When Owners in an LLC Are Personally Liable

what-is-liabilityEntrepreneurs and business owners often elect to create a formal business entity, such as a limited liability company (“LLC”), to shield themselves from personal liability.  In other words, they create such an entity to ensure that if an adverse court judgment is entered in relation to the business’ activities (e.g. breach of contract; slip & fall; infringement, etc.), the judgment is solely collectible against the LLC and not against the individual owner(s) in their personal capacity.

A recent Iowa Court of Appeals case illustrates that limited liability is not an “automatic” benefit conferred upon business owners when creating an LLC. Specifically, the Iowa Court of Appeals determined Continue reading

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Iowa’s Open Records Law – Who, What, When, and Why?

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Iowa’s Open Records laws permit Iowans and Iowa businesses to obtain numerous types of records and communications from government bodies and officials (e.g. state departments, cities, and schools). Frequently, Iowans and Iowa businesses use these laws to obtain general information about government activities as well as information about how competitors may be communicating with the government. Access to such records is governed by Iowa Code Chapter 22.

Who may request a public record?

Iowa Code Chapter 22 explains how “[e]very person shall have the right to examine and copy a public record…” Iowa Code 22.2 (emphasis added).  Put another way, Continue reading

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Single Taxation Versus Double Taxation and the Iowa LLC

As discussed in this prior post, Iowa Limited Liability Companies have the benefit of electing to have a single layer of tax.

imagesWhen an LLC chooses a single layer of tax, LLCs are taxed as pass-through entities, meaning all earnings pass through to its members (i.e. owners) in the year they are earned and are not taxed at the corporatelevel. Comparatively, in a traditional corporation, the corporation is taxed on earnings and then its shareholders (i.e. owners) are taxed on any dividends when distributed – often referred to as double taxation.

For demonstration purposes, the following example helps illustrate the difference.

Assume ABC Entity, a new small business, sells 100,000 widgets for a net taxable income of $100,000. Assume that the tax rate for corporations on this income is 20 percent, and the personal income tax rate for the owner is 25 percent. ABC Entity and its owner would pay the taxes shown on the following table.

Corporation LLC Electing Pass-Through Taxation
Corporate Net Income (Revenue-Costs)  $100,000  $100,000
Corporate Tax @ 20%  $20,000  N/A
Income Available To Distribute  $80,000  $100,000
Dividend Taxes @ 15%  $12,000  N/A
Personal Income Tax @ 25%  N/A  $25,000
Earnings After Taxes  $68,000  $75,000

Pass-through taxation can have significant advantages for small-business owners. In this hypothetical, ABC Entity’s owner would save approximately $7,000 in taxes. Actual results will vary depending on, among other items, the size of the business, the owner’s other income, the marginal tax rates of the corporation and owner.

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3 Key Differences Between an Iowa LLC and a Corporation

The_DecisionsWhether you are looking to form a new business, or perhaps you are seeking personal liability protection by “upgrading” your existing business entity, you may find yourself wondering what is the difference between an Iowa Limited Liability Company (LLC) and a traditional Iowa Corporation (C-corp). Here are three key differences between an Iowa Company (LLC) and an Iowa Corporation (Inc.):

  1. Single Taxation v. Double Taxation LLCs may be treated as “pass-through” entities at the election of its owners. In other words, the members (i.e. owners) of an LLC are allowed to pass their share of the company’s profits to their personal income tax return. A corporation on the other hand has two layers of taxation. A corporation’s first tax level occurs when the company files taxes as a business. The second tax occurs after dividends are paid to the corporation’s shareholders, who are then required to pay taxes on dividends received from a corporation on their personal income tax return. In short, while members in an LLC can take advantage of a single layer of taxation, shareholders in a corporation cannot.
  2. Legal Formalities Iowa business law requires corporations to follow many more formalities than their LLC counterparts. For example, corporations must maintain certain books and records of the corporation, including minutes from all director and shareholder meetings  Comparatively, LLCs are not required to maintain minutes from meetings that occur. Similarly, while a corporation is generally required to have an annual meeting, there is no such formal requirement for LLCs. Additionally, while LLCs are not required to create financial statements that detail the company’s financial status, corporations are required to prepare annual financial statements for its shareholders.
  3. Management Structure Members in an LLC can elect to manage the LLC’s daily affairs. Alternatively, the members can also choose to hire non-member managers to oversee day-to-day activities. Such flexibility allows an LLC’s owners to participate in managing the company. Comparatively, corporations have rigid management structures that must be followed and which consist of shareholders, directors, officers and employees. As a result of such rigid structures, unlike an LLC, the owners (i.e. shareholders) do not necessarily participate in managing the entity, which in a corporation is generally left to elected directors and officers.
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Iowa Shareholders Can Remove a Director From the Board of Directors

6306132745_347e21a6e8_o-1Shareholders in large and small corporations 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 about being ousted as a director. Alternatively, the shareholder may be frustrated with a particular director’s conduct and is seeking a change in board composition and leadership. Either way, in theory, removing a director from a corporation’s board of directors is relatively straightforward.

As the corporation’s owners, shareholders possess power under Iowa law to “remove one or more directors” in an Iowa corporation. 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.” In other words, if the corporation’s articles of incorporation are silent and do not address the issue, shareholders may remove a director or directors without providing any justification for their decision – they can simply act and remove the director(s).

Notably, however, if a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove that director.

As with many corporate actions, removing a director requires shareholders to follow a very specific process. For instance, as of the time of this posting, shareholders may only remove a director at a shareholder meeting that is called for the express purpose of removing the director and after proper notice is provided. The notice must state that the purpose (or one of the purposes) of the meeting is removing the director(s).

Additionally, a shareholder may also petition a court and request a judge remove a director from the board. Not surprisingly, there is also a very specific process by which to seek removal through the court system.

If you are considering removing a director from your Iowa corporation’s board of directors, or if you are a director concerned about future removal, you should consider contacting a licensed attorney who practices in this area of law.

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Do Fiduciary Duties Apply Between Equal, 50/50 Shareholders?

SealIAFiduciary duties are often described as the highest duties recognized under the law.  Their application, however, is often challenged by litigants in court.  In a recent case before Iowa’s Business Courtthe Honorable Judge John Telleen was tasked with determining whether equal, 50/50 shareholders in a corporation are charged with exercising fiduciary duties in their dealings with each other.

Judge Telleen began the June 4, 2015 opinion by explaining Iowa’s long history of applying fiduciary duties: (1) by directors and officers of a corporation to the corporation and its shareholders; (2) between a majority shareholder and a minority shareholder; (3) between joint venturers through the life of a venture and its dissolution; (4) between partners in a partnership; and (5) between shareholders in closely held corporations.  After reviewing and explaining Iowa’s well-established history of applying fiduciary duties in numerous business settings, Judge Telleen concluded, “[e]qual shareholders owe each other a fiduciary duty” (emphasis added).  In support of this holding, the court explained

[i]f equal partners, joint venturers and shareholders in closely held corporations owe each other [sic] fiduciary duties, the Court sees little reason why those same duties should not be required of equal shareholders.

Idat 13.  Based upon the holding in this June 2015 opinion, 50/50 shareholders in Iowa corporations should consider exercising caution in their dealings with one another consistent with the fiduciary duty concepts adopted and imposed upon Iowa shareholders.

Click here to learn more about the who, what, when, where, and why of fiduciary duties.

Download a copy of the June 4, 2015 Opinion.  A special thank you to Ben Weston, of Lederer, Weston, and Craig for providing a copy of the Opinion.  

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Protecting Your Trade Secret in the Court of Law

Iowa Trade Secret

Savvy business owners understand the value of protecting proprietary information; especially when the information provides a competitive advantage in the marketplace (commonly referred to as a trade secret).  What happens, however, when your business is unexpectedly defending claims in our public court system or protecting itself by filing a lawsuit in open court?  Will your business’ trade secrets be publicly exposed?  Will a competitor have access to the Court’s public records (now online statewide) and the ability to review proprietary practices, pricing, or customer lists revealed through litigation?  Fortunately, Iowa’s courts are empowered to protect your business’ trade secrets.

A recent Iowa Supreme Court opinion, filed June 26, 2015, identifies several protections that Iowa’s courts may employ to preserve trade secrets, including:

  1. Closing court proceedings to the public;
  2. Sequestering witnesses during testimony of other witnesses;
  3. Excluding parties from the courtroom when trade secrets are presented;
  4. Restricting attendance at trial; and
  5. Sealing transcripts of court proceedings.

Our high court also recognized “[i]t would be of little practical value to file a lawsuit to protect the confidentiality of a trade secret if the secret became part of the publicly available court record and was thereby lost.” In short, while our court system is open and public by design, sophisticated parties can and do protect their trade secrets in the court of law.

Click here to to learn more about whether your information may qualify as a trade secret in Iowa.
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Protecting Your Business’ Trade Secret in a Court of Law

UnknownSavvy business owners understand the value of protecting proprietary information, especially when the information provides a competitive advantage in the marketplace (commonly referred to as a trade secret).  What happens, however, when your business is unexpectedly defending claims in a public court system or protecting itself by filing a lawsuit in open court?  Will your business’ trade secrets be publicly exposed?  Will a competitor have access to the court’s public records (now online statewide) and the ability to review proprietary practices, pricing, or customer lists revealed through litigation?  Fortunately, Iowa’s courts are empowered to protect your business’ trade secrets.

A recent Iowa Supreme Court opinion, filed June 26, 2015, identifies several protections that Iowa’s courts may employ to preserve trade secrets, including:

  1. Closing court proceedings to the public;
  2. Sequestering witnesses during testimony of other witnesses;
  3. Excluding parties from the courtroom when trade secrets are presented;
  4. Restricting attendance at trial;
  5. Sealing transcripts of court proceedings.

Iowa’s high court also recognized “[i]t would be of little practical value to file a lawsuit to protect the confidentiality of a trade secret if the secret became part of the publicly available court record and was thereby lost.” In short, while our court system is open and public by design, sophisticated parties can and do protect their trade secrets in the court of law.

Click here to learn more about whether your information may qualify as a trade secret in Iowa.

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Follow State Law or Risk Negligence Per Se Claim

Iowa Court of Appeals - Negligence Per SeNegligence is a term commonly used by lawyers and non-lawyers alike.  But what does the term mean?  In short, this one word generally describes one party’s failure to exercise reasonable care, causing damage to another.  Recently, the Iowa Court of Appeals reaffirmed prior Iowa case law and found that an apartment complex’s violation of a city code – failing to place guardrails at forty-two inches high – is evidence (not conclusive proof) of the complex’s negligence.  While such a conclusion is not surprising on its surface, it is notable that the Iowa Court of Appeals chose not to follow “most” states and further conclude the violation of a city ordinance amounts to negligence per se; essentially, certain liability.

The Iowa Court of Appeals reasoned Continue reading

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Cybersecurity and Your Business’ Board of Directors

CA recent court opinion underscores the importance for a company’s board of directors to assess cybersecurity. As we’ve explored in several prior posts, directors are charged with exercising fiduciary duties, including the duties of care, loyalty, and oversight.

It is this latter duty – the duty of oversight – that resulted in a plaintiff filing a lawsuit against against his corporation and the corporation’s board of directors for failing to exercise proper oversight that purportedly harmed the company.

The opinion provides valuable insight into steps that directors may undertake to minimize potential liability (both to the company and personally) for such claims.  For instance, the court noted the asserted claims were potentially weak because the company implemented cybersecurity measures before the first data breach.

Further, the board addressed security matters “numerous” times before the breach.  Moreover, the corporation took time to enact security policies, reviewed those policies, and even hired outside technology firms to issue recommendations on enhancing security.  Had the company not taken such proactive steps, including before the breach occurred, the outcome certainly could have been different.

While there is no one-size-fits-all approach to data and cybersecurity, given the increasing threat such issues pose to companies, a board should at the very least consider data and cybersecurity in fulfilling it’s fiduciary duties.  Such consideration may result in no action being taken, or it may result in consulting with privacy counsel, technical experts, or insurance professionals to insure against cyber-related liabilities (including costs related to forensic analysis, breach notification, business downtime, credit monitoring services, and third-party claims).

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