small business

What is the Business Judgment Rule?

by Fred Abramson on March 13, 2013

There is no shortage of  examples of corporate wrongdoing. Officers and directors have been using the business judgment rule as an excuse for corporate malfeasance since the stone age. The defense is used in complex cases, such as mortgage backed securities indiscretions, to the relatively mundane where officers are accused of purchasing New York Knicks season tickets out of the corporate till for personal use.

New York Knicks logo

The business judgment rule, which began as a minor exception, is now so strong a winning argument that the only fun left is trying to prove that it  does not cover absolutely all forms of corporate stealing. 🙂

WHAT IS THE BUSINESS JUDGEMENT RULE? 

If you are an officer or director  of a corporation then you are responsible for managing and directing the business and affairs of the corporation. The larger the business, the more challenging the issues the officers face. Should your fashion tech start-up expand and open up a store? What if the lease is in a building that your family owns and the terms are unfavorable for the company?

If you own a business and have partners and shareholders, you don’t want to be scared that you will be subject to an expensive lawsuit if things don’t work out. However, if the officers and directors are acting against for personal gain and against the interest of the other shareholders, who should be to blame?

The courts have given large leeway to the decisions the directors and officers must make.

Under the business judgment rule, the officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority, so long as the transactions are made in good faith and with reasonable skill and prudence.

When lawsuits focusing on the businesses judgement rule are commenced, they are usually highly fact driven and subjective. Was the CEO acting in good faith or did she have dual allegiance? In the example regarding the fashion tech start-up, the issue regarding dual allegiance is relevant but you may not win on that alone.

If you are an office or director and there comes an issue where your business judgement may be called into question, I would suggest that you disclose any potential conflicts up front. Open communication and fostering a business environment based on trust is the best preventive medicine.

The Law Office of Frederic R. Abramson represents business in New York. If you have questions about corporate governance and the business judgement rule, feel free to call me at 212-233-0666. 

Legal issues Comparing Loans and Equity Investments

by Fred Abramson on July 5, 2011

Lemonade Stand

Image by cmiked via Flickr

When starting a business, you probably need to finance part of it. After looking at you own pocketbook, which usually includes any savings, raiding your retirement account or if you are lucky any inheritance money from Aunt Matilda you probably need more money. There are two sources of outside funding: equity investment and loans.

Loans: The Pro’s and Con’s.

You probably don’t need me to tell you what a loan is. If you want to open a lemonade stand, your parents lend you $10 with interest of 2% and you promise to pay them back with interest at a later date.

While your dad was able to simply open his wallet to provide you with an infusion of $10 when you were eight, he might not be able to lend you a more hefty sum now. One step is to contact a commercial lender. I have the name of a fantastic bank lender that could help you out. However, the bank needs to make sure that it will be paid back. This requires security, often in the form of a mortgage. Bank loans often require a personal guarantee, which means that you are responsible if the business fails.

The big plus of obtaining a loan as compared to selling an equity stake is that if your business becomes successful and your profit is larger than you interest payment, you keep everything in the future and do not have to share them with investors.

If you have equity investors, you do not have to repay the investment that your investors put into your company if your business fails. However, you can also be subject to a lawsuit by your investors if they think that you misinformed them. Since an equity investor is a shareholder in the company, they may also require a voice in the running of the business.

The Law Office of Frederic R. Abramson represents start-up businesses in New York. If you have a question regarding equity investments and loans feel free to contact me at 212-233-0666.

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Creating Bylaws for Your New York Corporation

by Zachary Nathanson on June 1, 2011

Cover of guideline document by United Steelwor...

Image via Wikipedia

How can I set internal rules within my company to help resolve disputes in the future? The answer is your next step in forming your corporation or start-up. After creating your articles of incorporation, you must now create bylaws. Bylaws are contained within a single written document and dictate the operating standards and procedures of your business entity. They are your way to set internal guidelines and procedures for your new company.

The standards set out in your bylaws will follow through the life of your business entity determining what it can do. You are not required to file bylaws with the Secretary of State in New York, but you must keep a copy of them at your principal place of business. Typical bylaws will contain the following:

  • Documenting your identifying information, such as: the name of your organization and where your office(s) are located
  • The number of corporate officers and directors: you should include the members of your organization including your board of directors and the range or specific number of those directors.
  • The election of your board of directors and how they will function.
  • Committees: the specific roles of any special committees including formation, how their appointed, and their duties.
  • The shares and stock classes that the corporation can issue.
  • Information concerning director and shareholder meeting protocol, the extent to the liability arising out of the performance of their duties, conflicts of interest, and corporate record keeping.
  • Specific procedure in amending bylaws and articles of incorporation.

Bylaws cover far more specific topics than the Articles of Incorporation including the corporation’s organization and structure. They are what give your company direction. What difficulties are you finding when creating your LLC’s or corporation’s bylaws?

The Law Office of Frederic R. Abramson represents start-ups in New York. If you have any questions regarding bylaws feel free to contact our office at 212-233-0666

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3 Important Ideas on How to Attract Angel Investors

by Fred Abramson on January 7, 2011

Angel Investing is expected to pick up in 2011. In the past, tapping a home equity line of credit was a critical way for entrepreneurs to fund their business. But since that avenue for for borrowing has dried up, entrepreneurs have had to look for alternative ways to fund their business. Todd Taskey, writing in Small Businesses Trends takes a “look behind the curtain” to see how one very successful angel investment group tracks and considers its investments.  He looks at 3 factors- 1) Pre Money Valuation, 2) Liquidation Preference and 3) Market Perspective.

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Top Ten Legal Mistakes Made by Entrepreneurs

by Fred Abramson on November 8, 2010 · 1 comment

The life of a start-up can be like riding the Taconic State Parkway, a single mistake can cause serious damage.   Many entrepreneurs try to “play lawyer” to try to save money.  I don’t really understand the concept.  Simply because you know how to change the oil in your car does not make you a mechanic.

Recently Harvard Business School professor Constance Bagley made  a list of the most frequent legal mistakes made by entrepreneurs, everything from hiring the wrong lawyer to puffing up the business plan. I bring you his list, along with my 2 cents.

  1. Thinking any legal problems can be solved later. If you are an entrepreneur, you don’t need me to tell you that you are probably engrossed by your idea. You think night and day about bringing your business to market. I see it all of the time. But when it comes time to thinking about the legal implications 0f your ideas, you procrastinate. “We don’t have enough money.”  “Let’s focus on producing the best product and we’ll deal with the legal issues later.”  Huge mistake.  Legal issues not addressed at the start, such as an inexpensive contract with a web developer can result in expensive litigation later.
  2. Promising more in the business plan than can be delivered and failing to comply with state and federal securities laws. In your business plan that present to potential investors, you have to be honest about valuating your business. If your valuation has no reasonable basis, you can be sued for fraud.  Be aware that there are securities laws that protect your grandmother’s friend Matilda from investing in your venture.
  3. Disclosing inventions without a nondisclosure agreement, or before the patent application is filed. Non-Disclosure Agreements also known as NDA’s are surprisingly cheap for a lawyer to draft. For less than an iPad 3G you can protect your business from someone stealing your ideas.
  4. Waiting to consider international intellectual property protection. First off, my firm handles only trademarks so I won’t discuss the legal ramifications of patents.  However, if you have any inkling that you want you brand to go global, do an international trademark search and register.  You don’t need the headache of dealing with a trademark infringement suit with a company from China.
  5. Negotiating venture capital financing based solely on the valuation. Valuation is not the be all and end all when it comes to financing.
  6. Issuing founder shares without vesting. Some entrepreneurs are great at creating ideas, but hate running a business. If you are planning to start your company with a number of founders, especially a serial entrepreneur, you must protect the founders who stay.  If a founder exits the venture early, then you can get back the shares.
  7. Failing to make a timely Section 83 (b) election. Your eyes are probably glazing over this one.  But the Section 83(b) election is vital for tax purposes, especially if you plan on paying the founders shares rather than a salary. An 83 (b) election allows the tax computation to be made based on the value at the time the shares are issued, which is often minimal.
  8. Failing to incorporate. Without incorporating, your personal assets would be put at risk.
  9. Starting a business while employed by a potential competitor, or hiring employees without first checking their agreements with the current employer and their knowledge of trade secrets. Your employer can argue that the company is theirs, especially if you worked on your project on company time.
  10. Hiring a lawyer not experienced in dealing with entrepreneurs. It is amazing how many entrepreneurs contact my office and only focus on price. “How much do you charge to review my contract.”  Business law is a specialty and requires experience.  Many lawyers don’t understand the 83(b) election, which if improperly drafted, could cost you hundreds of thousands of dollars.  A Venture Capitalist will have a seasoned attorney representing them and they will provide you paperwork that may contain traps. Why risk it?

The Law Office of Frederic R. Abramson represents entrepreneurs and start-up companies. Contact me at 212-233-0666.

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Do you Have an Exit Plan for your Small Business?

October 18, 2010

On October 1, 2010, Gallup released a poll which found that nearly half of all small business owners may never retire. Incredibly  nearly half, 47%, of small-business owners now plan to never retire until forced to do so for health reasons — up from around 40% in 2007. Small business owners are also saying that they […]

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12 Things You Need to Know About New Small Business Jobs Act

September 27, 2010

President Obama signed into law today the Small Business Jobs Act. If you are an entrepreneur or run a small business, there are a number of key provisions that can help. Successful SBA Recovery Loan Provisions will be extended. The extension of these provisions provides the capacity to support $14 billion in loans to small […]

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Note to Small Business: There is no Lawsuit Plague

September 27, 2010

Mark Henkins, writing in bnet.com puts forth a persuasive rebuttal to the argument that our current “litigious” climate has produced an avalanche of frivolous lawsuits that have hurt small businesses. According to Mr. Henkins, the rhetoric espoused by this view goes like this: “Lawsuit abuse that clogs our courts and raises the costs of goods […]

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Nurturing Start-Ups is the Path to Creating New Jobs

September 13, 2010

Two-thirds of net new jobs are created by small businesses.  However, the National Bureau of Economic Research found that once the age of a business is taken into consideration, there is no systematic relationship between firm size and growth. According to the New York Times, nearly all job growth occurs when businesses are starting up. […]

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Your Small Business Must be Aware of 6 New Tax Laws for 2010

January 28, 2010

Image via Wikipedia 2010 tax year brings several changes to small business tax law.  I know, the thought of taxes isn’t a pleasant topic to think about, unless you are an accountant. However, a look now at the tax position of your company can help you assess how your business can benefit and comply with […]

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