In This Issue:• Asset Protection for the Business Owner• How Much Is Enough?• We’re Moving!

Volume 3, Issue 1 March 2015

Corporations and limited liability companies (LLCs) are legal entities, separate and distinct from the people who create and own them. (Owners are called corporate “shareholders” or LLC “members.”)

Asset Protection for the Business Owner Do not ignore corporate formalities if you want to avoid creditors poking into your personal assets.

The MendenFreiMan A Report on Legal Issues Affecting Privately Held Businesses and Personal Wealth

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The MendenFreiMan advisorpage 2

Continued from page 1 One of the principal advantages of forming a corporation or an LLC is that as a separate entity (unlike partnerships and sole proprietorships), its liabilities are distinct from the liabilities of its owners. This means that people who own the corporation or LLC are protected from being held personally responsible for the debts and obligations of the business. This protection is commonly referred to as “inside liability protection.” Alternatively, if the owners incur personal debts, the assets of the business would typically not be immediately available to the owners’ creditors to satisfy those debts. This advantage of forming business entities is known as “outside liability protection.” However, in certain situations, courts can ignore the limited liability status of a corporation or LLC and hold its officers, directors, and shareholders or members personally liable for its debts. When this happens, it is called “piercing the corporate veil.” Once the corporate veil is pierced, creditors can reach the personal assets of the business owner (including homes, bank accounts, investments and other assets) to satisfy the debts of the company. Piercing the corporate veil most commonly occurs when a court finds there is no significant difference between a business and its owners or that the entity is, in essence, a fraud or sham. This “alter-ego doctrine” which allows a court to ignore the existence of a separate entity in order to avoid an unjust outcome is most commonly used against small, closely held businesses because of the informality often found in the administration and management of those businesses. To avoid this outcome, business owners should take the following steps to maintain the distinct identity of their entities and ensure that a court will not pierce the corporate veil:

1. Maintain the corporate formalities.Small businesses are less likely to observe corporate formalities than larger companies, which makes them more vulnerable to a piercing of their corporate veil. To avoid

trouble, it is best to play it safe. It is important for small corporations and LLCs to comply with the rules governing formation and maintenance of a corporation, including:

• adopting company bylaws (for a corporation) or an operating agreement (for an LLC);

• making sure officers and agents abide by and follow the provisions in the bylaws or operating agreement;

• holding annual meetings of directors and shareholders of corporations (or managers and members of LLCs – if the operating agreement requires it);

• keeping accurate, detailed records (called “minutes”) of important decisions that are made at the meetings; and

• conduct all business (i.e., advertise goods and services, execute contracts, issue invoices, pay bills) in the name of the business, not the owners.

2. Avoid commingling of funds. Small business owners may be more likely than their larger counterparts to commingle their personal assets with those of the corporation or LLC. For instance, if the owner pays personal bills from the business checking account, deposits checks made out to the business in his personal account, or does not maintain separate bank accounts for the business, a court could decide that there is not a sufficient financial distinction between the business and the owner. This is called “commingling of assets.” To avoid such a finding, corporations and LLCs should keep separate financial records and maintain their own bank accounts; and the owners should never use the company account for personal use or deposit checks payable to the company in a personal account (or vice versa).

3. Properly capitalize the business. Another factor courts look at to determine whether the limited liability protection of the corporation or LLC should apply is whether the business was “grossly undercapitalized.” If a court finds that the corporation or LLC never had enough funds to properly conduct business, such that it was never really a separate entity that could survive on its own,

it may find that piercing the corporate veil is appropriate. In making this determination, courts will look at factors such as a corporation’s or LLC’s cash flow, debt-to-equity ratio and financing sources. Accordingly, any operating business should be capitalized in a sufficient manner to keep it running. (A holding entity will not have this problem unless it begins to conduct business with third parties.)

4. Avoid fraudulent or wrongful actions.Piercing the corporate veil is what is known as an “equitable remedy,” which means that the courts have the discretion to impose the remedy in the interest of justice and fairness. Accordingly, if the owner(s) recklessly borrowed and lost money; made

ANNOUNCING OUR NEW SENIOR

ASSOCIATE, JEFFREY J. MEEK!

MendenFreiman is pleased to announce that Jeffrey J. Meek has

joined the firm as a senior associate. As a member of the firm’s business, estate planning, and trust and estate

administration practice areas, Jeff will provide comprehensive business, tax and estate planning counsel to high-net-worth individuals

and families, as well as privately held businesses.

Please join us in welcoming Jeff!

business deals knowing the business could not pay the invoices; or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated. Then the limited liability protection of the corporation or LLC should not apply.

5. Diversify ownership of LLCs.In some states, courts have ignored the existence of an LLC simply because it was a “single-member LLC,” meaning it only had one member. For this reason, it is a good idea for an LLC to have more than one member, even if the second member is another business entity or trust. If having multiple members is not possible, then it is a good idea to form or organize the LLC in a state that offers specific protection for single-member LLCs.

6. Maintain state registrations. In most cases, states require an “annual report” be filed and an annual fee paid for any corporation or LLC in order to maintain the existence of the entity. If the corpora-tion or LLC falls into “inactive” status or is administratively dissolved due to lack of annual maintenance, the courts will not recognize it as a distinct entity; and it can no longer seek the protection afforded it by the laws of the state. Accordingly, it is essential to keep up to date with these annual filings. While these recommendations are not intended to be an exhaustive list of necessary actions to avoid “piercing the corporate veil,” they do provide a summary of actions that can be taken in order to ensure entities established to help protect a business owner’s personal assets are fully utilized and properly administered. If the business leadership culture embraces these housekeeping details, the owners will have gone a long way toward keeping creditors out of their personal pockets. However, if owners ignore their corporations or LLCs, creditors will ignore them as well. If you have any questions regarding corporate and/or limited liability formalities or need help maintaining your annual minutes or annual reports, please contact us at http://mendenfreiman.com/contact.php

MendenFreiMan 2015

That is the question we sometimes hear from our high-net-worth clients as they consider how much of their wealth they should set aside for their children.

There are now nearly 1.8 million US households with assets of $3 million or more, according to a report issued by US Trust. Many of these families will wrestle with how to set up an inheritance that gives their children a good start in life but does not inhibit their independence and ability to thrive. MendenFreiman often works with clients who have created first-generation wealth – they have become prosperous through their own sweat and ingenuity. A common concern expressed by these clients is that if they leave too much money to their children, they may not instill their revered values of a strong work ethic and giving back to the community. It seems this concern is becoming more pronounced in recent years – perhaps as a result of media attention on some of the antics of trust- fund babies such as Paris Hilton and the Kardashian offspring. But we have also seen high-profile examples of wealthy people who are

determined not to handicap their children with too much of a good thing. Warren Buffett said he wanted his children to have enough money to feel as though they could do anything “but not so much that they could do nothing.” Buffett feels strongly that his family should be a good steward of its wealth, and he has involved his children in the charitable foundations he supports. There are a number of ways to structure the transfer of wealth to children so it has boundaries, but we usually suggest that clients begin this process by thinking about their own values, their relationships with their children, and their children’s relationships with each other. No two families are alike. What would constitute a financial safety net for some children might be largess for others.Continued on page 4

voluMe 3, issue 1 page 3

How much is enough? Even rich people are surprisingly cautious about leaving money to their kids.

We are pleased to announce that Lawrence (Larry) H. Freiman, Paige P.

Baker, and Jim R. Kanner have been recognized as 2015 Georgia

Super Lawyers. Associate Nathan T. Johns was also selected as a “Rising Star” among

Georgia’s Super Lawyers.

Continued from page 3 We have had several wealthy clients establish an inheritance limit for their children. These limits have tended to range from $1 or $2 million on the low end to $10 million on the upper end. We have seen clients with assets of several hundred million dollars establish a $10-million-per-child limit. To be sure, there are many cases where our wealthy clients do not cap their children’s inheritance but focus rather on how to structure their inheritance in a way that promotes their core values and furthers their legacy planning objectives. Once clients decide how much, the discussion turns to how to do it. Most often, with clients of relatively modest wealth, we see them establish trust funds that distribute assets to their children on a staged schedule — for example, a third at age 25, a third at age 30 and a third at age 35. Wealthier clients frequently will forego the age-based distribution schedule in favor of an inheritance trust that can span the generations while empowering a trustee to provide for the family under a specified set of guidelines. There are many variations on trust

funds we will not go into here, but one device that sometimes makes the news is the incentive trust. The recipient in a typical incentive trust must hit certain targets to qualify for trust distributions, such as graduating from college. In order to encourage kids to work, an incentive trust might link distributions to the amount of money children earn. While incentive trusts may be well intentioned, they can have unexpected consequences. A common incentive tactic is to require a trust beneficiary to earn a certain amount of money to qualify for distributions. The idea is to ensure the beneficiary engages in a career and earns a living rather than relying on the trust funds for lifestyle support. However, this incentive might reward a child who made loads of money selling luxury cars on a part-time basis instead of one who is a high-achieving and hardworking public school teacher or cancer researcher. For this reason, we encourage clients to think long and hard before creating a set of trust rules that may not ultimately further their legacy planning objectives. Studies have shown that the foundation

of a good estate plan is communication between generations. We counsel many of our clients to sit down with their adult children to discuss family values, review key elements of their estate plan, and introduce family advisers. Recently, we had an experience where we were privileged to join our clients, their three young-adult children, their CPA and their financial adviser for such a family meeting. Among other things, the family had a very candid discussion centered on what core values are important to the parents and how the children can perpetuate these values in the face of a large inheritance. Clients should talk about these issues early on in the estate planning process.They will likely come up with a plan that validates their values and gives their children the right measure of help.

A version of the article was published by Business Insider on December 17, 2014, and is available online at http://www.businessinsider.com/rich-people- leaving-less-money-to-kids-2014-12

MendenFreiMan 2015

Business can be complicated. Life can be complicated. Simplifying the “complicated” is what makes MendenFreiMan distinctively different. Our attorneys have strong tax, accounting and financial backgrounds which create an opportunity to analyze each client situation from a number of points of view. We not only relish the opportunity to apply what we know to solving complex client problems, but to do that in a caring and supportive way. Services include Business Representation and Transactions, Mergers and Acquisitions, Estate Planning, Wills and Trusts, and Estate Administration.

Two Ravinia Drive, Suite 1200, Atlanta, GA 30346 www.mendenfreiman.comPhone: (770) 379-1450 | Fax: (770) 379-1455

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LTH MANAGER

GeorgiaTrendLEGAL ELITE

We’re moving!

MendenFreiman is pleased to announce that we will soon relocate to a new office within the Central Perimeter area. Effective April 24, 2015, you will be able to find us at 5565 Glenridge Connector, NE, Suite 850, Atlanta, GA 30342.

We look forward to assisting you at our new location.

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