boilerplate contract | glasses on papers

So You Just Want a Boilerplate Contract?

Asking a lawyer to prepare a boilerplate contract is akin to fingers scratching a chalkboard. Lawyers hate writing them—or even being asked to write them—because they devalue their services. Clients only think attorneys love them.

Why Are You Asking for That?

For some reason (actually I know the reason), I have recently been asked by clients to prepare a boilerplate contract for them. Why? Well I suspect the obvious: that they are looking to save money or control their costs. I suggest that working with your lawyer to avoid runaway hourly fees is often a good thing, but doing that in exchange for a cookie-cutter contract is short sighted.

What Is a Boilerplate Contract Anyway?

Boilerplate clauses are contract provisions that do not bear any direct relationship to the subject matter of the contract. That is, they do not speak to any specific needs of the parties to the transaction or their business goals. In theory, these clauses could appear in any contract and not affect the terms of the transaction. They mostly affect the respective rights of the parties to the contract during the life of the contract and often afterward, particularly if there is a breach of the contract.

The basic idea is to use terms familiar to attorneys so that drafting the contract can take less time.

What’s the Problem with Boilerplate?

Where should I start? First, as stated above, the boilerplate contract mostly addresses legal rights, not transactional ones. In any contract, you must make sure that the terms of your deal are being completely and fully addressed. No boilerplate contract is going to do that for you.

Second, because they have become so commonly used, boilerplate clauses are often overlooked and not scrutinized to make sure they apply to the particular deal or how you are actually doing business with the other side. Rest assured, if there is a problem, everyone is going to be looking at the boilerplate contract to determine their rights. That is a terrible time to find out mistakes were made or important points overlooked.

Sometimes, the error can be as simple as a “cut and paste” error, which results in mistaken names or irrelevant clauses. Other times, the error can be substantial and result in increased litigation over what the “boilerplate” even means! So much for standard language. These types of clauses really should only be used as a starting point to make sure that important issues are raised. Then the particulars have to be focused on.

If you have been lucky enough to avoid litigation over the terms of a contract, you are very fortunate. Most contract litigation involves just that: a dispute over the terms of the contract and whether it can avoid a breach, minimize damages, or provide other remedies. It is an expensive way to find out what your “standard” contract really means.

Oh, and by the way, understand that in a hard case, the court may overlook or reinterpret the terms of your contract to fashion a relief for the party it feels should prevail. The more “boilerplate” your language looks, the more chance a court may find its own way to interpret it to find justice. Believe me, it happens.

So What are Some Boilerplate Clauses and What do they Mean?

Even with the potential problems, it is good to know what some boilerplate clauses are, what they address, and some potential concerns.

Costs and Attorneys’ Fees

In the event of a legal dispute, the party that loses must pay the prevailing party’s legal fees. Often, clients think that this will result in an automatic award of fees if you win. The problem is that any particular judge or court has their own view of what “prevailing” means in the event of any less than a full victory, or what it should have taken to obtain that.

Arbitration

Any disputes about the contract must be resolved through arbitration proceedings, not in a lawsuit. The common wisdom is that you can save legal fees through arbitration. This may be true, but arbitration is not necessarily inexpensive or likely to reach the right type of result. You need to consider the type of transaction you have.

Choice of Law

In the event of a dispute, which state’s law will apply to your lawsuit? In a case with all parties in the same state, this may not be an issue. The second an out-of-state party is involved, this clause needs attention because states have different laws on contracts.

Jurisdiction

How would you like to fight a lawsuit in a different county or worse, in a different state? It can happen if this clause is overlooked.

Waiver

Sometimes, a party gives the other party a break during the life of the contract. That party does not want this to become a permanent part of the contract. This clause allows such temporary deviations.

Severability

If a court finds that one of your clauses is invalid, this clause will save the rest of the contract from being declared invalid. Otherwise, the baby goes out with the bathwater, so to speak.

Integration

A boilerplate contract prevents a party from claiming that there were other terms that you agreed to that were not in the written contract. It also usually provides that any changes have to be in writing. This is a good thing unless you anticipate that you will be making many oral changes as you transact your business.

Notice

This is often overlooked or not specific enough. When the time comes to give the other party notice of a problem with the contract, you need to know how this can be done properly or risk the other side claiming that you failed to give prior notice. It also had to take into account that future notice locations may change.

Assignment

The last thing you want to find out is that the other party has transferred their rights under your contract to another party that you never dealt with.

Force Majeure

Pronounced fors- mazhoor’; also referred to as “Acts of God”, this clause establishes that the agreement will be suspended in the event of unforeseen disasters (such as earthquakes, hurricanes, floods, and so on).

Headings

This is a silly clause that says that the headings of each paragraph are not to be given any meaning. No doubt, somewhere, litigation turned on this issue.

Jury Trial Waivers

The expense and time of a jury trial is huge. Most if not all commercial contracts contain this clause.

Limitations on Damages

This is sometimes considered boilerplate, but experience shows that this will be a heavily negotiated clause if it is inserted. No one really wants to leave any money on the table in the event of a dispute.

Warranties

If anyone thinks warranties are boilerplate, they are sorely mistaken. This is where a dispute is going to arise in many conflicts.

Indemnity

These clauses, too, are not boilerplate. This amounts to a potential guaranty of paying for certain costs in a dispute. Often, insurance coverage concerns are relevant, but there is tremendous exposure here for the business owner.

Applicable Law

Even if you end up litigating in a different jurisdiction, you may want your local law to apply. This clause will allow that.

What Is the Value of a Boilerplate Contract to You?

No question, the use of a boilerplate contract can reduce the drafting time of a contract. For any agreement that involves any significance to your business, thinking that you can use a boilerplate contract runs a tremendous risk that your contract may work against you in a big way. For most transactions other than the simplest ones, it will benefit you to understand what such clauses are for and what they address. Your contracts, however, should be constructed for you or your business specifically.

Need to know more? Schedule a consultation with us.

web legal forms

Web Legal Forms Beg the Question: Do You Really Need an Attorney?

When it comes to running your business—especially if it’s a small business—you may be inclined to reduce costs wherever possible. One of those costs could be in legal services. Will web legal forms stand in place of hiring a good business attorney?

When Web Legal Forms May Be Sufficient

There are, no doubt, situations where simple web legal forms obtained for free or at a minimal cost will suit your purposes. But don’t trust everything you find. You need to be cautious.

While there are many web legal forms available, you have no assurance about the quality of these documents. They are often created to cover every conceivable situation but maybe not yours. As a result, instead of being complete, the forms you choose may leave many important issues unaddressed, which can, and often do, come back to haunt you.

Having said that, reviewing these web legal forms can save you money when you do meet with an attorney. If your situation calls for something other than a simple, straightforward matter, maybe these simple forms will be sufficient. Before you use such a form, however, spend a little time considering any legal implications and potential liabilities if the form is inadequate. If you are thinking that you probably need to have an attorney review the documents, then you should be listening to your inner voice. The money you are saving now could be very costly.

Use Online Forms to Help Facilitate Legal Conversations

You can prepare yourself for a useful legal consultation by doing some prep work. And web legal forms are a great way to do that. You may end up reducing legal fees and get the support you need.

A good way to use forms you find online is to focus your attention on the issues that you should be discussing with the attorney. That way, you can give the attorney direction about what you want to accomplish.

Using an online form can also help you think about answers to questions that the attorney might have. This may result in a more efficient (and less costly) meeting.

If you have an outline or form that you think is appropriate, and the attorney confirms that it is the correct form for your particular situation, you won’t have to pay the attorney to draft the entire agreement.

Poulos Law Firm Is Here to Help

As a small business ourselves, we understand how important it is to watch your costs. We offer cost-effective legal solutions for our clients, primarily due to our extensive experience and ability to apply it to your needs. If you have started with web legal forms and are ready for a legal consultation, give us a call. We’re happy to help.

business with friends and family | family business sign

Should You Go into Business with Friends and Family?

If there was a single piece of advice that I might give to clients who are considering going into business with friends and family, it would be to seek out every other possibility. As an attorney who has spent a great deal of time in litigation unraveling the horrible consequences when these relationships fail, I cringe whenever potential clients think about doing this.

10 Questions to Ask Before Family and Friends Become Business Partners

This excellent article poses a series of questions that, at a minimum, people should discuss with potential family or business partners BEFORE entering into the business relationships.

The questions suggested by the article are challenging and sometimes difficult to raise, but their beauty lies in raising questions about the expectation of both sides. The excitement of a new small business and potential to make money with people you trust and maybe love can be overwhelming. As a result, decisions to go into business together are often made for the wrong reasons. Or even worse, the reasons for going into business with friends and family are not the same for both parties.

Challenges of Going into Business with Friends and Family

When the stress of actually doing business enters the picture, and they will, the basis for the relationship is directly challenged. If the expectations were unspoken or misunderstood at the beginning, they will come out when things get hard. At that point, because of financial and relationship issues, things are going to go bad. And the shame is if this happens, the business is at risk and the relationship may lost forever.

As a final thought, look outside your friends and family if you can. If you cannot find someone else you can trust, treat the relationship as if you were entering into a relationship with an outsider. That perspective may save your business and your relationship someday.

Questions about your small business’s legal setup? Contact us to schedule a consultation.

increase cash flow | calculator with ledger

5 Steps to Increase Cash Flow for Your Small Business

As a small-business owner, collecting the money you are owed can be critical to your success. Especially in light of what is happening in the economy now, the ability to increase cash flow is imperative. Unfortunately, many of your customers might also be experiencing cash-flow problems now, which means that they are taking longer to pay their bills while waiting for their own income.

The consequences of even a few customers not paying can be dramatic for small business owners. You can take several steps at the beginning of a customer relationship that will increase the odds of being paid. Here are 5 steps that can help.

Step 1: Check Credit

At the beginning of any relationship with a new customer, you have the best opportunity to protect yourself. Before you offer any customer credit, it is a good idea to get a credit report done. If the customer will not consent (in writing, by the way) to your doing this then we suggest you make them a cash customer. While there may be some expense to you to get a report, it is likely to be cheaper than extending credit that you never are paid back. If they balk or refuse, “cash only” is the only way to go.

Step 2: Review Your Contract

Make sure your forms provide protection for you in the event of nonpayment. Before you send out your first invoice, you should have a completely filled-out vendor form that provides you with details about the customer and—most important—financial information, including where they bank. A continuing personal guaranty for any corporate debt should be required as well. Your form should also make provisions for late charges and—my favorite—attorney’s fees.

Step 3: Set Boundaries

Make a decision about when you will drop a customer if they are not paying. You should be tracking how many days late payments are. Your QuickBooks can age your receivables for you. When clients get to 30 days, contact them and talk about what is going on. If you think that the delay in paying is a temporary condition you probably want to continue to work with the customer, but keep them on a short leash. If you are sensing that the customer might be in a serious financial problem you have to consider making the difficult decision to cut them off. Communication is obviously important. When you make decisions about allowing the customer more time to pay, keep in mind that this decision will affect your profit margin not just your cash flow.

Step 4: Be Ready for Objections

“The check is in the mail” is a cliche that we all know to be meaningless. When confronted with this, meet it head-on with an offer to accept a credit card payment or PayPal. You may also consider telling the client that you will send someone to pick up the check or cash.

Step 5: Have an Out

When in doubt, discount. While no one likes to reward clients for not paying, sometimes having fewer dollars in your hand now is better than not being paid at all. Don’t be afraid to give a deep discount if your client is having problems. Giving up 10%is a lot less than you will give up to a collection agent or law firm.

Questions about How to Increase Cash Flow?

Having a business coach in your corner is smart to set up your processes and systems. But having legal advice is invaluable when those systems fall through. Poulos Law Firm can help you develop contracts and legal documents to protect your business. And ultimately, that can help to increase cash flow. Contact us to learn more.

foreclosure | home with foreclosure sign

Notifying Tenants about a Foreclosure

If you have a renter who signed a lease and your property is at risk of foreclosure, that renter may have some protections and rights that you should be aware of.

What the Federal Law Says

In 2009, the federal law known as the “Helping Families Save Their Homes Act of 2009” was enacted. The aim of the law was to keep in a foreclosed home as long as they had a bona-fide lease in place at the time of the recorded notice of foreclosure by the lender. However, this act is subject to a number of limitations. And unfortunately, many tenants are still left without proper recourse after foreclosure.

The law allows some tenants to finish out the term of their lease even after the foreclosure. For month-to-month tenants without a lease, they must be given at least 90 days advance notice of termination. This, of course, is only if the federal law applies to the tenant’s specific facts. In part, the loan that is being foreclosed is a “federally related” home loan. The law protects “bona-fide tenants” as they are defined under that law.

What Arizona Law Says

Arizona has a law that requires landlords to give written notice to tenants of the property to be rented if the foreclosure action was already initiated (Arizona Revised Statutes, §33-1331). If the landlord fails to provide the required notice, the tenant may terminate the lease, get a refund of the security deposit, and possibly obtain other relief. If the lease was entered into before the foreclosure action was started, then whatever rights exist will be determined by the lease itself. Some leases contain clauses that specifically state that the landlord may not allow the property to become the subject of a trustee’s sale.

Who Notifies the Tenant of a Foreclosure?

Not only might the landlord have an obligation to tell the renter, but if the building is managed by a Realtor or property manager, they may have the obligation to communicate with the renter as well. The answer will depend on the type of tenancy and other relevant issues, such as when the lease ends relative to the foreclosure date. The specific facts of each situation need to be properly analyzed before determining whether notice is needed or not.

Have questions about your rights and those of your tenants? Contact Poulos Law to schedule a consultation.

contract notice provision | glasses on contract

Is Your Contract Notice Provision Up to Date?

It’s just part of life and business that we get involved in contracts. Almost any contract that is properly drafted will have a contract notice provision, or clause. This clause states that the parties are agreeing to receive notices about matters relating to that contract. Unfortunately, this provision is almost always treated as an afterthought. It is, however, an item that should be periodically reviewed.

Why a Contract Notice Provision Matters

Unfortunately, the first time a contract is usually reviewed following the initial signing is when something goes wrong. And that’s only when personal visits, emails, or telephone calls aren’t working to resolve the problem. At that point, the aggrieved party is going to want to give formal notice of its claim.

The contract, of course, provides the address to use for notices. Based on the contract notice provision, once a notice is sent to that address, the time to respond clock starts.

What to Do If You’re Being Notified

If you have moved and not updated your address, your rights under the contract may be jeopardized.There is abundant case law that holds parties to strict compliance with these clauses. Most contracts provide that you can change the address for the contract notice provision, but you have to remember to actually do that.

If the other party complies with the notice provisions and you do not actually get the notice, your failure to keep it updated can be held against you.

When You Have to Give Notice

If a situation occurs where you have to notify the other party of your rights under the contract, pull it out and review what the contract notice provision says you have to do. Follow that procedure to the letter. You might think that an email or fax is sufficient. After all, “I know they received it” seems to be a rational thought.

Unfortunately, that may not be enough. And if the contract does not permit notice that way, it will be wholly ineffective.

Are Electronic Notices Sufficient?

While most business has moved into the 21st century and electronic communications, that does not mean that the law is keeping up. This lag is an ongoing discussion since general email services don’t typically provide confirmation of receipt. While you may be able to prove you sent notification, you can’t be assured of what happened on the other side. An email sent to the other party and to yourself, a common practice, is really not legally sufficient.

There are some services, such as RPost and Verisign, that can confirm delivery and receipt of emails. These companies take the position that their services meet legal requirements. They well may, but I have not researched any cases challenging their claims and would not want my clients to be involved in a test case.

Questions about Contract Notice Provision?

As an individual and business professional, you no doubt have many contracts you have (and will) signed. Instead of hoping that everything is correct and up to date, let’s take a look. Contact us to schedule a review and make sure you’re in compliance.

business books | single-member operating agreement

Single-member Operating Agreement: Do you need one?

When it comes to creating single-member operating agreements, some business owners are wary. After all, you are the only member. But could it be considered a type of insurance for your business? Take for instance if you live in a place where it rarely rains, such as Phoenix. Do you still own an umbrella? The likelihood is that you do. But getting wet is definitely not as severe a consequence as having your corporate veil pierced and your personal assets exposed.

“Do I Need a Single-member Operating Agreement?”

This question comes up a lot with small-business owners. As they launch their business, they file the proper documents for a limited liability company. Then they receive their articles… and never look back. While the odds are small that there will be any consequence of such lack of attention to detail, if the day comes that a claim is filed, the first thing you will be looking for is those papers to show you have no liability.

Even in Arizona, where an operating agreement is not required, failing or neglecting to have one just leaves you open to challenges. If a suit is filed against your company, you can be cross-examined about whether you were really operating a legitimate company.

The more you look and act like a corporate structure, the more immune your personal assets will be. A simple single-member operating agreement is another step in the process of protecting yourself. It should not be expensive, but like that umbrella, is nice to have if and when it rains.

Have Questions? We Can Help!

At Poulos Law Firm, we put our depth of experience to work for you. Contact us to learn more about our services and find out if you need a single-member operating agreement.

sole proprietor

Sole Proprietor? What Happens to Your Business without You?

As a sole proprietor, you and your business are the same. When you die as a solopreneur, so does your business. It may sound harsh, but it’s the truth. When you die, your family will have to sell any assets of the business (if you have any) to pay off debts. Anything left will be distributed according to your will. There will be no more income to support your family, and if your debts are substantial, your family gets nothing. That is a horrible result.

But you can change that outcome with some proper estate planning.

Create a Business Estate Plan

If you own a business yourself, all of your assets will be tied to the business. Not only do you need to determine now what will happen to your business when you die, you need to provide for your family—especially if they rely on your business income and salary.

That’s where a business estate plan comes in.

There are certain components you should include in your plan to protect your family and your business once you’re gone.

Life Insurance

Life insurance can be a game changer for a sole proprietor, especially if your revenue is the primary income source for your household. A life insurance policy provides funds for your family to live on once your income is no longer available. In addition, if you have a business partner, the money from insurance can be used to pay your partner or buy out your interest.

Important Documents

Don’t make your family wonder where all of your documents are, what’s in your queue in your business, or how to get things done. Organize your paperwork now. Include:

  1. Operations manual that outlines everything you do in your business as a sole proprietor.
  2. Organized customer list and database, whether in a note program, Excel, or CRM.
  3. List of your passwords for banking and any websites, such as your business website.
  4. Folder of important business documents and legal documents, including contracts, leases, or operating agreements.
  5. Durable financial power of attorney in case you are unable to make business finance decisions yourself.
  6. Complete personal and business estate plan. A trust can be a lifesaver for those a sole proprietor leaves behind.

Emergency Bank Account

When you die as a sole proprietor, your assets may be tied up for weeks or even months. Leaving an emergency bank account for your family to access for cash to pay immediate bills will provide much-needed comfort during their time of grief. That financial cushion also provides time to make decisions calmly without having to rush around trying to figure out how to keep things in place until decisions can be made about what to do with the business.

Instructions

This may be the simplest thing to do but the hardest to get done. Sit down and take the time create an instruction document for your family. Tell them where your important documents are. Leave them information about what must be taken care of immediately. Avoid leaving your family in the dark about what to do at a time when they are in the middle of grieving. If they have such a document or checklist, it will make it easier for them to step in and keep things running until they can get a handle on what to do.

For a Sole Proprietor in an LLC

All LLCs should have an operating agreement. Even single-member LLCs. In the state of Arizona, if you do not have an operating agreement, the state will provide one for you. That state mandate may not be what you want, though, especially if the LLC needs to be immediately dissolved and the assets disbursed.

Your operating agreement should say what happens in the event you or another member of the LLC (if there are others) dies. A sole proprietor needs an operating agreement just as much as a larger business does.

Get Help with Your Business Estate Plan

As a sole proprietor, your business means everything to you and your family. Make sure you protect it and them by planning now for your passing. Contact us. We have extensive experience in developing plans and ensuring that your wishes are fulfilled.

LLC considered community property

Is Your Share of an LLC Considered Community Property in a Divorce?

While thousands of LLCs, or limited liability companies, are formed every year in Arizona, that’s just the business entity. What about the people who are members of the LLC? If a member gets divorced, is the LLC considered community property?

Defining Community Property

Arizona is a community property state. That means community property law controls the division of all assets of the marital estate. All community property acquired during the marriage is generally divided equally when divorce occurs. The only exception is when the presumption of community property is overturned or if the property is separate property.

If you formed an LLC while you were married, should you get divorced, your spouse may have rights to half of the economic benefits you receive from the business. However, your spouse will probably have no rights to the management or control of the business.

The same holds true if you die as a member of the LLC.

In the instance that you die as an LLC member, your heir, representative, or other successor may be assigned the membership. Still, though, they will not have control or a say in the business.

If the business is truly your business and your spouse does not want any part of it, it is wise to document that with a proper disclaimer.

If you have partners in the business who are married, even if you are not, you should have a proper operating agreement, which addresses the rights of all spouses who are not active members of the LLC to make sure you do not end up with someone else’s spouse as your partner. That could be a disaster.

Pre-planning to Protect Your LLC

These kinds of situations are why you need to be prepared in advance. Contingency plans help protect your business. More often than not, in the event of a divorce or death, members may prepare an operating agreement with buy / sell sections to purchase the membership interest from the surviving spouse or divorced partner.

As you form your LLC, it is important to consult with a professional business attorney. They can help you plan for any contingencies in advance so you can protect your LLC and determine if your LLC is considered community property. Attorneys provide counseling on these issues and present alternatives for your unique situation; online forms just do not.

Poulos Law Firm has extensive experience with forming LLCs and can support you and protect your investment from community property laws. Contact us to learn more.

LLC protect you

Will Your LLC Protect You?

There’s a reason it’s called a “limited” liability company and not a “no liability” company. But just calling yourself an LLC and filing your articles of organization isn’t enough. If something goes wrong, that LLC alone won’t be enough to protect your personal assets. In fact, you may have completely overlooked creating an operating agreement, especially if you filed your own paperwork or hired a low-cost agency via the internet.

Sure, there are advantages in LLC ownership, namely that there is flexibility in management, and profits and losses can pass directly through to the owner’s personal income tax return while personal assets are shielded from liability. But if you don’t operate the LLC as a real and separate business, you may be asking for trouble.

Is Your LLC in Compliance with Court Regulations?

You’ve likely heard the term “piercing the corporate veil.” When a disgruntled employee, customer, or anyone else who wants a piece of your pie chooses to sue you, that corporate veil is what protects your personal assets. However, if the court finds that you disregarded the corporate form, you’ll be left wide open.

Here are some things a court may consider:

  • Did you disregard LLC formalities?
  • Did you provide enough capital to run the business or remove capital, leaving the LLC bone dry?
  • Did you use the LLC bank account as your personal piggy bank?
  • Do you and your LLC share phone numbers, address, etc.?
  • Were your decisions to benefit you or the LLC?
  • Did you personally pay or guarantee the debts of the LLC?

Protect Your Company’s Limited Liability

There are a few things you can do to protect your company and yourself. You first need to keep your LLC papers and actions organized as if someone were looking over your shoulder. And make sure that you separate your personal stuff and your LLC:

  • Keep separate bank accounts.
  • Pay your business expenses from your LLC’s account.
  • Do not put personal funds in the LLC account.
  • Do not use LLC funds for personal expenses.
  • Set a percentage ownership for each owner and distribute profits accordingly, or draw an annual salary for each owner of the LLC.

By keeping everything very black and white, you’ll protect yourself and your LLC. Treat your company like the precious creation it is; it may surpass your own expectations in the long run, and such rewards are priceless.

Questions about Your LLC?

Poulos Law Firm has extensive experience forming and protecting LLCs. Whether you are considering launching a business or have an existing LLC, we can ensure that your business and personal assets are protected. Contact us to learn more.

quitclaim deed to llc

Quitclaim Deed to LLC: Is That the Right Choice for Your Real Estate?

Protect Your Real Estate Investment

I am often asked by clients whether it makes sense to transfer a real estate investment property to a limited liability company. This is called a quitclaim deed to LLC. This question comes up for investors who own only a few residential investment properties. There is no question that this is probably a very good asset-protection strategy. By operating the rental property through an LLC, if you do it properly, you can protect your other assets from claims of third parties relating to the specific property.

Similarly, if you own more than one property, keeping each in a separate LLC will shield the others from being accessible to creditors who have a claim against the first property.

Keep in mind that you must observe the formalities of running each LLC like a business and not co-mingle income, expenses, or assets with personal ones or those of other LLCs. You should also speak with your tax professional about how to structure the LLCs for income tax purposes. Be aware that an LLC will not be protected from any personal claims against you since it is your asset.

How to Quitclaim Deed to LLC

A quitclaim deed to LLC is actually a very simple process. You will need a deed form and a copy of the existing deed to make sure you identify titles properly and get the legal description of the property. Legal descriptions are written in odd language that either describes where the original description was recorded with the county recorders office or language, called metes and bounds, that reads like a map with references to points, compass directions, and distances. A cover sheet may be necessary. You can do this yourself, but most attorneys will only charge $75 to $150 plus small recording fees to do this for you. A title company may also be willing to help you.

I would recommend language in the deed that in some way reflects that the transfer is subject to the underlying mortgage.

Will the Quitclaim Deed Violate My Mortgage?

This is another question that comes up frequently and, I think, is often misunderstood. The reason for the confusion is that most if not all mortgages contain a “due on sale” or “due on transfer” clause. This clause basically says that if the real property is sold or transferred, the mortgage becomes accelerated and the entire amount is due. This is also known as an “acceleration” clause.

When you took out the mortgage to buy the property, the bank made its decision to loan you the money based upon your income, credit, and the value of the real property. Seemingly, the transfer of the title to an LLC would trigger the acceleration clause.

Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982. 12 U.S.C. § 1701j-3(b)(1). That law provides exemptions from enforcement of acceleration clauses, including transfers on death and transfers to trusts.

Keep in mind that the mortgage with an acceleration clause does not prohibit the transfer but merely gives the lender an option to accelerate. There is no duty to report such a sale, but you probably should. Whether you should or not is something to decide with advice of counsel. I would recommend that you request approval from your lender and expect that most if not all will agree as their collateral is really not being undermined since you are still on the mortgage personally, not the LLC. In legal speak, the LLC has not “assumed” the debt.

A lender might accelerate the mortgage because of title transfer when the transfer presents additional risk to the lender. The lender is concerned about ensuring that payments on the note are made and that their ability to foreclose in the case of default is protected.

Do be wary of using “trusts” to avoid triggering the acceleration clause. Several people on the internet recommend such a ploy. I won’t go into it other than to suggest you do not do this without the advice of counsel.

Transferring Real Estate Ownership

These days, transfers of real property into LLCs is quite common. While technically a violation of a due on sale/transfer clause, the reality is that if the lender continues to be paid, even if through the LLC, it is unlikely that there will be any consequences. The prudent course is to notify your lender and get their written approval before you make the transfer.

If you have questions about how to do this, contact us. We’re happy to provide counsel in the process of quitclaim deed to LLC.

 

contract changes

How to Make Contract Changes and Amendments

There are many advantages in using standard contract forms if you do similar or multiple transactions. Often, such forms have evolved from earlier litigation battles and the editing of legions of attorneys. While I often counsel clients who are presented with such contracts to have them reviewed at the first transaction, they do have their use. Often, the use of such contracts might reduce disputes and legal action within the industry. Plus, most practitioners are familiar with them.

On some occasions, it is necessary to include specifics about a particular or specific project in the standard contract. Or some of the terms can change over time due to the evolving course of dealings between the parties. Amending the contract in writing gives you the opportunity to make contract changes without having to rewrite the entire document. It also tracks and documents the course of conduct changes.

How Not to Make Contract Changes:

Most contracts contain a clause that says that they can only be changed, amended, or modified in writing. For businesses that are engaged in a series of transactions over a period of time, maybe even years, that clause is a time bomb if there is a dispute. Why? Because odds are you will have modified the terms of the contract in practice, but if there is a dispute, you may be bound only by the terms of the actual contract. It can get ugly.

Oh, by the way, marking up the original contract with notes and changes then initializing them is another recipe for trouble. It never reads the same when you look back at it when there is trouble. And I can almost guaranty that someone is going to claim that the changes were put there after the fact.

The Right Way to Make Contract Changes:

Do it in writing. But make sure that the amendment clearly references the original contract and states that whatever is not being changed in the amendment remains as is. A basic format is something like this: Amendment to Contract Form.

Might I suggest that if you are doing business under this type of contract that you periodically take a look at it to make sure that you are still doing business the way the contract says you are. If not, get your pen out and make those changes.

Get Help with Your Contract Changes and Amendments

Keeping your contracts up to date and correct can be cumbersome. Poulos Law Firm can help. Contract us now to schedule time to review your contracts and make the appropriate contract changes.

Transferring LLC Membership Interests Part 3—Involuntary Transfers

An involuntary transfer of an LLC membership interest is just that—a transfer prompted by a creditor action or the occurrence of a triggering event outside of the member’s control. An individual or entity obtaining a membership interest as a result of an involuntary transfer usually cannot fully step into the shoes of the transferring member.

This statutory protection—often called a pick your partner provision—acts as a safeguard that provides LLC members with a certain amount of personal asset protection. For example, whereas the creditor of a corporate shareholder could reach and exercise shareholder rights to their full extent, the creditor of an LLC member can reach and exercise only the economic rights associated with membership interests—not the voting or management rights. The recipient of this type of membership interest is called an assignee.

Statutory Provisions – Creditor Action

If an LLC does not specify any transfer provisions, creditor actions are subject to state LLC laws. Each state, in its LLC statute, has provisions limiting what actions a creditor can take against an LLC member for personal debt. Depending on the state, the statutory remedies available to an LLC member’s personal creditors may include:

  • A charging order, which is a court order requiring the LLC to pay all the distributions due to the member-debtor from the LLC to the creditor.
  • A foreclosure on the member-debtor’s LLC ownership interest.
  • A court order to dissolve the LLC.

These remedies protect the other LLC members from the risk of having the creditor of a debtor-member step into the debtor-member’s place and share in the control of the LLC. To a varying degree, they also address the creditor’s right to satisfaction of the debt.

Transfer Provisions – Other Triggering Events

Transfer provisions are typically specified in the LLC’s operating agreement or in a separate buy-sell agreement. There may be some overlap with creditor actions, as these are often included as triggering events in the transfer provisions.

Examples of triggering events that can be specified in an LLC’s transfer provisions include the following:

  • A deceased member’s membership interest passes to a prohibited individual or entity
  • A member’s bankruptcy or other involuntary transfer of a membership interest to the member’s creditors
  • A member’s separation or divorce, or the transfer to a member’s spouse under property division or under a divorce or separation decree
  • A member’s membership interest becomes subject to a valid court order, levy, or other transfer that the LLC is required by law to recognize
  • A member’s breach of the LLC’s confidentiality
  • A member’s failure to comply with any mandatory provision of the operating agreement
  • A member’s failure to maintain a license or other qualification that disqualifies the member from engaging in the LLC’s primary business

If a triggering event occurs, the transfer provisions may prompt a mandatory redemption of the member’s membership interest or a right of first refusal to the LLC or to the other members. If an involuntary transfer does occur, the recipient of the membership interest—the assignee—typically receives only an economic interest in the LLC with no management or voting rights.

Transferring LLC Membership Interests Part 2—Voluntary Transfers

An LLC affords its members a certain amount of personal asset protection. Part of this protection hinges on the restricted transferability of LLC membership interests.  Restricted transferability protects the non-transferring members from creditors and unwelcome new members, which upholds the integrity and value of the non-transferring members’ membership interests.

  • Most (but not all) LLCs impose requirements or restrictions on the transfer of a member’s interest.
  • If the LLC’s operating agreement is silent on the transferability of interests, you must look to state law to be sure there are no default provisions restricting transferability.

This article, part 2 in a 3-part series, focuses on voluntary membership interest transfers done with the intent to grant full membership rights to the recipient.

Step 1 – Determine the Transfer Process

The LLC’s operating agreement should specify the process for transferring a membership interest. If the LLC has a buy-sell agreement in place, that must also be consulted.

  • Find the provisions that detail allowable transfers, the steps to complete them, and the method for calculating the value of the membership interest, if any.
  • The membership interests may be freely transferable but are likely subject to restrictions set forth in the operating agreement, the buy-sell agreement, or by state law.
  • Some transfers may be permitted without prior approval of the other members, such as transfers to a member’s immediate family or to a trust for the benefit of a member or a member’s immediate family.
  • The LLC or the other members may have a right of first refusal before a transfer can be made.

If the operating agreement or buy-sell agreement doesn’t specify the process for transferring a membership interest, you will have to look to state law. Once you determine the authority governing the transfer process—the operating agreement and buy-sell agreement or state law—be sure to note all requirements and restrictions.

Step 2 – Determine the Value

Calculate the value of your membership interest. If the operating agreement or a separate buy-sell agreement doesn’t address this, you will have to work with the other LLC members to determine and agree upon the value of the membership interest.

Step 3 – Follow Transfer Process

Complete the LLC transfer process as determined in Step 1. Make sure you follow all requirements. For example, if the operating agreement requires the unanimous written consent of all LLC members (a common requirement), meet with all of the LLC members to obtain their written consent.

Step 4 – Obtain or Draft the Transfer Document

 If the LLC does not have a standard transfer document, you will need to draft a transfer document.

  • Check the operating agreement or state law to determine what the transfer document must include.
  • Typically, it must include the transferor’s name, the LLC’s name, the recipient’s name, and the percentage of the membership interest being transferred.
  • If a form is not provided by the LLC, note that the form of the transfer document is usually subject to the LLC’s approval; make sure to obtain this approval if necessary.

 Step 5 – Execute the Transfer Document; Other Documents

 Sign and date the transfer document. Make a copy for your records, for the recipient, and for the LLC.

  • The recipient typically receives the original transfer document.
  • The LLC may have additional documents that the recipient must sign in order to be admitted as a member.
  • State law may require the operating agreement and certificate of formation to be updated with the new member information.
  • The LLC may pass the costs associated with the transfer to the new member.

Conclusion

Making a proper transfer of membership interests requires the transferor to jump through a lot of hoops. The first step in the process is determining which hoops are required. Taking the time to properly transfer membership interests ensures that the recipient obtains full membership rights and protection.

 

We offer proactive business planning strategies. We help businesses draft thorough operating agreements that provide clear directions to the LLC members—to exercise membership interest transfers and other important member rights. We also assist existing LLC members who want to properly transfer their membership interests in the absence of a thorough operating agreement.  Contact us today to learn more about our business services.

Transferring LLC Membership Interests Part 1—An Overview

Say you are a member of an LLC. You own membership interests in the LLC. But what if you want to leave the LLC? What if you get a divorce? What if you have creditors seeking immediate repayment? What can you do with your membership interests? The answer depends on how transferable those membership interests are.

A transfer of LLC membership interests can mean selling, donating, assigning, or gifting—basically one LLC member turning over his or her membership interests to another individual or entity. The transfer can be voluntary or involuntary.

● Examples of voluntary transfers include selling membership interests to a third party or to the remaining members, donating membership interests to a charity, or leaving membership interests to a trust upon death.

● Examples of involuntary transfers include those prompted by divorce, bankruptcy, and termination of employment.

The transferability of LLC membership interests is subject to competing interests. On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out of—in other words, the membership interests are more liquid and marketable.

On the other hand, LLC members usually want to maintain the right to “pick their partners.” If membership interests are freely transferable, the remaining members have no control over who comes in as a business partner when a member decides to transfer membership interests. Restricted transferability places limits on transfers and the status of the recipient.

Are Membership Interests Freely Transferable or Restricted?

The members decide. The good news about forming an LLC is how flexible the structure is. At the outset, the founding members can adopt transferability provisions— either in the operating agreement or in a separate buy-sell agreement.

● If neither document addresses transferability, the default provisions of state law prevail.
In other words, if the founding members fail to address transferability in the operating agreement or in a buy-sell agreement, they’ve relinquished control and subjected the members and the LLC to the state law default provisions.

● Although planning for a member’s departure from the LLC when you’re just forming it may be difficult, thinking through all the possible exit scenarios—and planning for them—is essential.

If your LLC is already up and running and you don’t have transferability provisions in place, the members can amend the operating agreement or adopt a buy-sell agreement. Look to the operating agreement for directions on how to amend the LLC’s terms.

How are Membership Interest Transfers Restricted?

While membership interests are freely transferable in the sense that any member generally can transfer his or her economic rights in the LLC (subject to the operating agreement, a stand-alone buy-sell agreement, and state law), the management or voting rights in the LLC are usually what are restricted—otherwise, other members would be forced to become “partners” with someone not of their choosing. Typically, a recipient of restricted membership interests can receive economic and management rights—a full membership interest—only with unanimous member consent.