Three Risks for Small Businesses

If you’re a business owner assessing risks and legal problems, there are three concerns that should be at the top of your list. Appropriately preparing for these risks can help you to avoid drawn out litigation and financial catastrophe.

1. Ownership disputes

Unfortunately, small businesses are more prone to ownership disputes and corporate freeze-outs than larger businesses. This is for a host of reasons, but one of them is because small businesses do not always adequately document their ownership structure. This can even be true in situations where there’s only one owner.

If you have a 50/50 business arrangement, do you have adequate safeguards in place to allow for what happens in a deadlock? Even with a larger board of owners, what happens when you have a tie? Or what happens when the board room becomes increasingly heated, and one group of voters feel that they’re being frozen out of the company by virtue of not having sufficient voting power? In all of these situations, expensive lawsuits can result, and the discord that goes along with such a lawsuit can kill your business success.

To avoid these problems, it’s important to have a sufficient operating agreement or bylaws to document contracts with highly compensated employees and ensure that frequent communication keeps your boardroom out of chaos.

2. Contracts with vendors

All too often, small-to-medium sized businesses rely on “course of performance” contracts, which are essentially unwritten deals between the business and its vendors. This can be acceptable when the deals are small and the amount of money being risked in each transaction isn’t enough to sink your business. It becomes very serious when large customers suddenly stop paying or large suppliers breach on essential terms of the contract and refuse to work out even a partial refund for their failures.

Businesses often find themselves in the difficult position of having to decide whether to bring an expensive lawsuit without clear contractual remedies to recover their attorneys’ fees and other costs. A business attorney can advise you on how to draft good contracts with your vendors that don’t tie anyone’s hands, and which allow for flexibility as your business relationship matures. This is another area where having a dedicated corporate council can be extremely helpful.

3. Insurance

Is your business properly insured? Having general liability and business insurance is important not just for slips and falls and delivery drivers, but also for situations where someone accuses you of using their artwork on your website, sues you for trademark infringement, claims you’ve violated the Americans with Disabilities Act, and more. Obtaining proper insurance means not only that you are covered for any damages that you are found to have caused, but more importantly, a good insurance policy will ensure that your attorney is paid by insurance and not out of your general operating budget.

Running a business doesn’t have to be risky

These are just a few legal risks you should consider regarding your business. Give us a call today to speak with one of our attorneys about how we can protect you from legal risks and help you maximize your business success.

What Should go in Your LLC’s Operating Agreement

Limited liability companies in Pennsylvania are organized by filing with the department of state. But the most important document that an LLC’s owners sign is the operating agreement. The operating agreement serves the same function that bylaws serve for a corporation. They are the constitution that governs the organization’s operations. The operating agreement is generally not filed with the department of state, nor with any other government agency. They are an entirely private document between the owners (called members in an LLC).

Operating Agreements are agreements between the LLC’s owners

The operating agreement is an agreement between the members and the organization itself as to how the LLC will be run. It lays out the ownership interest of the parties and provides for dispute resolution. Below are a few things that every LLC operating agreement should consider including:

  1. Ownership interest of the members.

The operating agreement is usually the first document to actually name who the owners of an LLC are. Indeed, it is often the only document to name the owners. The operating agreement should identify who the owners are and what their percentage interest is.

There’s a difference between beneficial and legal ownership in LLCs. Someone may have a non-voting interest in the LLC, meaning that they’re entitled to some of the profits of the entity without having any power to determine how the organization is run. Conversely, someone may have a high voting percentage but not necessarily a high ownership interest.

Most LLCs tend to keep it simple, however. If you have four owners, they each have 25%, or if you have two owners, they’re 50/50. But in the case of an even number of owners, what happens if there’s a tie? If the owners for whatever reason are unable to agree on how to run the organization on a very important issue, how do you break the deadlock?

  1. Dispute resolution provisions.

For this reason, a good operating agreement should include dispute resolution provisions. These provide that if the members are tied in an important vote, an outside party can be chosen as an arbiter. Sometimes this arbiter is named, but more often, a guide to how the arbiter should be chosen is laid out in case of such deadlock. In extreme cases, operating agreements that we’ve seen at our firm have dictated a coin flip to make a final determination. We certainly don’t recommend that! But even a coin flip is better than nothing in laying out ahead of time how conflict resolution will occur between the members.

Furthermore, having a plan in place sometimes helps everyone avoid such conflict. Knowing that an important vote might be left to a coin flip or an outside arbiter encourages the members to work harder to resolve things before invoking such provisions.

  1. Oppressed minority owner provisions.

In cases where there is a majority owner and minority owner, or even where there are a handful of owners, sometimes you want to write in provisions of what happens if one person or more feel like their interests are no longer represented by the whole. As a simple example, if you have six owners and two of them feel that the other four owners are “forcing them out” of major decisions, what rights do these two have?

When LLCs form, the members are usually getting along. But divorces, inter-personal fights, business or artistic disagreements and more can get in the way. If the majority is outvoting the same minority repeatedly, the minority can begin to feel as though their ownership interest is no longer valuable.

Although Pennsylvania law provides a number of avenues for minority owners to address this, its best if you spell out provisions in your operating agreement to govern these situations. Doing so also avoids fights in many cases by giving everyone ways to avoid conflict before it starts, and by spelling out how everyone loses if anyone is being pushed out.

  1. Indemnification of officers and members.

Another thing to consider in your operating agreement is having a clear statement about indemnifying officers or members for their work in the company. In the event that an individual is sued for their work with a company, the question often becomes whether the company should have to pay their legal bills. Making sure that your owner members aren’t left to fend for themselves if sued is an important step to maintaining the long-term commitment of all investors to the company.

  1. Buyout provisions.

Perhaps the most important part of an operating agreement is a statement about how a member’s interest is bought out once they’ve decided to sell. This happens both when a member sells voluntarily and involuntarily due to bankruptcy or other proceedings. Will the membership interest be appraised? Must it be sold first to other members or to the company? Or can they sell to an outside investor? These and other important questions should be resolved up front before the problem arises. Doing so can avoid costly litigation and unintended consequences of having an unexpected member buy in from the outside without warning.

Conclusion: Speak to a business lawyer about your LLC operating agreement

If you’re forming an LLC in the commonwealth of Pennsylvania, there are advantages to hiring an experienced business lawyer to help you. At Cornerstone Law Firm, our attorneys help draft operating agreements that foresee the types of problems that you may run into even with a single business partner with whom you’re on good terms. A good operating agreement is not a tool to start fights with; rather it can help to prevent conflict down the road.

Call us today to discuss how we can help you in your business.

How Businesses Use Small Claims Court to Save Money

One of the best kept secrets in business law is how companies can use small claims court to save money. In Pennsylvania, Magisterial District Courts (sometimes called “MDJs” for the Magisterial District Judges that sit in them) act as our small claims’ courts. Learning to navigate them can save time and money. MDJs have concurrent jurisdiction with the county Courts of Common Pleas for claims up to twelve thousand dollars, meaning you can file your claim in “big court” or in the MDJ.

Suing Without an Attorney

When small businesses have minor claims against business associates or customers who haven’t paid bills, the MDJs are a great venue to consider. Going to court in an MDJ does not always require the services of an attorney. Technically, any corporate entity, whether an LLC, a corporation, or similarly otherwise, is required to hire an attorney. This is because a corporate entity cannot represent itself the way an individual can. A corporate entity is technically a separate person. However, in practice, most MDJs allow a business to be represented by an owner or other representative pro se. As a practical matter, this means that businesses can pursue overdue bills, deadbeat tenants, and contract-breaching business associates without the expense of hiring a lawyer.

Of course, there are many benefits to having a lawyer, but even businesses that utilize the services of a corporate attorney will seek advice from this attorney on a specific case before deciding whether to undertake filing the suit and handling it themselves.

Small Claims Court is Quick

Another reason that small businesses utilize small claims court in Pennsylvania to save money is because the process to file in the MDJ is fast and leads to a hearing usually within around sixty days. Compared to filing in the Court of Common Pleas (the court that governs a county), this is lightning speed.

The MDJ will have one day of hearings, without any “discovery” process for producing documents between the parties, and without the litigation that accompanies the months of waiting on a response. MDJs don’t require complicated pleadings, and typically make a decision the day of the hearing or within a few days thereafter.

Small Claims Court gets the attention of your adversary

A final benefit to the MDJ process is that it is typically a simple way to get someone’s attention. It shows that you’re serious about collecting an overdue bill and triggers them to pay an attorney or at least respond. If they fail to show up to court, judgment is issued against them. Although you have the right to appeal from an MDJ decision within 30 days, as a practical matter, it often ends disputes and allows the parties to settle in the courtroom.

Conclusion: Call us for advice on how to handle your MDJ hearing

Our attorneys have helped business clients with hundreds of appearances before MDJs, and we’re ready to help you.  Call us at Cornerstone Law Firm today to discuss how your business could save money by utilizing small claims court.

Non-profit Best Practices

When you are on the board of a non-profit organization, you are handed the important trust of ensuring that your organization is complying with all legal obligations and is adhering to financial best practices in how it handles donor money. In addition to having a good accountant to help you figure out the best way to handle funds, it is important that you keep up with legal requirements for your non-profit. Here are a few important steps every non-profit should take to ensure long-term stability and legal compliance.

  1. Draft a Constitution and Bylaws

Most people are vaguely aware of the requirement that non-profits have bylaws that govern their existence. Once a non-profit is properly formed, it is important to have an operating agreement that governs the rights and responsibilities that directors, officers, employees, and even sometimes the general public have in regard to the non-profit. This includes answers to the following questions:

How many members are on your board?

How many committees will the board have?

Will you require more than one signature on checks before expenditures of a certain amount are made?

Does your organization hold to a specific statement of faith or political creed (and what hiring and other decisions will this affect)?

In your bylaws, these questions should be answered. They do not have to be lengthy and shouldn’t be hard to understand. Your bylaws should be setup like an owner’s manual—but one that you’ll actually consult! Good bylaws are empowering, allowing everyone to know their obligations and responsibilities, and foreseeing how to resolve difficult conflicts that inevitably arise in even the best-run non-profits. Best of all, a good set of constitution and bylaws relieve everyone of the nagging fear that they’re not doing something right.

A common question we hear is what the difference is between a constitution and bylaws. As you can see above, we’ve used the term interchangeably. There once was a difference, but today, one document, called the “bylaws,” is more than enough to get your organization set and running on the right path.

  1. Draft Resolutions and Keep Meeting Minutes

Once your bylaws are in place, it is important to produce “meeting minutes” at all of your meetings. These minutes can be the notes that your secretary takes, but ideally are typed up in a standardized format, reflecting the general flow of discussion of the board, and approved at the following meeting after everyone has had a chance to see them.

So what’s the point of meeting minutes? Meeting minutes act as the history of your organization showing what actions were authorized or rejected at various meetings. At first, it can be tempting to rely on one individual’s memory or on the board’s collective memory for these actions. However, in the case of legal action against the board by a donor or government agency, or even by a disgruntled board member, having meeting minutes can strongly support the validity and propriety of actions that the board has taken on behalf of the non-profit.

Furthermore, organizations which keep track of minutes and are consistent with them provide helpful information for new board members and new officers of the organization to look back on and understand the trajectory of your organization. Meeting minutes are one of the first things to be sacrificed by non-profits who have just formed. Often, officers and directors feel that they are a lot of work to keep up with. But meeting minutes are a vital form of guaranteeing that your non-profit is operating according to law and protecting it from threats within and without.

What is the difference between minutes and resolutions? In general, minutes are for meetings that were held, while resolutions are actions the board takes by vote without a formal meeting being called. They are number of situations where this is necessary and many more situations where it is merely the most convenient. Sometimes the organization authorizes bonuses annually, or an emergency comes up in everyone’s absence. A resolution can be signed by everyone authorizing action and confirming that the board is in agreement with a specific proposal.

There’s no reason that meeting minutes are required over resolutions or resolutions over minutes. Both serve the same essential function in different ways.

  1. Ensure no excess benefit

For smaller nonprofit organizations, this piece is easy, but as you grow, it presents new challenges. You must avoid excess benefit to any individual or group of individuals arising out of a nonprofit’s property. A few examples of this are when your organization enters into a transaction with a private party or group to give them a piece of real estate at less than full value. Any property exchanged that is not in an “arms-length transaction” can fall under suspicion and can put the nonprofit corporation at risk. Another common example is when an executive director and his family are all driving vehicles owned by the corporation, making money off of their private company’s services to the nonprofit, and bringing in large paychecks from the nonprofit for their labors. While any or all of these can be legal, they must be done in a way that does not transgress the IRS’s rules on excess benefit.

This is a complicated area of law, and sometimes the best you can do is manage the risks. But working with an experienced nonprofit attorney is an important step in ensuring that your nonprofit doesn’t lose tax exempt status or otherwise expose itself to lawsuits or other challenges.

Conclusion: Contact a Non-profit Lawyer today

At Cornerstone Law Firm, our attorneys help nonprofit boards and leaders to manage their legal responsibilities and ensure compliance with best practices. If your organization could use a helping hand, call us for a consultation on your next steps.

January 2021 Update

Attorney David Crossett has continued working through personal injury claims for car accident victims in Reading, Pennsylvania this month. Speaking of clients who are concerned about whether their car insurance was sufficient during a car accident, Attorney Crossett explains: “Clients who are ‘limited tort’ should not assume their insurance will not cover their injuries, especially when the injuries are catastrophic. We don’t want to see clients give up their rights in those situations.” Attorney Crossett’s work has also included mediation with judges in attempts to help clients resolve their conflicts outside of court.

Meanwhile, Attorney Joel Ready has been handling a number of civil rights matters, including for violations of the 1st Amendment. “Harassment claims, in particular, bring an important legal issue into the crosshairs,” Attorney Ready explains. As part of his work in this area, Attorney Ready appeared on WFMZ to speak about the First Amendment’s application to private life and employment issues.

Finally, Tim Crossett, Cornerstone’s Firm Administrator, has been working on the launch of the all new web-show, “Business in Berks,” a series of interviews with local business owners about the challenges of 2020 and beyond. The show goes live in February on our youtube channel.

At Cornerstone Law Firm, our attorneys and staff are hoping that 2021 is more pleasant for the world than its predecessor! We look forward to helping you in the coming year.

The Importance of Putting it in Writing

One of the most common causes of legal disputes is the failure to get an agreement, however small, in writing. Today, on the Cornerstone Law Blog, we want to tackle why it is so important to put your thoughts in writing when you and a friend or business associate are agreeing to a contract.

To begin with, it’s important to note that agreements are typically binding even if they are not in writing. Contrary to popular belief, most oral agreements are legally enforceable — if you can prove them (although there are exceptions, such as when dealing with land, with contracts for goods over a certain price, and in certain industries such as home improvement).

So why is it important to get your agreement in writing if it can be enforced even without a written document?

Why get it in writing?

  1. The most important reason is it is hard to prove what an oral agreement was for.

    Unscrupulous parties can lie about what was agreed to, and even when everyone is being honest, people’s memories tend to fade surprisingly quickly. Relying on someone else’s memory to agree with your own is a recipe for disaster in enforcing your contracts.

  2. Misunderstandings are harder to smoke out and deal with when a contract is not written down.

    It may sound funny, but there have been many lawsuits litigated over something as simple as the meaning of “here.” If someone agreed to bring a product “here,” where is “here?” If the agreement was made over the phone, one person may have assumed that “here” meant someone’s home, when in fact they meant their business some many miles away.
    Sometimes this type of disagreement can be cleared up easily, but in other cases it can be a mistake that can cost substantial sums of money.

    The point is this: without putting something in writing and taking the time to clarify simple points of misunderstanding, you can end up in a contract dispute that neither party brought about by their malice or ill will.

  3. It helps you to think about things that you weren’t really considering when you first made the contract.

    If two people get together and agree orally to a “handshake deal,” they may not be thinking about questions such as, “What happens if a pandemic shuts down the world and one side can’t deliver the product because the government won’t allow it?”

    And what happens if there is a good-faith dispute over the contract? Do the two of you first have to go and deal with it in front of a board of arbiters, or do you got straight to court? And which court? Where can you be sued? What do you do if a labor shortage or a war in another country suddenly makes it impossible to get the raw materials necessary to produce the product you’ve ordered? 

There are hundreds of potential questions that a good transactional lawyer can help you to work your way through. Even without the involvement of a lawyer, there are things you may think of as you put the agreement in writing that will help you to confront potential misunderstanding and disagreements that will cause problems down the road. 

How can you put it in writing without being overly difficult?

Sometimes business owners in particular are concerned that continually putting contracts in front of their clients or customers will cause them concern and will scare them off of working with them further. In most cases, this concern is not well-founded.

Most customers understand and even appreciate the time that you will take to put things in writing. But if they don’t or if you are concerned that the time necessary to reach a written agreement will make it difficult for you to continually get new contracts drafted, one approach is simply to put everything into an email or even a text message.

Once again, putting everything in writing will help you to confront disagreements that may arise between you and the other party. In most cases, it is best practice is to say, “Are you in agreement with all of these things?” at the end of the email (or something to that effect). Getting them to respond back will in many cases create a binding written contract between you two. 

Note: this article is not meant as legal advice.

There are specialized areas of law where a simple email or text message is not sufficient. It’s important that you talk to a lawyer about your specific concerns. But in the meantime, we hope that the tips in this article will help you in your day to day business and personal affairs to ensure that your contractual agreements are being memorialized in writing.

For help in drafting or reviewing contracts, contact Cornerstone Law Firm today.

Cornerstone Law Firm in the Greater Reading Merchandiser

Cornerstone Law Firm is honored to serve the Berks County, Pennsylvania and beyond. We’re happy to solve your legal problems, even through the uncertainty and stress of the current coronavirus (COVID-19).

In this month’s Greater Reading Merchandiser, we’re sharing a little bit about ourselves and what we’re doing to make sure your legal needs are still met! Check out are ad:

april 2020 merchandiser

For more information about how we can serve you, contact us today!

Injunctions for Breach of Contract

Contracts are formed when two or more parties reach an agreement that involves an exchange of promises. When one party breaks their promise and fails to reform their obligation on their contract the other party to the contract often asks, “Can I seek an injunction requiring the other party to perform?”

Injunctions Court Orders Requiring Performance

An injunction is a court order that requires someone to refrain from doing something you don’t want them to do or requires them to do something that you want them to do. We’ve discussed injunctions elsewhere on the blog. However, it is important to know that injunctions are typically very difficult to get in contract cases, even in fairly extreme situations. Injunctions require an irreparable harm (that is, something other than monetary damages).

In other words, you have to be able to show a court that if the court doesn’t act, you will suffer damages that can’t be adequately compensated by money. In most situations involving a breach of contract, that is not possible. Rather, if a party breaks their promise, they can pay you the damages that theirs breach has caused you.

Damages

There are several different ways that you can measure how you have been financially damaged by someone’s failure to perform their agreement under a contract. The bottom line is the court will seek to place you in a position where you are made whole and put in the same position that you would have been in had the contract been performed. However, this doesn’t typically include repayment of your legal fees, the costs and frustration of finding a replacement party to perform the contract for you, nor anything for the sense of moral outrage that people often feel when a promise to perform under a contract is broken.

Conclusion

You may not be able to obtain an injunction regarding your contract, but this doesn’t mean that you should ignore the problem or not pursue it in court. Legal action regarding a breach of contract will often jolt the other party into action. At the very least, it will allow you to recover the damages you’ve incurred as a result of what’s happened.

At Cornerstone Law Firm, our litigation attorneys can help you analyze your case. Call today to discuss your situation and let us know how we can help you. 

“I’ve been Charged with a Crime in Union County. What Now?”

If you’ve been charged with a crime in Union County, Pennsylvania and you’re wondering what happens next in the process, you’ve come to the right place. The responsibility of filing charges in Union County, Pennsylvania falls to local police departments as well as the Pennsylvania State Police who have jurisdiction to file charges. But ultimately the responsibility of proceeding with those charges belongs to the District Attorney for Union County, Pete Johnson.

Here’s the process that you will encounter if you’ve been charged with a crime.

Preliminary Arraignment and Preliminary Hearing

union county court

We’ve written before about preliminary arraignments and preliminary hearings in criminal cases. Union County’s process is not different in that the preliminary arraignment and preliminary hearing are the defendant’s first opportunity to hear the charges against him or her and to hear the evidence that the Commonwealth has to prove the crime.

The bar for the Commonwealth to prove their case in a preliminary hearing is very low. The Commonwealth need only prove that they have probable cause for bringing the charges. If they’re able to prove that, then the charges move forward to more serious stages of criminal litigation.

Omnibus Pretrial Motion

Assuming the Commonwealth is able to meet its burden and move past the preliminary hearing, the next stage in the process is for the defendant if they wish to request discovery and file an omnibus pretrial motion. This motion allows the defendant to challenge the charges against them and to have them assessed at a much higher standard that is construed against the Commonwealth.

If the Commonwealth will be unable to meet its burden, the charges will be dismissed. Omnibus pretrial motions are a unique opportunity for criminal defendants to bring a motion to suppress evidence or to bring a habeas corpus motion to have the charges dismissed entirely.

Disposition and Trial

Most cases in Union County, Pennsylvania are resolved at a disposition hearing long before trial. This is an opportunity to reach a plea agreement with the Commonwealth, enter into a diversionary program such as ARD (accelerated rehabilitative disposition) or to reach some other arrangement. Disposition hearings are typically where an experienced attorney will have worked out the best deal possible for a client.

However, many criminal defendants don’t wish to plead guilty. They want to go forward to trial. This might be because the deal offered is not very good or because they believe that in principle they are right and shouldn’t have to agree to some sort of deal. In this case, it is absolutely vital to have an experienced criminal defense attorney who is able to go forward to trial and handle the charges by aggressively challenging the Commonwealth’s case.

Conclusion

At Cornerstone Law Firm, we help criminal defendants in Union County to defend against criminal charges by defending them at all stages in the litigation process, including at trial. Call us today to discuss your charges and to have a free consultation on what we can do for you.

What is Impeachment?

Continuing our “Cornerstone on the Constitution” series, we have received a number of requests to answer, “What is impeachment? How does it work? What are the results of the impeachment process?” Although impeachment is one of the hottest political topics in America right now, it is relatively misunderstood.

Impeachment is authorized in the Constitution for all officers of the government of the executive and judicial branches. While the House and Senate retain the power to expel their own members by a vote of their own house, the members of the executive and judicial branches have to be removed by the specific process of a majority vote in the House and two-thirds majority in the Senate. This is done to protect the independence of the executive and judiciary from the legislative branch.

Background

impeachment

It may be hard to believe, but at the founding of the country, the founding fathers were mostly concerned about the potential for abusive power in the legislative branch. They believed that Congress would attempt to arrogate all power to itself and rule the country without the input of the other two branches.

Indeed, Congress is the most powerful branch in the Constitutional frame of government. Congress can limit the president’s salary, define his authority over foreign affairs to a large degree, fire all of his staff and even auction off the White House if they so choose! Accordingly, it’s not surprising that Congress also retains the power to impeach the president if they believe that the president is abusing his power.

Cause for Impeachment

The Constitution allows impeachment of the president in the case of “high crimes and misdemeanors.” Despite the best efforts of historians and legal scholars, this phrase remains largely undefined. It certainly seems to imply that an actual crime must have been committed, but the debates in the Constitutional Convention about the phrase suggest that it was meant to be a check on an abuse of political power even if it were not necessarily able to be defined as a crime.

The use of the word “high” in response to these crimes strongly supports the argument that these are meant to be more than “minor” crimes that are the subject of an indictment. Simply put, if the president is caught jay-walking, that is probably not going to be legitimate grounds for impeachment. 

However, the situation is somewhat complicated by the fact that the Supreme Court has ruled that federal courts may not interfere with the process of impeachment. Put more simply, they have determined that it is a “political question” that is left to the legislative branch and the legislative branch alone to determine. Accordingly, there is no right of appeal from the removal from impeachment, and it is permanent. 

Impeachment Myths

So, let’s tackle a couple of common myths about impeachment.

  1. First, impeachment is not removal from office. Think of impeachment as formal charges being brought against the president of the United States by the House. A group of “prosecutors” from the House are selected to bring the case against the president, and the Senate is the jury.

    The Chief Justice acts as the judge in any trial would act—ruling on the admissibility of evidence and keeping order in the Senate chamber. This is the only time that a judicial official is constitutionally mandated (or permitted) to preside over any proceeding in any other branch of the government.
  2. No, impeaching a President doesn’t mean he is ineligible to be President again. Conversely, it also doesn’t mean he can run for a third term. And impeachment does not remove the president—it only sets up his trial in the Senate. Our two previously-impeached presidents were not removed from office and served out their term in the White House.

No one can say for sure how this impeachment process will end up, but we hope this overview helps you understand this very important constitutional process!