Personal Liability for Failing to Hold LLC Meetings and Keep Corporate Minutes?

Iowa Court of Appeals

On January 9, 2014, the Iowa Court of Appeals published its opinion in Northeast Iowa CO-OP., n/k/a Viafield v. Joel Lindaman et al., No. 3-1058 / 13-0297 January 9, 2014 (Full Opinion Here), which is yet another Iowa Court of Appeals opinion addressing member liability in an Iowa limited liability company (“LLC”).  In particular, the opinion addresses whether the plaintiff, Viafield, can pierce an LLC’s corporate veil and hold the defendant, Lindaman, personally liable for the LLC’s debts.

Viafield requested the Court pierce the LLC’s corporate veil under several legal theories. Before assessing Viafield’s legal theories, however, the Iowa Court of Appeals acknowledged an LLC’s corporate veil may be pierced in Iowa upon establishing one of six different factors:

Iowa courts may disregard a corporation’s existence if (1) it is undercapitalized, (2) it is without separate books, (3) its finances are not separated from individual finances, (4) it pays an individual’s obligations, (5) it is used to promote fraud or illegality, or (6) it is merely a sham. Briggs, 262 N.W.2d at 810.

One of Viafield’s arguments for piercing the LLC’s veil and holding Lindaman personally liable was that the LLC “did not hold meetings and no minutes exist.”  Viafield, p. 18. Continue reading

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5 Must-Consider Clauses for Your Business’ Governing Documents

5 thingsIncluding the proper provisions in your business’ governing documents (Articles of Incorporation, Bylaws, Operating Agreement, etc…) can help eliminate several problems – legal and otherwise – down the corporate road.  The following legal issues, all of which relate to a corporation’s board of directors, are important to consider when either starting a business or amending the business’ governing documents as they generally must be addressed within the corporation’s appropriate governing document(s) (articles of incorporation or bylaws) to have an effect:

1.  Directors’ Power to Set Their Own Compensation.  In some small corporations, shareholders are frustrated to learn that directors are setting their own compensation.  In Iowa, unless the articles of incorporation or bylaws state otherwise, the board may fix the directors’ compensation.  Consequently, should you want to restrict or limit the directors’ power to set their own compensation, you should consider this issue early and before finalizing the corporation’s articles of incorporation and/or bylaws.  See Iowa Code Section 490.811.

2.  Electing Directors by Cumulative Voting.  Similar to paragraph 1, unless the corporation’s articles of incorporation state otherwise, shareholders generally do not have a right to cumulate their votes for directors.  For minority shareholders, the right to cumulative voting is often the key voting provision that will allow a minority shareholder to elect someone to represent them on the Board of Directors.  Without the right to cumulate their votes, minority shareholders may not have the voting power to elect an individual, including themselves, to the board.  See Iowa Code Section 490.728.

3.  Electing Directors by Greater Than a Simple Plurality of the Vote.  Just like the prior paragraph, unless the articles of incorporation state otherwise, directors are elected by a plurality of the votes cast, not a majority of the votes case.  In other words, individuals receiving the largest number of votes are elected directors, which may result in individuals being elected but having fewer than a majority of all the votes cast in the election.  If you or your corporation want to require a majority vote, rather than a plurality vote, you should consider contacting an attorney to discuss including the proper language within your corporation’s appropriate governing documents.  See Iowa Code Section 490.728.   Continue reading

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Howdy Partner, Show me Your Books!

Iowa Partnership Books and Records

Access to Books & Records in an Iowa Partnership

Similar to shareholders in a corporation and members in a limited liability company, partners in a partnership are entitled to access the partnership’s books and records.  Iowa partnership law expressly states partners may access books and records: “[a] partnership shall provide partners and their agents and attorneys access to its books and records.”  Iowa Code Section 486A.403.  Access to books and records in a partnership promotes transparency in the organization, instills accountability amongst partners, and provides the opportunity to implement a system of “checks and balances.”  Indeed, a partner who suspects wrongdoing – such as a partner using partnership money for personal purposes and/or gain – may inspect the partnership’s books and records to either confirm or alleviate their suspicion(s).

Notably, the right to inspect a partnership’s books and records survives a partner’s departure from the partnership.  Iowa law provides former partners with the ability to access books and records – even after departing a partnership – so long as the records sought relate to the time period during which the former partner was a partner in the partnership. Continue reading

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Ousting a Corporate Director in Iowa

Removing a Director from the Board of Directors

A Shareholder’s Power to Remove a Director From the Board of Directors

Shareholders often inquire: How is a director removed from a corporation’s board of directors?  The question may be posed out of concern that the shareholder – who also serves as a director – feels threatened as a director and is concerned about being ousted, or the shareholder may be frustrated with a particular director’s conduct and is seeking a change in leadership.  Either way and in theory, removing a director from a corporation’s board of directors is relatively straightforward.

Shareholders, as the corporation’s owners, possess the power to “remove one or more directors” in an Iowa corporation.  Iowa Code Section 490.808.  Importantly, pursuant to Iowa law, so long as the corporation’s articles of incorporation do not state otherwise, “shareholders may remove one or more directors with or without cause.”  Id (emphasis added).  In other words, Continue reading

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2 Must Know Duties Between Partners in a Partnership

Fiduciary Duties Between Iowa Partners

Legal Duties Between Iowa Partners

The Holidays are upon us, and just as tempers can unfortunately flare during family gatherings, so too can they flare between partners at Holiday parties.  And while frustrations arise for good, bad, and other reasons, knowing whether a valid legal reason exists – as opposed to a personal, trivial issue – is important to know for the future of your business and partnership.  To this end, partners often wonder what, if any, legal duties they owe to each other and the partnership generally.  This post quickly identifies two legal duties that partners owe to each other and to the partnership under Iowa law. Continue reading

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Business Owners Taking Legal Mulligans? Caution!

Successor Liability in Iowa

Successor Liability in Iowa

The Legal Mulligan You May Not Want to Take

While mulligans are commonplace on the golf course, they can spell trouble for business owners in the business world.  In particular, business owners who believe they can “start over” and avoid liability or debt held in their first company by “taking a mulligan” and starting a second company – which provides the same product or service as the first – are often setting themselves up for not only a penalty, but perhaps years of costly litigation.  A legal doctrine known as “successor liability,” allows Iowa courts to find a successor company (Second Co.) liable for the debts of a predecessor company (First Co.) in several circumstances.  Many successor liability cases involve business owners giving up on their first company and trying to “take another swing” by starting the business over with a second company (because of too much debt or other liabilities in First Co.) – the proverbial legal mulligan.  On November 6, 2013, the Iowa Court of Appeals published an opinion (here) addressing this legal mulligan – successor liability in Iowa.

In the November 2013 opinion, Continue reading

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How do I Start an Iowa Limited Liability Company?

Start an Iowa Limited Liability Company

“The Way to Get Started is to Quit Talking and Begin Doing” – Walt Disney

Whether you are looking to start an Iowa corporation (“Inc.”), an Iowa limited liability company (“L.L.C.”), or an Iowa limited liability partnership (“L.L.P.”), starting on the right foot and complying with Iowa’s legal requirements is a good first step.  Not surprisingly, complying with Iowa’s legal requirements can not only help reduce future legal disputes, but it can also trigger several corporate liability protections.  This short post addresses two Iowa legal requirements that should be addressed when starting a new Iowa limited liability company (L.L.C).

What’s In a Name?  Selecting a business name is a logical starting point for those seeking to form an Iowa business.  Careful consideration should be given to your business name, not only for marketing and branding purposes, but also for important legal reasons.  For instance, legal disputes can (and do) arise if the business name you choose is the same or too similar to the business name of another business or entity operating in your market.  Such disputes frequently include unwanted consumer confusion in the marketplace (mistaking your good/service for that of another), which may lead to among other things, an infringement lawsuit against your new business.  To reduce the likelihood of a future legal dispute related to your business’ name, you can begin by searching the Iowa secretary of state’s online business entity database (here) as well as the federal trademark office listings (here) to determine if someone has already claimed rights in the name.  If your desired business name does not appear to be used by another business, you are one step closer to potentially securing the name for your business and you may want to consider “reserving” the name in Iowa, which can be done with this Iowa form (here).  It is important to point out that as with so many areas of the law, even the most basic issue, such as choosing a name for an L.L.C., can be complicated by several legal requirements.  Click here for an example of a few of Iowa’s many naming requirements.  A licensed attorney in your jurisdiction that works with business owners and entrepreneurs can assist in navigating this legal terrain and help ensure that the name you choose will not create problems for you and your business down the road.

Iowa L.L.C. Creation  After carefully navigating Iowa’s naming requirements and settling on your new business’ name, you may begin the legal process of formally creating a legal entity.  In Iowa, you may act as an organizer to form a limited liability company by signing and delivering to Iowa’s secretary of state a “certificate of organization.” According to Iowa law, a certificate of organization must include at least the following information: Continue reading

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As an Owner, Am I Liable for the Debts of my Iowa Limited Liability Company?

Iowa LLC Umbrella of Protection
Member Protections Under Iowa’s LLC Umbrella

Just as shareholders in Iowa corporations are, by default, generally not liable for the debts and liabilities of their corporation, members (a.k.a. owners) in Iowa limited liability companies are also generally not liable for the debts and liabilities of their companies (see this article for more information about protections provided to shareholders in Iowa corporations).  Put another way, the “limited,” in limited liability company (L.L.C.) actually means something and conveys just what Iowa law provides: limited liability for members.

Iowa black letter law provides that members in an Iowa limited liability company enjoy limited liability and, by default, are generally not liable for the debts, obligations, or other liabilities of an Iowa LLC: Continue reading

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Business Divorce in Iowa – Can I Kick a Fellow Member Out of My Iowa Business?

Business Divorce - Iowa LLCs

Iowa Business Divorce

Unfortunately, like some marriages, the exciting and passionate fire that burns between business owners and drives them to come together to do amazing work is replaced by a dull flame, bickering, money problems, and a deep yearning to part ways – the business divorce.  In Iowa, business owners in limited liability companies (LLCs), partnerships, and corporations often consider divorcing – booting a fellow owner or find themselves on the other end of an effort to remove them as an owner.  As a result, it is often asked, how does Iowa law address business divorce?

This post identifies three (3) instances in which an Iowa court may divorce business owners by kicking out (i.e. expelling) an owner in an Iowa limited liability company.  Iowa law expressly permits Iowa courts to legally separate business owners in Iowa limited liability companies under certain, specified circumstances,  including the following: Continue reading

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Are Shareholders in Small Family Businesses Personally Liable for Business Debts and Liabilities?

Iowa Shareholder - Pierce the Corporate VeilRegardless of whether your family business may be considering taking on debt for a much-needed expansion or whether it is facing liability from a lawsuit or other matter, one question frequently arises:  As a shareholder in an Iowa corporation, can I be held personally liable for my business’ debts, liabilities, or actions?  In Iowa, the “default rule” rule is stated as follows:

A purchaser from a corporation of its own shares is not liable to the corporation or its creditors  with respect to the shares…

Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation.

Iowa Code § 490.622 (2013) (emphasis added).  As set forth above, unless your family business corporation – incorporated in Iowa – has otherwise agreed, the default rule in Iowa is that shareholders are generally not personally liable for the corporation’s acts or debts.  This “shield of liability” or “corporate veil,” as it is often called, is generally the fundamental reason that entrepreneurs and business owners alike decide to incorporate in the first place – to create liability protection, the “shield of liability.”  While the provision reproduced above certainly creates legal protections and will provide comfort to many shareholders, it should be noted that as with many legal principles, instances exist in which courts will recognize the “shield of liability,” but nonetheless “pierce the corporate veil” and hold directors, officers, and others liable.  To read more about piercing the corporate veil, click here.

If you have questions about whether you or someone you know may be personally liable or potentially liable for the acts, debts or other liabilities of a business, you should consider contacting a corporate dispute attorney.

Continue reading

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