In the alternative, a debtor can file for chapter 13 bankruptcy, commonly referred to as “debt restructuring” bankruptcy, the effect of which is to negotiate with your creditors to pay off your debts within three to five years at a lower rate.  Rather than freeing you from your unsecured debt like a chapter 7, chapter 13 simply restructures your debt to a more manageable amount.  In a chapter 13, you don’t have to liquidate any assets (as in a chapter 7) and your credit rating doesn’t take a big hit (like it would in a chapter 7).

For further information, you can call us at (612) 355-2200.

We recently ran an article regarding eliminating your debts and similar obligations without filing for bankruptcy. Many readers called us with a variety of questions, some of which I want address in this follow up article.

First of all, one of the most utilized services these days by our clients is attorney assistance with negotiation and elimination of credit card obligations. The main question we get from clients is, “We don’t want to file for bankruptcy, but our debts far exceed our assets, the value or equity in our home is gone and we have thousands of dollars charged on our credit cards, what can you do to help us?”

My answer is that, over the past ten years we have been able to negotiate client’s debts with credit card companies down by approximately 70-85% of the total outstanding balance existing at the time you retain our firm. For example, if you have a $10,000.00 credit card debt owing to Chase Bank, we have been fully and finally settling this type of obligation for approximately $1,500 – 3,000. That is a saving of roughly $7,000 – 8,500 to you depending on the specific financial situation of each client.

The next question we get asked is “How does your negotiation actually work?” The concepts are employ is no different from our handling of complex business matter. We take a hard negotiation position that has factual and legal basis and try to achieve the best result for you. If we take the $10,000.00 Chase Bank example, once our client has stopped paying on the card due to his/her financial inability to continue to make payments (which are in many cases interest only, so the debt never gets reduced), Parker & Wenner, P.A., sends out a settlement offer (after meeting with our client and setting up a plan of action) to Chase offering 20% ($2,000.00) of the outstanding debt as a full and final settlement of that account. In the letter we set forth the reasons that our client is unable to pay more, such as unemployment, health issues or overexposure to the real estate or other markets.

After receiving our settlement offer the credit card company or a collection agency engaged on its behalf, contacts our office regarding settlement of the account. Typically, the settlement proposals from the credit card company start at a discount of 50-60%. However, we have been successful in getting the discount up to 60-85% of the outstanding balance. Once an agreement has been reached on the settlement amount ($2,000.00 in our example) the credit card company or its representative sends our firm a letter acknowledging same and requesting payment. We confirm the settlement amount with our client and then send a final settlement letter to the credit card company accepting the settlement and providing payment instructions via automatic withdrawal from the client’s bank account. We receive a confirmation letter when the payment is received indicating the matter is closed.

Finally, another important issue that gets raised is the potential tax liability for the settled or reduced debt amount. The credit card company often sends a form 1099 to the IRS indicating the amount of the discharged debt. The IRS will treat this amount as income unless the client can demonstrate that he or she was “insolvent” at time of settlement and is therefore exempt from tax under Section 108 of the IRS Code. The IRS, pursuant to Section 108 does not tax the discharged indebtedness of individuals it considers to be insolvent; in other words when the individuals’ liabilities exceeded the fair market value of their assets immediately prior to the settlement date. There are also other exclusions from income that may apply to an individual case, such as the Mortgage Forgiveness Debt Relief Act. Consequently, with the help of a good CPA or tax preparer, clients who qualify as “insolvent” avoid any income liability to the IRS as a result of the settlement.

If you have any questions regarding debt consolation or negotiation, whether that debt was accumulated in the form of credit cards or other loans call 612-335-2200 for a free telephone consultation. Each situation is different and requires independent analysis and advice.

The litigation attorneys at Parker & Wenner are in constant contact with our Minnesota Judges both at the State and Federal level. The following general observations are intended to help the lay person understand the individual judge who is or will be making crucial legal and factual determinations on their particular matter.

In general, judges have no special expertise in the law. While there are some specialized courts (e.g. bankruptcy court, family court, probate court, and juvenile court), the majority of judges work in courts that have the power to resolve any type of dispute people might have. Consequently, most judges are asked to resolve a wide variety of legal issues every day. Even the most experienced and knowledgeable judges find themselves confronted with issues they have not addressed before.

Unlike most judges, most attorneys specialize in a few areas of the law. Consequently, attorneys have the ability to become acquainted with the fine details in a given area of the law. Thus, attorneys are often in the position to instruct the judge about important legal aspects of a dispute. In addition, as officers of the court, attorneys have an ethical duty not to mislead the court about the law. Because of all this, judges are able to trust that attorneys will provide them with valuable insights into the law.

In addition to their limited expertise in the law, judges are extremely limited in their knowledge of the facts surrounding a particular dispute. Unless a case proceeds to trial (and less than 20% of cases actually do proceed to trial), a judge is rarely given a full picture of the dispute. Furthermore, the average judge in Hennepin County, Minnesota for example, has over 120 active cases at any given time. As a result, the time that a judge can devote to a particular case is quite limited.

In contrast, attorneys acquire intimate knowledge of their client’s dispute. They can devote the necessary time to understand their clients’ perspective. Using their knowledge of the law, they can then highlight for the judge those facts that are important from a legal standpoint. At the same time, they can filter out facts that are not legally relevant.

When appearing in court, there is no requirement that an individual be represented by an attorney. However, more often than not, having an attorney is a good idea. Not only can they protect your rights, they can help the judges understand your side of the story. The judges I have met in the court system take their work seriously. They strive to make correct decisions, because they know that making a bad decision can have devastating consequences for the people involved. In exercising their duties, they strive to be fair to all parties. In striving to be fair, judges are often reluctant to make a decision unless asked to do so by a party. Instead, they rely on parties to present their respective positions in the best possible light and request the relief that the parties deem most appropriate. An attorney can help them do that.

For questions pertaining to any litigation related issues please call Boris Parker at (612) 355-2201 for a free telephone consultation.

Employers of all shapes and sizes are requiring their Employees, whether at will or term, to execute employment agreements that clearly define the obligations and duties the Employee owes to the Employer both during and after the employment relationship. Some of the general duties encompassed in employee agreements include:

1. To do what a reasonable employee would do in any situation.
2. Duty to be honest.
3. Duty to be loyal.
4. Not to disrupt business, for example, taking part in industrial action.
5. Disclose wrongdoing (does not include ‘spent’ convictions).
6. Carry out and follow orders of the employer, (as long as they are legal).
7. Not to disclose the employer’s confidential information.
8. Work with reasonable care and skill.
9. Look after the employer’s property if using it.
10. Not to compete in business against the employer while still working for them as an employee.
11. Not to take bribes.
12. Be prepared to change when the job changes. For example, if computers or other machinery are introduced to help the employees do their job.
13. Give any inventions to employer if developed by the employee during their employment.

These duties may be encompassed in contract of employment, but even if no contract exists the law of agency dictates that these certain obligations and duties are owed by an employee to the employer, even if the contract does not mention them.

The duties during employment translate into obligations of an employee post termination of the employment relationship. Most common obligations that survive post termination center around confidentiality, intellectual property protection, non-solicitation and non-competition. The breadth or complexity of the employment agreement depends on each particular case. For instance, an employment agreement for an executive will likely be more complex and the duties to the employer greater vis-a-vis a lower level employee, but there are more similarities than one might think.

In the case of contract or term employees, the employee is expected to perform faithfully the services for which he or she contracted for the entire term or period of service. Courts presently hold if an employee leaves before the expiration time, he or she cannot claim pay for the work done. Some courts hold, however, that even in this case the employee is entitled to pay for work done “quantum meruit” less what the employer lost by necessity of paying higher wages to the employee’s successor, or the amount lost by the employee’s failing to perform his contract.

The key provisions to include in employment agreements are as follows:

1. Term of employment;
2. Duties;
3. Compensation and benefits;
4. Effects of early termination and termination in general;
5. Compliance with hours;
6. Ownership and protection of information and intellectual property;
7. Post-employment non-competition, non-solicitation obligations;
8. Default and remedy section; and
9. Miscellaneous provisions such as jurisdiction and venue.

The importance of employment agreements, whether they set out the parameters of an “at will” hourly arrangement or a salaried “term” relationship, cannot be understated. In this day and age when investment in employees and protection of intellectual property costs employers a great deal of revenue and time, a properly drafted employment agreement which adds an extra layer of insulation or the force of a hammer to an employer, at a time of need, can be vital.

For further questions or employee litigation matters, please call Boris Parker at (612) 355-2201 for a free telephone consultation.

As uncertainty continues to permeate our economy more and more debtors have difficulty paying their bills. A creditor or borrower is in constant competition with those similarly situated and must fight for position and priority in the collection of the debts owed to them from various borrowers and debtors. Often times a creditor or lender makes life difficult or easy for itself based on how the underlying transactional documents were prepared by the creditors/lender’s attorneys and the forth sight that was used in the initial stages of the contractual negotiations for purposes of providing the creditor/lender with remedies and easy access to the debtors/borrowers assets and sources of income for security collateral as each particular situation may provide.

It is very important for a lender/creditor in the early application process to obtain the necessary information on a particular borrower or debtor which could be used in the collection process to help the creditor or lender collect the monies due it. Financial statements information with respect to places of residence, social security numbers, driver licenses, spouses and relatives, bank account numbers and bank locations along with the employment information are all crucial to the collection process, and can save lots of time and money in pursuing the particular debtor or borrower. Such information is also in most cases easily obtained from a particular debtor or borrower at the time that they are applying for a loan or lease or any type of credit. In addition to the background information which is critical to the collection of unpaid loans or debts perhaps the most significant aspect of debt collection is lenders or creditors ability to obtain personal guarantees and not only from the debtor but also the debtors spouse in any arms length transaction. If lender or creditor has in its possession the personal guarantee of a debtor’s spouse the likelihood of success on collection for that particular account arises exponentially. Other significant language which needs to be in every contract between a lender and a borrower or a creditor and a debtor deals with the default provision of a particular agreement and the language contained therein with respect to their responsibility of the debtor or creditor for all costs, disbursements and reasonable attorney’s fees plus interest in any collection process that has to be initiated by a lender or creditor. Similar importance are acceleration clauses where the lender/creditor can make the entire debt come due and owing upon a default by a debtor or creditor. Jurisdictional provisions along with choices of law are also of equal importance. One is dealing with an out-of-state or foreign debtor or creditor and if one or more debtors or creditors are involved they joint in several liability provision is necessary. These provisions only highlight the importance of having the proper language in any agreement and are only a few of many such provisions that must be included in any lending situation in which optimize a lenders/creditors ability to put a squeeze on a defunct debtor and to optimize the chance and potential for maximum and complete recovery of all amounts due and owing pursuant to any particular agreement.

Debt collection practices in general are regulated by the Fair Debt Collection Practices Act and the act was enacted to eliminate abusive debt collection practices by debt collectors including those practices that are false, deceptive, unfair or harassing. Any creditor or lender that does more than a handful of debt collection activities a year must comply with the FDCPA. The FDCPA limits debtor collector’s ability in terms of ways he or she can communicate with the consumer/debtor directly. The debt collector cannot communicate with the debtor at an unusual time or place, communicate with the debtor directly if the debtor has an attorney to represent him or her regarding the manner of debt or communicate with the debtor’s place of employment. Although the FDCPA applies to business debts in very few incidences it is still in all cases very important to use a formal process in collecting on any type of debt. Any letters sent to debtors should be identified as attempts to collect debts and that any information obtained through that process will be used for those purposes. Where collateral is involved a self-help process or repossession should be used with extreme caution with recourse to court of law always being the best and the safest alternative.

The collection of a loan or debt should begin with the review of the initial financial and personal information provided by the debtor followed up with a notice letter to the debtor and any guarantors or cosigners both certified and regular mail indicating that such and such amounts are due and owing and if not paid within a specified period of time legal action will be initiated. If a positive response is not thus obtained by way of notice letter, a credit search or an asset search should be done on the debtors and any guarantors who determine their ability to pay for the outstanding debt and thereby assess the chances of collection of all of the amounts due and owing to the lender/creditor. The asset search also will help the lender/creditor to determine whether the initial disclosures made by debtor or borrower during the application process was accurate or misleading and will assist the lender/creditor in any negotiation process which normally takes place in the debt collection process. If the response to the notice letters has been negative and after a preliminary review of the file along with an asset search of a particular debtor has been conducted, the next step is to serve the debtor and any cosigners or guarantors with a formal legal complaint which incorporates causes of action for breach of the underlying agreement whether they be lending documents, leases, promissory notes or any other type of agreements, accounts for conversion or misappropriation of property if collateral is being retained by a debtor has an obligation to transfer such to the lender/creditor pursuant to the parties agreement or were in cases of leases property is leased and not returned by the lessee, and accounts for misrepresentation or fraud based on false financial statements and information provided to the lender/creditor during the application process by a particular debtor. The accounts for conversion, misrepresentation and fraud dealing with financial statements are very important with the respect to debt collection process involving a bankruptcy were accounts for judgments for conversion, misrepresentation and fraud are very difficult to discharge in a bankruptcy process. If a settlement is not reached after the service of a Summons and Complaint on a debtor and a judgment entered in the lenders/creditors favor which includes attorney’s fees and costs involved in the collection of the particular debt plus interest, judgment is registered in the county where the debtor resides or may have other property and such judgment severely hampers the ability of a particular debtor or creditor to obtain any type of financing without first paying off the judgment of a particular lender/creditor. In addition, the lender/creditor may levy upon the bank accounts and assets of a particular debtor/borrower and may also garnish wages from the employer or the particular debtor/borrower for purposes of satisfying the judgment rendered in its favor by the court.

Parker & Wenner has been helping lenders/lessors and general creditors of all nature and size to successfully collect debts owed to them by both businesses and the public at large. Parker & Wenner has a very high success rate in collection debts for its clients and has pursued successfully pursued debtors/bars in virtually every state in this country.

For questions about your debt collection, please call Boris Parker at (612) 355-2201 for a free telephone consultation.

It is all too common these days to hear of cases where a key man or woman in a Minnesota business, who has had access to the company’s confidential information, marketing strategy, product specifications, customer lists, and trade secrets, leaves the company either to join a competitor or to form a competing business, relying upon the knowledge, expertise, and exposure gained while employed. This is especially true in new high-tech companies, which have developed new and unique technology, giving them a special advantage or niche in a particular product market.

A company could, therefore, face devastating losses in the market if the key person, who does not have a non-compete agreement in his or her contract, leaves the company, forms a competing business, and takes with them the trade secrets, customer lists, and market strategy.

To protect the company under these circumstances, it is highly recommended that every business, which enters into an employment agreement with a key person, require as a condition of employment the execution of a non-compete agreement. These agreements are enforceable under Minnesota law as long as the restrictions they impose, prohibiting the right to compete within a specific time frame and geographic area, are reasonable.

The Minnesota Courts have consistently struck a balance between two competing policies: one of which favors the right of individuals under our system to freedom in earning a livelihood; the other which recognizes the right of a business to protect itself from unfair competition, particularly where an employee has access to highly sensitive confidential or secret data.

Even though non-compete agreements represent a restraint of trade and therefore are cautiously considered and carefully scrutinized, they are nevertheless enforced by the Courts if the restraint is necessary for the protection of the business or goodwill of the employer, and if the agreement imposes no greater restraint on the employee than is reasonably necessary to protect the employer’s business. Thus, for example, a non-compete agreement that restricts the employee from working for a competitor, or from starting a competing business, for a one-year period within a particular geographic area, i.e. the State of Minnesota, will be deemed a reasonable restriction and will be enforced. However, a five-year restriction within all of North America might not be.

Generally, however, these restrictions will not apply to an unskilled laborer, who would not normally have access to trade secrets or be in a position to exploit those secrets, and who has a greater need to earn a living without restrictions. Rather, non-compete agreements apply to professional or skilled employees with special high-tech skills, who understand the business’ trade secrets and technology, and who could use those to the detriment of the employer in a competing business.

Moreover, for a non-compete to be enforceable, the Courts require that the employee receive adequate consideration, or something of value, in exchange for giving up the right to compete. In this regard, an employee’s agreement to continue employment can be sufficient consideration if his contract is bargained for, and provides the employee with advantages, such as gaining knowledge of product development and marketing as a result of the employment, or being given access to trade secrets and confidential information about the company’s products and clients.

In order to enforce these non-compete agreements, the employer must file a Complaint with the District Court, and request a remedy called a temporary restraining order or a temporary injunction, prohibiting the former employee from competing in the geographic area and for the length of time stipulated in the non-compete agreement. The decision whether to grant an injunction or restraining order always involves a balance of harm, and the Court must find that the employer will suffer “irreparable harm” if the agreement is violated. Such harm can be inferred if the employer will lose the goodwill of a limited customer base where the employee developed a relationship with the clients in a way which created a personal hold on the goodwill of the company.

It is important when drafting a non-compete agreement to specify that the employee’s job position allows the employee access to product development, technological secrets, marketing strategy, and confidential client information, which could serve as consideration for the non-compete agreement. The more explicit the non-compete agreement is in this regard, the easier it will be to enforce.

Not only does Minnesota law allow the employer to enjoin the employee from violating the non-compete agreement, but under an important Minnesota case, Kallok v. Medtronic, Inc., 573 N.W. 2d 356 (Minn. 1998), the Minnesota Supreme Court held that the original employer can obtain damages if it shows that the new employer who hired away the key person knew of his or her non-compete agreement, but hired the employee anyway. Indeed, if the original employer is forced to sue the new employer to enforce the non-compete agreement, it can obtain as damages the attorneys’ fees it incurs in prosecuting the lawsuit.

In technical legal terms, the Supreme Court held that interference with a non-compete agreement by a third-party is a tort (called tortious interference with contract) for which damages, including attorneys’ fees, are recoverable. Therefore, any business contemplating the hiring of a key employee from another company must first carefully investigate and exercise due diligence to determine whether that employee has signed a non-compete agreement which prevents that person from being employed by the competing business.

All businesses dealing with key employees should, therefore, review their contracts and, if they do not currently have a non-compete agreement, should consult with their attorneys to make sure that such a carefully drafted provision is included in all employment contracts. In these highly competitive times, failure to do so could have devastating consequences on the future of the company.

For questions pertaining to litigation involving non-competition agreements, please call Boris Parker at (612) 355-2201 for a free telephone consultation.

With the rising costs of basic necessities such as groceries and rent, not to mention gas for our cars, along with wage freezes and layoffs, it is easy for even the most careful spender to become overwhelmed and allow credit card balances to creep up farther than we ever thought possible. At Parker & Wenner our attorneys deal with these situations every day; we stop the harassing calls and deal with credit card companies and bill collectors directly for you. We negotiate with credit card companies and their assigns to lower your payments so that you keep control of your accounts and avoid filing for bankruptcy. We charge a flat fee based upon the number of creditors – there are no subscription fees, start up fees or monthly “maintenance” fees. Here’s how we do it.

Our first step is always to meet with you, get a list of your creditors and pull a credit bureau to see who is saying what about you. Knowing your credit picture, we then send letters to your creditors instructing them to deal only with our experienced attorneys. This will stop the calls and letters to your home and cell phone. We will also help you develop a budget to work within your means so that you manage your expenses and reduced your debts! Based on this budget we will then work with your creditors to arrange affordable payments or payoff for you. Here is where Parker and Wenner differ from the so-called credit counselors we deal directly with your creditors on your terms while you stay filling informed and in control of your accounts. We do not take your money and make payments for you – you stay in control of your finances, and we help you discharge debt without bankruptcy.

Credit card companies want your money. Once credit card companies realize that you are having financial difficulty, and in a position of insolvency they are willing to work with our attorneys and reduce your bill by 65 – 85 percent! We will negotiate on your behalf to obtain the lowest payoffs possible.

Creditors have their own policies on reporting debt write-off to credit bureaus. Fair, Isaac and Company, who produce the FICO credit score that many lenders use, are on record that they will not deduct any points from your score for being on a DMP. Having fallen behind in your payments, a DMP may improve your chances of getting credit in the future since you will have repaid your (negotiated) debts in full. Banks and creditors want customers to take responsibility for their obligations; unlike most bankruptcy, working with the credit company to repay your debt tells banks that you are willing to be responsible for your own obligations.

Bankruptcy should be a last resort solution. The consequences of filing bankruptcy can reach far beyond your credit report as a bankruptcy is also a public record. Filing bankruptcy can impair your ability to rent an apartment, purchase auto insurance and may even impact a real estate purchase you make in the future. If, however, it is determined that bankruptcy is an appropriate action, we will work with you to insure you receive appropriate counseling in that regard.

For help with your debts, call Parker & Wenner at 612-355-2200 for a free telephone consultation or visit our website at www.parkerwenner.com. We will help you evaluate your credit risk, work with you to create a realistic budget and negotiate on your behalf to obtain payments you can afford.

There are many different types of business organizations available in the state of Minnesota.  This article is meant to give a brief introduction into these organizations, including general information on formation, taxation and liability.  It concludes with a chart summarizing the key points of each business entity.

Corporations – S-Corp and C-Corp

A corporation is a separate legal entity in and of itself rather than as a collection of individuals. It is owned by one or more shareholders. The shareholders elect a board of directors which is responsible for management and control of the corporation. Because the corporation is a separate legal entity, it is responsible for the debts and obligations of the business. In most cases, shareholders are insulated from claims against the corporation. An “S corporation” is a corporation that elects to be treated under Subchapter S of the Internal Revenue Code. In most cases, S corporation shareholders, rather than the corporation itself, are taxed on the profits of the corporation. In contrast, a “C corporation” (taxed under Subchapter C of the Internal Revenue Code) is taxed on the profits of the corporation at the corporate tax rate, and any dividends paid to shareholders from after-tax profits are taxed again at the shareholder level at the individual tax rate (often referred to as, “double taxation”).  A “C corporation” is a publically held corporation and usually has a large number of individual owners.  An “S corporation” is typically a closely held corporation.  All of the shareholders must consent to Subchapter S treatment.  Further, to be treated as an S-Corp, the corporation:

• Must be a domestic corporation;
• Must not be part of an affiliated group of corporations;
• Must not have more than 35 shareholders;
• Must have only one class of stock;
• Must have only shareholders who are individuals, a decedent’s estate, or one of special class of trusts (not corporations or partnerships); and
• Must have no shareholders who are nonresident aliens.

A corporation provides the most secure shelter from personal liability for the obligations of the business.  Furthermore, a corporation is the best business organization to raise significant capital for the operations of the business.  Another advantage is the “survivability” of the corporation.  Whereas a number of other business organizations do not, or need special language in its formation documents to, survive beyond the life of its owners.  Because a corporation is a separate legal entity, it is independent of its owners.

A corporation has many corporate formalities required to put the public on notice that they are dealing with a limited liability entity.  Among many others, these formalities include: separate bank accounts between the corporation and its owners; conducting regular meetings of the board of directors and of shareholders; electing directors; and complying with numerous registration, and periodic reporting requirements.  Furthermore, if a corporation is publicly traded, a whole plethora of regulations ensue under the SEC and Federal Regulations Acts.  A failure to adhere to these corporate formalities may cause a court to ignore the organizations corporate status subjecting the shareholders to personal liability.  This is called “piercing the corporate veil”.

Limited Liability Company (LLC)

An LLC may have one or more owners, called “members.” The most common form of an LLC is a business organization that is designed to combine the tax treatment of a sole proprietorship or partnership with the limited liability characteristics of a corporation.  This means that the profit or loss of an LLC is passed through to your individual tax return, and taxed at the individual rate.  Thus, an LLC member avoids corporate double taxation as well as the higher corporate tax rate on any profits from the LLC.  In addition to the taxation benefit, an LLC also offers limited liability to its members’ personal assets.  This benefit exists in a limited partnership for the limited partners (who have limited to no managing authority) as well as in a limited liability partnership under certain conditions.  Unlike these business organizations an LLC offers unconditioned limited liability for all of its members without the loss of any decision-making authority (subject to the legal doctrine of piercing the corporate veil mentioned below).  Since Minnesota has recognized the LLC business organization in 1993, it has become one of the most popular choices for budding entrepreneurs in the state.

The formation and operation of a Minnesota LLC is governed by Minnesota Statutes Chapter 322B.  Under Minnesota law, an LLC is formed by filing articles of organization with the Secretary of State and paying the filing fee, which is $160 as of this writing.  An LLC must register with the Secretary of State once every year.  The articles of organization must include information that satisfies the minimum requirements prescribed by the state.  However, the most important function of the articles of organization is to define the infrastructure of the LLC including tax-status election and member responsibilities.  For instance in an LLC, governance rights (the right to control the operations of the business) may be separated from ownership rights (the right to share in the increased value of the business).  This means that an LLC member may own 50% of the value of an LLC, but have less or more than 50% control of the business as de3termined by LLC documents.

An LLC is the most flexible business organization with regard to management and ownership.  To properly outline the direction and boundaries of these areas, non-compulsory documents are highly recommended, such as an operating agreement and a member control agreement.  A member control agreement is similar in function to a corporation’s shareholder agreement, whereas an operating agreement is similar in function to a corporation’s bylaws.  Without these documents, the members of an LLC are subject to the default provisions in Minnesota statutory law, which will most likely govern over the operation of the LLC in a manner different than what its members desire.  These agreements are fact-specific to the circumstances of each limited liability company, and limited liability company members should consult with legal counsel in creating or signing such agreements.  If you would like help with your LLC, call us at (612) 355-2200.

Sole proprietorship

A sole proprietorship is a one-person business that is not registered with the state as a corporation or a limited liability company (LLC).  It is the default business form.  It is the easiest type of business entity to form and maintain.  In fact, it’s so easy to form and maintain that you may already own one without knowing it.  For instance, if you independently contract a service for compensation, or get paid exclusively on commission, you are already a sole proprietor.  There may be some local registration, license and/or permit requirements to make your business legitimate; however, in practice, businesses that are small enough will get away with ignoring these requirements.  Keep in mind that if you choose to ignore these requirements, such as: local registration; obtaining an EIN from the IRS (if you have employees); and obtaining proper licensing and zoning permits; you are subjecting yourself to possible liability in the form of back taxes and other penalties.

A sole proprietor can and will be held personally liable for any business-related obligations, such as business debts, business related lawsuits, or defaults on a debt.  The sole proprietorship offers the individual no liability protection.  On the flip-side of that coin, the sole proprietor keeps all of the business profits as personal income.

Just as the sole proprietorship offers no protection from liability, it also offers no specific tax benefit.  In the eyes of the law, a sole proprietorship is not legally separate from the person who owns it.  This means that any income or loss from the business is reported directly on your individual income tax return – IRS Form 1040, with Schedule C attached.  In addition, a sole proprietor will have to pay “self-employment” tax, which consists of contributions to Social Security and Medicare, and pay estimated taxes throughout the year.  Typical business deductions such as health, dental, and life insurance for the sole proprietor may not generally be deducted either.

Partnerships – General and Limited

A General Partnership is much like a Sole Proprietorship, except it requires two or more owners.  Under Minnesota Statutes (323A.0202(a)), “The association of two or more persons to carry on as co-owners a business for profit, forms a partnership, whether or not the persons intend to form a partnership.”  This means that it is possible, just like a sole proprietorship, to be in a general partnership without even knowing or desiring it, and without a written agreement setting forth its terms.  The major distinction between a general partnership and a sole proprietorship is the existence of a relationship between co-owners.

It is imperative (but not required by law) that general partners draw up a partnership agreement and other partnership documents, to define the relationship between the partners at every stage of the business (formation, operation and dissolution).  This includes managing authority, authority to bind the partnership, and how to withdraw profits from and make contributions to the partnership, among other things.  Most often, general partners get into legal disputes with each other where no agreements have been executed which define exit strategies, succession ownership or partner buy-outs.  It is difficult for general partners to recognize potential areas of disagreement they may encounter in the future, which generally leads to conflict between the partners.

According to Minnesota statutory law and absent a partnership agreement, in a general partnership each partner has an equal voice in how the business is run and an equal share in the profits and losses.  Just like a sole proprietor, a general partner’s personal assets are subject to the liability of business obligations.  Even more significant, anything that one partner does affects all of the partners.  That means each partner is personally responsible for all obligations of the partnership even if that obligation was entered into solely by the other general partner on behalf of the partnership.  If it is not apparent already, one can see many areas of potential conflict between general partners absent a partnership agreement.  If you need legal contracts to govern your business, contact us at (612) 355-2200.

A general partner faces tax liabilities identical to that of a sole proprietor.  Each general partner is personally taxed on his or her share of partnership profits.

A Limited Partnership, unlike a general partnership, is required to file with the State.  It consists of an association of individuals, some of whom participate in the day to day operations of the business (general partners) and others who do not (limited partners).  Those who do not participate are typically the ones who provided the financing for the business.  An LP must have at least one limited partner and at least one general partner.  In addition, ownership interests of the partners cannot be freely transferred or sold without filing additional documents with the state and perhaps subject to additional limitations placed into partnership agreements.  The most important distinction between an LP and a general partnership is that an LP sets limits on the power of partners to conduct business and affords limited liability to each limited partner (general partners have the same amount of liability as do partners in a general partnership).

A limited partner is prohibited from managing or making day-to-day-decisions concerning the business but is shielded from most debts incurred by the business.  A limited partner is liable for business obligations only up to the amount of investment he or she put into the business.  This means that a limited partner’s personal assets are not typically at risk.  More legal formalities must be met under this type of arrangement than in a general partnership.  In Minnesota, a limited partnership can only be formed in accordance with the Uniform Limited Partnership Act.  State and federal tax codes make a number of distinctions between limited and general partnerships.  In general, neither kind of partnership has to pay federal income tax, instead, each partner pays tax at the individual tax rates on his or her share of the profits.

Limited Liability Partnership (LLP)

An LLP is a fairly new business entity and is governed in the state of Minnesota by the Uniform Partnership Act of 1994.  To change an existing partnership to an LLP, one must file a statement of qualification with the State.

An LLP is a general partnership with limited exposure to personal liability for business obligations.  However, an LLP does not exempt general partners from personal liability in all circumstances.  An inquiry into whether personal liability is attached to particular business obligations is very fact specific.  Remember that in a general partnership, the general partners are personally liable for the business obligations incurred by any other general partner on behalf of the partnership.  This is called vicarious liability.  In Minnesota, an LLP affords protection to the personal assets of general partners from vicarious liability for malpractice claims in both tort and contract as well as non-malpractice torts and other contractual liabilities.  An LLP does not protect a general partner from personal liability for his or her own negligence or malfeasance.  In addition, most LLP statutes provide that LLP partners are liable for the negligence, wrongful acts and misconduct of any person under the LLP partner’s “direct supervision and control.”

Many judicial caveats arise under an LLP, which can mostly be attributed to the underdeveloped jurisprudence of LLP’s.  The original purpose of the LLP was to protect general partners engaging in a professional activity from personal liability for the acts of another within the partnership, which is a great benefit.  However, the extent of that protection ranges from state to state and case to case depending on a number of variables.  For more information regarding LLP’s, call us at (612) 355-2200.

An LLP is generally taxed like a general partnership for federal income tax purposes.  However, with more complex LLP’s, more complex tax implications arise.

Limited Liability Limited Partnership (LLLP)

An LLLP extends the liability protections of an LLP to the general partners in a limited partnership.  Minnesota is one of twenty-two states that have LLLP enabling statutes.

Professional Corporation

Professional corporations are formed by professionals such as doctors, lawyers, and accountants for the purpose of saving money on their taxes through pension plans and deferred-income programs.

A professional corporation is much like any other corporation except that it can be formed by only one person and can engage in only one category of professional service. Also, only other individuals licensed to practice in that particular profession can own shares in such a corporation. The shares cannot be easily transferred. Although forming a professional corporation does not shield the individual from liability for professional malpractice, it can shield an individual from liability for malpractice committed by other persons with whom he or she associates.

Piercing the Corporate Veil

Piercing the corporate veil is when a limited liability entity loses its limited liability status subjecting the private owners / shareholders to personal liability for the organizations obligations.  Courts will do this for a variety of reasons.

In Minnesota and Wisconsin, piercing the corporate veil is extremely rare.  The Court will analyze the shareholders’ relationship to the corporation. Some questions that a court may ask include:

• Was there sufficient capitalization to carry on the corporate business?
• Did the shareholder follow corporate formalities such as conducting regular meetings, electing directors, and keeping separate accounts?
• Have proceeds of the corporation been siphoned off to shareholders?

There are numerous risks associated with forming a corporation. It is always wise to seek legal advice.

The following chart summarizes some of the key characteristics of some of the business organizations listed above:

The new child support statute became effective on January 1, 2007, for newly filed cases, or for existing cases in which a modification would be warranted as long as the basis for the modification is not the change in the child support statute. For most existing cases (cases where modification is not warranted under the old law), the new statute is effective January 1, 2008. It is important to note at the outset that the effect of the new law will in many cases result in a significant modification of an obligor’s support obligation but, conversely, there will be many instances were the new law will not change the support obligation and may even increase the obligation. Therefore, it is important that you consult with legal counsel to recalculate the support obligation under the new law before actually filing a motion.

Generally speaking, under the old law, child support was calculated as a percentage of the obligor’s net income depending upon the number of children for whom support was paid. Support calculations under the new law include the gross income of both parents, the sum of which is referred to as “Parental Income for Child Support” (PICS). The calculation then divides the non custodial parent’s income by the combined PICS to arrive at the non custodial parents “Percentage Share of Combined PICS”. The non custodial parent’s percentage share of combined PICS is multiplied against the “Combined Basic Support Obligation” (the combined PICS for each parent applied against the guidelines chart which is included in the new statute, factoring in the number of joint children), which results in the non custodial parent’s basic support obligation.

By using the gross income of both parents, the new statute eliminates the deductibility of income, social security and Medicare taxes, retirement contributions, and the like. For self employed individuals, the statute does allow certain deductions to arrive at “adjusted gross income”, such as a cost of goods sold and other strictly business related expenses.

Another important feature of the new law is that both parents (including the custodial parent) are rebuttably presumed to gainfully employed on a full time basis and, if the custodial parent is not employed on a full time basis, support must be calculated based on a determination of potential income. This has always been the case for the non custodial parent who has the obligation to support the child, but the old law did not factor in the custodial parent’s income or employability. The presumption that a custodial parent can be employed on a full time basis can in some cases be “rebutted” with the result that potential income will not be “imputed” to the custodial parent. However, it appears that the policy behind the new statute mandates the inclusion of potential income for a custodial parent, with rare exceptions.

The foregoing illustrates the calculation of a non custodial parent’s basic support obligation, but there are other features of the new statute which, when figured into the calculation, will change the amount of the basic support obligation. For example, non joint children who primarily reside in the parent’s home and for whom that parent is not obligated to pay basic child support is factored into the calculation as a “deduction” equal to 50% of the guideline amount of support for that child. The new law caps the number of non joint children that can be considered for each parent to two.

The last significant change with respect to the new child support law involves the parenting expense adjustment which basically adjusts the non custodial parent’s basic support obligation according to the amount of parenting time that parent has with the children. If the non custodial parent’s parenting time with the children is less than 10% (typically, but not exclusively, calculated as a percentage of overnights during the year), there is no adjustment. If the percentage of parenting time is between 10% and 45%, there is a 12% adjustment, and parenting time between 45.1% and 50% results in a presumption of equal parenting time and a corresponding adjustment. In such cases, a basic support obligation and a 50% adjustment is calculated for both parents, the support obligation is offset, and the party with the greater obligation pays support to the other party in an amount equal to the difference between that party’s obligation and the other party’s obligation.

The calculation of either parent’s share of child care expenses (daycare) under the new law is very similar to the calculations under the old law, as the old law contained a formula which in effect resulted in a PICS number after considering both parties’ income after the transfer of child support to the custodial parent. On the other hand, the determination of either party’s share of medical and dental insurance expenses under the new law is significantly different than the calculation under the old law, as both parties are obligated to contribute to those expenses according to their percentage share of combined PICS. For example, if the non custodial parent incurs medical and dental insurance expenses for one child in the amount of $300.00, and the custodial parent’s percentage share of combined PICS is 30%, the custodial parent will “owe” $90.00 resulting in a reduction of the non custodial parent’s basic support obligation is the amount of $90.00. With respect to unreimbursed medical and dental expenses, each parent’s share of those expenses correlates precisely to their percentage share of combined PICS. Typically, the parent who has not incurred the unreimbursed medical or dental expense is obligated to reimburse the other parent for a percentage of that expense. Importantly, under the new law, there is a retroactive two year statute of limitation for one party to collect the other party’s share of unreimbursed medical and dental expenses. In other words, even for those cases decided before the effective date of the new law, the court will now only go back two years when considering any motion for an order or judgment for unpaid medical and dental expenses.

The changes in the removal statute, effective August 1, 2006, substantially leveled the playing field with respect to the custodial parent’s right to move the children out of state. Briefly, under the old statute, it was presumed that a custodial parent could move out of state with the children, and the burden was on the non custodial parent to show that the move was not in the children’s best interest. The new statute places the burden of proof on the custodial parent who is requesting the move to show that the move is in the children’s best interest, and allows the court to consider several factors in determining the children’s best interest relative to the prospective move. However, if the parent requesting permission to move has been a victim of domestic abuse by the other parent, the burden of proof would be on the parent opposing the move. There are many in the legal community who believe that most courts will continue to side with the custodial parent requesting the move, but the new statute forces much stricter scrutiny of a prospective move and gives the non custodial parent a better chance of preventing a move.

The new child support statute is widely considered to be a more fair way of balancing each parent’s respective share of financial obligations for their children, but as I indicated earlier, it will not automatically result in a substantial change to a non custodial parent’s collective support obligation. It is recommended that those paying support under an existing order seek legal counsel to determine whether the new law will have a dramatic effect on their support obligation. For those experienced in implementing the new law and drafting worksheets under the new calculations, the process can be competed very efficiently and inexpensively.

For questions related to this article please contact Nic Wenner at 612-355-2202.

Back in February 17, 2004, the Minnesota Court of Appeals handed down a decision bringing together several important theories of law as to disclaimers of warranties of products.  In Lester Building Systems vs. Louisiana-Pacific Corporation the Court of Appeals applies rules of law providing that disclaimers of warranties do not preclude an action for fraud (although they are effective to disclaim contractual actions for breach of warranties), and then pointed out that attempts to exclude consequential damages by a seller of goods are ineffective as to the seller’s own fraud. In addition to that, the court holds that the seller of goods cannot contractually disclaim liability for consequential damages resulting from its own fraudulent conduct.

The court then moved on to a very difficult area of the law involving what is known as the “economic loss doctrine”. In its broadest form that doctrine holds that in the case of a purchase of goods which are defective resulting in damage to the goods themselves (and perhaps other goods) the purchaser could recover only for the damage to the defective goods themselves. By 1992 the Minnesota Legislature recognized that, at least as to private individuals (that is to say, not merchants in the type of goods involved), Plaintiff should be able to recover for damage to property other than the goods which were warranted but, as to merchants, continued the prior law by providing that “economic loss that arises from a sale of goods between parties who are each merchants in goods of the kind is not recoverable in tort.”  As between merchants, that left merely a claim based on the warranty on the goods themselves.

Think of a fraud claim by a dealer against the manufacturer of a twin engined aircraft falsely warranted to be flyable on one engine which claim arises from a defective engine causing a total loss of the quarter million dollar aircraft and $13,000,000 of contents. The dealer could not recover for the valuable contents even though the manufacturer had intentionally misrepresented that the aircraft could continue flight on a single engine with that load.

But then in 1998 the Minnesota Legislature added subdivision “(e)” to Minn. Stat. 604.10 and provided that the law “shall not be interpreted to bar tort causes of action based upon fraud or fraudulent or intentional misrepresentations or limit remedies for those actions.” Thus the law no longer discriminates against merchant Plaintiffs in fraud cases. It is that provision which the Minnesota Court of Appeals in the Lester Building Systems case has so clearly applied allowing Lester to recover from Louisiana Pacific more than $13,000,000.00 for very broad losses arising from Lester’s use of Defendant’s defective siding for Lester’s pig shelter products.  Humans, on the other hand, with homes damaged by the same defective siding, have been relegated to a class action lawsuit against Louisiana Pacific.

For questions pertaining to litigation for Misrepresentation or Fraud, please call Boris Parker at (612) 355-2201 for a free telephone consultation.