of single member limited liability companies are reported by the owner.

10.5 Employer Identification Number. While the single member limited liability

company is generally a disregarded entity for tax purposes, it would appear that the employer identification number of the owner would be applicable to the single member limited liability company. However, this has created a number of issues for single member limited liability companies that have employees.

FRANK J. CARROLL

515.288.2500

[email protected]


14


As a result, the IRS issued IRS Notice 99-6 which provided that if a

corporation is the owner of a single member limited liability company, the limited liability company may either (i) report and pay all employment taxes with respect to employees of the limited liability company under the name and employer identification number of the limited liability company, or (ii) report and pay all employment taxes with respect to employees of the limited liability company as if the employees of the limited liability company are employed directly by the owner.

If the owner is an individual and the single member limited liability

company has employees, the entity must obtain its own employee identification number; employment taxes cannot be reported or paid under an individual’s social security number.

10.6 Use of Limited Liability Companies. Use of single member limited liability companies have grown in popularity since the check the box regulations. The following are some of the uses of single member limited liability companies:

10.6.1 QSSS Alternative. Single member limited liability companies have

been used in lieu of qualified “S” subsidiaries because single member limited liability companies can add additional members without affecting the flow through nature of the entity. Additionally, there is no one class of stock requirement to restrict investment alternatives.

10.6.2 Real Estate Ownership. Single member limited liability companies

have been used to hold real estate and provide limited liability protection to the owner and avoid transfer fees when the property is sold. Since the single member limited liability company is disregarded for tax purposes, the members should be able to exchange their membership interest for real estate in IRC § 1031 exchange. PLR 9751012.

10.6.3 Tax-Free Reorganizations and Sales. Single member limited

liability companies have been used to participate in tax free reorganizations, particularly mergers under IRC §1368(a)(1)(A).

10.6.4 Corporate Liquidations. Limited liability companies have

sometimes been used in connection with liquidations of a corporation. If the corporation to be liquidated has future potential liabilities, it may be possible to contribute the stock of the liquidating

FRANK J. CARROLL

515.288.2500

[email protected]


15


corporation to a single member limited liability company in order to provide limited liability protection to the contributing entity.

XI. ELECTING OUT OF PARTNERSHIP STATUS.

11.1 Elect Out of Check the Box. The check the box regulations provided a default for unincorporated entities to be treated as partnerships for tax purposes unless a contrary election is made. The regulations further provide that unincorporated entities may specifically elect to be treated as corporations. This allows unincorporated entities to be operated under the less formal rules of a general partnership, limited liability partnership, limited partnership or limited liability company and at the same time to be treated as a corporation for tax purposes.

11.2 An unincorporated entity that elects to be treated as a corporation for tax

purposes may also elect to be treated as an “S” corporation. See PLR 9853045. An unincorporated entity that elects to be treated as an “S” corporation for tax purposes must meet all of the requirements for an “S” corporation at the time the election is made.

11.3 Limited Partnerships. The IRS has indicated that it will not rule where a

limited partnership can elect to be treated as a corporation and make a valid “S” corporation election. See Rev. Proc. 2003-3.

SOURCES FOR OUTLINE

Frank Carroll & Bev Evans, Business Law Manual, Business Organization Update VOL. I (Frank W. Pechacek, Jr. ed. Iowa State Bar Association) (2005) Frank Carroll, Tax Advantages and considerations, The Ins and Outs of Limited Liability Companies In Iowa (National Business Institute) (2005) C. Wells Halls, III, Ronald A. Levitt, Choice of Business Entity (American Bar Association Committee on S Corporations) (2004)

FRANK J. CARROLL

515.288.2500

[email protected]


16


Exhibit A Iowa Entity Formation Trends1

LLPs Ltd.

Partnerships LLLPs LLCs Corporations Total

1990 N/A 90(2.3%) N/A 4(.1%) 3,775(97.6%) 3,869 (100%)

1991 1(.03%) 98(2.3%) N/A 3(.07%) 4,074(97.6%) 4,176 (100%)

1992 N/A 102(2.3%) N/A 154(3.4%) 4,223(94.3%) 4,479 (100%)

1993 N/A 104(2.02%) 2(.04%) 619(12.03%) 4,423 (85.91%)

5,148 (100%)

1994 30(.6%) 123(2.2%) N/A 852(15.5%) 4,500(81.7%) 5,505 (100%)

1995 77 (1.2%)

140(2.2)% N/A 1,197 (18.4%) 5,072(78.2%) 6,486 (100%)

1996 85 (1.3%)

187(2.7%) N/A 1,492 (22.2%)

4,959(73.8%) 6,723 (100%)

1997 60(.8%) 214(3.0%) N/A 1,952 (27.1%)

4,966(69.1%) 7,192 (100%)

1998 93 (1.4%)

191(2.9%) N/A 2,172 (32.5%)

4,236(63.2%) 6,692 (100%)

1999 103 (1.4%)

158(2.1%) N/A 2,777 (37.3%)

4,408(59.2%) 7,446 (100%)

2000 105 (1.4%)

175(2.3%) 11(.1%) 3,062 (39.9%)

4,321(56.3%) 7,674 (100%)

2001 113 (1.4%)

116(1.5%) 20(.3%) 3,389 (43.1%)

4,221(53.7%) 7,859 (100%)

2002 106 (1.2%)

102(1.1%) 32(.4%) 4,341 (48.7%)

4,335(48.6%) 8,916 (100%)

2003 101 (1.0%)

102(1.0%) 31(.3%) 5,316 (53.5%)

4,387(44.2%) 9,937 (100%)

2004 110 (1.2%)

68(.7%) 27(.3%) 5,391 (57.8%)

3,730(40.0%) 9,326 (100%)

2005 118 (1.0%)

85 (.7%) 46 (.4%) 7,661 (61.9%) 4, 471 (36.1%) 12,381 (100%)

2006 151 (1.1%)

68 (.5%) 61 (.4%) 9,226 (68%) 4,065 (30%) 13,571 (100%)

20072 85 (.9%) 41 (.4%) 33 (.4%) 6,385 (70.1%) 2,566 (28.2%) 9,110 (100%)

1 Source: Iowa Secretary of State Filings

FRANK J. CARROLL

515.288.2500

[email protected]


2 Totals for 2007 cover January 1, 2007 through September 30, 2007

17

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500

© 2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C 1666275_2.DOC

Dear Members of Newco, LLC: The organization of Newco, LLC (the “Company”) has now been completed. As you know, one of the primary reasons for organizing the Company was to provide liability protection to the individual members. The purpose of this letter is to discuss certain issues and procedures relevant to safeguarding the liability protection afforded to members by organizing a limited liability company (“LLC”). The summaries below are not a complete analysis of the areas discussed, but rather they are provided to give a basic understanding of common areas in which members may be found personally liable and certain procedures that should be followed in order to protect the Company’s members. Because this discussion is general in nature, it should not be relied upon as exhaustive. Please feel free to contact our office if you have any questions.

As we have discussed, LLC status generally shields the members of the Company from personal liability for Company obligations. However, Iowa law provides that members of an LLC will have personal liability for the obligations of the LLC under certain circumstances. Some of the instances in which personal liability may be imposed on members include: (a) when a specific section of the limited liability company act provides for personal liability; (b) when the company governing documents provide for personal liability of members; (c) when the member has agreed to be personally responsible for the obligation; (d) if the member personally participated in tortious or criminal conduct giving rise to the obligation; (e) if the individual purports to act on behalf of the company knowing that no company has been formed; (f) failure to pay certain taxes; (g) to the same extent that shareholders of a corporation have personal liability for the acts of the corporation.

Statutory Liability. Members of an LLC can be held personally liable under the circumstances in which the limited liability company act provides for personal liability. For instance, under current law if a member consents to an improper distribution that member may be liable to the company to the extent of the improper distribution.

Governing Document Liability. Members of an LLC may be personally liable for

debts of the LLC if the LLC’s governing documents so provide. Please note that the governing documents for the Company do not provide for personal liability of the members but please keep this potential liability in mind for future reference.

Personal Agreement of Liability. Members of an LLC can be held personally

liable for the obligations of the LLC to the extent they personally agree to be obligated. For example, a member who signs a personal guarantee of a loan or lease of the LLC will be personally obligated to the extent of the guarantee. Further, a member may be

B. J. MILLER

515.288.2500

[email protected]


2

found personally liable if they sign in an individual capacity as opposed to identifying the LLC as the principal party and sign in a representative capacity.

Tortious Conduct and Violation of Law. While members cannot be held

vicariously liable for the actions of other members or agents of the LLC, members can be held personally liable for their own tortious or criminal conduct. Further, the LLC cannot shield the member from their own actions even if the member was acting in an official capacity on behalf of the LLC at the time of the action.

Pre-Formation Liability. Members may be held personally liable if they purport to

act on behalf of an LLC knowing that no LLC has been formed. Since the Certificate of Organization for the Company has already been filed with the Secretary of State, this type of liability will not be applicable in this case, but is being highlighted for your future reference.

Tax Liability. An LLC employer generally must withhold both income and social

security tax from an employee’s taxable wages. The procedures to be followed for these withholding taxes are beyond the scope of this letter but you should be aware that failure on the part of an employer to collect, account for and pay withholding taxes subjects the employer to a significant monetary penalty. Those individuals responsible for remitting the withholding tax may be held personally liable for failure to act and will not be shielded from personal liability by the LLC.

Further, the State of Iowa has a sales and use tax regime that may result in personal liability for LLC members. If the nature of the Company’s business results in imposition of a sales or use tax and the Company does not pay these taxes personal liability may be imposed on the members.

Piercing the Liability Shield. LLC members may be subject to personal liability

under the same circumstances in which a shareholder of a corporation may be held personally liable. Generally, if a court finds that the corporate privilege has been abused, the corporate entity may be disregarded for the purpose of remedying the abuse and the corporate shareholders may be liable for the corporation’s acts relating to that abuse. This is commonly called “piercing the corporate veil.”

When determining whether to pierce the corporate veil, Iowa courts generally consider the following factors: (a) whether the corporation is adequately capitalized; (b) whether the corporation keeps separate books or records; (c) whether the corporation keeps its finances separate from the principals’ personal finances (including whether corporate funds are used to pay for personal obligations); (d) whether the corporation is used to promote fraud or illegality; (e) whether corporate formalities are followed (note, under the Revised Uniform Limited Liability Act this factor is specifically excluded from consideration); (f) whether the corporation is merely a sham.

B. J. MILLER

515.288.2500

[email protected]


3

Reducing the Likelihood of Personal Liability. An LLC and its members can reduce the possibility that the individual members will be subject to liability for LLC obligations by following the guidelines listed below:

(a) The members should limit all guarantees to the extent possible. In the

event a personal guarantee is required, the members should attempt to limit the amount guaranteed and/or the term of the guarantee.

(b) The Company should be adequately capitalized to enable it to carry on its business.

(c) The Company should obtain adequate insurance to meet all of its insurance needs. It is suggested that the Company contact its insurance agent and consider coverage including general liability insurance, fire and casualty insurance, life and disability insurance for key personnel, insurance to fund repurchases of a membership interest in the event of death or disability of a member, business interruption insurance, and workers’ compensation insurance.

(d) Although whether the Company has followed formalities relating to the exercise of the Company’s powers or management of its activities is specifically excluded from consideration when determining the personal liability of members under the current limited liability act, the Company should observe all post-formation formalities. These formalities include, but are not limited to, holding annual members’ meetings and holding regular managers’ meetings if such meetings are required by the Operating Agreement; keeping minutes of such meetings, and keeping clear records of all Company activities.

(e) Authorized persons should clearly indicate to parties with whom they transact business that they are dealing on behalf of the Company and not in their individual capacity. Further, they should execute all letters, contracts or other documents, signed on behalf of the Company, in the Company’s name rather than in their individual capacity. By way of example, below is a sample signature block for the Company:

“Newco LLC By:__________________________________

John Smith, Manager”

(f) Company funds should not be commingled with the funds of the individual members or any other entity involved with the Company. Further, Company funds should not be used to pay personal obligations of the members or of any affiliated entity.

B. J. MILLER

515.288.2500

[email protected]


4

(g) The Company should maintain separate operations and records from those of other entities and its members and managers.

(h) All taxes, including withholding tax payments and sales and use tax payments should be timely made. Conclusions. As a reminder, the information contained in this letter only summa-rizes various issues and procedures relating to maintaining liability protection and should be considered a preliminary introduction only. Additional or different considerations may apply in a particular case, and the law frequently changes. Therefore, I encourage you to contact our office to discuss this letter in greater detail if you have any specific questions or issues that you would like us to address.

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500

© 2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C. #1665907v2


BUSINESS PERMIT AND LICENSE INFORMATION

KELLY A DETERS

[email protected]

After you decide how to structure your business, you will need to determine what permits and licenses your business needs and how to apply. Some commonly needed business permits and registrations are:

I. Federal Employer Identification Number (EIN).

1.1 Do you need an EIN? You will need an EIN if:

•• You have employees; •• Your business is a corporation or a partnership; •• You sell alcohol, firearms or tobacco; or •• You need to pay federal excise taxes

1.2 More Information. You can get more information and apply for an EIN

online on the IRS website at: http://tinyurl.com/EmployerID. A sample EIN application is also included with these materials.

II. Iowa Permits and Registration

2.1 Iowa sales tax permit. You will need an Iowa sales tax permit if your business is based in Iowa and will be selling goods and/or services that are subject to Iowa sales tax.

2.2 Businesses with employees. If you have employees, you will need to

register with the Iowa Department of Revenue for withholding purposes, which can be done through the Iowa Business Tax Registration form.

2.3 Iowa Business Tax Registration Form. A sample Iowa Business Tax

Registration form is included with these materials. This is a combined business tax registration application, which allows you to do any of the following with one form:

http://tinyurl.com/EmployerID


Business Permit and License Information

•• apply for a sales tax permit; •• apply for a use tax permit if you are an out-of-state retailer; •• register to withhold Iowa income tax if you have employees; •• register to file corporation or partnership income tax returns; and •• register for motor vehicle rental tax, hotel/motel tax or a household

hazardous materials permit.

2.4 More Information. You can get more information and file an Iowa Business Tax Registration form online on the Iowa Department of Revenue website at: http://tinyurl.com/IABusTax-Reg.

III. Additional Permits and Licenses - Iowa Business License Information

Center. Your business may be required to obtain additional permits or licenses depending on the nature of your business. 3.1 Iowa Business License Information Center. The Iowa Business License

Information Center provides a comprehensive, searchable guide to Iowa registration, certification, licensing and permitting requirements, available on the Iowa Department of Economic Development website, at http://www.iowalifechanging.com/business/blic.html.

3.2 More Information. Additional licensing information is also available at

http://tinyurl.com/licensinginfo.

KELLY A. DETERS

515.288.2500

[email protected]


2

http://tinyurl.com/IABusTax-Reg

http://www.iowalifechanging.com/business/blic.html

http://tinyurl.com/licensinginfo

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500

© 2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C. #1666436v2

TRADEMARKS AND TRADE NAMES

KENT A. HERINK

[email protected]

I. TRADEMARKS

A. Nature of Right. Trademarks protect business and product names. A trademark is usually a word, phrase, symbol or logo used by a manufacturer or merchant to identify its goods or services and distinguish them from those of its competitors.

B. How Protected: Trademarks can be protected by

1. Federal Trademark Registration – The United States has a

federal statutory scheme of trademark protection known as the Lanham Act. Under the Lanham Act an owner of a federal trademark is presumed to own a valid mark and also is presumed to have the exclusive right to use the trademark in interstate, territorial and foreign commerce.

2. State Trademark Registration- Trademarks may also be

registered with the state of Iowa, pursuant to Iowa Code Chapter 548.

3. Common Law Trademark Rights- In addition to the statutory

trademark protection, Iowa has a history of enforcing common law trademark rights.

C. How Enforced: Trademark rights can be enforced through litigation

in both state and federal courts. Remedies in both state and federal courts include:

1. Injunctions 2. Damages, including treble damages in Iowa; 3. Seizure and/or destruction of infringing goods.

D. Length of Protection – State trademark registrations last for ten

years and are renewable for successive ten-year terms. Under the

TRADEMARKS AND TRADE NAMES

common law, marks can be protected for as long as they are continuously used in commerce.

II. TRADE NAMES

Trade names are covered under Iowa Code Chapter 547. A person or co-partnership conducting business under a name other than the true surname of each person having an interest in the business must record the trade name with the county recorder. Recording includes the names and addresses of all owners and the business address of the business. Failure to comply is a simple misdemeanor.

KENT A. HERINK

515.288.2500

[email protected]


2

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500

2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C #1666872v2


ORGANIZATIONAL CHECKLIST FOR

A LIMITED LIABILITY COMPANY

JASON M. STONE

[email protected]


ORGANIZATIONAL CHECKLIST FOR A LIMITED LIABILITY COMPANY

A project of the Limited Liability Company Subcommittee of the LLCs, Partnerships and Unincorporated Entities Committee, Section of Business Law, American Bar Association http://meetings.abanet.org/webupload/commupload/CL590000/newsletterpubs/LLCChecklist_v2.pdf

TABLE OF CONTENTS PART I. Information for Articles of Organization.............................................................. 1

A. State of organization.................................................................................. 1 B. Name of LLC.............................................................................................. 1 C. LLC will be ................................................................................................. 1 D. Name of Registered Agent......................................................................... 1 E. Address of Registered Agent ..................................................................... 1 F. Principal Address of LLC ........................................................................... 1 G. Name and address of Organizer................................................................ 1 H. Effective date of organization..................................................................... 1 I. Professional LLC ....................................................................................... 2

PART II. Identification of Members.................................................................................. 2 A. Members.................................................................................................... 2 B. OFAC Compliance..................................................................................... 4

PART III. General Provisions .......................................................................................... 4 A. General Provisions .................................................................................... 4 B. Financial statements; accountant; accounting method; audits................... 4 C. Capital contributions .................................................................................. 6 D. Additional contributions.............................................................................. 6 E. Services to the LLC ................................................................................... 7 F. Member guarantees of LLC obligations ..................................................... 8 G. Distributions ............................................................................................... 8 H. Allocations of Profits and Losses ............................................................. 10 I. Code § 704(c) methodology and reverse 704(c) methodology ................ 10 J. Loans from Members............................................................................... 11 K. Transfers of membership interests .......................................................... 11 L. Disengagement Arrangements ................................................................ 13 M. Dissociation ............................................................................................. 14 N. Consent for Approval of Amendments to Operating Agreement .............. 14 O. Will the LLC be offering interests to the public?....................................... 15 P. Dissenter rights in the event of merger .................................................... 15 Q. Derivative actions .................................................................................... 15 R. Tax Matters Partner ................................................................................. 15

PART IV. General Member Information......................................................................... 15 A. Classes of members ................................................................................ 15 B. Manner of consenting .............................................................................. 16

JASON M. STONE

515.288.2500

[email protected]

2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C.

i



JASON M. STONE

515.288.2500

[email protected]

PART V. Information for Operating Agreement if Member-Managed ............................ 16 A. Methods of measuring level of consent.................................................... 16 B. Items requiring different levels of consent................................................ 16

PART VI. Information for Operating Agreement if Manager-Managed ......................... 19 A. Initial Managers ....................................................................................... 19 B. Qualification of Managers ........................................................................ 21 C. Selection of Managers ............................................................................. 22 D. Election or appointment of Managers ...................................................... 22 E. Removal of Managers.............................................................................. 23 F. Manner of consenting .............................................................................. 24 G. Methods of measuring level of consent.................................................... 24 H. Items requiring different levels of consent................................................ 25 I. Duties of managers.................................................................................. 30 J. Other Duty of Loyalty Issues.................................................................... 30 K. Good Faith/Fair Dealing........................................................................... 30 L. Member Approval of Conflict of Interest Transaction ............................... 30 M. Standard for Judicial Approval of Conflict of Interest Transactions

between LLC and Managers.................................................................... 30 N. Management fee and arrangemen:.......................................................... 30 O. Titles of certain managers, if any ............................................................. 31 P. Compensation of managers, if any .......................................................... 31

PART VII. Other matters ............................................................................................... 31 A. Foreign qualifications............................................................................... 31 B. Capital contribution agreement needed ................................................... 31 C. Business already in operation as a general or limited partnership or sole

proprietorship........................................................................................... 32 D. Tradename registrations with Secretary of State ..................................... 32 E. Advise given that name registration of company and of tradename

does not give trademark protection.......................................................... 32 F. Name of accountants; other legal advisors .............................................. 33

PART VIII. Dissolution, Winding up & Termination........................................................ 34 A. Voluntary Dissolution ............................................................................... 34 B. Involuntary Dissolution............................................................................. 34

PART IX. Dispute Resolution ........................................................................................ 35 A. Mediation required ................................................................................... 35 B. Arbitration ................................................................................................ 35 C. Waiver of jury trial .................................................................................... 36

PART XI. Schedule of responsibilities ........................................................................... 36


ii



MEMORANDUM

TO: File

FROM:

RE: LLC Formation Checklist

DATE: April 8, 2009

PART I. Information for Articles of Organization A. State of organization:

B. Name of LLC:

C. LLC will be:

Member Managed Manager Managed Other

D. Name of Registered Agent:

Law Firm Other:

E. Address of Registered Agent:

F. Principal Address of LLC:

G. Name and address of Organizer:

Law Firm Other

H. Effective date of organization:

JASON M. STONE

515.288.2500

[email protected]


1



JASON M. STONE

515.288.2500

[email protected]

I. Professional LLC: Yes No

PART II. Identification of Members A. Members:

Name: United States Person Yes No

State(s) of Residence or in Which Taxable:

If entity: form of entity, jurisdiction of organization and tax status:

Taxpayer Identification Number:

Address: Telephone Number:

Fax Number:

E-mail Address:

Member #2

Name: United States Person: Yes No





Fax Number:

E-mail Address:


2



JASON M. STONE

515.288.2500

[email protected]

Member #3






Fax Number:

E-mail Address:

Member #4






Fax Number:

E-mail Address:

If a member is a trust, provide name of trustee and date of document

creating trust.

If a member is an estate, provide name of legal representative, date of death if applicable, and certified copy of appointing court order.

If agent, provide name of principal, copy of appointing document, and affidavit of effect.

Is any member an Affiliate of any other Member or Manager?

Identify other relationships between the Members and/or Manager (personal, family, other business relationships).


3



JASON M. STONE

515.288.2500

[email protected]

B. OFAC Compliance:

1. Confirmation that no initial manager or beneficial owner is on Office of Foreign Asset Control (OFAC) Specially Designated Nationals (SDN) List.

Yes No

Date of List:

2. Responsibility for checking SDN upon admission of additional member(s):

Manager All Members Legal Counsel Other:

PART III. General Provisions A. General Provisions:

1. Effective date of operating agreement: , 20___.

2. Statement of LLC’s purpose:

3. Is this a single member LLC: Yes No

4. Fiscal year:

Calendar year Other:

5. Assumed Name Filings:

Name File in State(s)

Name File in State(s)

B. Financial statements; accountant; accounting method; audits:


4



JASON M. STONE

515.288.2500

[email protected]

1. LLC to be taxed under:

Subchapter K Subchapter C Subchapter S Other

2. Financial Statements to Members

a. Regular financial reports provided to members b. Audited financial reports provided to members c. Any one or more of the foregoing provided to member, but only

upon members’ request (items ).

3. Accountant

(Name) (Firm) (Address) (Phone) (Fax) (E-Mail)

4. Accounting Method:

Cash Accrual

5. Audit or Review:

Audit Review

Required Required At option of Managers At option of Managers At option of Members At option of Members Who shall bear cost Who shall bear cost

6. Certification of Membership Interests: Yes No

7. Power of Attorney to file Composite Return:

Yes No


5



JASON M. STONE

515.288.2500

[email protected]

C. Capital contributions:

1. Initial Contributions:

Member Form of Contribution (if debt, how secured)?

Value

1 2 3 4 5 6

2. Representations and warranties regarding debt and title related to

contributions:

D. Additional contributions:

1. Are additional contributions required? Yes No

2. If agreed in advance:

Form of Contribution

Value Date or Conditions of Making Contribution

1 2 3 4 5 6

3. Are additional capital calls permitted?

Yes No


6



JASON M. STONE

515.288.2500

[email protected]

a. Triggering Events:

(1) Who can make the capital call? (2) Specific event or circumstance or process?

b. Manager makes call; members must contribute pro rata

(1) within days/weeks/months, or (2) within the time period specified in call notice

c. Manager makes call; if % of members consent, members must contribute pro rata

(1) within days/weeks/months, or (2) within the time period specified in call notice d. Voluntary Contribution (changes sharing ratio/ operating

agreement may have pro-rata rights)

4. Consequences of failure to fund:

a. Reduction in share of profits b. Reduction in share of profits and reallocation of capital c. Preferential distributions to other members d. Loan from company at % e. Loan from non-defaulting member (and interest rate) f. Personal liability on the part of member g. Opportunities for other members to make up and defaulting

member is diluted h. Suspension of management authority or voting rights i. Right to purchase defaulting member’s interest in the LLC j. Forfeiture of defaulting member’s interest in the LLC k. Automatic diversion of distributions to make up deficit (lien like)

5. Maintenance of Capital Accounts. Capital accounts will be maintained in accordance with:

a. “Tax Basis” b. “Tax Book Rules” (Treas. Reg. § 1.704-1(b)(2)(iv)); c. GAAP.

E. Services to the LLC:


7



JASON M. STONE

515.288.2500

[email protected]

1. Will the LLC issue equity interests as compensation for services?

Yes No

If yes, describe any vesting requirements:

2. For services by members?

Yes No

3. For services by non-member employees?

Yes No

F. Member guarantees of LLC obligations:

1. No

2. Partial

3. Unlimited

G. Distributions:

1. General Questions About Distribution Scheme:

a. Will distributions be made in proportion to capital contributed? b. Will any members receive a preferential return on capital? c. Will any members receive a preferential return of capital? d. Are preferences intended to be temporary or permanent? e. Are distributions of operating income expected? f. Will operating distributions and capital distributions be treated

differently? g. Will losses be charged back?

2. Guaranteed Payments: .

3. Distributions of Proceeds from Operations:


8



JASON M. STONE

515.288.2500

[email protected]

a. Sharing Ratios and Economic Units

Member Sharing Ratio Economic Units 1 2 3 4 5 6

b. In accordance with Capital Accounts c. As a preferred return on Capital Contributions (temporary or

permanent?)

d. Other:

4. Distribution of Proceeds from Capital Transactions.

a. In accordance with Capital Accounts b. As preferred return on Capital Contributions c. In accordance with Sharing Ratios d. In accordance with Economic Units e. Other:

5. Liquidating distributions:

a. State law creditors b. In accordance with Capital Accounts c. As preferred return on Capital Contributions d. In accordance with Sharing Ratios e. In accordance with Economic Units f. As preferred return on capital contributions g. Other: (should it mirror distribution provisions? Not SE

problem if mirrors economic relationships)


9



JASON M. STONE

515.288.2500

[email protected]

6. Distributions in kind:

Prohibited (all distributions must be in cash) Permitted if pro-rata among the members Other:

7. Tax Distributions:

Yes No

a. automatically at % of taxable income b. member applies to manager; manager approves c. member applies to manager, manager approves; members

approval required at % d. member applies to manager, manager approves; if manager

declines, special meeting of members is called (or consent required) who have to approve at %

H. Allocations of Profits and Losses:

1. “Substantial Economic Effect” Safe Harbor

2. “Deficit Restoration Obligation”

3. “Alternate” Test

4. In an amount equal to a preferred return

5. In accordance with Sharing Ratios

6. In accordance with Economic Units

7. In accordance with capital accounts

8. Using targeted capital accounts

9. Other:

10. Allocation of Non Recourse Debt.

I. Code § 704(c) methodology and reverse 704(c) methodology:


10



JASON M. STONE

515.288.2500

[email protected]

J. Loans from Members:

1. May members make loans to the LLC?

Yes If Yes, who makes that determination?

No

2. Are members obligated to make loans to the LLC?

Yes No

3. If mandatory:

a. Amount: $_________ b. Interest Rate: $_________ c. Term: $_________ d. Collateral: $_________

Not collateralized e. Remedies upon default:

4. If permitted:

a. Amount: $_________ b. Interest Rate: $_________ c. Term: $_________ d. Description of collateral:

e. Remedies upon default:

f. Recourse or Nonrecourse:

Recourse Nonrecourse

K. Transfers of membership interests:

1. Voluntary transfers:


11



JASON M. STONE

515.288.2500

[email protected]

a. Absolutely prohibited b. Permitted, but assignee is not admitted without consent of

% of the other members c. Permitted only with consent of % of the other members d. Permitted to:

(1) Spouse (2) Children (3) Other relatives:

(4) Trusts for any of the above (5) Controlled business entities but only under these

conditions:

Assignee automatically becomes member Assignee is not admitted without consent Permitted only with consent of % of the

other members

2. Involuntary transfers.

a. Assignee is not admitted without consent of all other members

b. Assignee not admitted without consent of % of the other members

3. Right of first refusal/offer:

a. Voluntary transfers:

(1) Exercisable by LLC (2) Exercisable by members but not economic interest

holders (3) Exercisable by members and economic interest

holders (4) Exercisable by LLC first and members second (5) Exercisable by LLC first and members and economic

interest holders second

b. Involuntary transfers

(1) Exercisable by LLC (2) Exercisable by members but not economic interest

holders


12



JASON M. STONE

515.288.2500

[email protected]

(3) Exercisable by members and economic interest holders

(4) Exercisable by LLC first and members second (5) Exercisable by LLC first and members and economic

interest holders second

L. Disengagement Arrangements:

1. Type of arrangement:

a. Put b. Call c. Buy-Sell d. Russian roulette e. Other:

2. Circumstances for exercise of disengagement:

a. Any time b. Any time after c. In the event of deadlock d. In the event of certain deadlocks

e. Upon the dissociation of a member f. If non-reciprocal rights among members or classes of

members, describe rights of each here:

3. Price:

a. Set by agreement by the members or managers on a regular basis

b. “Book” value

(1) As kept for tax purposes (prepared by the Company’s regularly employed accountant)

(2) “Booked up” to fair market value of Company assets

c. “Fair Market” determined by appraisal periodically or at time of call, etc.

(1) As kept for tax purposes


13



JASON M. STONE

515.288.2500

[email protected]

(2) “Booked up” to fair market value of Company assets.

M. Dissociation:

1. Voluntary withdrawal of a member

a. A member may not voluntarily withdraw

(1) Member’s interest is repurchased (2) Member becomes an assignee

b. A member may voluntarily withdraw

(1) Member’s interest is repurchased (pursuant to terms set forth in disengagement agreement section, above)

(2) Member becomes an assignee

2. Death, disability, dissolution or bankruptcy of a member:

a. Member’s representative or heir becomes a member without further action

b. Member’s representative or heir continues as an assignee c. Member’s interest is repurchased from the representative or

heir d. Member’s representative or heir becomes a member only

with consent e. Definition of disability:

(1) Guardian/conservator appointed by court (2) Primary care physician or designee determines inability to

manage business affairs (3) Member has not performed business functions for

days (4) Agent pursuant to power of attorney notices Company

3. Dissolution/termination of a member’s existence as a member:

a. Member’s interests are repurchased b. Member becomes an assignee

N. Consent for Approval of Amendments to Operating Agreement:

1. Unanimous consent of the members for all amendments

2. Consent of % of the members is required for all amendments (other than those that affect a member uniquely)


14



JASON M. STONE

515.288.2500

[email protected]

3. Consent of % of the members for amendments but unanimous consent for some amendments, possibly including

a. Financial Arrangements b. Any matter requiring unanimous approval in the operating

agreement c. Admission and expulsion of members d. Name e. Purpose f. Authority of members or managers g. Dissolution h. Other:

O. Will the LLC be offering interests to the public?

Yes No

P. Dissenters’ rights in the event of merger:

Yes No

Q. Derivative actions:

Yes No

R. Tax Matters Partner:

PART IV. General Member Information A. Classes of members:

1. One class

2. Multiple classes of members

Differing voting rights Differing economic rights Other:

3. Initial voting rights:


15



JASON M. STONE

515.288.2500

[email protected]

Member Class of Voting Rights ________ of Voting Rights

1 2 3 4 5 6

B. Manner of consenting:

1. Meetings with formal rules

2. Voting by Proxy

3. Consent

Unanimous of the members Vote of members otherwise sufficient to act Other:

PART V. Information for Operating Agreement if Member-Managed

A. Methods of measuring level of authorization or consent:

1. Per capita

2. By sharing ratios/units

3. By listed capital contributions

4. By current capital account balances

5. Other: .

B. Items requiring different levels of authorization or consent:

Member(s) Ot


16



JASON M. STONE

515.288.2500

[email protected]

Managing

Majority of

Supermajority of

Unanimous Consent of

1. Acquire property 2. Maintain insurance 3. Borrow funds 4. Approve or initiate a Loan from a Member 5. Call a Loan 6. Investment of LLC funds in excess of $ 7. Execute documents 8. Decisions with respect to investment of funds 9. Maintain records

10. Do other acts to carry on business in the usual way 11. Cause the LLC to participate in a reorganization, merger,

conversion

12. Dissolve the LLC 13. Sell all or substantially all of the property of the LLC outside

of the ordinary course of the LLC’s business

14. Incur indebtedness not in excess of $ 15. Incur indebtedness in excess of $ 16. Expend funds of the LLC not in excess of $ 17. Expend funds of the LLC in excess of $


17



JASON M. STONE

515.288.2500

[email protected]

Member(s) Managing

Majority of

Supermajority of


Other

Action

18. Construct capital improvements not in excess of $

19. Construct capital improvements in excess of $ 20. Cause the LLC to guarantee the obligation of any person or

to pledge its property to secure the obligation of any person

21. Lend money of the LLC to any person 22. File on behalf of the LLC under the reorganization,

insolvency or bankruptcy laws

23. Cause the LLC to require a capital contribution from its Members

24. Amend the operating agreement 25. Determine the time and amounts of distributions to the

Members

26. Admit an assignee as a Member 27. Make tax elections 28. Commence litigation in the name of the LLC 29. Enter into agreements on behalf of the LLC 30. Exercise LLCs rights under rights of first refusal or buy/sell

agreements


18



JASON M. STONE

515.288.2500

[email protected]

Member(s)

Action

Managing

Majority of

Supermajority of


Other

31. Open bank accounts and signing checks 32. Approve payment of compensation to Members and other

agents

33. Approve reimbursement of expenses of managers 34. Determine to expel member for cause 35. Institute an action for judicial dissolution and winding up 36. Admit new member and modification of economic

relationships of members in connection therewith

PART VI. Information for Operating Agreement if Manager-Managed

A. Initial Managers:

1. Number of Managers:


19



JASON M. STONE

515.288.2500

[email protected]

2. Board of Managers?

Yes No

3. Classes of Managers

Yes No

4. Names, addresses and titles (if any) of Managers:

Manager #1

Name: Taxpayer Identification Number:


Fax Number:

E-mail Address:

Manager #2



Fax Number:

E-mail Address:


20



JASON M. STONE

515.288.2500

[email protected]

Manager #3



Fax Number:

E-mail Address:

Manager #4



Fax Number:

E-mail Address:

Manager #5



Fax Number:

E-mail Address:

B. Qualification of Managers:

1. Must be members?

Yes No

2. Must be individuals?


21



JASON M. STONE

515.288.2500

[email protected]

Yes No

C. Selection of Managers:

1. Unanimously selected by members

2. Selected by a majority of members consisting of %

3. Managers selected by particular members or classes of membership interests:

Member / Class

Number of Managers that Member can appoint

4. Managers selected by cumulative voting

5. Special rule where manager removed for cause

a. All of the members other than member who appointed the manager

b. The member appointed the manager c. Same rule as for other elections or appointment d. Majority of the members other than the member who

appointed the manager e. Majority of the members

6. Other:

D. Election or appointment of Managers:

1. Periodic election of managers


22



JASON M. STONE

515.288.2500

[email protected]

a. Annual b. Other:

2. Election or appointment only on the removal or departure of a manager

3. Specific succession provided in operating agreement:

E. Removal of Managers:

1. Who determines removal of manager?

a. All of the members b. All of the members who appointed the manager c. % of the members who appointed the manager d. All of the members other than the member who appointed

the manager e. % of the members f. % of the members other than the member who

appointed the manager g. All of the managers other than the manager being removed h. % of the managers other than the manager being

removed i. Other:

2. Removal only for cause?

Yes No

a. If yes, definition of “cause:”

(1) Fraud (2) Gross negligence (3) Bankruptcy (4) Disability; if so, definition of disability:

.

(a) Guardian/conservator appointed by court (b) Primary care physician or designee determines

inability to manage business affairs


23



JASON M. STONE

515.288.2500

[email protected]

(c) Member has not performed business functions for days

(d) No performance of duties for Company in days

(e) Agent pursuant to power of attorney notices Company of disability

(5) Willful misconduct (6) Conviction of a crime (7) Conviction of a crime against the Company (8) Violation of the operating agreement:

(a) Any violation (b) Material violation (c) Repeated violation (d) Violation of particular provisions:

(9) Other:

3. If yes, who determines whether “for cause” factors have been met?

a. Same as determines removal of manager, above b. Adjudication c. Arbitration

F. Manner of consenting:

1. Meetings with formal rules

2. Informal consent

3. Vote by Proxy?

G. Methods of measuring level of consent:

1. Per capita

2. Other:


24



JASON M. STONE

515.288.2500

[email protected]

H. Items requiring different levels of consent:

Manager(s)

Ratification Required

by:

Action

Single

Majority of

Supermajority of


Single “Super”

Major i ty

of

Members

Supe r ma j o r i t y

o f

Membe r s

Unan i

mous

Cons ent

o f

Member s

Other

1. Acquire property 2. Maintain insurance 3. Borrow funds 4. Approve Loan from a Member 5. Call a Loan 6. Invest LLC funds in excess of $____ 7. Execute documents 8. Employ professionals and other agents 9. Decisions with respect to investment of

funds

10. Maintain records


25



JASON M. STONE

515.288.2500

[email protected]

Manager(s)


by:

Action

Single

Majority of

Supermajority of


Single “Super”

Major i ty

of

Members


o f

Membe r s

Unan i

mous

Cons ent

o f

Member s

Other

11. Do other acts to carry on business in the usual way

12. Cause the LLC to participate in a merger/conversion/domestication/________

13. Dissolve the LLC 14. Sell all or substantially all of the

property of the LLC outside of the ordinary course of the LLC’s business

15. Incur indebtedness not in excess of $_____

16. Incur indebtedness in excess of $________


26



JASON M. STONE

515.288.2500

[email protected]

Manager(s)


by:

Action

Single

Majority of

Supermajority of


Single “Super”

Major i ty

of

Members


o f

Membe r s

Unan i

mous

Cons ent

o f

Member s

Other

17. Expend funds of the LLC not in excess of $______

18. Expend funds of the LLC in excess of $______

19. Construct capital improvements not in excess of $________

20. Construct capital improvements in excess of $________

21. Cause the LLC to guarantee the obligation of any person or to pledge its property to secure the obligation of any person

22. Lend money of the LLC to any person


27



JASON M. STONE

515.288.2500

[email protected]

Manager(s)


by:

Action

Single

Majority of

Supermajority of


Single “Super”

Major i ty

of

Members


o f

Membe r s

Unan i

mous

Cons ent

o f

Member s

Other

23. Cause the LLC to commence an action in bankruptcy

24. Cause the LLC to require a capital contribution from its members

25. Amend the operating agreement 26. Determine the time and amounts of

distributions to the members

27. Admit an assignee as a member 28. Make tax elections 29. Commence litigation in the name of the

LLC

30. Enter into agreements on behalf of the LLC


28



JASON M. STONE

515.288.2500

[email protected]

Manager(s)


by:

Action

Single

Majority of

Supermajority of


Single “Super”

Major i ty

of

Members


o f

Membe r s

Unan i

mous

Cons ent

o f

Member s

Other

31. Exercise LLC’s rights under rights of first refusal or buy/sell agreements

32. Open bank accounts and sign checks 33. Approve payment of compensation to

members and other agents

34. Approve reimbursement of expenses of managers

35. Determine to expel members for cause 36. Institute an action for judicial dissolution

and winding up

37. Admit new members and modification of economic relationships of members in connection therewith


29



JASON M. STONE

515.288.2500

[email protected]

I. Duties of managers:

1. Duty of care

a. Gross negligence b. Ordinary prudence c. Other:

2. Right to compete:

a. Yes b. No c. Yes, but limited to . d. No, but may invest in entities competing with the Company if

no management rights and investment in other entity does not exceed a % interest in the competing venture.

3. Duty to offer opportunities to the LLC:

Yes, as to . No

4. Expectation that manager will have other activities:

Yes No

J. Other Duty of Loyalty Issues:

K. Good Faith/Fair Dealing:

L. Member Approval of Conflict of Interest Transaction:

Unanimous

M. Standard for Judicial Approval of Conflict of Interest Transactions between LLC and Managers:

Entire Fairness Arms Length

N. Management fee and arrangement: ___________________________________


30



JASON M. STONE

515.288.2500

[email protected]

O. Titles of certain managers, if any:

P. Compensation of managers, if any:

PART VII. Other matters

A. Foreign qualifications:

Yes No

If yes, specify where and registered agent/office. Keep in mind that each state has its own requirements as to when state registration is required.

State RO/RA

B. Capital contribution agreement needed:

Yes No

If yes, then provide for:

1. Disclosure that membership interests are not registered securities

2. Acquisition of membership / economic interests

3. Acceptance of contribution; consideration

a. Cash b. Letter of Credit c. Secured promissory note


31



JASON M. STONE

515.288.2500

[email protected]

d. Personal guaranty of company debt (if permitted by state law)

4. Representations as to investor suitability standards; other standards

5. Representations as to non-foreign person status; residence

6. Representations that all requested information was made available

7. Representations that investment intent only

8. Indemnification as to representations; security therefor

9. Transferability

10. Consider legal review of other offering documents

11. Other:

C. Business already in operation as a general or limited partnership or sole proprietorship:

Yes No

1. Transfer of documents of assets in exchange of capital contribution

a. Bill of sale for assets (request listing from client) b. Assignment for intangible assets and other assets

2. Tax considerations for initial contribution (book-up; taxable event, etc.)

D. Tradename registrations with Secretary of State:

E. Advice given that name registration of company and of tradename does not give trademark protection:

Yes No

Intellectual Property Work Referred to:


32



JASON M. STONE

515.288.2500

[email protected]

F. Name of accountants; other legal advisors:

1. Tax Advisor

Name: Address: Telephone Number:

Fax Number:

E-mail Address:

2. Estate planning attorney


Fax Number:

E-mail Address:

3. Financial advisor


Fax Number:

E-mail Address:


33



JASON M. STONE

515.288.2500

[email protected]

4. Other Advisor


Fax Number:

E-mail Address:

PART VIII. Dissolution, Winding up & Termination A. Voluntary Dissolution:

1. Consent of members

a. Unanimous consent of the members or classes of members b. Consent of Number or % of the members c. Will of any one member d. Other: .

2. Specific event

a. Upon Sale of substantially all assets of the LLC b. Event making it unlawful to carry on business c. Disassociation of key person d. Date or Event Certain e. Other: .

B. Involuntary Dissolution:

1. Judicial Dissolution

2. Administrative dissolution

a. Authority to reverse administrative dissolution?

3. Agreement to allow a court ordered dissolution

a. Oppression b. Inability to operate except at a loss c. Deadlock d. Not reasonably practical standard


34



JASON M. STONE

515.288.2500

[email protected]

4. Winding Up

a. Who has authority to wind up? b. Articles or Certificate of Dissolution c. Publication requirement (Notice to known and unknown creditors) d. Change in fiduciary duties?

5. Termination

PART IX. Dispute Resolution A. Mediation required:

Yes No

B. Arbitration:

Yes No

1. Initiation of arbitration:

a. Who? b. How?

2. Single arbitrator or

Panel

3. Selection

4. Rules applied to arbitrators

Evidentiary: Procedural: Substantive:

5. Require written decision

Yes No


35



JASON M. STONE

515.288.2500

[email protected]

6. Exclusive remedy

Yes No

7. Binding

Yes No

8. Limitations on Damages

Yes; No

C. Waiver of jury trial:

Yes No

D. Choice of venue:

Yes No

PART X. Schedule of responsibilities

Task Party Responsible Promised to client

by Articles/Certificate of Organization

File immediately? Yes/No Delayed Effective Date? Yes/No

Operating Agreement Capital contribution agreement Manager employment agreement(s)

Member employment agreement(s)

Equity compensation documents


36



JASON M. STONE

515.288.2500

[email protected]

Task Party Responsible Promised to client by

Subscription agreements Bills of sale for capital contribution

Assignments for capital contribution

Tax identification number (SS-4) State Revenue Cabinet initial filing registration

Company minute book Foreign state qualifications


37

insert

number

tab

here

BEST PRACTICES FOR OPERATING YOUR BUSINESS

JULIE JOHNSON MCLEAN, BEV EVANS, JASON ROSS,

SCOTT MIKKELSEN, AND JOHN LONG

2:25 p.m. to 3:25 p.m. • Banking relationships & credit agreements • Personal guarantees • Insurance relationships • Insurance purchase - E & O, D & O • Negotiating and contracts • Strengthening client business forms • Annual meetings and minutes - documentation of business transactions • Lien searches/UCC checks, credit checks • Rights of first refusal • Financial difficulties of partners - buy-sell provisions? • Dealing with bankruptcy and insolvency of customers and suppliers • How does the Stimulus Bill affect you?

ATTORNEY BIO

JULIE JOHNSON MCLEAN

CONCENTRATION

Julie is a senior shareholder of the Davis Brown Law Firm in the Business Division. She has a general practice in but not limited to areas of Banking, Bankruptcy, Business Organizations, and Mergers and Acquisitions.


• AV rated by Martindale-Hubbell. An AV® certification mark is a significant rating accomplishment - a testament to the fact that a lawyer's peers rank him or her at the highest level of professional excellence. A lawyer must be admitted to the bar for 10 years or more to receive an AV® rating.

SUMMARY

Julie has experience representing creditors and debtors in financial and bankruptcy transactions. She represents buyers and sellers in purchase transactions.

MEMBERSHIPS

• Past President of the Iowa Chapter of the Federal Bar Association, served as the Iowa Chapter’s National Delegate • Business Law Section of the Iowa State Bar Association and • Uniform Commercial Code Committee, Iowa State Bar Association. • Greater Des Moines Leadership Institute graduate, Secretary GDMLI Board of Governors. • Commerce and Economic Development Committee of the Association of Business and Industry. • Past member Polk County Republican Central Committee. Active in Republican activities. • Coe College Board of Visitors

PERSONAL

Julie loves all sports, especially golf, volunteering for their daughters’ sports and other activities, and the Chicago Cubs.

BORN CEDAR RAPIDS, IOWA, 1956 EDUCATION COE COLLEGE (B.A., WITH HONORS, 1978);

UNIVERSITY OF IOWA

(J.D., WITH DISTINCTION, 1981) ADMITTED TO BAR 1981, IOWA AREAS OF LAW BANKING

BANKRUPTCY AND CREDITORS' RIGHTS

BUSINESS ORGANIZATIONS AND

TRANSACTIONS COMMERCIAL LAW

FINANCE

MERGERS & ACQUISITIONS MEMBERSHIPS AMERICAN BAR ASSOCIATION

FEDERAL BAR ASSOCIATION

IOWA STATE BAR ASSOCIATION PHI BETA KAPPA


#1555495

http://www.davisbrownlaw.com/areas/view/index.cfm/banking

http://www.davisbrownlaw.com/areas/view/index.cfm/bankruptcy_and_creditors_rights

http://www.davisbrownlaw.com/areas/view/index.cfm/bankruptcy_and_creditors_rights



http://www.davisbrownlaw.com/areas/view/index.cfm/commercial_law

http://www.davisbrownlaw.com/areas/view/index.cfm/finance

http://www.davisbrownlaw.com/areas/view/index.cfm/mergers__acquisitions

ATTORNEY BIO

BEVERLY EVANS

CONCENTRATION

Bev is a senior shareholder of the Davis Brown Law Firm in the Business Division. She has a general practice in but not limited to the areas of Business Organizations, Mergers, Acquisitions and Securities.


• AV rated by Martindale-Hubbell. An AV® certification mark is a significant rating accomplishment - a testament to the fact that a lawyer's peers rank him or her at the highest level of professional excellence.

SUMMARY

Bev enjoys working with start-up enterprises as well as with publicly-held companies, in regional as well as international transactions. She works with the Iowa Capital Investment Corporation (ICIC), an entity authorized by the state for the purpose of forming, through the use of incentive tax credits, a fund of funds designed to encourage the development of venture capital in the state. She also works with Iowa Community Development, L.C., (ICD) an entity that has successfully applied for and deployed Federal New Market Tax Credits. Her work with ICIC, ICD and with start-up enterprises has fueled her enthusiasm for the economic development potential of Iowa.

MEMBERSHIPS

• Iowa State Bar Association Business Law Section

• Author and editor Iowa State Bar Association Business Law Practice Manual.

OF NOTE

Bev is active in Lex Mundi, an international association of independent law firms. She represents the Firm at meetings around the world and enjoys developing worldwide relationships that enhance the Firm’s ability to provide exceptional service to businesses interested in international trade or in engaging in international transactions.

BORN RUSHVILLE, NEBRASKA, 1949 EDUCATION CREIGHTON UNIVERSITY (B.A., 1971); UNIVERSITY OF NEBRASKA AT

LINCOLN COLLEGE OF LAW (J.D.,

1979) ADMITTED TO BAR 1979, NEBRASKA; 1996, IOWA AREAS OF LAW BANKING

BUSINESS ORGANIZATIONS AND TRANSACTIONS

SECURITIES MEMBERSHIPS LINCOLN INNE NEBRASKA STATE BAR ASSOCIATION

IOWA STATE BAR ASSOCIATION

BUSINESS LAW SECTION

#1555166

http://www.davisbrownlaw.com/areas/view/index.cfm/banking



http://www.davisbrownlaw.com/areas/view/index.cfm/securities

ATTORNEY BIO

JASON M. ROSS

CONCENTRATION

Jason is a shareholder of the Davis Brown Law Firm in the Business Law Division. His practice concentrates on Commercial Transactions, Finance Transactions, and Distribution and Franchise Law.

SUMMARY

Jason acts as counsel on the full spectrum of commercial matters affecting businesses, including mergers and acquisitions, finance, purchase and sale of goods and services, licensing, commercial agency, product distribution and franchise. Jason also acts as counsel to borrowers and lenders in the real estate finance arena.


His clients include franchisors, manufacturers, and vendors of a diverse array of goods and services, including food items, packaging materials, telecommunications services, agricultural products, and engine parts. Jason also represents real estate developers in finance matters, including portfolio loans, FNMA and conduit loan transactions.

SEMINARS, LECTURES, AND PUBLICATIONS Jason has written on trade regulation matters such as financial privacy and internet advertising. OF NOTE

Jason lived in Germany and speaks German proficiently. Jason is active in Lex Mundi, an international association of independent law firms, and works to develop relationships with legal professionals outside the United States to assist clients in international transactions. PERSONAL

Outside of work, Jason enjoys traveling, skiing, and playing golf. He is a volunteer for Youth for Understanding (YFU) International Exchange.

BORN FREEPORT, ILLINOIS, 1973

EDUCATION UNIVERSITY OF ILLINOIS-URBANA (B.A., MAGNA CUM LAUDE, 1995);

UNIVERSITY OF IOWA

(J.D., WITH DISTINCTION, 1999); PHI BETA KAPPA; IOWA LAW REVIEW

ADMITTED TO BAR 1999, WISCONSIN; 2000, ILLINOIS;

2003, IOWA

AREAS OF LAW BUSINESS ORGANIZATIONS AND

TRANSACTIONS

COMMERCIAL LAW FINANCE

FRANCHISE AND DISTRIBUTION LAW

INTERNATIONAL LAW REAL ESTATE

MEMBERSHIPS AMERICAN BAR ASSOCIATION IOWA STATE BAR ASSOCIATION

WISCONSIN STATE BAR

ASSOCIATION

#1555544



http://www.davisbrownlaw.com/areas/view/index.cfm/commercial_law

http://www.davisbrownlaw.com/areas/view/index.cfm/finance

http://www.davisbrownlaw.com/areas/view/index.cfm/franchise_and_distribution_law

http://www.davisbrownlaw.com/areas/view/index.cfm/international_law

http://www.davisbrownlaw.com/areas/view/index.cfm/real_estate

ATTORNEY BIO

JOHN S. LONG

CONCENTRATION

John is an associate of the Davis Brown Law Firm. He joined the Business Division in 2007 in the areas of Securities, Insurance Regulation, Business Organizations, and Mergers and Acquisitions. ACADEMICS

He graduated, with distinction, from the University of Iowa College of Law in 1999. John received his Bachelor of Arts in Economics and Philosophy from Northwestern University in Evanston, Illinois in 1996.

OF NOTE

John joined us from AEGON USA in Cedar Rapids where he was an attorney in the legal department of the Annuity Products & Services Division. He started his legal career practicing securities law in the San Francisco office of a large international law firm where he represented investment banks and financial services firms in a wide variety of both public and private securities offerings.

PERSONAL

John was born and raised in the Des Moines area. John is married and enjoys golfing, running, and spending time with family and friends.

BORN DES MOINES, IOWA, 1973 EDUCATION NORTHWESTERN (B.A., 1996); UNIVERSITY OF IOWA (J.D., WITH DISTINCTION, 1999) ADMITTED TO BAR 2005, IOWA; 2000, CALIFORNIA AREAS BUSINESS LAW

SECURITIES MEMBERSHIPS IOWA STATE BAR ASSOCIATION STATE BAR OF CALIFORNIA

#1553867

ATTORNEY BIO

SCOTT D. MIKKELSEN

CONCENTRATION

Scott is an associate of the Davis Brown Law Firm Business Division focused in the areas of Business Organizations and Transactions, Renewable Energy, and Community and Economic Development Law and Development-related Tax Credits.

SUMMARY

Scott has assisted private developers, non-profit entities, and community development entities and corporations in both the application and transaction phases of development related projects. He has experience with Low-income Housing Tax Credits (LIHTC), New Market Tax Credits (NMTC), Federal Renewable Energy Tax Credits, Historic Tax Credits, State Enterprise Zone Credits, Venture Capital Credits and City and State HOME funds.

He regularly consults with businesses in the formation stage and has been involved in the formation of businesses of every size and tax level, including LLCs, S corps., C corps., and LLPs.

ACADEMICS

Scott graduated from Duke University Law School in 2006. He was the founder and Editor-in-Chief of the Duke Journal of Constitutional Law and Public Policy. His note, “Eminent Domain after Kelo v. City of New London: Compensating for the Supreme Court’s Refusal to Enforce the 5th Amendment,” was published by the Journal.

He has an MSc Economics, with an emphasis in accounting and finance, from the University of Manchester Institute of Science & Technology & Manchester Business School in Manchester, England.

He graduated summa cum laude, with a BA in Finance from the University of Northern Iowa. At UNI, he was a letter-winner for the Panther football team.

OF NOTE

Prior to law school Scott worked in institutional investment research and trading in Chicago, Il.

COMMUNITY

Scott is a board member of the East Des Moines Chamber of Commerce, the Polk County Republican Central Committee, a volunteer at the HOLA legal clinic and Volunteer Lawyers Project, a member of the Iowa State Bar Association’s Know Your Constitution Committee, and a member of the American Bar Association’s Forum on Affordable Housing and Community Development Law.

PERSONAL

Scott and his wife Amber live in the Des Moines area and have a son and two daughters.

BORN MARSHALLTOWN, IOWA EDUCATION UNIVERSITY OF NORTHERN IOWA

(B.A., SUMMA CUM LAUDE, 2000)

UNIVERSITY OF MANCHESTER INSTITUTE OF SCIENCE &

TECHNOLOGY, MANCHESTER,

ENGLAND (MSC, 2001) DUKE UNIVERSITY LAW SCHOOL

(J.D., 2006) ADMITTED TO BAR IOWA, 2006; UNITED STATES DISTRICT COURT, NORTHERN AND

SOUTHERN DISTRICTS OF IOWA;

UNITED STATES COURT OF APPEALS FOR THE 8TH CIRCUIT AREAS OF LAW BUSINESS ORGANIZATIONS AND

TRANSACTIONS COMMERCIAL LAW

RENEWABLE ENERGY

FINANCIAL INSTITUTIONS REAL ESTATE PLANNING,

DEVELOPMENT AND MANAGEMENT

REAL ESTATE TRANSACTIONS TAX CREDIT FINANCE AND

ECONOMIC DEVELOPMENT MEMBERSHIPS AMERICAN BAR ASSOCIATION AMERICAN BAR ASSOCIATION FORUM

ON AFFORDABLE HOUSING AND

COMMUNITY DEVELOPMENT LAW IOWA STATE BAR ASSOCIATION


#1554437

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500

2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C. #1668060

FINANCING A BUSINESS - GENERAL CHECKLIST

Taken from Legal Checklists by Thomson Reuters/West, December 2004.


[email protected]

1.1 SOURCES OF FINANCING. A. Banks. B. Savings and loan associations. C. Finance companies. D. Venture capital firms, including small business investment companies

(SBICs), which can borrow funds from the SBA or have the SBA guarantee loans made by the SBIC to small businesses.

E. Private lenders or investors. F. Equity financing (e.g., issuance of stock). G. Insurance companies. H. Life insurance policies. I. Government agencies (e.g., Small Business Administration). J. Creditors. K. Factors. L. Personal savings. M. Suppliers. N. Lessors of equipment and facilities. O. Relatives and friends. P. Retirement plans. Q. Distributors. 1.2 TYPES OF FINANCING. A. Loans. B. Leasing of needed equipment and facilities. C. Supplier credit (trade credit). D. Accounts receivable. E. Inventory. F. Factoring. G. Chattel mortgage. H. Real estate mortgage. I. Letters of credit. J. Equity financing.


K. Distributor credit. 1.3 FACTORS TO CONSIDER WHEN SELECTING TYPE OF FINANCING. A. Cost of financing (e.g., interest rate, charges to process loan). B. Availability of money from lenders. C. Planned use of proceeds. D. Security required. E. Personal guarantees required. F. Time that money will be needed. G. Repayment program. H. Restrictions that lender will impose on business activities. 1.4 CAUTIONS IN OBTAINING FINANCING. A. Limits of borrowing capacity should not be exhausted. B. Loan should be large enough to provide cushion in case there are

unexpected developments. C. Debt financing is preferred over equity financing. D. Borrowing should be avoided, if possible, when interest rates are high. E. Personal guarantees should be avoided. F. Important to know what financing is available. G. Comparison shop for best terms. 1.5 STEPS TO TAKE BEFORE APPLYING FOR LOAN. A. Business should establish a strong relationship with a lender before

asking for a loan. B. Copy of credit reports should be obtained, and any mistakes should be

corrected. C. Financial records should be put in order. D. Assets of business should be revalued at current worth. E. Information that will be required by prospective lender should be

determined. F. Lending limit for prospective lenders should be determined. Borrower

should consider whether limit will be sufficient for current and future needs.

G. Accounts payable and accounts receivable should be put in good order. H. Plenty of time should be allowed for a loan to be processed. The worst

time to apply for a loan is when the borrower needs it most.


515.288.2500

[email protected]


2


1.6 PREPARATION OF FINANCING PROPOSAL. A. Prospective borrowers are judged in part by the manner in which they

present their financing proposal. 1. “Hit or miss” request for funds without supporting data will be

viewed unfavorably because it is difficult for prospective lenders to evaluate the merits of the proposal and potential risks.

2. Well-formulated presentation conveys a good impression. B. Contents of financing proposal. 1. Identify prospective borrower. 2. Borrower’s ability to use loan proceeds successfully in business. a. Skills and experience of those running business. b. Record of achievement of business. 3. Description of business. a. Type of business. b. Products and services. c. Major customers. d. Major suppliers. e. Sales history of products and services. f. Product development. g. Presence or absence of unions and current status of any

collective bargaining agreements. h. Number of employees. i. Key personnel. j. Competition. k. Existence of any disputes among owners. l. Legal disputes. 4. Current financing arrangements, including any contractual

restrictions on borrowing. 5. Past and present financial condition of business. a. Income statements for representative number of years. b. Balance sheets for representative number of years. c. Cash flow statements for representative number of years. d. Contingent liabilities. e. Independent audit reports. f. Independent appraisals of business assets. Lenders are

particularly interested in the value of business assets, because in the event that a business is not successful and cash is not available to repay a loan, a lender will depend on the liquidation of the assets for repayment.

6. Prepare a business plan. JULIE JOHNSON MCLEAN

515.288.2500

[email protected]


3


a. Provides background about ownership and management of the business.

b. Details operational strategy that management is pursuing. c. Details distinguishing elements of borrower’s product or

service that provide advantage over competition. d. Market niche strategy should be supported by complete

assessment of demand, demographics and distribution characteristics.

e. Anticipates reaction of existing competition to a market newcomer.

f. Details a contingency plan in case something unexpected occurs (e.g., sudden loss of key personnel).

g. Size of market should be analyzed according to: (1) Dollar volume. (2) Growth potential (3) Number and type of customers. (4) Competitors. (5) Geographic spread. 7. Financial needs of borrower. 8. How (and when) loan proceeds will be spent. 9. Repayment program. a. Program should be realistic. b. Demonstrate that the business will be able to repay the loan

at various levels of projected sales and earnings. 10. Security for repayment.

C. Borrower should practice his or her presentation before being interviewed by a lender since ill preparation may turn off a lender.

1.7 RESTRICTIONS IMPOSED BY LENDER ON BORROWER.

A. Many lenders who loan money to small businesses will impose various restrictions on the borrower’s freedom to conduct business.

B. Types of restrictions that may be imposed. 1. Expenditures for capital improvements and additions may be

limited, or lender’s consent may be required. 2. Declaration of dividends and other distributions may be limited, or

lender’s consent may be required. 3. Executive salaries may be limited. 4. Existing management may have to be retained. 5. Additional borrowings may be prohibited or limited. 6. Mortgages on real estate and equipment may be prohibited. 7. Pledging of assets may be prohibited. 8. Equity financing may be prohibited.


515.288.2500

[email protected]


4


9. Operating ratios (e.g., current assets to current liabilities) and working capital may have to be maintained at certain level.

10. Minimum net worth may have to be maintained. 11. Board of directors may have to include representatives of lender. 12. Acquisition of additional businesses may be prohibited without

lender’s consent. 13. Mergers and consolidations with other businesses may be

prohibited without lender’s consent. 14. Leasehold expenditures may be limited. 15. Life insurance policy of minimum amount may have to be

maintained for key employees. C. Consider carefully how each restriction will affect business operations. D. Financial statements and reports will be required by lender.

1.8 SECURITY FOR REPAYMENT. A. Lender usually will want security for repayment of loan. B. Types of collateral. 1. Chattel mortgages. 2. Real estate mortgages. 3. Accounts receivable. 4. Warehouse receipts. 5. Trust receipts. 6. Lease may be assigned. 7. Savings account may be pledged. 8. Life insurance policies. 9. Stocks and bonds. C. Personal guarantee may be required. In the event that a borrower’s

business fails, a personal guarantee ensures that the borrower will maximize the liquidation efforts. If borrower’s personal assets are owned jointly (e.g., with a spouse), the co-owner will also be required to guarantee the loans or to subrogate his or her interest in the assets.

1.9 SBA 7A LOAN PROGRAM. A. Small Business Administration (SBA) estimates that the 7A loan program

will provide $11 billion of guaranteed loans to small businesses in one year.

B. 7A program is the most popular federal assistance loan program. C. 7A money can fund start-up of business, help meet cash-flow needs, as

well as finance expansion and acquisition. D. Because these loans are guaranteed by the SBA, it is easier to obtain

them than conventional bank loans. The SBA and the lender share the risk that the loan will not be repaid in full. However, this guaranty is only a


515.288.2500

[email protected]


5


guaranty against payment default and does not apply to poor lender decisions or borrower misrepresentations.

E. The loan comes from a commercial lender, not the government. Even if a borrower qualifies for an SBA guaranty, the SBA cannot force the lender to change its mind if it has denied the loan. Therefore, it is critical that the borrower make a positive impression on the lender and know the lender’s requirements.

F. Interest rates are negotiated between the borrower and the commercial lender but are subject to SBA maximums. The interest rate may be fixed or variable. The major drawback to variable rate loans is that they float with the prevailing rate. If the prevailing rate increases, the 7A repayment costs will increase. See Small Business Administration, http://www.sba.gov.

1.10 SBA 504 LOAN PROGRAM. A. Interest rates on 504 loans are pegged above the current market rate for

five-year and 10-year U.S. Treasury obligations. B. Disadvantage: 504 loans can only be used to finance the acquisition of

fixed assets (e.g., real estate, buildings, equipment). C. How the program operates: 1. Small businesses can borrow 90% of a project’s cost, with the other

10% provided by borrower equity. 2. Fifty percent of the project cost comes from a participating financial

institution, and the remaining 40 percent comes from a network of certified development companies (CDC’s) that are certified by the SBA to provide 504 loans.

3. The SBA debenture can be up to $1 million for a business meeting job development criteria or a community development goal. In general, a business must create or retain one job for every $50,000 provided by the SBA.

4. The maximum SBA portion can be up to $1.3 million for meeting a public policy goal. The public policy goals are:

a. Business is situated in a community with a plan that encourages business redevelopment.

b. The project will enhance export sales and at least 10% of the borrower’s revenue comes from export sales.

c. The borrower is owned at least 50% by a minority individual or group designated by the SBA.

d. The business is situated in a rural area. e. The project will enhance economic competition, such as an

advancement in technology.


515.288.2500

[email protected]


6

http://www.sba.gov/


f. The borrower is situated in an area affected by federal budget of defense cutbacks or adversely affected by federally mandated environmental standards or policies.

D. To be eligible for a 504 loan: 1. Must be for-profit company. 2. Net worth must be less than $7 million. 3. Average net profit after taxes for previous two years must be less

than $2.5 million. 4. May not be in the opinion-forming business (e.g., a radio or

television station, newspaper or magazine) or an investor in rental real estate.

5. Borrower must show that, for every $50,000 loaned under the 40% portion, it will create one new job or retain one job that otherwise would be lost, or that the project will have an “alternative impact” on the local economy.

E. SBA 504 loan is an end loan - it is funded only after the project has been completed or the asset purchased. Therefore, the borrower must find an alternative lender, usually the financial institution that provides the 50% portion of the end loan.

F. For information about a 504 loan and for the name and number of a local CDC, consult the Small Business Administration at http://www.sba.gov.

1.11 OTHER SMALL BUSINESS ASSISTANCE PROGRAMS. The Small Business Administration’s website (http://www.sba.gov) provides information about many financing programs and provides contact names, addresses and telephone numbers. 1.12 THE SEC’S ROLE. A. Although typically known for its role in large company capital formation,

the Securities and Exchange Commission (SEC) also promotes small business capital formation.

B. Securities Act Releases 33-6949 (57 Fed. Reg. 36442) and 33-6996 (58 Fed. Reg. 26509) provide opportunities for small businesses to raise capital for start-up or expansion.

C. Securities rules reduce the cost of capital formation through public securities offerings for small businesses:

1. Rule 504 allows issuers to raise up to $1 million in any 12-month period in a general solicitation without registering under the Securities Act of 1933.

2. Regulation A provides a ceiling of an exempt small offering of $5 million and allows issuers to test the waters by soliciting indications


515.288.2500

[email protected]


7

http://www.sba.gov/


of possible investor interest before incurring an offering circular’s preparation costs.


515.288.2500

[email protected]


8

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500

© 2009 DAVIS BROWN KOEHN SHORS & ROBERTS P.C. #1668071

DEBTOR BANKRUPTCY CONSIDERATIONS


[email protected]

I. PRE-BANKRUPTCY. A. Keep current all employment-related liabilities.

Avoid “responsible person” personal liability for officers, directors, controller and/or others in charge of payroll.

B. Keep current all income and sales taxes (all states). Avoid “responsible person” personal liability for officers, directors, controller and/or others in charge of payments.

C. Avoid preferential transfers. Pay current liabilities, especially essential suppliers.

D. Avoid fraudulent transfers. Follow ordinary course of business practices. Any unusual sale or purchase should be at arms-length for a fair value, especially if an insider is involved.

E. Work closely with secured creditors holding cash collateral.

Debtor cannot use “cash collateral” (cash, negotiable instruments, deposit accounts, accounts, payments or other cash equivalents) unless the secured creditor consents or the Bankruptcy Court authorizes it.

F. Work on bankruptcy plan.

Increase sale efforts and other revenue generating activities, eliminate unnecessary expenses. Work on pro formas and income projections. Solidify banking relationship - will need debtor accounts. Must have one impaired, accepting class of creditors to obtain plan confirmation.

II. BANKRUPTCY CODE CHAPTERS. A. Chapter 7 - Liquidation.

Debtor surrenders all property to Chapter 7 Trustee. Trustee liquidates unencumbered property and distributes proceeds to pay priority creditors


first, then unsecured creditors prorata. Secured creditors’ liens and rights to collateral are preserved.

B. Chapter 11 - Reorganization.

Debtor keeps property and continues to operate as a debtor in possession (“DIP”). Automatic stay prevents creditor actions. Debtor proposes plan of reorganization for full or partial payment of creditors over a number of years, which plan is confirmed by the Bankruptcy Court. Creditors must receive not less than they would receive if Debtor is liquidated. Secured creditors’ liens are preserved.

III. SMALL BUSINESS DEBTOR REORGANIZATION.

A. “Small Business Case” - a Chapter 11 reorganization case in which the Debtor is a “small business debtor”. §101(51C)

B. “Small Business Debtor” - a person engaged in commercial or business

activities with not more than $2,190,000* in aggregate non-contingent liquidated secured and unsecured debts (excluding debts owed to affiliates or insiders of the Debtor) as of the petition date. §101(51D) (*effective April 1, 2007 - April 1, 2009).

C. Reporting Requirements.

Financial statements (with petition); most recent balance sheet; statement of operations; cash flow statement; federal income tax return. Post-petition monthly financial reports of all income and disbursements.

D. Meeting Attendance. Initial debtor Interview (with U.S. Trustee); scheduling conference (with U.S. Trustee); creditor meeting (with all creditors §341).

E. Post-petition Requirements.

Bank deposit accounts; insurance; tax returns; U.S. Trustee inspections.

F. Disclosure Statement and Plan Requirements. More streamlined process and less expensive; disclosure statement may not be necessary; 180-day exclusive period to file plan; confirmation must occur within 45 days after plan filed.


515.288.2500

[email protected]


2


IV. METHODS USED BY DEBTORS TO REORGANIZE. A. File a plan of reorganization (§1121, et al.) B. Enter into settlement agreement or compromise (Fed. R. Bank.P. 9019) C. Sale of all or substantially all of the assets (§363) D. Obtain credit (§364) E. Assume or reject executory contracts and unexpired leases (§365)

V. PERIOD OF EXCLUSIVITY A. The debtor (unless a “small business debtor” has 180 days) has a 120-

day period during which it has an exclusive right to file a plan. B. Exclusivity period may be extended (unless a “small business debtor”) or

reduced by the court. But, in no event, may the exclusivity period, including all extensions, be longer than 18 months. 11 U.S.C. §1121(d).

C. After the exclusivity period has expired, a creditor or the case trustee may

file a competing plan. D. The U.S. Trustee may not file a plan. 11 U.S.C. §307. VI. CLAIMS: IMPAIRED v. UNIMPAIRED §1124 A. A class of claimants is impaired unless (i) the legal, equitable, and

contractual rights of the class are unaltered; or (ii) the debtor cures the defaults, reinstates the maturity, compensates claimant, and “does not otherwise alter the legal, equitable, or contractual rights.”

VII. HIERARCHY OF CREDITORS A. Secured Creditors B. Administrative Expense Claimants C. Unsecured Creditors (priority unsecured are paid first)


515.288.2500

[email protected]


3


D. Equity Shareholders VIII. ACCEPTANCE OF A PLAN OF REORGANIZATION A. Under §1126(c), an entire class of claims is deemed to accept a plan if

plan is accepted by creditors that hold at least 2/3 in amount and more than 1/2 in number of the allowed claims in the class.

B. Under §1129(a)(10), if there are impaired classes of claims, the court

cannot confirm a plan unless it has been accepted by at least one class of non-insiders who hold impaired claims.

C. Under §1126(f), holders of unimpaired claims are deemed to have

accepted the plan. IX. CRAMDOWN - APPROVAL OF PLAN OVER REJECTION A. The court may approve the plan despite rejection by one or more classes

provided the following two conditions are met: (i) requirements under §1129(a) with the exception of §1120(8) be met; and (ii) there is no unfair discrimination and the plan is “fair and equitable.”

B. If debtor pays the class in full or otherwise provides property of a value

equal to their claims or by ensuring that the plan provides that no claim or interest that is junior to the rejecting classes will receive or retain anything under the plan.

X. ABSOLUTE PRIORITY RULE

A. Senior dissenting classes of unsecured claims must be paid or provided for in full or else junior classes of creditors or interests get nothing.

B. Property under absolute priority rule is broadly interpreted and includes all

tangible and intangible property, which may consist of cash, notes, real estate, securities and/or equity interests in either the reorganized entity or some other entity.

C. New value exception to the absolute priority rule allows equity holders to

retain ownership interests even in cases where the unsecured creditors have not received full payment on their claims.


515.288.2500

[email protected]


4


CREDITOR BANKRUPTCY CONSIDERATIONS

I. PRE-BANKRUPTCY. A. Credit applications and references required for all new customers and

suppliers. B. Closely monitor troubled customers and suppliers.

If accounts are not paid within terms, then consider “cash on delivery” or other ways to minimize growth and delinquency of account (e.g., next delivery upon payment of prior delivery, security position, personal guarantees or other credit options).

C. Avoid preferential transfers. 1. The bankruptcy trustee may avoid any payment of the debtor (i) to

or for the benefit of a creditor, (ii) for or on account of an antecedent debt owed by the debtor before the transfer was made, (iii) made while the debtor was insolvent, (iv) made on or within 90 days before the date of the petition filing (or within 1 year before the filing date if the creditor is an insider), and (v) that enables the creditor to receive more than the creditor would receive under a Chapter 7 case.

2. Preference defenses include (i) transfers made as a

contemporaneous exchange for new value given to the debtor, (ii) transfers made in the ordinary course of debtor’s business and the transferee, (iii) transfers which create a security interest in property acquired by the debtor to the extent such security interest secures new value given by the secured party to the debtor enabling the debtor to acquire the property and is perfected within 30 days of debtor’s receipt of the property, and (iv) transfers to creditor to extent creditor gave new value to debtor.

3. If filing is imminent, apply proceeds to goods most recently shipped

to the debtor within payment terms. D. Communicate with the debtor’s accounts payables clerk frequently.


515.288.2500

[email protected]


5


II. RELEVANT BANKRUPTCY CODE PROVISIONS. A. Section 362 - Automatic Stay. All collection, enforcement, setoff and other actions against the debtor and

the property of the debtor are stayed. B. Section 363 - Use, Sale or Lease of Property. 1. The debtor or trustee may use, sell or lease property of the estate,

other than in the ordinary course of business, only after notice and a hearing.

2. If the debtor’s business is authorized to operate, the debtor or

trustee may enter into transactions, including the sale or lease of property, in the ordinary course of business, without notice or a hearing, and may use property in the ordinary course of business, without notice or a hearing, except the debtor or the trustee may not use, sell or lease “cash collateral” (cash, securities, deposit accounts, or other cash equivalents, including proceeds, products, offspring, rents or profits of property) unless (i) each entity that has an interest in such cash collateral consents or (ii) the court, after notice and a hearing, authorizes such use, sale or lease of such cash collateral.

3. The debtor or trustee may sell property under Section 363 free and

clear of any interest in such property of another entity, with the proceeds subject to such interest or lien as the Court may direct.

C. Section 365 - Executory Contracts and Unexpired Leases. 1. The debtor or trustee may assume or reject executory contracts

and unexpired leases of the debtor. 2. If there has been a default in an executory contract or unexpired

lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee (i) cures, or provides adequate assurance that the trustee will promptly cure, such default, (ii) compensates, or provides adequate assurance that the trustee will promptly compensate, a party to such contract or lease for any actual pecuniary loss to such party resulting from the default, and (iii) provides adequate assurance of future performance under such contract or lease.


515.288.2500

[email protected]


6


3. In a case under Chapter 7, if the trustee does not assume or reject

an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the filing, then such contract or lease is deemed rejected.

4. In a case under Chapter 11, the trustee may assume or reject an

executory contract or unexpired lease of residential real property or of personal property of the debtor at any time before the confirmation of a plan, but the Court, on the request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease.

5. The trustee shall timely perform all obligations of the debtor arising

after the filing date under any unexpired lease of non-residential real property until such lease is assumed or rejected. The Court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the filing date, but the time for performance shall not be extended beyond such 60-day period.

6. An unexpired lease of non-residential real property under which the

debtor is the lessee shall be deemed rejected if the trustee does not assume or reject the unexpired lease by the earlier of (i) the date that is 120 days after the filing date, or (ii) the date of the entry of an order confirming a plan.

7. The trustee shall timely perform all of the debtor’s obligations first

arising from or after 60 days after the order for relief in a Chapter 11 case under an unexpired lease of personal property until such lease is assumed or rejected.

D. Section 501 - Filing of Proofs of Claims. 1. Always file a proof of claim - for prepetition claims - if the Clerk of

Court accepts claims. 2. File a request for allowance and payment of an administrative

expense priority claim if grounds under Section 503(b) exist. E. Section 503(b)(9) - Administrative Claims.


515.288.2500

[email protected]


7


1. Claims for the value of goods received by the debtor within 20 days before the filing date in which the goods have been sold to the debtor in the ordinary course of the debtor’s business are provided administrative expense priority and will be paid prior to general unsecured claims.

F. Section 546(c) - Rights of Sellers of Goods to the Debtor Received by the

Debtor within 45 Days before the Filing Date. 1. A seller has the right to reclaim goods if the debtor received such

goods (i) while insolvent, (ii) within 45 days before the filing date, (iii) if the seller provides a written reclamation demand of such goods (a) not later than 45 days after the date of the debtor’s receipt of such goods, or (b) not later than 20 days after the filing date if the 45-day period expires after the commencement of the case.

2. If the seller fails to provide the reclamation demand, the seller may

still assert Section 503(b)(9) rights to an administrative expense priority claim (see Part II. E. above).

G. Sections 522, 523 and 727 - Objections to Exemptions and Discharge. 1. A creditor may object to the assets claimed exempt by an individual

debtor under Section 522. 2. A creditor may object to the discharge of an individual debtor from

certain debts, including (i) for money, property, services or credit to the extent obtained by (a) false pretenses, a false representation, or actual fraud, or (b) use of a false financial statement, (ii) for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny, or (iii) for willful and malicious injury by the debtor to another entity or to the property of another entity, all under Section 523(a). If a Section 523(a) discharge objection is successful, the individual debtor does not receive a discharge of the debt(s) incurred by one of the above nondischargeable actions of the debtor owed to the objecting creditor only.

3. A creditor may object to an individual debtor’s discharge under

Section 727 if (i) the debtor, with intent to hinder, delay or defraud a creditor, has transferred, removed or concealed property of the debtor within one year before the filing date or property of the estate after the filing date, (ii) the debtor has concealed, falsified or failed to keep or preserve records from which the debtor’s financial


515.288.2500

[email protected]


8


condition or business transactions may be ascertained, (iii) the debtor knowingly and fraudulently made a false oath or presented a false claim or obtained money or property for acting or forbearing to act, (iv) the debtor has failed to explain satisfactorily any loss of assets or deficiency of assets to meet the debtor’s liabilities, (v) the debtor has committed one of the above acts on or within one year before the filing date or during the case, or (vi) the debtor has been granted a discharge in a case commenced within eight years before the filing date, all under Section 727(a). If a Section 727(a) discharge objection is successful, the individual debtor does not receive a discharge of any debts that arose before the filing date.

H. Section 1112 - Conversion or Dismissal. 1. A creditor may, after notice and a hearing, obtain the conversion of

a Chapter 11 case to a case under Chapter 7 or the dismissal of the case altogether if such conversion or dismissal is in the best interests of the creditors and the bankruptcy estate if the movant establishes “cause” under Section 1112.

2. For purposes of conversion or dismissal, the term “cause” includes

(i) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation; (ii) gross mismanagement of the estate; (iii) failure to maintain appropriate insurance that poses a risk to the estate or to the public; (iv) unauthorized use of cash collateral; (v) failure to comply with an order of the court; (vi) unexcused failure to satisfy timely any filing or reporting requirement established by the Court or the Bankruptcy Code; (vii) failure to attend the creditors meeting; (viii) failure to timely provide information or attend meetings reasonably requested by the United States Trustee; (ix) failure to timely pay taxes owed after the filing date or to file tax returns due after the filing date; (x) failure to file a disclosure statement or to file or confirm a plan of reorganization; (xi) inability to effectuate substantial consummation of a confirmed plan; (xii) material default by the debtor with respect to a confirmed plan; and (xiii) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan.


515.288.2500

[email protected]


9

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500


INSURANCE CONSIDERATIONS FOR NEW BUSINESSES

JASON M. ROSS

[email protected]

I. BUYING INSURANCE

A. Essential Coverage (some types are bundled with others)

1. Property and Casualty Insurance

2. Life, Health and Disability Insurance

3. Errors & Omissions Coverage

4. Directors and Officers Liability Insurance

5. Commercial General Liability

6. Business Interruption

B. Choosing Insurance

1. Sales Channel Type

a) Broker

b) Captive Agent/ Single insurance carrier

2. Company Credit Rating

a) Measures financial soundness of insurance company -- need a company with a strong credit rating

b) Standard & Poor’s, A.M. Best, Fitch, Moody’s

C. Types of Liability Coverage


1. Claims-Made

2. Occurrence

II. STRUCTURE OF AN INSURANCE POLICY

A. Policy jacket: Contains the “guts” of the policy, including the insuring agreements, the exclusions, the definitions, and the conditions.

B. Declarations: Contains the variable information, such as the name and address of the insured, the limits of liability, the deductible/self-insured retention, and the premium.

C. Endorsements: Contains the additions, subtractions, and other modifications to the policy jacket and declarations.

D. Application: Contains basic information required by the insurer to determine whether the risk is acceptable and at what price or under what conditions and with what limitations.

III. COMMERCIAL GENERAL LIABILITY

A. Layers of Coverage

1. Primary

2. Umbrella

3. Excess

B. Occurrence-Based Policies

1. Bodily injury and property damage; personal injury and advertising injury

2. “Damage” or its cause as the trigger

C. Claims-Made Policies

1. Claim against the Insured

JASON M. ROSS

515.288.2500

[email protected]


2


2. Notice to Insurer

3. Retroactive Date

4. Extending Reporting Periods

a) Basic Tail Coverage

b) Supplemental Tail Coverage

D. Intentionality Limits 1. Contractual Intentional Injury Exclusions

2. Public Policy Considerations

E. Property Damage and Bodily Injury

F. Personal Injury and Advertising Injury

1. Personal Injury

2. Advertising Injury

a) Misappropriation of Advertising Ideas or Style of Doing Business

b) Infringement of Copyright, Title, or Slogan

G. Exclusions 1. Business Risk Exclusions

2. Owned-Property Exclusions

3. Pollution Exclusions

IV. OTHER THIRD-PARTY LIABILITY POLICIES

A. Directors and Officers Liability Insurance

B. Errors & Omissions Coverages

JASON M. ROSS

515.288.2500

[email protected]


C. Employment-Related Coverages

3


D. Specialized Pollution Liability Coverages

E. Workers’ compensation and employers’ liability

F. Specific and aggregate excess workers’ compensation and employers’ liability

G. Automobile liability

H. Garage liability

I. Employment practices liability

J. Employee benefits liability

K. Fiduciary liability

L. Foreign liability

M. Pollution legal liability

N. Errors and omissions liability

O. Professional liability

P. Aviation liability

Q. Liquor liability

V. ERRORS & OMISSIONS POLICIES

A. Provides third party coverage against claims related to the provision of service -- usually professional services.

B. Courts have stated: “A ‘professional’ act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor or skill, and the labor or skill is predominantly mental or intellectual, rather than physical or manual.”

C. This definition has included accountants, bankers, beauticians, clergy, doctors, engineers, real estate agents and brokers, records processors, social workers, and other service providers.

D. This coverage is different than general premises liability. It is liability related to the services provided.

JASON M. ROSS

515.288.2500

[email protected]


4


E. Policy terms and coverage differ across different industries.

VI. DIRECTORS AND OFFICER LIABILITY INSURANCE

A. A specific type of E&O policy for claims against directors and officers acting as such.

B. Two types of coverage

1. Coverage is for director or officer for liability not subject to indemnification by the company. This is often called “Side A Coverage.”

2. Coverage is for the company for liability that is indemnified. This is

often called “Side B Coverage.”

C. Some policies have shared limits for Side A and Side B coverages. This can reduce coverage limits available to officers and directors. If policy has shared limits, consider supplemental policies for officers and directors.

D. Coverage is typically “claims made.”

E. There is no industry standard policy language -- you must pay close attention to each particular policy’s coverage and exclusions. Policy terms differ across insurers and insured industry.

F. Insurers often include exclusions from coverage in policies, including:

1. “Matters deemed uninsurable under law” (e.g. criminal sanctions),

2. Dishonesty exclusion,

3. Intentional conduct,

4. Federal Securities laws exclusions,

5. Bodily injury exclusion,

6. Regulatory agency exclusions (e.g. banking),

7. Excess executive compensation exclusion,

JASON M. ROSS

515.288.2500

[email protected]


5


8. Personal profit exclusion,

9. Professional services exclusion (e.g. general counsel),

10. Exclusions for specific types of claims:

a) Environmental

b) ERISA

c) others,

G. Insurer’s duty to defend obligations can vary according to policy language and the nature of specific claims.

H. Bankruptcy of the company can complicate D&O coverage. Consider separate supplemental policies covering only officers and directors.

I. Policies are also available for nonprofit corporations.

VII. SPECIAL ISSUES

A. Insurance and risk management in business relationships and contracts 1. Determine what types of risk are associated with the transaction

and require the parties to maintain appropriate coverage.

2. Consider whether it is appropriate for the party carrying the insurance to name the other party as an additional insured.

B. Loan documents typically require the borrower to maintain property insurance on the collateral. The lender is to be named under the mortgagee and loss payee provisions. These provisions insure the lender’s interest in the collateral, whether real or personal property.

C. Additional considerations.

JASON M. ROSS

515.288.2500

[email protected]


6


1. The least detailed provision merely states that the party will obtain and maintain for a stated duration the types of coverage customarily maintained by similar business of the kind.

2. Other provisions state that the party will obtain and maintain for a stated duration the indicated types of insurance with limits, from carriers, and on forms acceptable to the other party.

3. More detailed provisions will specify the type of policy form, the specific limits, and the credit rating of the carriers.

4. A certificate of insurance may be issued as evidence that the required insurance is being maintained. A certificate should be required for renewal or replacement policies. It is common that the insured party agrees to provide a complete copy of the policy upon request.

5. Notice of cancellation, non-renewal, renewal with altered terms, and even impairment of limits of liability can be required.

6. Consider whether being able to require a party to reinstate significantly impaired limits of liability is appropriate.

D. Typical Contracts Requiring Insurance Coverage

1. Real estate lease

2. Mortgage loan

3. Supply or distribution agreements

4. Architect’s contract

5. Consultant’s contract

6. Bond indenture

7. Key man employment agreement

8. Service contract

9. Shareholder’s agreement in a service corporation

10. Builder’s contract

JASON M. ROSS

515.288.2500

[email protected]


7

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500


BEST PRACTICES IN USING STANDARD FORM CONTRACTS

JASON M. ROSS

[email protected]

I. HOW DO PARTIES CONTRACT WITH ONE ANOTHER?

A. The ideal: each contract would

1. be written; 2. be signed by both parties; 3. cover all possible disputes; 4. be clear and unambiguous; and 5. consist of terms satisfactory to both parties.

B. Variations of how parties enter into contracts:

1. Written, oral, or implied (or a combination);

2. 50-page written signed document with numerous exhibits;

3. 1 page letter, with a counter signature;

4. Phone order accepted orally and confirmed by mail;

5. Exchange of purchase order and order acknowledgement; and

6. Shipment and acceptance. C. Using standard terms for contracts: Most buyers and sellers usually agree expressly on a few terms, usually

quantity, price, and timing of delivery. Each may have adopted standard terms to fill in certain gaps (including those dealing with warranties and liability of one party to the other).


II. WHAT HAPPENS WHEN STANDARD FORMS DISAGREE? YOU HAVE A “BATTLE OF THE FORMS.”

A. In the context of a sale of goods, a contract can be formed by an

exchange of forms, including those that contain terms that disagree. B. The process favors the party who starts negotiations, the offeror. The

purchaser of goods makes an offer (whether to sell or buy). As a general rule, a form sent in response to an offer will be considered to have accepted the terms of the offer. This rule favors the offeror because the offeror’s terms become part of the contract.

C. This advantage in favor of the offeror is counter-balanced by the ability of

the offeree to make his/her terms part of the sales contract. However, the following three exceptions swallow up that the rule in favor of the offeree, again favoring the offeror. The offeree’s terms do not become part of the contract if:

1. The initial offer limits acceptance to its terms; 2. The offeree’s terms would materially alter the first offer (note: any

liability limit would be a material alteration); 3. The offeror has notified, or promptly notifies, the offeree that the

offeree’s terms are objectionable. III. BEST PRACTICE NO. 1 - PREPARE STANDARD TERMS AND CONDITIONS

AND MAKE THEM PART OF YOUR AGREEMENTS. Suggested strategies:

A. Standard terms should characterize you as an offeror, condition acceptance of an offer on consent to all of your terms, and object to any additional or different terms in the other parties’ forms.

B. Print standard terms on all sales forms, acknowledgements, etc.

C. Deliver standard terms at the opening stage of each prospective sale,

preferably before the other party delivers its terms. D. Never sign the other party’s forms. E. Encourage others to sign your form.

JASON M. ROSS

515.288.2500

[email protected]


2


1. Include a signature block on your forms for other party to sign (or

counter sign) 2. Refer to standard terms (use exhibit) in other agreements.

F. Avoid approving a reference to another person’s forms (e.g., per your quotation).

IV. BEST PRACTICE NO. 2 - STATE THE EXPRESS WARRANTY ON THE PRODUCTS AND EXCLUDE ALL OTHER WARRANTIES.

A. Disclaim warranties of merchantability and fitness for a particular purpose.

State the express warranty (e.g., performance according to specifications).

B. Limit the duration of the warranty (set number of years).

C. Specify remedies that are available (repair work, replacement, refund). V. BEST PRACTICE NO. 3 - EXCLUDE CONSEQUENTIAL AND INCIDENTAL

DAMAGES TO LIMIT YOUR LIABILITY. A. The inclusion should be conspicuous (BOLD OR ALL CAPS). B. Limit liability to a specified warranty.

C. Failure to do so exposes seller to liability for costs of replacement goods, lost profits, additional inspection costs, etc.

VI. BEST PRACTICES NO. 4 - MAINTAIN FLEXIBILITY IN DELIVERY TIME AND

LIMIT RISK WITH RESPECT TO PRODUCTS IN TRANSIT. A. Standard terms should state that delivery times are approximate.

B. What happens if one installment is late but not the others? Provide that a delay in one installment should not allow the buyer to avoid taking further installments.

C. Limit the time that the buyer can make claims for errors or shortages in

delivery of goods.

JASON M. ROSS

515.288.2500

[email protected]


3


D. Buyers, of course, will want to do the opposite of the above.

VII. BEST PRACTICE NO. 5 - PROTECT CONFIDENTIAL AND PROPRIETARY INFORMATION.

A. Confidential information might include information that you provide to the

other party, such as financial, planning, or technical information. B. Standard terms and conditions should not allow the other party to disclose

any of this information except in connection with the contract between the buyer and seller.

VIII. BEST PRACTICE NO. 6 - MAINTAIN PRICING FLEXIBILITY AND PAY ATTENTION TO PAYMENT TERMS.

A. Consider whether to include in the price of the products things such as

taxes, packaging. B. Make sure that you are able to change prices upon notice. C. Make sure that you may refuse an order if credit issues arise.

IX. BEST PRACTICE NO. 7 - PREPARE FOR DISPUTES BY SETTING OUT HOW THEY WILL BE TREATED.

A. Select the law of a local jurisdiction, unless the law of local jurisdiction is

unfavorable to you.

B. Decide whether you prefer litigation or arbitration as a dispute resolution method.

C. Decide whether you want to waive the right to a jury trial.

X. BEST PRACTICE NO. 8 - NEGOTIATE INDIVIDUAL SALES CONTRACTS

WHEN NECESSARY OR EFFICIENT. IN OTHER WORDS, INVOLVE YOUR ATTORNEY.

A. When goods are made to order.

JASON M. ROSS

515.288.2500

[email protected]


4


B. When the volume of business or the risk level justifies the expense and inevitable give and take of such negotiations.

XII. BEST PRACTICE NO. 9 - TRAIN ALL PERSONNEL IN DEALING WITH STANDARD FORMS.

JASON M. ROSS

515.288.2500

[email protected]


5

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500


ANNUAL MEETINGS AND MINUTES:

SCOTT D. MIKKELSEN

[email protected]

I. ANNUAL CORPORATE SHAREHOLDER MEETING

A. Address in the Corporate Bylaws.

1. A Corporation’s Bylaws should require it to hold an annual meeting. The Iowa Business Corporation Act requires an annual meeting for all corporations. (I.C.A. §490.701(1)). The meeting should be held to discuss:

a) The ratification of the actions of the Officers/Directors of the

previous year. b) Elect new Officers/Directors for the year going forward.

(I.C.A. § 490.803) c) Anything that requires annual or periodic review, such as

salaries, bonuses, stock offerings/gifts, contract renewals d) Consider other matters for shareholder action and give

shareholders the opportunity to ask questions about corporate operations.

2. The meeting can be accomplished through:

a) Holding the meeting at a designated place and time, as

described below; b) Through written consents from shareholders. (See example

form 1 provided).

B. Right of Shareholders to Compel. If a corporation does not conduct an annual meeting, a shareholder can sue under IBCA §490.703 to compel the holding of an annual meeting.

C. Time and Place

1. Time. The annual shareholders’ meeting of an Iowa corporation is

to be held “at a time stated in or fixed in accordance with the bylaws.” I.C.A. §490.701(1)


a) Ex. The bylaws might provide, “The annual meeting is to be held “on the third Tuesday in April of each year,” or “at a time fixed by the Board of Directors, but no later than two months after the end of the corporation’s fiscal year.”

2. Place. The meeting should be held “at the place stated or fixed in

accordance with the corporation’s bylaws,” or, if no place is specified in or fixed in accordance with the bylaws, at the corporations ‘principal office’. I.C.A. §490.701(2).

D. Notice of Shareholders Meeting.

1. Notice - Between 10 and 60 Days Before Meeting. An Iowa

corporation must “notify shareholders of the date, time, and place of each annual shareholders’ meeting no fewer than ten nor more than sixty days before the meeting date.” I.C.A. § 490.705(1)

2. Given to Voting Shareholders as of Record Date. In most cases,

notice must be given only to those shareholders “entitled to vote” at the meeting, determined as of the “Record Date” for the meeting.

a) Record Date. The board of directors fixes the record date,

unless it is otherwise specified in the bylaws. I.C.A. § 490.707(1).

b) Note: If certain fundamental changes are going to be considered at a meeting, other parts of the IBCA require that notice be sent to all shareholders, regardless of voting status. I.C.A. §§490.1003, 490.1202, & 490.1402

E. Voting List.

1. Voting List Required 2 Days Following Notice. No later than two days after giving notice of the meeting, the corporation must prepare an alphabetical list, often referred to as the “voting list” of all shareholders entitled to notice of the meeting. I.C.A. § 490.720. The list must be available for inspection by shareholders continuing through the meeting. I.C.A. § 490.720(2).

2. No Right to Copy Without Written Demand. A shareholder may

copy the list only if she/he first makes written demand to do so and the demand is in “good faith and for a proper purpose.” I.C.A. 490.720, 490.1602(3).

F. Voting.

SCOTT D. MIKKELSEN

515.288.2500

[email protected]


2


1. Quorum. Shareholders may not take any action at a meeting unless a quorum is present. I.C.A. § 490.725(1). The IBCA establishes that a majority of votes entitled to be cast on an issue constitutes a quorum on that matter … unless the corporation’s articles of incorporation or bylaws provide otherwise.

a) Ex. If all outstanding shares have equal voting power, and

the articles and bylaws are silent on to what constitutes a quorum, it is the majority of the outstanding shares.

2. Acceptance of Votes. IBCA 490.724 provides a concrete set of

guidelines concerning the corporations “acceptance of votes” where an issue arises concerning the validity of a name signed on a ballot, proxy, or other written evidence of shareholder action.

G. Checklist for the Shareholder Meeting and Consent Forms

1. Appoint a Chair if the Bylaws Do Not Designate a Presiding Officer. If the Corporation’s Bylaws do not designate a presiding officer, elect a presiding officer. Presumably, any shareholder can call the meeting to order and preside until a presiding officer is elected.

a) I.C.A. § 490.708 provides that there shall be a chair,

appointed in accordance with the Bylaws, who shall preside over shareholders’ meetings and who “shall determine the order of business and shall have the authority to establish rules for the conduct of the meeting.”

2. Typical Order:

a) Call to Order; b) Roll Call; c) Reading and approving prior minutes; d) Ratification of Officers/Directors actions from previous year; e) Reports and Election of Officers; f) New Business; g) Adjournment;

3. Minutes of the Shareholder Meeting:

a) A written record reflecting the results of the corporate shareholders’ meetings.

b) A corporation’s bylaws or its board of directors must “delegate to one of the corporation’s officers responsibility

SCOTT D. MIKKELSEN

515.288.2500

[email protected]


3


for preparing the minutes of the shareholders meetings”. I.C.A. § 490.840(3)

c) The IBCA requires the corporation to maintain a copy of the minutes and make them available for shareholders to inspect and copy. I.C.A. §§ 490.1601, 490.1602.

II. LLC - ANNUAL MEMBER MEETING

A. Address in the Operating Agreement.

1. An LLC’s Operating Agreement should address whether an Annual Meeting among the Members will be held. Any obligation for regular meetings will be by agreement among the members.

2. An LLC may decide it will not require an annual meeting, or decide

to use written consents for the Annual meeting. (See example form 2 provided). A meeting at a designated time and place among the members may be held as well.

a) The decision will depend on how the LLC operates on a day-

to-day basis, the number of members, the management structure, and advice from its legal counsel.

3. Whatever option is chosen, of most importance is to make sure you

understand what your Operating Agreement requires and make sure it is followed.

SCOTT D. MIKKELSEN

515.288.2500

[email protected]


4


[EXAMPLE FORM 1]

CONSENT AND MINUTES OF THE _____ ANNUAL MEETING OF THE SHAREHOLDERS

OF ___________________________________

WHEREAS, the Iowa Business Corporation Act (a) authorizes the taking of action by the shareholders of a corporation without a meeting if written consents, which may be in counterparts, describing the action so taken shall be signed by the holders of outstanding shares having not less than ninety percent (90%) of the votes entitled to be cast at a meeting, at which all shares entitled to vote on the action were present and voted, and such consents are included in the minutes or filed with the corporate records within sixty (60) days of the earliest dated consent; (b) declares that such consents shall have the same force and effect as a meeting vote; and (c) requires that prompt notice of such action without a meeting by less than unanimous consent shall be given to those shareholders who have not consented in writing; and WHEREAS, the undersigned shareholders of ______________________________, an Iowa corporation (the “Corporation”), desire that the actions described in the following resolutions be taken. NOW, THEREFORE, the undersigned, being all of the shareholders of the Corporation, hereby consent to the taking of the actions expressed in the following resolutions and hereby adopt the same effective as of the date of the signature below, unless a different date is specified:

RESOLVED that the following resolutions shall be effective as of the ____ day of _______, 200__. RESOLVED FURTHER that all of the actions taken by the directors of the Corporation since the last annual meeting are hereby ratified and approved in all respects. RESOLVED FURTHER that the following persons are elected as directors of the Corporation to manage the affairs of the Corporation until the next annual meeting or until their successor(s) are duly elected and qualified:

Mr. X Mrs. Y

____________________ ______________________________ Signature Date , Shareholder

____________________ ______________________________ Signature Date , Shareholder

SCOTT D. MIKKELSEN

515.288.2500

[email protected]


5


[EXAMPLE FORM 2]

CONSENT AND MINUTES OF THE __________ ANNUAL MEETING

OF THE MEMBERS OF _________________________________

Whereas, Section ____ of the Operating Agreement of __________________, an Iowa limited liability company (the “Company”), requires an annual meeting of the Members for the election of officers and company managers and for the transaction of such other business as may be necessary; and Whereas, the undersigned Members of the Company desire that the actions described in the following resolutions be taken. Now, Therefore, the undersigned, being all of the Members of the Company, hereby consent to the taking of the actions expressed in the following resolutions and hereby adopt the same effective as of the date of the last signature below, unless a different effective date is specified: RESOLVED that the following resolutions are effective as of the ______ day of __________, 200__. RESOLVED FURTHER that all of the actions taken by the Manager of the Company since the last annual meeting are hereby ratified and approved in all respects. RESOLVED FURTHER that all of the actions taken by the officers of the Company since the last annual meeting are hereby ratified and approved in all respects. RESOLVED FURTHER that the following persons are hereby elected to the offices shown opposite their names to serve in those capacities until the next annual meeting or until their successors are duly elected and qualified: President Vice President Secretary Treasurer ___________________________ ________________________ Signature Date , Member ___________________________ ________________________ Signature Date , Member

SCOTT D. MIKKELSEN

515.288.2500

[email protected]


6

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500


1

SECURITIES IMPLICATIONS INVOLVED IN

RAISING MONEY FOR YOUR BUSINESS

BEVERLY EVANS

[email protected]

A BIT OF BACKGROUND

Securities regulation in the United States at the national level followed a generation of state regulation and several centuries of regulation in England. Brokers were licensed in England as early as 1285. All such regulation was aimed at the curtailment of dubious money-raising schemes, such as the one in England during the early 18th Century when thousands of people were persuaded to purchase stock in a company based upon the representation that the company founders were preparing to carry “on an undertaking of great importance, but nobody to know what it is.” The investors in this scheme, as well as many others who invested in similar schemes, had their bubbles burst, lost their money and, as a result, the “Bubble Act” was passed in 1720. The Bubble Act focused on “persons who contrive or attempt such dangerous and mischievous undertakings or projects, under false pretenses of public good, do presume . . . to open books for public subscriptions, and draw in many unwary persons to subscribe therein towards raising great sums of money . . . ”. 1 The Securities Act of 1933 (the “1933 Act”), Congress’ first entry into securities regulation, was prompted by the Wall Street crash of 1929. The first administrator of the newly created bureaucracy was Joe Kennedy. The pronounced goal of the legislation was consumer protection. Subject to certain exemptions, the 1933 Act requires registration of all securities being sold. The purpose of registration under the Act is “[t]o provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails and to prevent frauds in the sale thereof....”2 To achieve this goal, the 1933 Act generally requires a company which proposes to issue its securities to file a registration statement with the Securities and Exchange Commission. The registration process is designed to protect investors by providing them the information necessary to make informed investment decisions. The process, however, is time consuming and expensive. Therefore, when you have determined that you need to raise money for your business, you will want to answer two questions: 1. whether your efforts will involve the offering of “securities” and, if so,

1The general information and the quotations in this paragraph are taken from Fundamentals of Securities Regulation by Louis Loss and Joel Seligman, Little Brown and Company, 3rd edition (1995) pp 1-8. 2Securities Act of 1933, 15 U.S.C.A. §§ 77 et seq., Preamble.

2

BEV EVANS

515.288.2500

[email protected]


2. whether your efforts can be undertaken either without registration or with an abbreviated registration.

WHAT IS A SECURITY?

Any instrument offered in exchange for capital could be viewed as a “security” and its issuance may therefore raise securities law concerns. Section 2(1) of the 1933 Act defines the term “security” as follows. The term “security” means any note, stock, treasury stock, bond, debenture,

evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security:, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.3

The term “investment contract” has become the catchall category and the focus of many courts considering whether a particular instrument is a security. An investment contract has been defined as any contract or profit-making scheme whereby a person invests his or her money in a common enterprise and expects to make a profit solely from the efforts of others. S.E.C. V. W. J. Howey Co.4 This test remains a useful guide in determining whether, for example, an interest in a limited liability company should be considered a security. Any transaction in which an outside investor is asked to furnish money to a business likely involves either a public offering or a private offering of securities. Raising money for companies that chose not to (or are unable to) tap public markets can range from a simple cash contribution by a founder to a complex private offering. The latter circumstance may require the sacrifice of control and will likely raise concerns under the Federal Securities Laws. Various types of instruments can be used to attract capital. Equity interests in a corporation may be sold as common stock, preferred stock, options, or warrants. Equity interests in other types of entities could be (by way of example) “units” in a limited

3Securities Act of 1933, 15 U.S.C.A. § 77B. 4328 U.S. 293 (1946).

3

BEV EVANS

515.288.2500

[email protected]


liability company or “interests” in a limited partnership. (A limited liability company is a hybrid entity that provides limited liability like a corporation but is taxed as a partnership.) Debt instruments can also be used to attract capital and provide investors the protection of guaranteed interest payments rather than the risk of uncertain dividends. The sale of, or the offer to sell, any instrument that is classified as a security requires either registration or an exemption from registration. Public markets are often unavailable for start-up companies and small businesses. Such companies must turn to the exemptions from registration. It is important to remember that if the requirements of the exemption are not met, companies are liable for securities sold in violation of the registration requirements. It is also important to note that securities acquired in a private offering are not immediately re-saleable by the investor. There are re-sale limitations on persons affiliated with the issuer that apply whether the offering was a registered public offering or a private offering.

WHAT OFFERING OPPORTUNITIES ARE AVAILABLE FOR YOU?

The type of offering you choose depends on a number of factors, such as: How much money do you wish to raise? The SEC has created certain registration formats and exemptions that are dependent upon established monetary limits. Companies can raise only limited dollar amounts using certain forms and federal registration exemptions. Does your marketing plan require you to generally solicit potential customers? If you want to advertise in newspapers or approach persons with whom you have no pre-existing relationship, you will not be able to use certain forms or certain exemptions from registration. General advertising and solicitation is currently only permitted in a public offering. The SEC has proposed regulations that would allow limited advertising to accredited investors. Where do you wish to sell the securities? If you need the ability to solicit investors in more than one state, the intrastate exemption will not be available to you.

REGULATION D

4

BEV EVANS

515.288.2500

[email protected]


Regulation D may provide the most common avenue for raising significant amounts of money through the sale of securities without registering the offering with the SEC. It contains three registration exemptions - Rules 504, 505 and 506.

In two separate releases late in 2007, the SEC has proposed changes to Regulation D. The SEC has proposed a new exemption for sales of securities to a new category of investors called "large accredited investors." The SEC has also proposed relaxing some of the general solicitation restrictions on private offerings to large accredited investors, permitting a new private offering that begins 90 days after the closing of a prior one to be considered a separate offering, and revising the current definition of accredited investor.

In a February 2008 Release, the SEC has mandated electronic filing of Form D. Private companies wishing to use one of the Regulation D exemptions are required to obtain an EDGAR filing code and file the Form D on the SEC's EDGAR system. Rule 506 Private offerings for an unlimited dollar amount are governed by Rule 506. Such offerings cannot be made to more than 35 non-accredited investors but to an unlimited number of accredited investors. There is an additional requirement that the purchaser be a “sophisticated person,” i.e. a person with “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”5 The required level of sophistication can be provided by a purchaser representative such as a broker, accountant or attorney. As with offerings under Rule 505, there are specific disclosure requirements for offerings to non-accredited investors and a note strongly suggesting that similar information be given to any accredited investors included in the same offering. The non-financial disclosure for offerings over $5,000,000 is that which is required by any available registration form, Part I. Financial information required is generally two years of audited income statements and an audited balance sheet. For offerings over $7,500,000, if the issuer does not qualify as a small business issuer, three years of audited income statements plus an audited balance sheet would be required. In certain circumstances, (see Regulation 505 discussion above) only an audited balance sheet within 120 days of the start of the offering is required.6 Integration Doctrine

5Regulation D, Rule 506(b)(2)(ii), 17 CFR 230.506(b)(2)(ii). 6Regulation D, Rule 502(b)(2)(B)(3), 17 CFR 230.502(b)(2)(B)(3).

5

BEV EVANS

515.288.2500

[email protected]


Under the integration doctrine, the SEC can treat two or more offerings as one. Offers and sales that are made more than six months before the start of a Regulation D offering or are made more than six months after completion of a Regulation D offering will not be integrated. Integration is an important because, if applied, the number of offerees will be increased and the amount of the offering will be increased, thus possibly destroying an otherwise available exemption. Definition of Accredited Investor The concept of the accredited investor is key to the understanding of Rules 505 and 506 of Regulation D. An accredited investor is defined by Rule 501(a)7 of Regulation D to include (but not limited to) the following: (a) “Institutional Investors”, such as banks, savings and loans, insurance companies, investment companies, employee benefit plans with total assets in excess of $5,000,000 and plans established by a state, its instrumentalities or any agency or instrumentality thereof, for the benefit of its employees, if the plan has total assets in excess of $5,000,000. (b) Private Business Development Companies as defined in Section 202(a)(22) of the Investment Adviser Act of 1940. (c) Tax Exempt Organizations and For-Profit Entities if the entity is not formed for the specific purpose of making the investment and its total assets exceed $5,000,000. (d) Directors, executive officers and general partners and certain other insiders of the issuer. (e) Any natural person whose net worth at the time of purchase or the joint net worth of the investor and the investor’s spouse is $1,000,000. (f) A natural person who has an income in excess of $200,000 in each of the last two years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same level in the current year.

7Regulation D, Rule 501(a), 17 CFR 230.501(a).

6

BEV EVANS

515.288.2500

[email protected]


General Regulation D Considerations To obtain the safe harbor protection of Regulation D, Form D must be sent to the SEC 15 days after the first sale. The following should be noted about any Regulation D offering. 1. Regulation D offerings (even those with no specific disclosure

requirements) are not exempt from antifraud or civil liability provisions of the federal securities laws. Issuers conducting Regulation D offerings must disclose whatever material information may be needed to make the available information not misleading.

2. An issuer is obligated to comply with applicable state laws for all Rule 504

and Rule 505 offerings. 3. Regulation D is available only to the issuer for the transaction in question

and not to its affiliates or others for re-sales of the securities. Form D is the official notice of an offering in reliance on Regulation D. Effective March 16, 2009, all Forms D must be filed electronically. Issuers will all need an EDGAR code in order to file. The information will bw become publicly searchable. The form itself has been amended. For example, issuers will be required to disclose the date of the first sale in the offering. Procedures for amendments to a previously filed will be simplified. More specificity on the registration exemption being claimed will be required. A CRD number will be required for individuals receiving sales compensation.

RESALE OF NON-REGISTERED SHARES

Rule 144 applies to the resale of shares of stock acquired in a private (non-registered) transaction and to shares of stock held by “affiliates.” An affiliate is a person who directly, or indirectly though intermediaries, controls, or is controlled by, or is under common control with the company (usually officers, directors and 10% holders). Rule 144 provides safe harbor "safe harbor" protection for the sale of restricted stock and for affiliates to sell their shares of stock (no matter how acquired).

Generally, the holding period for restricted securities of companies that report to the SEC under the Securities Exchange Act of 1934 will be shortened to six months, after which securities held by non-affiliates will, in most cases, be freely saleable. Securities held by affiliates will be saleable subject to other requirements of Rule 144.

Non-affiliates of a reporting company: As of that date, a person who is not an affiliate (and has not been an affiliate for the preceding three months) of an issuer that

7

BEV EVANS

515.288.2500

[email protected]


has met reporting requirements for at least 90 days, may resell the securities after a six-month holding period. If the issuer has not filed all required reports for at least twelve months prior to the sale (or for a shorter period if the issuer has been subject to reporting requirements for less than twelve months), the holding period is extended to one year.

Non-affiliates of a non-reporting company: If the issuer is not subject to reporting requirements, a minimum of one year must elapse prior to resale of the securities.

Affiliates of a reporting company: If the issuer has met reporting requirements for at least 90 days and has filed all required reports for at least twelve months prior to the sale (or for a shorter period if the issuer has been subject to reporting requirements for less than twelve months), an affiliate can resale securities after the expiration six months, subject to certain other conditions:

• The number of securities to be resold must fall within specified volume

limitations; • The resale must comply with the revised "manner of sale" conditions; and • The seller may be required to file a Form 144 reporting the sale (or proposed

sale), subject to the new reporting threshold.

The provisions of Rule 144 are not available for the resale of securities initially issued by a shell company unless one year has elapsed from the date Form 10 information has been filed with the Commission.

LIABILITIES UNDER FEDERAL SECURITIES LAW

In furtherance of the philosophy of the Securities Act, an issuer that raises capital through the use of a registration statement containing material misstatements or omissions is absolutely liable to the purchaser, unless the purchaser had knowledge of the truth and was therefore not misled by the prospectus. Directors, officers, underwriters and experts can also be liable for such material misstatements or omissions.8 Any person who offers or sells a security without following the disclosure requirements of the Securities Act is liable in a civil action to the purchaser of the security.9 A successful plaintiff under this section is entitled to rescission and return of the purchase price. The Securities Act also provides an express private remedy for a purchaser against the seller of a security for material misstatements or omissions in connection with the offer and sale of a security.10

8Securities Act of 1933, Section 11, 15 U.S.C.A. §77k. 9Securities Act of 1933, Section 12(a)(1), 15 U.S.C.A. §77l(1). 10Securities Act of 1933, Section 12(a)(2), 15 U.S.C.A. §77l(2).

8

BEV EVANS

515.288.2500

[email protected]


Law suits for material misstatements or omissions or for violation of the disclosure requirements of the Securities Act must be brought within one year of discovery but in no event later than three years after a sale.11 Potential defendants in an action brought with regard to misstatements or omissions in a registration statement, other than the issuer, can avoid liability by demonstrating that they performed a reasonable investigation of the company and had no reason to believe (and did not believe) that the prospectus contained material misstatements or omissions.12 Defendants in an action brought with regard to misstatement or omissions in a private placement disclosure document can avoid liability by demonstrating that they did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.13 It is to preserve these defenses that a good deal of the time, effort and cost of preparing for an offering (either public or private) involves corporate housekeeping and fact gathering - a process known as Due Diligence. In the context of a private placement, Due Diligence efforts will likely be confined to issuer’s counsel and principal officers. These efforts likely will include providing counsel with all organizational documents and copies of all minutes of meetings of directors, shareholders and committees since the date of incorporation. Minutes may be missing and may have to be reconstructed. Accurate records of stock ownership will be necessary. Copies of all stockholder agreements; creditor arrangements; contracts between the issuer and its officers, directors, shareholders or members of their immediate families; appropriate records of property and equipment transactions; business operations information such as audited financial statements, insurance coverage, top customer lists and employment policies; copies of all authorities or licenses issued by any governmental entity as well as an explanation of any violations or alleged violation of governmental laws or regulations; information regarding any transportation or disposal of hazardous material; explanation of pending litigation; tax returns; material contracts and general operations statistics. Gathering and reviewing this information will consume large amounts of your time and that of your counsel. The detail of the information requested by your counsel may, to some extent, depend upon the size of the offering and the nature of the offerees. Due Diligence remains the principal avenue for protecting yourself from potential significant liability.

SECURITIES REGULATION IN IOWA

11Securities Act of 1933, Section 13, 15 U.S.C.A. §77m. 12Securities Act of 1933, Section 11(b), 15 U.S.C.A. §77k(b). 13Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th Cir. 1980).

9

BEV EVANS

515.288.2500

[email protected]


Each state and most foreign jurisdictions have securities laws and regulations that need to be considered any time you are preparing to offer securities to residents of that jurisdiction. Following is a short summary of state law issues in Iowa. The Iowa Uniform Securities Act is found in Chapter 502 of the Iowa Code. The Iowa Act was enacted in 2004, became effective January 1, 2005, and is patterned largely on the 2002 version of the Uniform Securities Act. The Iowa Act is based upon a regulatory approach that is common to many other state securities statutes. Under the Iowa Act securities sold to Iowa residents must be registered with the Iowa Securities Bureau unless: (i) the securities qualify as "federal covered securities"; or (ii) the securities, or the transaction through which the securities are sold, qualify for an exemption from registration under the Iowa Act. The term “federal covered securities” includes securities sold under Rule 506 of Regulation D of the federal Securities Act of 1933. (Under Rule 506 an unlimited dollar amount of securities can be sold to a maximum of 35 sophisticated and experienced investors and an unlimited number of accredited investors without federal review or registration, as long as the securities are sold without general solicitation and specific disclosure requirements are met if non-accredited investors are included in the offering.) Rule 191-50.14 (IAC) contains the notice filing procedures for Rule 506 offerings in Iowa. An issuer offering securities under Rule 506 must file a notice on SEC Form D, a consent to service of process on a form U-2, and pay a fee of $100 to the Iowa Securities Bureau no later than 15 days after the first sale of the federally covered security in Iowa. There are a variety of exemptions under the Iowa Act that may apply to the offering of securities to Iowa residents. Once such exemption is the private placement exemption found in Iowa Code Chapter 502.202(14). Under this exemption, an issuer may sell unregistered securities, as part of a single issue, to no more than 35 purchasers (plus an unlimited number of “institutional investors”) in Iowa during any twelve consecutive month period. The term “institutional investor” under Iowa law has generally the same meaning as does the term “accredited investor” under federal law. The Securities Bureau has indicated that persons who purchase at different times should be counted as a separate “purchaser” for each such transaction. The owners of entities formed for the purpose of making an investment will each be counted as a separate “purchaser” for purposes of this exemption. No general solicitation is allowed and no commissions or other remuneration may be paid (other than to broker-dealers registered in Iowa) in order to qualify for this exemption. The issuer must have taken reasonable steps to ascertain that each purchaser is purchasing the securities for investment purposes, and not with an intent to distribute. Regardless of whether the offering of securities is exempt from either Iowa law or US federal law regarding registration, no offering is ever exempt from the anti-fraud provisions of federal and state securities laws. All issuers must provide adequate

10

BEV EVANS

515.288.2500

[email protected]


disclosure to each prospective investor to assure that the investor has the information necessary to make an informed decision. Persons and entities involved in the business of distributing and trading securities are required to be registered under the Iowa Act. The Iowa Act also contains the typical prohibitions against use of fraudulent practices in the issuance and distribution of securities. Please refer to the Iowa Act and accompanying regulations regarding these matters. This summary is intended only to alert readers to the general applicability of Iowa law to these matters. Please refer to Iowa Code Chapter 502, the Iowa Administrative Code and applicable US statutes and regulations.

insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500

SUMMARY OF ECONOMIC STIMULUS PLAN

JOHN S. LONG

[email protected]

I. HIGHLIGHTS

A. Total cost of $787 billion

B. Tax breaks for individuals of $237 billion

C. Tax breaks for businesses of $51 billion

D. Healthcare spending of $147.7 billion

E. Education spending of $90.9 billion

F. Aid to the disadvantaged of $82.5 billion

G. Infrastructure investments of $80.9 billion

H. Investment in government infrastructure of $20.7 billion

I. Energy spending and tax incentives of $49.7 billion

J. Housing spending and tax credits of $12.7 billion, mostly focused on low income and public housing

K. Scientific research spending of $8.9 billion

L. Broadband and wireless internet access spending and tax incentives of $7.2 billion

M. Block grants to states of $8.8 billion



II. SMALL BUSINESS PROVISIONS

A. The SBA has been allocated $636 million for SBA loans.

B. The legislation instructs the SBA Administrator to eliminate or reduce loan program fees.

C. The legislation authorizes the SBA to guarantee up to 90% of 7(a) loans issued within one year of enactment.

D. Small businesses should consider the Stimulus’ general spending and incentive programs as well.

III. SPENDING MEASURES OF SPECIAL INTEREST

A. Employment

The Stimulus provides for a new COBRA health insurance continuation subsidy. A FAQ is available on our website at: http://tinyurl.com/CobraSubsidies.

B. Health Care

1. The Stimulus greatly expands the applicability of HIPPA’s security provisions. A summary of changes is available on our website at: http://tinyurl.com/HipaaCompliance.

2. Significant funding is provided to modernize the information technology used in the healthcare sector.

C. Broadband and Wireless Access

Funding and tax incentives are provided to expand broadband access to un-served and underserved areas.

D. Housing

1. The Stimulus allocates $4 billion for the rehabilitation of public housing, with a focus on improving energy efficiency.

2. A $2 billion neighborhood stabilization fund has been created to assist state and local governments and nonprofits with the purchase and rehabilitation of foreclosed housing.

JOHN S. LONG

515.288.2500

[email protected]


2


3. A new Home Investment Partnership Program of $2.25 billion has been created to help fill financing gaps for stalled low income housing projects.

4. Additional funding is provided for lead paint removal and energy efficiency upgrades to low income housing.

5. $250 million is provided to upgrade energy efficiency of HUD sponsored low-income housing.

E. Agriculture

1. The Emergency Watershed Protection Program has been allocated $145 million for the purchase and restoration of floodplain easements.

2. The Rural Business-Cooperative Service has been allocated $150 million for grants to rural businesses. In addition, the Stimulus provides for loan guarantees of $2.99 billion in loans to rural businesses.

F. Energy and Transportation

1. The Stimulus provides $11 billion for research and improvements related to the electric grid.

2. The Stimulus provides states and local governments $300 million to help reduce diesel emissions.

JOHN S. LONG

515.288.2500

[email protected]


3

©2008 DAVIS BROWN KOEHN SHORS & ROBERTS P.C. #1672805

CERTIFIED DEVELOPMENT COMPANIES IN IOWA WHO PROVIDE SBA 504 LOANS

SCOTT D. MIKKELSEN

515.288.2500 [email protected]

Black Hawk Economic Development, Inc. Waterloo, IA 304 South Street P.O. Box 330 http://www.bhed.org/ Corporation for Economic Dev. in Des Moines Des Moines, IA 400 Robert D. Ray Drive E.C.I.A. Business Growth, Inc. Dubuque, IA 7600 Commerce Park http://www.ecia.org/businesses/loans.html Iowa Business Growth Company Johnston, IA 5409 NW 88th Street Suite 100 http://www.iowabusinessgrowth.com/ Siouxland Economic Development Corp. Sioux City, IA 1106 Historic 4th Street Suite 201 http://www.siouxlandedc.com/

©2008 DAVIS BROWN KOEHN SHORS & ROBERTS P.C. #1672454

WEBSITES OF INTEREST

JOHN S. LONG SCOTT D. MIKKELSEN

515.288.2500 [email protected]

[email protected]

General Information http://www.recovery.gov http://www.financialstability.gov IRS information http://www.irs.gov/newsroom/article/0,,id=204335,00.html Department of Energy http://www.energy.gov/recovery/index.htm Small Business Administration http://www.sba.gov/recovery National Telecommunications and Information Administration http://www.ntia.doc.gov/recovery/index.html Federal Communications Commission http://www.fcc.gov/recovery/broadband/ Housing and Urban Development http://www.hud.gov/recovery/ http://www.hud.gov/news/recoveryactfaq.cfm

insert

number

tab

here

BUSINESS SUCCESSION ISSUES

BRUCE CAMPBELL, MARGARET VAN HOUTEN, TOM HOUSER,

COURTNEY STRUTT TODD, AND KRYSTLE CAMPA

3:35 p.m. to 4:35 p.m.

• Buy-sell agreements • Rights of first refusal • Is this a good time to make gifts? • Family disputes • Nonqualified deferred compensation plans • Retirement and employee benefit plans in today's

environment from the employer’s point of view

ATTORNEY BIO

BRUCE I. CAMPBELL

CONCENTRATION

Bruce Campbell is a senior shareholder of the Davis Brown Law Firm in the Business Division. His general practice is in but not limited to the areas of Estate Planning, Estate and Trust Administration and Taxation.



• The Best Lawyers in America® 2008 in the areas of Non-Profit/Charities Law, Tax Law and Trusts and Estates.

• Super Lawyers Iowa, Tax, Estate Planning and Probate • Chambers USA 2008 Bruce Campbell in Corporate and M&A- Iowa Ranked Band 3

SUMMARY

Bruce has extensive experience in the areas of revocable trusts and the avoidance of formal probate, Family Limited Partnerships and Limited Liability Companies, Grantor Retained Annuity Trusts, Charitable Remainder Trusts, marital deduction planning, charitable planning, special use valuation, estate tax deferral, valuation of entities, U.S. Estate and Gift tax examinations, income and inheritance tax protests before the Iowa Department of Revenue, fiduciary and individual income tax planning and sales of real estate, farms, and businesses from estates.

Bruce has handled several fiduciary litigation cases including will and trust contests, will and trust interpretations, determinations of spousal rights, contested guardianship and conservatorship matters, breaches of fiduciary obligation, and removal of fiduciaries. He also has testified as an expert in cases involving estate planning and estate administration malpractice claims.

Bruce has assisted clients in establishing several not-for-profit charitable corporations and charitable trusts, including publicly supported charities, supporting organizations and private foundations, and obtaining their U.S. tax exemptions.


Bruce has also assisted several charities with exemption and unrelated business income tax matters including the successful case of Independent Order of Odd Fellows Grand Lodge of Iowa v. U.S., 72 AFTR 2d 93-5534, which held that share crop rentals were not unrelated business income.

BORN MASON CITY, IOWA, 1947 EDUCATION UPPER IOWA UNIVERSITY (B.A., SUMMA CUM LAUDE,1969); HARVARD UNIVERSITY (J.D., CUM LAUDE, 1973) ADMITTED TO BAR 1973, IOWA

AREAS OF LAW • AGRICULTURAL LAW

• ALTERNATIVE DISPUTE

RESOLUTION • BUSINESS ORGANIZATIONS AND

TRANSACTIONS

• EDUCATION • TAX

• WILLS, TRUSTS, ESTATE PLANNING

AND PROBATE LAW MEMBERSHIPS • AMERICAN BAR ASSOCIATION

• AMERICAN COLLEGE OF TRUSTS AND ESTATE COUNCIL (ACTEC)

• IOWA STATE BAR ASSOCIATION

• POLK COUNTY BAR ASSOCIATION

#1531705

PUBLICATIONS, SPEECHES AND SEMINARS

Bruce is a frequent speaker on estate planning, estate administration, and non-profit topics for CLE seminars and community groups.

MEMBERSHIPS

Bruce is a Fellow of the American College of Trust and Estate Counsel (ACTEC), and a member of the Real Property, Probate & Trust and Taxation sections of the ABA. He is also an ACTEC trained mediator specializing in the mediation of probate and family succession disputes.

OF NOTE

Bruce is a seventh generation Iowan and graduated from both Upper Iowa University and Harvard Law School with honors. He has taught Estate and Gift Tax, Estate Planning and Fiduciary Income Tax at Drake University and Drake University Law School as an adjunct professor.

COMMUNITY

Bruce serves as a Trustee and officer of Upper Iowa University, director and officer of the Iowa Natural Heritage Foundation, and a director of the Mercy Foundation.

#1531705

ATTORNEY BIO

MARGARET VAN HOUTEN

CONCENTRATION

Margaret is a senior shareholder of the Davis Brown Law Firm, having joined the Firm in 2007. Her areas of practice include Estate Planning, Taxation, Trust and Estate Administration, Charitable Organizations, and Employee Benefits.

AWARDS


• Best Lawyers in America® 2009, in the areas of Taxation, Employee Benefits, and Trust and Estates.

• Super Lawyers Iowa, Employee Benefits and ERISA

SUMMARY

Margaret assists individuals and small businesses with their tax, retirement and estate planning, including the succession of closely held businesses. She works with clients to transmit wealth to their intended beneficiaries with the least amount of tax and administrative expense. Some of the tools and techniques she has helped clients implement include the use of revocable living trusts; family owned entities, such as limited partnerships, limited liability companies and S Corporations; trusts for the long term management and protection of family owned assets, including generation skipping transfers; life insurance planning; and sophisticated wealth transfer techniques, such as Grantor Retained Annuity Trusts, Installment Sales to Defective Grantor Trusts; Charitable Trusts and Foundations; She has done a substantial amount of planning for individuals with large retirement plans.

Margaret has also represented many clients who want to enter into a premarital agreement and has assisted individuals in non-traditional families to achieve all of their estate planning goals. Margaret was instrumental in passage of the Iowa Uniform Premarital Agreement Act in the early 1990’s and is currently working on amendments to that Act which would allow spouse’s to enter into “pre-nups” after the date of the marriage.

Margaret is admitted to practice in the Iowa Courts, U.S. District Courts for the Northern and Southern Districts of Iowa and the U.S. Tax Court.

BORN LANCASTER, WISCONSIN, 1953

EDUCATION IOWA STATE UNIVERSITY (B.A. WITH DISTINCTION, 1974) UNIVERSITY OF IOWA (J.D., WITH DISTINCTION, 1979) NEW YORK UNIVERSITY (LL.M. IN TAXATION, 1984) ADMITTED TO BAR 1979, IOWA

AREAS OF LAW • BUSINESS ORGANIZATIONS AND

TRANSACTIONS

• EMPLOYEE BENEFITS

• TAX • WILLS, TRUSTS, ESTATE PLANNING

AND PROBATE LAW

MEMBERSHIPS • AMERICAN BAR ASSOCIATION

• AMERICAN COLLEGE OF TRUSTS

AND ESTATE COUNCIL (ACTEC) • IOWA STATE BAR ASSOCIATION,

TAX SECTION COUNCIL

• PHI BETA KAPPA

#1536136

SEMINARS, LECTURES & PUBLICATIONS

Margaret has been an adjunct professor of law at Drake University College of Law and is a frequent speaker on taxation and estate planning topics. MEMBERSHIPS

• Chair, Iowa Supreme Court Probate Rules Committee (2006-2008);

• American College of Trust and Estate Counsel (ACTEC), (1995-present): Member, Technology Committee Estate and Gift Tax Committee , and Iowa State Chair;

• American Bar Association, Member, Section of Probate and Trust Law and Section of Taxation;

• Iowa State Bar Association: Member, Section of Taxation, (section council, 2002-2005) and Section of Probate and Trust Law (section council, 1990-1993, 2006-present);

• Fellow, Iowa State Bar Foundation Iowa Supreme Court Commission on the Unauthorized Practice of Law, 1990-1999 (chair, 1997-1998).

PERSONAL

Margaret is married to Doug Churchill, and they have three children.

#1536136

ATTORNEY BIO

THOMAS J. HOUSER

CONCENTRATION

Tom is a senior shareholder of the Davis Brown Law Firm. Tom’s areas of practice include Estate Planning, Business and Succession Planning and Estate Administration and Trust Estates.

SUMMARY

Tom’s practice concentrates on crafting comprehensive estate plans that accomplish a client’s personal objectives in a tax efficient manner. He offer advice on methods for distributing wealth to the next generation, transfer techniques for the family business, tools that leverage the transfer tax system, coordinating beneficiary designations with the estate plan, and distributions from qualified plans and IRAs. He also advises on asset protection matters, pre-marital planning and handles complex estate and trust administration.


Estate Planning:

• Advisor to more than 70 physicians, 40 business owners, and 35 executives of Fortune 500 companies on their personal estate plans, succession plans and asset protection concerns.

• Advised on wealth transfer techniques including family limited partnerships and Grantor Retained Annuity Trusts (GRATs) for patriarch of closely held business valued at more than $60 million.

• Routinely advises mature clients on revocable trust agreements as a probate avoidance technique, federal estate and state inheritance tax minimization and Title XIX qualification issues.

• Counsels parents of minor children regarding guardianships, testamentary trusts, special needs trusts, irrevocable life insurance trusts, advanced directives and beneficiary designations.

BORN BELMOND, IOWA, 1964

EDUCATION

COLLEGE OF ST. THOMAS (B.A. 1986);

UNIVERSITY OF IOWA COLLEGE OF LAW (J.D. 1989)

ADMITTED TO BAR IOWA, 1989

AREAS OF LAW • AGRICULTURAL LAW

• BUSINESS ORGANIZATIONS AND

TRANSACTIONS • REAL ESTATE

• TAX

• WILLS, TRUSTS, ESTATE PLANNING AND PROBATE LAW

MEMBERSHIPS • AMERICAN COLLEGE OF TRUSTS

AND ESTATE COUNCIL (ACTEC)

• AMERICAN BAR ASSOCIATION • IOWA STATE BAR ASSOCIATION

• POLK COUNTY BAR ASSOCIATION

#1531165 v.2

Business and Succession Planning:

• Advised on the transfer of several family enterprises including an excavation business, a residential appraisal business, a commercial general contractor.

• Counseled dozens of farmers on the transfer of their farming operations, including transfers to children active in the business while providing for children not involved in the business.

• Reviews, advises and drafts buy/sell agreements, non-compete agreements, covenants not to solicit and non-piracy covenants.

• Drafted non-qualified deferred compensation arrangements for senior executives of a large retirement home operation.

• Counsels business owners on general business issues including formation, termination, acquisitions, routine asset purchases and sale agreements.

Litigation:

• Enjoined the sale of a closely held business and gained the appointment of a receiver in a state court action to judicially dissolve a limited liability company.

• Second chair on federal district court commercial litigation case involving a failed construction and demolition recycling system.

• Prosecuted and defended several will contest, will construction and contested probate and trust administration actions.

AWARDS


• Fellow of the American College of Trusts & Estates Council (ACTEC), a national association of lawyers skilled and experienced in and committed to improving the fields of estate planning, probate and trust law.

• Best Lawyers in America® 2008, in the areas of Trusts and Estates.

• Worth Magazine Top 100 Attorneys in the nation (2008, 2007, 2006, 2005). Worth compiled nominations from financial advisors, family office executives, accountants, consultants, academics and subscribers to produce the Top 100 Attorney listing.

• Super Lawyers Iowa, Estate Planning and Probate.

#1531165 v.2

SEMINARS, LECTURES & PUBLICATIONS

Seminars & Lectures:

• University of Iowa College of Law, Spring Tax Institute speaker (2003, 2008) • Iowa State Bar Association Probate CLE speaker (1996, 1999, 2001, 2002, 2007) • Iowa State Bar Association Tax School speaker (2002) • Iowa State Bar Association Annual Meeting Speaker (2002) • Iowa State Bar Association Bridge the Gap speaker (2003)

Publications:

• Kurtz on Iowa Estates, contributing author to 5th edition (expected publication 2009).

• Iowa Laws Affecting IRAs, author, published on Leimburg Information Services, Inc., website.

• A Comparative Study of the Former Owner’s Right of First Refusal Upon a Lender’s Resale of Foreclosed. Agricultural Land: A New Form of State Mortgagor Relief Legislation, The Journal of Corporation Law, Vol. 13, No. 3, pg. 895 (Spring 1988).

MEMBERSHIPS

• Fellow of the American College of Trust and Estate Counsel (ACTEC) • ISBA Probate Section Council (2005-2008) • ISBA President's Task Force for CLE Reform (2005-2008) • Iowa State Bar Association Bridge the Gap CLE (chair, 2001; member, 1994-2000)

COMMUNITY

• Iowa Health Foundation (Board of Directors, 1998 to present) • Financial Planning Association of Iowa (President and Board of Directors,

2000-2001) • Iowa Lutheran Hospital Foundation (Board of Directors, 1993-1998) • Leadership Iowa Graduate (1999-2000) • Member, Forty Under 40 Class by The Des Moines Business Record (2003) • Greater Des Moines Leadership Institute Graduate (1995)

PERSONAL

Tom is a third generation lawyer. He was born and raised in Belmond, Iowa. Tom and his wife, Susan, live in Urbandale with their two children. His hobbies include golf, basketball, water and snow skiing, and personal finance.

#1531165 v.2

ATTORNEY BIO

COURTNEY A. STRUTT TODD

CONCENTRATION

Courtney is an associate of Davis Brown Law Firm. She joined the Business Division in 2006 in the areas of Business Organization and Transactions, Mergers and Acquisitions, Public Finance, Renewable Energy, and Tax.

ACADEMICS

Courtney graduated from Drake University Law School, receiving her J.D. in May 2006. She also received her M.B.A. from Drake University Graduate College of Business in May 2006.

Courtney graduated from UNI in May 2003 with an Accounting major and a Computer Information Systems minor. She holds a certificate in international business and has also passed the Certified Public Accountant’s exam.

SUMMARY

She has been involved in the formation of businesses of every size and tax level, including LLCs, S corps., C corps., and LLPs. She gives advice as to what type of business they should be organized under. She has helped create renewable energy, health care, small business, and professional entities.

Courtney has represented a number of cities, hospitals, 501(c)(3)s, and state entities in obtaining public financing. She also has experience in dealing with state entities to obtain financing for private institutions.

Courtney has dealt with both personal and corporate tax cases in keeping accurate tax records. Her CPA authorization has allowed her to give companies cash flow and regulatory advice in managing their finances.

OF NOTE

Courtney previously was a summer associate at the Davis Brown Law Firm. She was the Managing Editor of the Drake Law Review, and received the Charles and Dora Taylor scholarship as well as a general law scholarship.

COMMUNITY

Courtney has a certificate in coaching authorization. She currently is an Assistant Varsity Volleyball Coach at Urbandale High School and serves as a Volleyball Camp instructor. Courtney has been involved in the Volunteer Income Tax Assistance Program, Big Brothers and Big Sisters of Iowa.

PERSONAL

Courtney is a Des Moines native and a 1998 graduate of Urbandale High School. She and her husband, Matthew, live in Ankeny.

BORN DES MOINES, IOWA 1980 EDUCATION UNIVERSITY OF NORTHERN IOWA

(B.A., 2003)

DRAKE UNIVERSITY GRADUATE

COLLEGE OF BUSINESS

(M.B.A., 2006);

DRAKE UNIVERSITY LAW SCHOOL

(J.D. 2006);

DRAKE LAW REVIEW ADMITTED 2006, IOWA AREAS OF LAW BUSINESS ORGANIZATIONS AND

TRANSACTIONS

MERGERS AND ACQUISITIONS

PUBLIC FINANCE

RENEWABLE ENERGY

TAX MEMBERSHIPS IOWA STATE BAR ASSOCIATION

AMERICAN BAR ASSOCIATIONS

IOWA SOCIETY OF PUBLIC

ACCOUNTANTS

POLK COUNTY WOMEN ATTORNEYS

#1554498

ATTORNEY BIO

KRYSTLE L. CAMPA

CONCENTRATION

Krystle is an associate of the Davis Brown Law Firm. She rejoined the Business Division in September 2008 in Business and Real Estate. ACADEMICS

In 2007, Krystle received her law degree from Drake University Law School with High Distinction. She was the Managing Editor of the Drake Law Review, received the Charles and Dora Taylor scholarship, and was elected Order of the Coif.

Krystle received her Bachelor of Science and Business Administration in Finance from Creighton University in 2004. While at Creighton, Krystle participated at the Division 1 level on both the Women’s Soccer and Basketball teams and was an Academic All-American. In addition, Krystle was a Student Manager of the Creighton Endowment, a member of the Beta Gamma Sigma Business Fraternity, and was inducted into the Omicron Delta Kappa National Honor Society. She was also heavily involved in community volunteer activities.

BORN ST. PAUL, MINNESOTA, 1982 EDUCATION CREIGHTON UNIVERSITY (B.S. B.A.,

2004); DRAKE LAW SCHOOL (J.D.,

WITH DISTINCITION, 2007) ORDER

OF THE COIF, DRAKE LAW REVIEW ADMITTED TO BAR 2007, IOWA; 2008, NEBRASKA AREAS OF LAW • BUSINESS ORGANIZATIONS

AND TRANSACTIONS • COMMERCIAL LAW

• REAL ESTATE PLANNING,

DEVELOPMENT AND MANAGEMENT • REAL ESTATE TRANSACTIONS MEMBERSHIPS • AMERICAN BAR ASSOCIATION

• IOWA STATE BAR ASSOCIATION • POLK COUNTY BAR ASSOCIATION

#1647721

http://www.davisbrownlaw.com/areas/view/?areaid=40



insert

letter

tab

here


215 10TH

STREET, SUITE 1300


515.288.2500



BRUCE CAMPBELL

[email protected]

MARGARET VAN HOUTEN

[email protected]

TOM HOUSER

[email protected]

COURTNEY STRUTT TODD

[email protected]

KRYSTLE CAMPA

[email protected]

CHRIS JAMES

[email protected]

Current Status of Estate and Inheritance Taxes

The U.S. Estate Tax exemption equivalent increased to $3,500,000 for deaths in 2009 and the rate on the excess is 45%. Under current law there would be no U.S. Estate Tax in 2010 and the exemption equivalent would decrease to $1,000,000 in 2011. The general consensus is that the U.S. Estate Tax laws will be amended to preserve the $3,500,000 exemption equivalent and the current 45% rate. The U.S. Gift Tax annual exclusion has increased to $13,000 for each donee of a present interest gift. The Gift Tax lifetime exemption equivalent remains at $1,000,000. Iowa has an Inheritance Tax. Unlike the U.S. Estate Tax, the tax is imposed based on family relationship so the tax is imposed only on property and certain assets passing to individual beneficiaries who are not a spouse, direct ancestor or direct descendant or stepchild.

Case Scenarios

Case Study #1

APPRAISAL AL


Al is the owner of a residential and commercial real estate appraisal company. Under Al’s leadership, the appraisal company has a significant share of the western Iowa marketplace. Barry has been employed at Accurate Appraisal LLC for the past 10 years. Although he is young (late 30s), Barry has helped grow the business into new markets. Together, Al and Barry believe the growth potential for the Midwest region is significant. Al’s son, Andy, has been involved in the appraisal company for the past six years. Al is conflicted because Barry is the future of the business but he doesn’t want to see Andy in a minority position. Al has parlayed his good fortune into several real estate holdings. He owns a 200 acre ranch outside of Aspen, Colorado, which has appreciated significantly in value. He also owns a 600 acre ranch in Montana. Al has two daughters who are not involved in the appraisal company. Al’s first wife died at an early age and he has remarried. Al wants his second wife, Alice, to receive the homestead and “enough money to live comfortably” but the rest of the estate should be divided equally among the three children. In an effort to simplify matters, Al formed a holding company that owns title to his homestead, the Colorado ranch, the Montana ranch, and 80% of Accurate Appraisal. Al sold the other 20% to Barry a couple of years ago, which he is purchasing on contract.

Homestead 250,000 Montana ranch 1,050,000 Colorado ranch 2,600,000 Accurate Appraisal LLC 6,000,000 TOTAL 9,900,000

NOTES FOR CASE #1:

515.288.2500


2


NOTES FOR CASE #1:

515.288.2500


3


Case Study #2

BAXTER DAIRY Betty Baxter is the sole owner of Baxter Dairy, a “C” corporation. She is 66 years old and is still active in the business. She works approximately 20 hours per week and makes all significant decisions along with her two sons, Clyde and Dexter. In recent years, in addition to being involved in significant decisions, Clyde and Dexter have become exclusively responsible for managing day-to-day operations. Clyde and Dexter are both in their mid-thirties. Clyde has four children. Dexter has three children. Baxter Dairy is worth $4,000,000. Aside from her interest in the dairy, Betty owns a residence worth $300,000, a portfolio of publicly traded stock worth $1,500,000, and personal effects worth $200,000. Betty does not use earnings from the business to support her standard of living. She lives entirely off her securities portfolio. Betty recently began to seriously think about estate planning. She wants Clyde and Dexter to eventually take over the business. She also thinks that it would be wise to implement a formal mechanism under which Clyde and Dexter would have actual authority to run the business. She is aware that she has exposure to the federal estate tax but she doesn’t know the extent to which it would affect her estate.

Personal residence 300,000 NQ investments 1,500,000 Closely held stock 4,000,000 Retirement accounts 250,000 Life insurance 200,000 TOTAL 6,250,000

515.288.2500


4


NOTES FOR CASE # 2:

515.288.2500


5


Case Study #3

FARMER FRANK Frank and Fanny have farmed in central Iowa all of their lives. They lived within their means and Frank always poured his profits back into the farming operation. Over the years, they have accumulated a nice net worth, though their lifestyle hasn’t changed much because the majority of their wealth is in their farmland. Their youngest, Fred, has farmed with Frank for the past eight years and is starting to build his own farming operation. Frank wants to see Fred continue farming the land. Their other four children are not involved in the farm operation. There is no discord among the family members. Frank and Fanny have a Will that was signed in 1986. Their wishes have not changed much – they want to treat their five children equally.

Homestead 175,000 Bank accounts 50,000 Farmland

500 acres owned jointly 2,000,000 40 acres owned by Frank 100,000 160 acres owned by Frank and Fred, T/C 200,000

2,300,000 Farm implements 50,000 Qualified retirement plans

Frank’s IRA 60,000 Fanny’s IRA 15,000

75,000 TOTAL 2,650,000

515.288.2500


6


NOTES FOR CASE #3:

515.288.2500


7


I. COMMON TECHNIQUES IN ESTATE PLANNING A. Use of your annual exclusion gifts. Gifts are not subject to tax up to the

amount of the annual exclusion. You should make use of your annual exclusion gifts and to the extent you are not using them, you should make sure that you make gifts to your beneficiaries in an amount you are comfortable with.

1. You may currently give $13,000.00 per donee or $26,000.00 for a married couple.

2. You may make annual exclusion gifts not only to your family members, but to anyone. If you are concerned about each family member receiving the same amount, because they have different number of children, you can deal with that situation by “making up” for unequal gifts at your death, or by using a portion of your $1 million lifetime exemption to make gifts equal “by family” as opposed to being equal for each beneficiary.

B. Use of lifetime unified credit exemption amount. As stated above, you and

your spouse can each give up to $1,000,000 of assets to your family now, which will count toward the $3,500,000 unified credit amount for each spouse, but would also allow all appreciation on the gifted assets between the date of the transfer to the date of your death to accrue to the benefit of your family rather than being included in your estate. If, for example, you give away $1,000,000 worth of assets now, and die when the assets are worth $2,000,000, your children will save estate taxes of approximately $450,000 at current rates. Both the annual exclusion gifts and the lifetime exemption gifts can be used in conjunction with the other techniques discussed below.

C. Charitable Techniques. Many people use charitable trusts or foundations

to achieve their charitable goals while saving income and estate taxes. This would include the following:

1. Charitable Lead Trust. A charitable lead trust is a technique in which a charity receives a percentage of the trust assets for a period of years, with the family members receiving the trust assets after the term.

a) Example: If you contribute $1,000,000 to a charitable lead trust for a term of 10 years, you could provide that the charity receive $50,000 per year for 10 years, and any amounts left

515.288.2500


8


in the trust at the end of the 10 years would be distributed to your children, or a trust for your family members. You would be making a $1,000,000 gift at the time you make the charitable gift, but of that amount, approximately $400,000 would be treated as a charitable contribution, and only $600,000 would be treated as a gift. If the fund earned 8% per year, the fund would be worth over $1,400,000 at the end of the 10 year term, after payments of $500,000 to charity. You would be transferring $1,400,000 for a reportable gift of $600,000, which saves transfer taxes on $800,000 of appreciation. That would save $360,000 of taxes at a 45% tax rate. This technique has several different ways of being set up, all of which have slightly different income and estate/gift tax consequences.

2. Charitable Remainder Trust. A charitable remainder trust is the opposite of a charitable lead trust; a non-charitable beneficiary (such as yourselves or your children) receives the annual income interest (5% or more) of the value of the trust for a term of years or for the lifetime of a beneficiary or another person. At the end of the term, the remaining trust assets are distributed to a charitable organization, including a family foundation or donor advised fund. In the above example, the charitable deduction would be the $400,000 amount. This is also a good way to dispose of highly appreciated stock (or other assets) by contribution to this charitable trust without paying tax on the gain at the time of sale.

a) Charitable Foundation or Donor Advised Fund. A charitable foundation or donor advised fund is a way to create an endowment with your charitable contributions in a way that allows you to make large contributions to the foundation or fund in any given year, with future distributions to the charities you choose. This is particularly important if you are going to have a year with large income, but you do not want to make charitable contributions to the charities in as large an amount as you may want to obtain as a charitable deduction for income tax purposes.

3. Grantor Retained Annuity Trust (GRAT). This is a trust for a term of years in which you would retain an income interest payable annually. The trust assets remaining at the end of the term would be distributed to a beneficiary, either an outright beneficiary or a

515.288.2500


9


trust. The idea is to retain an interest that actuarially approximates the value of the trust, and then have the trust assets outperform the retained income interest.

a) Example: You could transfer $500,000 to the trust for a 5 year term and retain the right to receive back $90,000 per year for the 5 year period (it is usually a graduated payment, beginning at a low figure and increasing by, for example, 10% per year so that you receive back a total of $450,000). If the fund earns 8% per year, you will make a taxable gift at the beginning of the term of $45,000 and the remaining fund will, at the end of the term, be worth $99,000, or a gift of approximately $45,000 worth of appreciation at no gift tax cost. If the fund earns 10% per year, it will be worth $146,000 at the end of the term, or a gift of over $100,000 at no gift tax cost.

b) The downside of this technique is the possibility that the fund will not earn enough to pay the annuity to you, or that the GRAT “failed.” You also need to survive the term, although you can use both spouses as beneficiaries. There is no tax consequence of failure. The cost to you is the cost of establishing and administering it. Many people do a series of GRATs with less money and for shorter terms to hedge against the possibility of having a failure of a large amount.

c) Another possibility is to combine a GRAT with an asset that is discounted, such as a minority interest in a real estate entity, investment entity or operating entity. In the above example, if you would transfer a minority interest in a corporation to the GRAT, the value of the gift would not be $500,000 but would be approximately $350,000.

4. Sale of Assets to Defective Grantor Trust. This is a technique in which you sell assets (hopefully appreciating assets) to a trust or trusts for the benefit of your children or grandchildren in exchange for a promissory note (an installment contract sale). Over the term of the note, which bears interest at a relatively low rate, the trust pays you back, but any appreciation of the assets over the interest rate inures to the children. If an asset whose value can be discounted can be used, the savings, like in a GRAT, are substantial.

a) The real benefit of this technique is that the trust is structured so that the senior generation pays the income taxes on the trust (there is no tax on the sale of assets even

515.288.2500


10


if there is appreciation); the parents are in effect paying their children’s income taxes. This is not treated as a gift, so it is a way to transfer substantial value to the next generation without a tax cost.

b) This is a technique very similar to a GRAT, but uses a lower interest rate and can probably transfer more value to the next generation with less tax cost because of that and because of the parents paying the taxes for their children. This technique has more of a risk and is more costly to implement, than is a GRAT.

5. Qualified Personal Residence Trust. This is a technique where you put a primary or vacation residence into a trust and reserve the right to live in the house for a period of years. At the end of the term, the house is distributed to your beneficiaries, and any appreciation in the value of the home between now and the end of the term is allocated to the remainder beneficiaries.

a) The benefit of this is that you can give away a substantial amount of appreciation without a gift tax cost. The detriment is that after the end of the term of years, you cannot force the remainder beneficiaries to let you live in the house or even rent it to you. So, you would want to make sure that the term is acceptable to you. Although this technique is used for vacation residences quite a bit, an Iowa personal residence often does not appreciate enough from year to year to accomplish much tax savings.

6. Family Limited Partnership or Limited Liability Company. This technique is one in which you create a limited liability company or a limited partnership to hold investment assets or other assets. Over time, you could give interests in the company to your children (and their families, if you wish), and could even use this as a way to make your annual exclusion gifts without paying cash. The benefit of giving an interest in a company instead of giving stock itself is that the value of the gift could be discounted by 30-35% because the company interest is not marketable and is only a minority interest.

a) Example: You could contribute $1,000,000 of securities to a limited liability company and retain 100% of the membership interests in the company. You could then give each of your children (and grandchildren if you wish) 2% of the membership interests, which would have a liquidation value of $20,000. Since the membership interest is not marketable

515.288.2500


11


and represents a minority interest in the Company, the reportable gift tax value would be close to $13,000 to $14,000 because of the marketability and minority discounts. This technique has been subject to a lot of IRS scrutiny over the past several years, but most planners still recommend its use if carefully planned and implemented.

7. Create a Generation Skipping Trust in your Estate Plan. You may give up to $3.5 million to your grandchildren (not counting annual exclusion gifts) without incurring a generation skipping transfer tax. You can make your children lifetime beneficiaries of that trust, but if drafted properly, the trust assets will not be included in your children’s estates.

a) This may not seem like a big issue, but if each child receives $650,000, if the value (after annual distributions) appreciates by 3% per year, and if your children live 30 years longer than you, each trust will have grown to over $1,600,000 at the end of the term. Upon the death of your children, taxes of $720,000 will be saved at current rates or $2,100,000 of total tax savings. In addition, this generation skipping trust can be used by your children as a place to invest more equity assets that do not have a high annual rate of return but which have more potential for appreciation.

II. BUY/SELL AGREEMENT CHECKLIST A. What is a buy/sell agreement

1. A buy/sell agreement is a contract that provides for the disposition of a shareholder’s stock upon his death, disability, termination of employment or purchase of his stock.

B. Types of buy/sell agreements

515.288.2500


12


1. Redemption agreement. This type of agreement binds both the shareholders and the corporation. Upon the death of shareholder, or if a shareholder wishes to sell his interest in the corporation, the corporation is bound to purchase the stock. The agreement need not be drawn to force the corporation to purchase the stock, but can merely give the corporation the right of first refusals.

2. Cross-purchase agreement. This type of agreement binds the shareholders to purchase each other’s shares upon death or other disposition of stock. The agreement can be drawn to force the purchase of the stock or merely to give the other shareholders the right of first refusal. This type along with the redemption model are the two most popular methods.

3. Basic Hybrid agreement. This agreement combines the elements of a redemption agreement and a cross-purchase agreement. (cross-purchase option, plus redemption of remaining shares)

4. Other Types:

a) Section 303 estate tax hybrid agreement. Redemption of sufficient shares to pay estate taxes and administrative expenses; cross-purchase of remaining shares.

b) Wait-and-see hybrid agreement. Shareholder option, followed by corporate option, followed by shareholder option, followed by mandatory corporate purchase of remaining shares.

C. Need for a buy/sell agreement

1. It guarantees a market for the sale of the stock.

2. It fixes the value for estate tax purposes if:

a) The agreement was in existence at the time of death;

b) The agreement was binding upon lifetime transfers as well as transfers taking place upon death; and

c) The agreement represented a bona fide business arrangement and was not merely a device to pass the decedent’s shares to the natural object of his bounty for less than adequate and full consideration in money or money’s worth.

515.288.2500


13


D. Elements of a buy/sell agreement

1. Redemption versus cross-purchase. In a redemption agreement, corporate funds are used to purchase the stock. If funded by insurance, the funds expended for insurance premiums would not be deductible, and the insurance proceeds would not represent taxable income to the corporation. The remaining shareholders would own a larger portion of the corporation but would not receive any increase in the cost basis of their stock.

a) In a cross purchase agreement, each individual shareholder must purchase the stock from the selling shareholder or from the deceased shareholder’s estate. His own funds must be used, and if funded by insurance, such insurance premiums must be paid for with after-tax dollars. The main advantage of a cross-purchase agreement is that the surviving shareholders get a stepped-up basis in that portion of the stock that was purchased.

2. Establishing a purchase price. The purchase price used in the agreement can be established by the following methods:

a) Fixed dollar price for the stock. This merely sets a price for the stock and does not reflect fluctuations in the market value of the corporation’s assets.

b) Fixed dollar price, subject to annual review. This sets a price for the stock, which is reviewed annually to reflect changes in the corporation’s worth.

c) Book value at a specific date (i.e. date of death). This method may call for only the book value, or the book value increased to reflect the fair market value of marketable securities and/or real estate.

d) The price determined by a qualified appraiser.

e) The price determine by a valuation formula. The formula can reflect capitalized earnings based upon an agreed multiple, or any other type of formula upon which the shareholders may agree. This is most common means of establishing a purchase price.

3. Required purchase or merely a right of first refusal. The agreement may call for any of the following:

515.288.2500


14


a) Shareholders must sell and the corporation (or the remaining shareholders) must buy.

b) Shareholders have an option to sell and the corporation (or the remaining shareholders) must buy.

c) The corporation or the remaining shareholders have an option to purchase and if exercised, the shareholder must sell.

d) The agreement may merely give the corporation or the remaining shareholders the right of first refusal.

E. Valuation formula for a buy/sell agreement

1. Definition - a valuation formula can help avoid litigation among the stockholders and allow for estate planning. Its purpose is to set the value of the stock that is being purchased.

2. Objectives of a buy/sell agreement valuation formula.

a) To create a relatively simple valuation mechanism so that shares can be readily valued and sold among current stockholders and between current stockholders and the corporate entity.

b) To create a simple valuation mechanism so that new shareholders can buy into the business and old shareholders can sell out of the business.

c) To assist in dispute resolution between disagreeing shareholders regarding minority squeeze-outs, mergers, or shareholder rights.

d) To provide litigation support or resolve disputes involving contentions as to equity valuation.

e) To provide a basis for stock valuation for security and collateral financing purposes.

3. Attributes of a valuation formula

a) Simplicity - to allow the stockholders of a closely held corporation to use the formula quickly and easily.

515.288.2500


15


b) Rigor - to withstand IRS scrutiny or a challenge by dissenting stockholders.

c) Comprehensiveness - to withstand charges that a particular “generally accepted” valuation methodology was deliberately excluded to achieve a particularly high or law value.

d) Flexibility - to allow stockholders to “manage” the value of the common stock when desired.

e) Structure - to avoid or mitigate significant and unexpected increases or decreases in stock valuation due to aberrational short-term financial results

f) Accuracy - to allow current stockholders to evaluate the potential for, and offers regarding, sales of a portion or the entirety of the company.

4. IRS requirements

a) In order to withstand IRS scrutiny, the following conditions must be met:

(1) The quantitative components of the formula must be reasonable.

(2) The formula must represent a valid valuation methodology that is employed in the business and stock appraisal profession.

(3) The owners of the corporate stock must abide by the result of the buy/sell agreement consistently in all of the stock transactions.

F. Funding the buy/sell agreement

1. Sinking fund. Although this funding mechanism is available for either cross-purchase agreements or entity purchase agreements, a corporation is unlikely to choose this route for an entity purchase agreement because of excess accumulated earnings considerations.

2. Life insurance. This is a more practical alternative for funding a buy/sell agreement. For example, a closely held corporation might hold insurance polices on each of its five stockholders equaling the

515.288.2500


16


value of their individual equity interests in the corporation, with the value of the equity interests based on the buy/sell agreement valuation formula. When one shareholder dies, the corporation would use the policy proceeds to buy the interest from the deceased owner’s heirs.

G. Major non-tax differences between cross-purchase and redemption

buy/sell agreements

1. Purchasing shares when insurance is not used as a funding device

a) Solvency and Liquidity

(1) Cross purchase. The net worth and liquidity of each surviving shareholder must be examined to determine whether each can afford to purchase a deceased shareholder’s shares.

(2) Redemption. State law must be examined to determine whether it would prohibit the corporation from redeeming shares if the redemption would render the corporation insolvent. The corporation may not have sufficient equity or surplus to redeem the shares of a deceased shareholder and a determination should be made under state law as to whether there is a fraudulent conveyance.

b) Installment purchases

(1) Cross purchase. An installment purchase can help to eliminate the need for insurance. The economic savings or detriment to the purchasing shareholders would be the difference between the present value of the insurance premiums that are not paid and the present value of the installment purchase payments that are contemplated to be made.

(2) Redemption. An installment purchase can help to eliminate the need for insurance. The economic savings or detriment to the corporation would be the difference between the present value of the insurance premiums that are not paid and the present value of the installment purchase payments that are contemplated to be made.

2. Purchasing shares when insurance is used as a funding device

a) Payment of premiums and ownership of polices 515.288.2500


17


(1) Cross purchase. Each shareholder pays the premiums on the life insurance polices on the lives of all the other shareholders. If a large number of shareholders is involved, then an escrow buy/sell agreement should be used to hold and fund the policies.

(2) Redemption. Only one policy per shareholder is needed. A redemption agreement has the virtue of simplicity when a large number of shareholders are involved.

b) Failure to pay premiums

(1) Cross purchase. If the shareholder fails to pay the premiums on the policies that he or she holds, such policies may lapse. One solution may be to require timely proof of payments.

(2) Redemption. Premiums will be paid by the corporation so that the premium payments can be monitored by the officers and directors of the corporation.

c) Bearing the burden of the cost of premiums

(1) Cross purchase. Premiums paid by younger shareholders on the lives of older shareholders will be greater than the premiums paid by older shareholders on the lives the younger shareholders. If this allocation presents a problem, it can be addressed by varying the salaries of the shareholders accordingly.

(2) Redemption. Since the corporation pays the premiums, the total cost of all premiums that will be indirectly borne by each shareholder will be in direct proportion to his or her shareholdings in the corporation. If this allocation presents a problem, the salaries of the shareholders can be varied accordingly.

d) Cash surrender value

(1) Cross purchase. If whole life insurance is used, the cash surrender value is an asset of each shareholder.

(2) Redemption. If whole life insurance is used, the cash surrender value is an asset of the corporation.

515.288.2500


18


3. Creditors

a) Cross purchase. Creditors of individual shareholders can reach the cash surrender value and proceeds of life insurance polices owned by them.

b) Redemption. Corporate creditors can reach the cash surrender value and proceeds of life insurance policies owned by the corporation.

4. Earnings per share

a) Cross purchase. Earnings per share will not be affected since there is no contraction of outstanding shares.

b) Redemption. Earning per share may be affected since there is a contraction of outstanding shares in the corporation and book earnings will increase from the receipt of proceeds of a life insurance policy on the death of a shareholder.

III. ADDITIONAL BUSINESS SUCCESSION PLANNING TECHNIQUES

A. Key employee retention arrangements - This is a plan that will provide for the succession of the business that is desired, while keeping the key employees within the business. When there are only a few employees that are essential to the on-going viability of the business it becomes essential to include a means to retain these employees when the business is transferred to the next generation.

B. Non-compete and Non-solicitation agreements - This type of agreement is

designed to prevent employees that are not retained in a succession plan from competing with the business within a certain geographic area, while preventing those non-retained employees from soliciting the current client base or other employees away from your business.

515.288.2500


19


C. Stock recapitalizations (voting & non-voting) - Existing shares of a corporation are exchanged for other types of an equity interests, such as preferred stock or new common stock. This allows for transferring the value of a business to the next generation without abdicating a large degree of control. This technique also gives the next generation an incentive to grow the business as the value of the stock given is based on the future growth of the company.

D. Sub chapter S corporation conversions - If property is retained in a C-

corporation, then it might be advantageous, from a tax perspective, to convert the business into an S corporation in order to accomplish a better result upon distribution of the property. Generally, there will be a 10 year period before such a distribution can occur. Thus, it becomes an important component in a forward-looking succession plan.

E. Valuation issues - When forming a succession plan for a closely-held

business the use of valuation discounts can provide tax advantages when distributing the value of the corporation to the next generation. Simply put, an interest is reduced from its fair market value to reflect a lack of marketability or a minority interest. There are several techniques which incorporate these ideas and result in reducing gift and estate taxes.

F. IRC § 6166 tax payment provisions - The amount of estate taxes that are

due can create a burden on a closely held business which is passed through an estate. This tax burden could result in a forced liquidation in order to pay the taxes owed. Internal Revenue Code § 6166 provides a means to prevent such a liquidation. If the interest in the business constitutes more than 35 percent of the adjusted gross estate, pursuant to Section 6166, the executor may elect to pay the estate tax attributable to the value of the business in 10 annual installments, beginning no later than five years after the date of death.

1. There are quite a few requirements that are imposed by IRC §6166 in order to qualify for the postponement of estate taxes. A good succession plan will look to various methods of paying for the estate taxes owed through life insurance and other similar products.

G. IRC § 303 stock redemptions - IRC § 303 allows an estate a one-time

opportunity to remove cash or other property from a business, at a very low or non-existent tax cost, through a partial redemption of stock. This technique is designed to provide enough liquidity to pay the taxes and expenses due at upon death.

515.288.2500


20


1. Eligibilty for a Section 303 redemption depends on the stock value of the business exceeding 35 percent of the estate. The maximum amount that can be paid through a redemption equals the total amount of the federal estate tax, state death taxes, funeral and administrative expenses.

H. IRC § 754 partnership elections - This election applies to a partnership

passed through an estate. The basis of the partnership property receives a step-up (or step-down) in basis as it passes to the heirs. Thus, the heirs will be able to take advantage of new depreciation deductions or reduced gain upon a sale of the partnership interest.

515.288.2500


21

Documents

THE DAVIS BROWN LAW FIRM ISSUES OF ......THE DAVIS BROWN LAW FIRM BEST BUSINESS MODELS WEDNESDAY, APRIL 8, 2009 HOTEL FORT DES MOINES ISSUES OF IMPORTANCE FOR BUSINESSES IN 2009 #1668528