Hidden Dangers of Representing Multi-Owner Businesses: Legal Pitfalls Accountants Must Avoid Presented by: David C. Roberts, Esq. Edward Kurowicki, MBA, CPA/CFF, CVA

2 Long Range Planning New companies Existing companies

3 Corp. vs. LLC vs. Partnership Unintended consequences

4 Corporations N.J.S.A. 14A:12-7 – Rights of minorities –“acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders” Can’t be waived

5 LLC’s and Partnerships No equivalent Depends ENTIRELY on how creation documents are worded LLC’s are creatures of contract Accountant’s involvement in creation documents = BLAME when an issue arises Tax status not determinative of legal status

6 Balance Between Helpful Business Advice and Subjecting Yourself to Liability Disclaim in retainer agreement Highlights issue spotting capabilities

7 Buy-Sell Aspects Formula used is important, but so is the issue of whether valuation should even be addressed Majority may want to know he can prevent minority withdrawal

8 Standards of Value Fair market value vs. fair value

9 Common Valuation Problems Shareholder perks Reasonable compensation Employment agreements Trade Secrets Unrecorded time Corporate governance issues Prior transfers of interests Rate of return – “Buying a job” Expectations Ignoring a provision in shareholders agreement that says to value every year

10 Salary Normalization Issues Can create liability Affects damages Affects value

11 Importance of Compliance Issues to Avoid Piercing the Corporate Veil Informality of closely held companies can be a trap Who really is the client? Communication with minority owners should be permitted up front, and carried out

12 Importance of Compliance Issues to Avoid Piercing the Corporate Veil Potential liability for the accountant? –N.J.S.A. 2A:53A-25 Accountant must have knowledge of a non- client’s reliance Reliance must be communicated back and forth –Pitfall – does NOT have to be in writing –Your word vs. minority shareholder’s –Conspiracy liability

13 Shareholder Oppression in More Depth Lack of dividend Paying personal expenses Overcompensation Lack of information Termination of employment Fictitious vendors/employees What if the accountant is aware of this?

14 The Case of the Company Where No One Takes a Salary – Only Distributions Fine as long as everyone is working What happens if someone leaves?

15 Remedies Available for Oppression Buy-out – either way Dissolution Damages Attorneys fees?

16 What Do You Do When You See the “Red Flags”? Books have suddenly become “secret” – unavailable Appears money is unaccounted for Lifestyle changes Family members suddenly on the payroll

17 Summary Distinguish yourself by knowing these issues Stick to issue spotting, rather than giving legal advice Expand your retainer agreement to point out what you are NOT doing Explain up front who the client is, and don't be lax about it Get written permission to keep everyone informed, and then do it

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Question & Answer Session Thank you for coming!