Pre-Incorporation Liability for Iowa Entrepreneurs and Startups

Iowa Preincorporation LiabilitySo you’ve come up with the next “big thing,” and you’re excited, anxious, and busting at the seams to get started.  All natural feelings, but before getting too far down that exciting path, be careful not to put your cart before the legal horse.

You have probably heard about some of the many legal protections that Iowa business owners receive by forming a corporation (e.g. limited liability), but you may not have heard that before the corporation is legally formed you are likely “on the hook” for any liabilities that arise (debt claims, infringement claims, personal injury claims, etc).  Specifically, Iowa law provides that if you act or purport to act on behalf of a corporation that has not yet been incorporated (i.e. legally recognized by the state), you are personally liable for all liabilities created while so acting.  See Iowa Code Section 490.204.  In other words, just because you intend to create a corporation or because you have filled out the paperwork to do so, if the corporation has not been legally recognized by the state, you could be held personally liable for any claims that arise. These claims include trademark infringement, copyright infringement, and patent infringement to name a few.  Consequently, before you go out and act or purport to act on behalf of a corporation you intend to create, saddle up that horse and get your legal affairs in order.  After all, in Iowa, incorporating is relatively inexpensive, easy, and quick.  To get started and learn more, you should consider contacting a licensed attorney.

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Innovative Litigation, L.L.C., as owner and host of this site, and Matthew McKinney as the author (acting on behalf of and through Innovative Litigation, L.L.C.) cannot and does not warrant the accuracy or reliability of the information presented on or through this site.  The law can and does change over time and the information contained herein may not reflect the most recent laws – whether statutory law, administrative law, case law, constitutional law, or otherwise.  The information on this website does not constitute legal advice and readers should not rely on it to solve problems or other matters.  Further, you should seek licensed counsel in the appropriate legal jurisdiction before taking any action.  Any information provided on this site is presented “As Is” for your personal curiosity and enjoyment.  It is not meant to be relied upon for legal advice, counsel, or for any other purposes.  Such information does not take the place of a lawyer.  Rules and laws differ by jurisdiction and the information contained within this website may not apply in your jurisdiction.  The appearance of articles, listings, or ads, by or for professionals, on this site, does not constitute an endorsement.  In all cases, you are responsible for determining the quality of services, information, and/or advice provided by professionals through, or as a consequence of, your use of this site.  Neither liability nor responsibility shall arise to any person or entity with respect to loss or damage caused (or alleged to be caused), directly or indirectly, by information posted on this website, or by reason of contact with a professional listed on, or posting information to, this site.  No attorney-client relationship is formed by viewing this website and practice is limited to jurisdiction where lawyers are admitted.  The information furnished on the website is only general and not a substitute for personalized legal advice.   Legal advice cannot be given without full consideration of all relevant information relating to the individual(s) situation.  Laws can change daily and new laws may, and likely will, affect the accuracy of the information herein.  The information herein may be outdated and replaced by new law.

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A Deeper Dive into a Director’s Duty to Become Informed

Iowa Fiduciary Duty to Become Informed

As described in a prior post (here), Iowa’s fiduciary duty law requires directors to become informed with respect to their decision-making obligations.  Thankfully, a director’s duty to become informed is fairly straightforward.  As you may suspect, the duty to become informed requires a director to become sufficiently familiar with background facts and circumstances relating to a particular issue before taking action.  Not surprisingly, the process typically involves directors reviewing written materials provided before or at a board meeting and paying attention to or participating in the deliberation leading up to a vote on a particular matter.

Further, there is not a specific “legal method” that courts require directors to follow in order to become sufficiently informed; rather, both the method and measure – “how to become informed” and “how much work is required” – are matters of reasonable judgment for the director to exercise and a court to evaluate on a case-by-case basis.  In short, when discharging your duty of care by becoming properly informed on a matter, you may ask yourself, would a judge or jury of my peers reviewing my actions believe I’ve become sufficiently informed by (1) reviewing the materials presented; (2) obtaining answers to questions that may arise; and (3) otherwise doing the work necessary to thoroughly understand a matter before taking action?  While these items are fairly basic, many directors overlook these responsibilities and find themselves on the wrong end of a costly lawsuit. Continue reading

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Care, or Beware! Iowa’s Fiduciary Duty of Care

Iowa's Fiduciary Duty of Care

With Valentine’s Day just around the corner, we think it’s high time to further explore “caring” in the corporate context.  And while we’ve frequently addressed the broad concept of fiduciary duties that Iowa law and Iowa courts impose upon corporate directors (here, here, and here), we have yet to dive further under the fiduciary duty umbrella and explore the fiduciary duty of care.

Duty of Care Characteristics – What is the Duty?

The duty of care is a somewhat abstract legal concept.  Consequently, rather than a clear  and simple explanation, courts and legal commentators use several characteristics to explain a director’s “duty of care.”  A director’s duty of care is frequently broken-down and explained in reference to a director’s obligation to manage the corporation in good faith and requiring a director to: (1) become informed (read more here); (2) devote attention to; (3) and to form a “reasonable belief” about certain matters.  Considering that a director’s role includes providing direction and oversight to officers, employees, and other agents of the corporation who carry out day-to-day management functions, it is easy to see why directors must abide by these important characteristics.

A Standard or “Baseline” From Which a Director’s Level of Care is Measured

The question frequently arises as to how much “care” a director must exercise to satisfy this duty.  In other words, how informed must a director become on a matter, or how much attention must a director devote to an issue in order to satisfy the duty?  Thankfully, just as Iowa law creates the duty of care, it also provides a “baseline” or “standard” from which to evaluate whether a director exercised sufficient care.  The baseline is described as: “the [level of] care that a person in a like position would reasonably believe appropriate under similar circumstance.”  Iowa Code Section 490.830.  An admittedly vague standard, but one that allows Iowa’s courts to apply the standard to all cases after taking into consideration the unique facts and circumstances of each case.  It must be noted that in certain circumstances a director’s duties are more specifically defined.  For example, with respect to the issuance of shares (Iowa Code 490.621), distributions (Iowa Code 490.640), dismissal of derivative proceedings (Iowa Code 490.744), indemnification (Iowa Code 490.855), and interested-transaction authorization (Iowa Code 490.862), among others, Iowa law provides further clarification as to how a director must carry out his/her duties. Continue reading

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Resources for Small Businesses in Iowa

Image Credit: The Greater Des Moines Partnership

The entrepreneurial experience of starting a new business is thrilling, exciting, scary, and often nerve racking, to name just a few emotions.  And whether you’re thinking about starting a new business in the Des Moines area – ranked Best Place for Business and Careers in 2013 – or you just launched your new endeavor, central Iowa is filled with countless, valuable resources to help you start off on the right foot and avoid future problems, including avoidable corporate disputes.

Check out this list of valuable resources and don’t be afraid to reach out and contact someone.  No matter what stage you’re in, they’re there for a reason:

  1. West Des Moines Incubator;
  2. StartupCity Des Moines;
  3. One Million Cups of Coffee Des Moines;
  4. Startup Iowa;
  5. CarpeDM;
  6. Iowa Small Business Development Center;
  7. The Greater Des Moines Partnership; and
  8. BrownWinick Startup Group.

We hope this list will help you in many aspects, and perhaps provide you with a few great people to surround yourself with in your business ventures.  Finally, we welcome our readers to send in additional resources that they’ve used or learned about in Iowa’s rich startup environment.

See related postHow to Start an Iowa Limited Liability Company in Iowa.

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Understand Your Burden of Proof Before Exercising the Nuclear Option

Breach of Fiduciary Duty Claims in Iowa

Duty of Care v. Duty of Loyalty and the Shifting Burden of Proof

Intra-corporate dispute cases frequently involve litigants asserting breach of fiduciary duty claims.  More specifically, they involve plaintiffs alleging the defendant(s) breached his/her duty of care and duty of loyalty.  Before a plaintiff exercises the nuclear option and launches such highly contentious claims against a defendant(s) in court, the plaintiff and his/her counsel should consider who (plaintiff or defendant) will bear the burden of proof to prove such claims.

On January 9, 2014, the Iowa Court of Appeals published its opinion in Virgil Moore and Marilyn I. Moore vs. Pioneer Estates, LC, et. al, No. 3-1000/ 12-2105 (Full Opinion Here).     In Pioneer Estates, the plaintiff launched a legal attack against defendants, alleging the defendants breached their duty of care and duty of loyalty in several ways (failing to disburse available funds; charging unauthorized and excessive management fees; making improper and unauthorized charges for business expenses of other entities; borrowing funds for other business entities owned by defendants; paying personal living expenses for defendants; and entering into transactions which were unfair).  For its duty of loyalty claims, the plaintiff recognized that while the burden of proof is traditionally placed squarely upon plaintiffs, a duty of loyalty case is unique and the burden of proof shifts to the defendants.  To address the plaintiff’s argument and this important proof question, the court relied upon a 1988 Iowa Supreme Court case.  See Cookies Food Products, Inc., by Rowedder v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 453 (Iowa 1988). Continue reading

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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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