U.S. Private and Emerging Business

1
Dec

How Can an LLC Operating Agreement or State Laws Remove a Member of an LLC?

Business owners sitting around a table eating, laughing and enjoying a fresh breakfast with warm croissants and crisp cold orange juice.  They have an LLC Operating Agreement yet have not discussed how to Dissolve an LLC or Remove an LLC Member.
Company owners often get along well in the beginning, yet have you discussed what will happen when you don’t?

In the beginning of a company, the founders often start out well. The team gets along and there is often no discussion about what the company will do if the team stops working well together, reaches a point of impasse, or if it needs to remove a partner. However, this should be one of the key conversations that owners have from the outset and at regular intervals during the life of the company. No matter the industry, it is important to discuss key business issues that could arise later. This is truly why an LLC operating agreement is necessary. An LLC operating agreement is the business operating agreement that helps limited liability companies, single or multi-member, to determine how their company will operate in key situations. This is similar to a shareholder agreement in a corporation, yet has a very strong focus on the operation of the company.

LLC Operating Agreement vs. State Default Corporate Rules

Often members of a limited liability company (LLC) do not consider the consequences of not having a fully developed operating agreement. When creating an operating agreement, a key provision to include is how the LLC will remove members. In the U.S., if an operating agreement is silent as to how a member will be removed, then the state default corporate rules will apply. For example, the Florida default rules for LLC law can be found in the Florida Revised Limited Liability Act.

Generally, any change to the members of an LLC are done pursuant to the terms of the LLC operating agreement. The operating agreement should set forth the how, why and when a member of the LLC could be removed. When drafting the operating agreement, the members should decide the circumstances and terms when a member can be removed. It need not be, only when the LLC is dissolved, rather multiple sets of circumstances can be elaborated. Ultimately, it gives the members the power to decide how they would like to exit or to remove a troublesome member. However, not all companies include such language in their operating agreement. Any language that is later disputed, yet not included in the operating agreement, is decided by default state law.

Removal of a Member in Florida

If not decided in the operating agreement, removal of a partner is decided by Florida law. Some options include the following.

Member Voting on Organizational Changes

Assuming the Articles of Incorporation or Operating Agreement have voting procedures set forth for member removal, members may vote for removal with respect to their proportion of

the then-current percentage or other interest in profits of the LLC owned by all members. 2 Florida Corporations Manual § 17.29 (2019). The affirmative vote or consent of the majority-in-interest of members is required to undertake an act, which would include member removal. Fla. Stat. § 605.04073 (2019). If voting is successful and in accordance with the Articles of Incorporation or Operating Agreement, the member can be compelled to submit the written resignation form. 2 Florida Corporations Manual § 17.29 (2019).

Unanimous and Involuntary Expulsion

Another way to remove a member from an LLC could be through involuntary expulsion, also known as involuntary dissociation. Involuntary expulsion is typically used when members are trying to remove a troublesome member that will not voluntarily leave. Involuntary dissociation, or dissociation by expulsion, can occur under one of two circumstances.i First, the operating agreement can prescribe a method by which a member may be involuntarily expelled.7 However, absent a method for expulsion in the operating agreement, the members may unanimously vote to expel a member.ii Expulsion by unanimous consent is only available if the LLC cannot lawfully carry on its activities with the expelled member; the expelled member has transferred his or her entire transferrable interest in the LLC; or the expelled member is a corporation or other entity that is dissolved.iii Thus, expulsion by unanimous consent under the revised act arguably only applies to unruly members to the extent the lawful activities of the LLC can no longer be carried on.iv If a company can argue that the acts of the member to be expelled rise to the level of resulting in illegal operation, then this may be an option available.

If these provisions are not included in the Articles of Incorporation or Operating Agreement, the other members of the LLC can unanimously consent to the member’s expulsion if certain conditions are met under the Florida Revised Limited Liability Company Act. Fla. Stat. § 605.0602 (2019). However, expulsion by unanimous consent is only available to the members if: (1) it is unlawful to carry on the LLC’s activities with that person as a member; (2) the member’s entire transferable interest in the LLC has been transferred, unless it was a transfer for security purposes or pursuant to a charging order; or (3) the member is an entity that has been dissolved. Id

Member Buyout

The most amicable solution to removing a member is likely conducting a buyout, which could potentially allow for business relations in the future, even if those relations are not in the same LLC. Further, this could prevent long-term litigation and judicial intervention, which may be more financially conservative even if a higher purchase price is paid. As with many other member guidelines, provisions governing buyout procedures are generally required to be listed in an Operating Agreement or Articles of Incorporation. 3 Florida Corporations Manual § 35.40 (2019).

Judicial Order

The members wishing to remove a single member may seek a judicial order calling for removal due to wrongful conduct. Fla. Stat. § 605.0602(6) (2019). Expulsion by judicial order is proper when the member has: (1) engaged in wrongful conduct that adversely and materially affects the LLC’s activities and affairs; (2) willfully or persistently committed a material breach of the LLC’s operating agreement or breached the fiduciary duties of loyalty or care; or (3) engaged in conduct relating to the LLC’s activities and affairs making it not reasonably practicable to allow the member to continue as a member. Id. As with the unanimous expulsion option, successful enforcement would be contingent upon demonstrating wrongful conduct. A review of the member’s conduct and the LLC’s operating agreement may be enough to satisfy the requirements for a judicial order.

LLC Dissolution

As a last resort, if managing the LLC has become an unattainable goal due to a member conflict, and the member isn’t willing to withdraw, petitioning the court for a judicial dissolution of the LLC is an option. Fla. Stat. § 605.0701 (2019). This option is typically only desirable when the LLC is no longer able to operate as a business due to conflicts among members.

Conclusion

When drafting an operating agreement for an LLC it is important to make sure the agreement establishes how the LLC can remove a member. If LLC is silent as to how to remove a member then the state law will apply. In Florida, the Florida Revised Limited Liability Act default rules will govern the process for removing a member from the LLC. The Florida Revised Limited Liability Act covers the process of removing troublesome members and how members can remove them. Florida allows for members to be removed in a variety of ways if an LLC does not establish the process in the operating agreement. If you have more questions, or would like a complimentary consult, contact our managing attorney today at ngonzalo@gonzalolaw.com or via phone at 352.389.5577. We would love to meet you and learn how we can best be of service!

i. Dennis A. Nowak & Caitlin M. Trowbridge, Involuntary Expulsion of Troublesome Members Under Florida’s Revised LLC Act, Fla. B.J., January 2017, at 8

ii. Id.

iii. Id.

iv. Id.

v. Fla. Stat. §605.0602(6)

15
May

Four Major Cases Affecting Nonprofits

Whether one is a nonprofit or for profit organization, it is important to recognize key changes that are happening in your field. This month we highlight four important cases that can effect your nonprofit.

Case #1: Transparent GMU v. George Mason University

This case is important because it affects whether a nonprofit has to disclose agreements between the nonprofit and its donors.[1] This lawsuit was filed by a George Mason University student group in response to the university receiving sizable donations to its foundation by the Charles Koch Foundation.[2] The Charles Koch Foundation had issued gifts up to 15 million USD to George Mason so that the university may rename the law school for Supreme Court Justice Scalia and allow the Charles Koch Foundation to have input on faculty staffing.[3] Transparent GMU sued George Mason University to publicize the rest of the agreement between the donors and the university with the argument that the agreements are covered by Virginia’s open record laws.[4] The Virginia Fairfax County Circuit Court held that the George Mason University Foundation was not a public body however and therefore not compelled to publicize the donation agreement due to the open record laws.[5] This case is important for nonprofits to know because after this ruling, it is unlikely that a nonprofit will have to disclose the details surrounding it’s donations even if the public demands it. This is significant in light of the typical public filings and public reporting that a nonprofit must normally do.

Case #2: Underwood v. The Donald J. Trump Foundation

This case is important because it concerns a 501(c)(4) nonprofit organization misspending funds.[6] Attorney General Underwood of New York alleged the Foundation had an unlawful political coordination with the Trump presidential campaign and had several transactions to benefit the Trumps.[7] Eventually the Trump Foundation agreed to be dissolved and have its assets distributed to other charitable organizations under judicial supervision after the Foundation failed to have the case dismissed.[8] This case is important for nonprofits to consider because it shows if that nonprofits can be sued for illegal practices. As such, nonprofits must take all necessary precautions to follow the rules or face charges.

Case #3:

This case concerns how nonprofits obtain donations. Recently, there was an ongoing investigation by the California Attorney General Xavier Becerra. He issued three cease and desist orders against Food For the Poor, MAP International, and Catholic Medical Mission Board.[9] These cease and desist orders stem from the three nonprofit organizations allegedly using deceptive practices in fundraising solicitations.[10] Allegedly the organizations represented program spending percentages as inaccurately high as a result of including noncash contributions.[11] The three charitable organizations are appealing the order. The group faces the possibility of having their charitable registrations revoked and fines over $1.65 million.[12] This case is important for nonprofits to note because none of the three nonprofits are based in California but simply have solicited California residents. As a result, nonprofits are on notice that the response will be swift and aggressive should it mislead the public. This is a cautionary tale to nonprofit organizations on the importance of being transparent and using honest means to solicit donations.

Case #4: Gogtay et al v. Second Chance, Inc.

This case demonstrates the importance of accurately disclosing to donors the tax deductibility of their donations. It is a class action lawsuit out of Maryland that alleged the nonprofit Second Chance mislead donors into believing they would receive significant tax refunds for donations.[13] The plaintiffs alleged hundreds of donors were deceived into donating with promises of tax refunds and were audited by the IRS that disallowed the deduction.[14] The plaintiffs allege Second Chance knew the IRS did not approve of the benefits they were promoting and that Second Chance made false representations.[15] Nonprofit organizations should be aware of this case because it demonstrates the need to make accurate disclosures or face serious ramifications.

[1] Big Donors Sometimes Mean Big Headaches: George Mason University, University of Chicago, and More, Nonprofit Law Prof Blog, (May 3, 2018) https://lawprofessors.typepad.com/nonprofit/2018/05/big-donors-sometimes-mean-big-headaches-george-mason-university-university-of-chicago-and-more.html.

[2] Id.

[3] Id.

[4] Id.

[5] Sarah Larimer, George Mason University Foundation is not subject to public records laws, judge rules, Wash. Post, (July 6, 2018) https://www.washingtonpost.com/news/grade-point/wp/2018/07/06/george-mason-university-foundation-is-not-a-public-body-judge-rules-in-records-case/?utm_term=.7513c0cb2a4f.

[6] Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board of Directors For Extensive And Persistent Violations of State And Federal Law, N.Y. State Office of the Attorney General, https://ag.ny.gov/press-release/attorney-general-underwood-announces-lawsuit-against-donald-j-trump-foundation-and-its (last visited at Feb. 13, 2019).

[7] Id.

[8] Id.

[9] Mark Hrywna, Charities Get Cease And Desist From California AG, The Nonprofit Times, (Mar. 22, 2018), http://www.thenonprofittimes.com/news-articles/charities-get-cease-desist-california-ag/.

[10] Id.

[11] Id.

[12] Id.

[13] Lorraine Mirabella, Lawsuit says nonprofit Second Chance misled consumers, Baltimore Sun, (Oct. 12, 2017), https://www.baltimoresun.com/business/bs-bz-second-chance-lawsuit-20171012-story.html.

[14] Id.

[15] Id.

4
Apr

Incorporation 101: Five Key Decisions When Forming a Corporation

Incorporating your business is an exciting transition. Whether you are changing your business from an LLC to a corporation or setting up your business for the very first time, the decisions you make in the early stages can protect your business interests for years to come. It is crucial to invest time at this stage and evaluate whether you are making the best decisions for your commercial and personal goals. Read below to review five key decisions you will need to make when incorporating your business.

  1. Choose your incorporating state: Businesses can incorporate in one state while operating in another. Each state has its own business environment, with varying annual filing fees and requirements, income taxes, and legal proceedings. The state in which you reside and operate may not be the most favorable environment for your business goals. Consult with legal counsel to determine the optimal state of incorporation.[1]
  2. Determine how many shares you will authorize: Whether you intend for your company to be publicly traded or not, you will need to determine the number of shares you authorize when you first incorporate the company. You can authorize one share or one hundred million shares; financial implications of a higher number of shares could include a larger initial filing fee, depending on the state of incorporation.[2] Still, it could be more advantageous to authorize a larger number of shares, in the tens of thousands or even millions. This will allow you to issue more shares to employees and investors, even if each share begins at a low valuation.
  3. Issue shares among co-founders: While you must determine the total number of available shares at incorporation, you will be able to issue those shares throughout the life of the company. It is typical to issue some of these shares to the company founders at incorporation. Keep in mind that whoever has the majority stake will have control over major business decisions that require a vote by stock owners. If you and a single co-founder will be receiving stock, yet you want to retain full decision-making abilities, ensure that you have at least 51% of the company stock issued to yourself.
  4. Secure a domain name: Advertising, networking, and selling your business all require a solid online presence. This is only possible with a domain name, where you will host your company website. You will need to purchase a domain name through a web hosting service. The domain name you choose will affect your visibility on the internet. If possible, include your company’s name and location in the domain, yet be cautious of the possibility of trademark infringement! Consulting with an intellectual property attorney before selecting your domain can prevent thousands of dollars spent down the road on an infringement lawsuit.[3]
  5. Create clearly defined bylaws: The corporate bylaws will determine company procedures and responsibilities of each company officer. This will set your rules, meeting procedures, and record-keeping standards. Clear and detailed bylaws will give your corporation a structured path to begin business operations. Additionally, setting these rules and standards down in writing at the beginning of business can prevent conflicts down the road. They can be used to protect the company if any member should infringe on these rules.

Seeking qualified legal counsel as you make these decisions can greatly reduce your exposure to legal risk down the road. If you would you like additional information, contact our legal counsel for a complimentary consultation at ngonzalo@gonzalolaw.com.

[1] https://www.entrepreneur.com/article/241528

[2] https://smallbusiness.chron.com/many-shares-should-authorized-incorporation-36282.html

[3] https://www.entrepreneur.com/article/219410

18
Feb

Registering A Trademark On The Supplemental Register of the USPTO

Did you know that there is a principal and supplemental registry where you can register your trademark? Registration on the Principal Register affords all rights and responsibilities available to trademark owners. However, there may be a time when an applicant may not be able to register on the Principal Register and the only option is registering on the Supplemental Register[1].

The question then becomes, what are the benefits and disadvantages of registering a trademark on the Supplemental Register with the U.S. Patent and Trademark Office (USPTO)?  Some benefits of registering on the Supplemental Register include the ability to use indicia of registration including “Registered in U.S. Patent and Trademark Office”, “Reg. U.S. Pat. & TM. Off.”, and the “®” symbol[2]. However, in a lawsuit, it is important to note, that no profits or damages will be recovered unless the other party attempting to use the mark (the defendant) had actual notice of the registration[3]. A mark registered on the Supplemental Register will also provide notice to people conducting trademark searches and can serve as a bar to registration of subsequent marks which may be confusingly similar[4]. If the mark has the potential to become distinctive through use in commerce, a mark registered on the Supplemental Register may apply once more for the Principal Register[5].

In the alternative, there are some disadvantages of registering a trademark on the Supplemental Register. Marks registered on the Supplemental Register do not receive the advantages of §§ 1051(b), 1052(e), 1052(f), 1057(b), 1057(c), 1062(a), 1063-1068, 1072, 1115, and 1124 of the Trademark Act[6]. This means a mark registered on the Supplemental Register may not have the power to achieve incontestability of the mark, the mark does not have the right to exclusive use of the mark, may not have the ability to cancel the registration of another mark that may be similar to it, does not have the presumption of Federal ownership, and supplemental registration provides protection for only nondistinctive trademarks. 

Once you decide to use the supplemental registry, what is the process of registering a trademark on the Supplemental Register? If the initial application to the Principal Register was denied with a “nonfinal Office action”, a trademark registration application can be amended to the Supplemental Register by filling out a “Response to Office Action” online form[7]. If the initial rejection was denied with a “final Office action”, then the “Request for Reconsideration after Final Action” online form must be used[8]. Unlike an application for the Principal Register, the mark must be in use by the time of application on the Supplemental Register. 

If you would like additional information, contact our legal counsel for a complimentary consultation at ngonzalo@gonzalolaw.com.

 


[1]15 U.S.C.A. § 1091(a). 

[2]15 U.S.C.A. § 1111. 

[3]Id. 

[4]15 U.S.C.A. § 1092. 

[5]15 U.S.C.A. § 1095. 

[6]15 U.S.C.A. § 1094. 

[7]How to Amend from the Principal to the Supplemental Register, U.S. Patent and Trademark Office, https://www.uspto.gov/trademark/laws-regulations/how-amend-principal-supplemental-register-1 (last visited Jan. 25, 2019). 

[8]Id.

3
Aug

The Nonprofit Outlook: Staying Ahead of the Financial Curve

nonprofittrends

As a tax-exempt organization, your business goals are likely not profit-driven, but they are purpose-driven. That’s fantastic and truly why your organization is authentic with heart and impact! However, adopting a financially competitive mindset can lead to more and better services provided, which leads to more lives being changed. The following are key ways to stay ahead of the financial curve:
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28
Jun

The Play-Doh Scent is Now Trademarked, and Five More Trademark Facts that Will Surprise You

trademark

Play-Doh recently received approval for its trademark on the Play-Doh scent, a distinctive smell that brings back childhood memories for many of us. If any competitors produce a modeling clay that smells too much like Play-Doh, they could be putting themselves at risk for a lawsuit. That scent now has the full protection of the United States Patent and Trademark Office (USPTO).

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13
Jun

Subsidiary vs. Branch: Best Choice of Structure for Your Growing Business

subsidiary

As your company grows, the time will arrive when you need to consider the next step for the company. This could mean expanding your company to a new location. One of the first decisions you must consider is the demand you seek to fill in your target market and how you want to structure your expansion. When considering the structure, you want to consider if it would make the most sense to have a branch or a subsidiary. To make this determination, we must consider what would be the differences between the two.

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4
Jun

The “Netflix Model” for Donations

nonprofit
In the age of the internet, the world is at your fingertips. Business transactions can cross thousands of miles in a matter of seconds when using online platforms. For nonprofit organizations who take advantage of this connectivity, the opportunities for growth are endless.

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24
May

Decoding the General Data Protection Regulation (GDPR)

Key Aspects of the General Data Protection RegulationFinal

What is it?

On May 25th, 2018, a new law concerning privacy and data protection will come into effect in the European Union. The Guardian calls it the “biggest personal data shake-up since 1995.” The GDPR updates the 1995 European Union Data Protection Directive to apply to the advances in technology that many consumers rely on today. Overall, the legislation requires companies to adopt greater transparency when handling individual data. It also transfers much of the decision-making power from the companies to the consumers.

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23
Apr

5 Keys to Expanding Your Non-Profit Abroad

shutterstock_69021739

You began your organization with a mission. You provide services or aid to a target population. Whatever your charitable purpose, you are driven by a desire to see change. After establishing your organization, ensuring governmental compliance, building a network of sustainable donations, and seeing your work create change in your community, what’s next?

Your organization may be ready to grow internationally. This ambitious goal requires preparation. Here are five keys to expanding your non-profit abroad.

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