Articles Posted in BUSINESS FORMATION & TRANSACTIONS

As an Atlanta Lawyer I have many clients that come to me to help them set up their businesses. Business entity formation, partnership and operating agreements, employment contracts and agreements, and employment law are all areas that I frequently work on for my clients. There are other times, though, when I do represent my business clients in court. In fact, according to a 1997 ruling by the Georgia Supreme Court, any Georgia business that is facing litigation must hire a licensed attorney to represent the company. Thus, if you do not have a business attorney and become involved in litigation, you must retain one. What is more, many of my Atlanta, Business Law Clients who work with our Atlanta Attorneys out of our Atlanta or Marietta Offices, often comment on how glad they are to have us nearby for piece of mind, prosperity, profitability, but most of all, that they know we are there for them when something inevitably and/ suddenly arises. I have engaged in dialogue with many of my clients, on more on a few occasions, to find out what makes having a good Local Atlanta, Georgia Business Attorney essentially, on call (or on staff). Virtually all of the answers I received were statements about how a prudent businessperson cannot just go out and find a business lawyer their business can work with and trust at the last minute . . . like a Starbucks.

It is always prudent to have Atlanta Attorneys on hand who is familiar with the company and can step in if litigation arises. But, there are other very good reasons to hire a business lawyer. The first is to properly set up the business. Deciding on which type of business entity will work for the business model is important before filing the proper paperwork. A knowledgeable Georgia Business Attorney is invaluable at this stage in business formation. Personal liability issues and tax consequences need to be considered and an experienced Atlanta, Georgia business lawyer will have good insight into which options are best for the business. An hour could be all that is required to complete an initial assessment of this step, but doing it right can help you avoid future financial and legal issues and serious tax problems or lost tax benefits.

Before hiring employees at the new company, it is essential to draft solid Georgia employment contracts. Job duties, payment terms, non-disclosure agreements and non-competition clauses all need to be considered. These documents will ensure that future litigation is kept to a minimum. This is especially true given the most recent proposed changed to The Georgia Constitution wherein Judges will be allowed to “blue pencil” in changes to employer-employee agreements to make them enforceable so long as they are no less favorable to the employee. (This subject matter is a whole new set of Articles/Blogs which will be coming soon. The fact is, the fallout from this legislation has yet to be seen).

An Atlanta, Georgia business attorney and Atlanta, Georgia employment attorney can also help with the hiring and firing or the process of “laying off” employees and can assist with setting up a system to measure employee performance. The guidelines and contracts that are established early on will help protect the company if any employee ever files a lawsuit against the company. Besides paying employees, many companies purchase services from suppliers, have leases on property (for example, vehicles and commercial real estate) and sign distribution or licensing agreements. A business attorney will safeguard your company against one-sided agreements by negotiating favorable terms for the company.
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As a Corporate Attorney in Atlanta who advises sole proprietorships, partnerships, and corporations, it is important to remember that each entity is more than just a name on paper that you take on to take advantage of various tax benefits.

Even if you have a simple family-owned business formed as a C Corp, that is no more than you and your spouse as the sole directors and shareholders, it is still important to observe basic required corporate formalities if you want to maintain the protection from personal liability that such a corporation provides.

If you fail to observe these basic formalities, you could risk your C Corp being disregarded by a court in an action called “Piercing the Corporate Veil” where the court holds that you indeed do not have a proper corporation and therefore can be held personally liable for any and all debts.
So, to avoid this and maintain the corporation you have established, what do you have to do?

Annual Meetings. Shareholders and directors must generally meet at least once a year to approve and authorize new business, elect new directors and officers, etc. Of course if this is just you and your spouse, partner, friend, etc., this can be as simple as sitting down or discussing over the phone the business of the company. The key to formalizing this step is keeping records of the meeting known as Minutes.

Minutes. Be sure to keep timely and accurate minutes of all shareholder and director meetings. In other words, write down what actions were discussed, agreed to, and taken, when, by whom, and where. The proper form for Minutes can be obtained from a licensed Georgia Business Attorney.

Consent Forms. Forms for “Actions by Unanimous Written Consent” can also be obtained from your business attorney to formalize and record decisions made at these meetings.

REMEMBER: THERE IS NO SUBSTITUTE FOR FOLLOWING GEORGIA CORPORATE FORMALITIES

At The Libby Law Firm we advise C Corps, Subchapter S Corps, LLCs, and many other types of corporations and business entities on following corporate formalities. Our Atlanta Business Lawyers know the importance of following corporate formalities and how this can prevent you from being personally liable for corporate debts, judgments, and other liabilities of your corporation.
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As an Atlanta, Georgia Corporate Attorney, advising CEOs, CFOs, Secretary, Directors, Officers, Shareholders, it is critical you avoid mingling your personal affairs with any business matters, and vice versa. Many new business owners seek to protect themselves from personal liability by setting up corporations, the most popular being Limited Liability Company (or LLC). Regardless, a corporation can only protect you from personal liability stemming from your corporations liability, to the extent, you take care to separate your role in the corporation from your role as an individual.

Generally, the fist step in protecting yourself from debts and liabilities incurred by your corporation is incorporating your corporation (or business). In Georgia, filing the appropriate documents with the Georgia Secretary of State and creating a Limited Liability Company (or LLC) or a Corporation, can provide protection from personal liability. However, taking this action will not give you absolute protection from liability. Additional steps in your behavior, statements, and actions are critical in protecting yourself from being personally liable for debts of the corporation. When you are held liable for debts of the corporation because the company and your personal affairs are to tightly interwoven, is called Piercing the Corporate Veil.

Piercing the Corporate Veil occurs when opposing counsel (or another party) can show that the CEOs, CFOs, Secretary, Directors, Officers, Shareholders, etc. are mingling corporate their affairs with their individual affairs. Doing this is a huge mistake and you should avoid it at all cost no matter what inconvenience it may cause you or what your personal view of the Georgia law on Piercing the Corporate Veil encompasses.

Under what circumstances can I be personally liable for debts of the LLC, or corporation? And, why should I take additional steps for protection?


As a Corporate Lawyer in Atlanta, Georgia, I know from seeing Piercing the Corporate Veil legal proceedings first-hand that taking additional precautions can prevent creditors from going after your personal assets – such as your money or your home – in the event your business incurs debts that it is unable to pay. These debts can include car loans, bank loans, lease obligations, and money owed to lawyers, accountants, etc., for services rendered to the business.

These extra precautions can also prevent plaintiffs from collecting money from your personal accounts and assets to satisfy a judgment against you. A Georgia business could incur this type of liability in a variety of ways, including:


• A personal injury or accident in your office––coffee burn, slip and fall, etc.


• A product or service that injures a client, either physically or financially


• A car accident that occurs when an employee is making a delivery or driving to meet a client in the scope of work.

• Mismanagement of a client’s money


So what are some extra precautions you must take take?


• Georgia law requires corporate entities to file for renewal every year. This is a quick, relatively low-cost ($50.00 annual fee) process that keeps your corporation or LLC active. If you do not renew your business, the Georgia Secretary of State will administratively dissolve your corporation and, therefore, your protection from personal liability.


• Keep your corporate and personal bank accounts separate. Do not use your business account to pay for personal expenses – taking your family out to dinner with business funds, buying presents for your in-laws with corporate monies, paying for a weekend getaway “on the corporations’ tab”, etc.


• Do not personally guarantee any loans or financial arrangements for the corporation if you can avoid doing so. Acting as a personal guarantor opens the door to personal liability, as creditors can look to you to pay the business’s debts.

• Make sure that all of your contracts entered into using your corporate position and then your name in this capacity (i.e. as President, etc.) Do not use your individual name, even if you are the sole shareholder. For Example:

___________________________ Signed, Larry J. Doe, President ABC Enterprises of Atlanta, LLC

• Maintain the proper insurance for your business and make sure that the corporation’s name is listed as the “name insured” on the insurance policy. Your Atlanta, Georgia, Corporate Insurance Attorney should be able to help you with this process. Additionally, keep written records of discussions and of how the insurance agents, lawyers, CPAs, advised you to ensure your business is safe or you want to compare it to another opinion at a different time. A personal umbrella policy might also provide additional personal protection for business owners.


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The Atlanta tax attorneys as well as the Atlanta Business Attorneys at The Libby Law Firm are always informing, educating, and assisting individuals and business owners about incurring taxable income (tax liability) without the liquidity to pay taxes on this income. This scenario can be a taxpayer’s worst nightmare and often generates significant internal struggles, infighting, and conflict between business owners. The Atlanta business lawyers and Atlanta tax lawyers at our Firm refer to the scenario of incurring tax liability without producing the liquidity to pay these taxes as “phantom income.” “Phantom income” means you have taxable income but no cash to pay taxes on this income.

“Phantom income” occurs most frequently in Subchapter S corporations and limited liability companies (LLCs), which are presently the most common and popular business entity forms for doing business in Georgia. This is especially true in small businesses owned by taxpayers who may not be aware how “phantom income” can be incurred or what “phantom income” is.

“Phantom income” occurs when Subchapter S corporations and LLCs are taxed. The income in these business entities is passed to the owners whether or not cash is actually distributed to the owners. Moreover, if a business makes a profit, at least for tax purposes, but the business owner(s) keeps most of the money in the business as so often is the case (especially in small businesses), then a “phantom income” scenario can result.

For example, suppose your business has a tax profit of $100,000, but you only distribute $10,000 because you need the rest of the money in the business to keep operating the business. However, you are taxed on $100,000 even though you only received $10,000. This is one instance where you have been the unknowing casualty of “phantom income.”

Thus, the question arises: How do you avoid phantom income? The answer is the proper drafting and prudent use of a well-crafted operating agreement.

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As an experienced Atlanta business lawyer, I find that one of the most rewarding parts of my business practice is helping clients set up a brand-new Georgia business or re-establish and existing one. In doing this, the basic issues which first need to be addressed, are choosing the correct legal entity under which the Georgia Business will operate and filing the necessary papers with the GA Secretary of State. In addition, the business must establish and confirm any necessary business relationships and memorialize these in legally binding contracts per GA law. Any business must also understand the legal requirements and ramifications of local, State of Georgia and federal tax requirements, and licensing.

In recent years, my colleagues and I have begun to notice “client perceived” competition from do-it-yourself companies, called legal document services or elawyering. Essentially, they offer legal forms and instructions for filling them out, claiming you will pay a much lower price for using their services than you might pay if you go to a licensed GA Business Attorney. Naturally, these services are only offered for common legal matters, which assume and lull you into a false sense of comfort that you have set up your business correctly. These elawyer and internet form companies maintain and make you believe your business is “cookie cutter” and without unusual circumstances. These services claim to offer such services as deed transfers, startup papers for a new business, etc. In the many years I have practiced business law, I have found that there is not a business without unusual circumstances, needs, and dynamics. This is a fact, not conjecture.

IN FACT, THESE ELAWYER INTERNET COMPANIES WHICH PURPORT TO PROVIDE LEGAL SERVICES EVEN STATE, THAT YOU NEED TO HAVE AN ATTORNEY AND THEIR INFORMATION IS NOT A SUBSTITUTE FOR LEGAL ADVICE AND IS LEGAL INFORMATION – IN FACT, WHAT THESE ELAWYER INTERNET COMPANIES ARE DOING TO CONSUMERS IS DISTURBING AND WORRISOME TO SAY THE LEAST.

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The three letters “IRS” strike fear in a lot of people, and for good reason. Nobody likes to be audited by the IRS. An audit is time-consuming and nerve-racking. An audit can also be expensive, with not only professional fees, but potentially having to pay a deficiency in taxes (plus interest and maybe penalties).

A primary cause for drawing an IRS audit is business deductions that look out of the ordinary. Even if legitimate, you still have to provide documentation, etc. So why would you want to draw attention to yourself? Yet I see many taxpayers do exactly that when they form a single member limited liability company (“LLC”).

If you are starting a new business, and select an LLC as your business entity (which I frequently suggest is the best entity), then you need a multiple owner LLC. If you have a business partner, then the LLC will be a multiple member LLC. But if you are starting a business by yourself, then make a spouse or family member a 1% owner.