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An Ounce of Prevention

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ph-programsThe following is a reprint of an article I wrote for the March 2016 edition of the Oakland Metropolitan Chamber of Commerce’s monthly magazine.

Everyone understands the value of lawyers if you are sued or need to sue someone who has damaged your business. Yet far fewer owners appreciate the value of consulting experienced business attorney before problems arise.

Just as in construction, when building a business one’s success depends on the time and energy spent establishing a solid foundation. Moreover, having an awareness of the consequences of the decisions one makes regarding one’s business is critical to the preservation and enduring stability of that business.

Having spent decades as a trial lawyer, I have the experience and insight to predict the kinds of mistakes most business owners are likely to make. I also know with relative certainty what the impact will be on a company when a particular mistake is made. This is not to say I’m clairvoyant; I’ve simply witnessed patterns in the hundreds of lawsuits I’ve analyzed and litigated.

I also know that the cost of cleaning up these types of mistakes is exponentially higher hiring a good transactional lawyer in the first place. Given the opportunity, such an attorney can craft the appropriate types of business structure, agreements, policies and procedures to reduce the possibility of catastrophic risks occurring. And such planning will also mitigate and reduce the effects of these occurrences. Stated otherwise, proactive planning is always cheaper and more effective than reactive crisis management.

Unfortunately, an increasing number of business owners choose to “save money” by using legal documents they find on the internet without ever consulting an attorney. Far too often, this type of “citizen lawyering” results in contracts and other documents that are completely unsuited to the particular business, and that lack basic legal protections. I’ve seen California businesses using contracts intended for use in Australia, setting up the wrong type of business entity, and as a host of other horror stories.

The lesson to be learned is that the more thought and time you spend identifying, understanding and planning for the risks your business may face, the more likely the company will survive and thrive. Consulting an experienced business attorney is key to this process.

When assessing any business client, among the questions I always ask are:

(1) What are the potential risks this business may encounter in the industry it inhabits?

(2) What type of entity or structure is best suited for the business, and that will provide the optimal legal protection and financial benefit?

(3) What are the legal requirements and procedures the owners must follow to retain the financial benefits and legal protections the business entity and structure can provide?

(4) Do the contracts and agreements the business uses provide appropriate protection against the types and frequencies of risks the business will face?

(5) Is there a written plan to protect the company and its owners in the event of a catastrophic event?

With these answers, an experienced business lawyer can help the owner proactively plan so as to support the business’ stability, growth and longevity.  Contact our office if you think your business might benefit from such a conversation.

RULLCA – New California LLC Law Coming in 2014

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On January 1, 2014, the California Revised Uniform Limited Liability Company Act (“RULLCA”) goes into effect, and will automatically apply to all California LLCs.  RULLCA will replace the Beverly-Killea Limited Liability Company Act, the current California LLC law.    

Generally, it will be unnecessary to reference Beverly-Killea when once this year ends.  Beverly-Killea will, however, remain relevant when considering acts or transactions by an LLC or its members or managers before January 1, 2014.  In addition, contracts dated prior to January 1, 2014 will also be governed under Beverly-Killea.  

Although RULLCA will not require existing LLCs to file any new documents with the Secretary of State or necessarily amend their operating agreements, it may be prudent to seek the advice of an attorney.  Particularly, older operating agreements that specifically reference Beverly-Killea should be amended to instead cite RULLCA.

While RULLCA is not a significant departure from Beverly-Killea, it has some notable differences.  For example, if there is a conflict between a provision in the operating agreement and a provision in the articles of organization, under RULLCA the operating agreement will prevail, except for third parties who reasonably rely on the articles of organization.  Under Beverly-Killea, conflicts were resolved in favor of the LLC’s articles of organization. 

Another change under RULLCA is that an LLC member will be bound to the operating agreement even if that member does not sign it.  

These are simply a few examples of what to expect.  For the most part, RULLCA represents an improvement to the default rules and was intended to align California closer to the LLC laws of other states.  It is expected the Act will be “tweaked” further before its January 1, 2014 effective date.  Significant changes will be noted in future blog posts.  

If you have an existing LLC and operating agreement, I would be pleased to review these matters with you to determine what changes, if any, are appropriate to ensure that your company will be compliant with the new Act.