Hidden Dangers of Hidden Dangers of Representing Representing

Multi-Owner Businesses:Multi-Owner Businesses:Legal Pitfalls Accountants Legal Pitfalls Accountants

Must AvoidMust AvoidPresented by:David C. Roberts, Esq.

Edward Kurowicki, MBA, CPA/CFF, CVA

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Long Range PlanningLong Range Planning

• New companies• Existing companies

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Corp. vs. LLC vs. Corp. vs. LLC vs. PartnershipPartnership

• Unintended consequences

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CorporationsCorporations

• N.J.S.A. 14A:12-7 – Rights of minorities– “acted fraudulently or illegally,

mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders”

• Can’t be waived

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LLC’s and PartnershipsLLC’s and Partnerships

• No equivalent• Depends ENTIRELY on how creation

documents are worded• LLC’s are creatures of contract• Accountant’s involvement in creation

documents = BLAME when an issue arises• Tax status not determinative of legal status

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Balance Between Helpful Balance Between Helpful Business Advice and Business Advice and

Subjecting Yourself to Subjecting Yourself to LiabilityLiability

• Disclaim in retainer agreement• Highlights issue spotting

capabilities

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Buy-Sell AspectsBuy-Sell Aspects

• Formula used is important, but so is the issue of whether valuation should even be addressed

• Majority may want to know he can prevent minority withdrawal

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Standards of ValueStandards of Value

• Fair market value vs. fair value

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Common Valuation Common Valuation ProblemsProblems

• Shareholder perks• Reasonable

compensation• Employment

agreements• Trade Secrets• Unrecorded time• Corporate

governance issues

• Prior transfers of interests

• Rate of return – “Buying a job”

• Expectations• Ignoring a provision

in shareholders agreement that says to value every year

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Salary Normalization Salary Normalization IssuesIssues

• Can create liability• Affects damages• Affects value

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Importance of Compliance Importance of Compliance Issues to Avoid Piercing the Issues to Avoid Piercing the

Corporate VeilCorporate Veil• Informality of closely held

companies can be a trap• Who really is the client?• Communication with minority

owners should be permitted up front, and carried out

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Importance of Compliance Importance of Compliance Issues to Avoid Piercing the Issues to Avoid Piercing the

Corporate VeilCorporate Veil• Potential liability for the accountant?

– N.J.S.A. 2A:53A-25• Accountant must have knowledge of a non-

client’s reliance• Reliance must be communicated back and

forth– Pitfall – does NOT have to be in writing– Your word vs. minority shareholder’s

– Conspiracy liability

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Shareholder Oppression Shareholder Oppression in More Depthin More Depth

• Lack of dividend• Paying personal expenses• Overcompensation• Lack of information• Termination of employment• Fictitious vendors/employees

What if the accountant is aware of this?

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The Case of the Company The Case of the Company Where No One Takes a Where No One Takes a

Salary – Only Salary – Only DistributionsDistributions

• Fine as long as everyone is working

• What happens if someone leaves?

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Remedies Available for Remedies Available for OppressionOppression

• Buy-out – either way• Dissolution• Damages• Attorneys fees?

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What Do You Do When What Do You Do When You See the “Red Flags”?You See the “Red Flags”?

• Books have suddenly become “secret” – unavailable

• Appears money is unaccounted for• Lifestyle changes• Family members suddenly on the

payroll

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SummarySummary

• Distinguish yourself by knowing these issues

• Stick to issue spotting, rather than giving legal advice

• Expand your retainer agreement to point out what you are NOT doing

• Explain up front who the client is, and don't be lax about it

• Get written permission to keep everyone informed, and then do it

Visit David Robert’s BlogVisit David Robert’s BlogShareholder Dispute NJShareholder Dispute NJ

at at www.shareholderdisputenj.www.shareholderdisputenj.

comcom

Question & Question & Answer SessionAnswer Session

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