| Read Time: 4 minutes | Business Law

Buy-Sell Agreements—An Overview

You and your business partners put together an idea to make money, and you worked to make that idea come true. To achieve success, you had to pay attention to the details. However, remarkably few small business owners account for the future of the business’s ownership and continuity. A good buy-sell agreement does just that. In this guide, we discuss the purpose of a buy-sell agreement and why you should have one. What Is A Buy-Sell Agreement? The buy-sell agreement definition is an agreement that formalizes the understanding between the owners of a business if one of the owners separates. Without a business buy-sell agreement, a separation can be disruptive and possibly paralyzing. Separation events fall into two general categories: unforeseen and foreseen.  Unforeseen events include when a business partner: Dies; Becomes disabled; Gets divorced; or Declares bankruptcy. Foreseen events include when a business partner: Alters their vision for the company; Loses interest in the business; Needs a cash infusion; and Acts in bad faith and willfully harms the business. In each of these events, you can end up with a business partner you don’t want. To further clarify, a business buy-sell agreement is appropriate for any owner who desires to: Control who their business partners are; Protect the continuity of their business; Preserve the value of their company; and Insulate the day-to-today operations of their business.  In addition to the above, investing in a buy-sell agreement also bolsters the business’s value to potential investors and buyers. Key Terms to a Buy-Sell Agreement Simply having a buy-sell agreement in place does not mean that you have cleared the horizon of all ownership issues. Let’s explore several basic terms that a buy-sell agreement must contain to be effective. Formal Notice When any triggering event occurs—such as those listed above—all appropriate parties are given notice. At its most basic level, notice requires a minimum form (e.g., being written and sent by FedEx) and a minimum amount of information (e.g., the separation event and names of relevant third parties). Notice then starts a period of time wherein the business partners must elect to take certain actions. For instance, suppose a business member’s divorce is finalized. That member must notify the other owners that they have a certain amount of time to purchase the divorcing member’s ownership interest to avoid the ex-spouse becoming a business owner. Valuation There are various ways to value a business, and a disagreement about valuation will almost certainly arise if not formalized in a buy-out agreement. Without such a provision, each party will naturally choose the valuation method that is most advantageous to them. Disagreements about valuation can be extreme and devolve into litigation and possible judicial dissolution of the business. Accordingly, choosing a valuation method is an indispensable provision to include in a buy-out agreement. Let’s look at some sample valuation methods: Times Revenue—a revenue stream generated over a certain period of time is applied to a multiplier determined by industry factors and the economic environment. Discounted Cash Flow—using projections of future cash flow determines the current market value of the business. The main difference between this method and the times revenue method is that it takes inflation into consideration. Book Value—subtract the total liabilities of a business from its total assets to arrive at book value.  Liquidation value—the net cash that a business would receive if its assets were liquidated and liabilities were paid off today. We encourage you to consult a skilled and experienced business lawyer to understand these and other valuation methods in more depth.  Payment Terms An owner’s separation from a business may require gathering a significant amount of cash to purchase the ownership interest. That said, more often than not, ownership interest purchases are structured as a blend of cash and financing. For instance, in a $100,000 purchase of a separating owner’s interest, the buy-sell agreement may require a 25% down payment in cash and then the balance of 75% paid by a promissory note. Lookback Protection Lookback protection prevents bad faith dealing. It requires the business, or the remaining owners, to include a separated owner in any sale of the business that occurs within a certain time from the purchase of the separated owner’s interest. The lookback period protects unsuspecting owners from owners that engage in self-dealing. The self-dealing owner typically sets up a deal to sell the business without letting the other owners know. Then, they buy out the other owners at a low rate and turn around and sell at a higher price to maximize their own profits. A lookback provision helps prevent this practice by requiring the sale benefits to apply to any owner for a certain period of time after they have sold their ownership interest. Exit Management Once an owner is separated from the business, they may potentially still be able to harm the business unless some precautions are taken. Placing restrictions on your former business partner can be an appropriate way to protect your company. Therefore, a buy-sell agreement should contain some of the following exit provisions: Confidentiality agreement—requires the separated owner to keep certain information regarding the business confidential; Non-compete agreement—prevents the separated owner from competing with the business; and Non-disparagement agreement—prevents the separated owner from speaking poorly of the business. These provisions can preserve the continuity and value of your business after the separation of an owner. How We Can Help Massingill Attorneys & Counselors at Law are experts in counseling owners of closely-held businesses. Within that counsel, we regularly craft custom buy-sell agreements for our clients. We consider these agreements part of the full package of business documents needed for business owners to best protect themselves and maximize their interests. Contact us today to see what we can do for you and your business partners.

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| Read Time: 4 minutes | Business Law

How to Dissolve a Business Partnership in Texas

Business partnerships come to an end for many reasons, some good and some bad.  Notwithstanding the reason, you and your partners have a legal obligation to dissolve and wind down the partnership business responsibly. In addition, it’s personally smart for you to wind down the business partnership so as to protect your personal assets and to bring a final and clear conclusion to your obligations to your partners and third parties. In this guide, we will discuss how to end a business partnership, whether that’s through an existing partnership agreement or without one.  What Is a Dissolution of Partnership? To begin, you have probably already noticed that we use the terms “dissolve” and “wind-down” together and also separately. These two terms have distinct legal meanings. A dissolution of partnership ceases operations, liquidates assets, and terminates the existence of the business entity with the State of Texas. Winding down a partnership is the procedure within the dissolution process where the responsible parties—in this case, you and your partners—take certain specific steps pursuant to an agreement or Texas statutes to properly, formally, and responsibly bring to an end all your business’s commercial activities.   Dissolution of a Partnership with an Agreement If you have a partnership agreement in Texas at the time you decide to dissolve the partnership, then your first step is to consult that agreement. Almost all partnership agreements address how and under what circumstances the partnership can be dissolved. To give you an idea, the wind-down provisions of a partnership agreement will address: Voting requirements to dissolve, Valuation of the partnership, Method to sell property, How to pay creditors, How to distribute partnership assets, The return of capital accounts, Payment of taxes, and Who is responsible for the wind down. After consulting the partnership agreement, be sure to review the Texas statutes on dissolving a Texas business. Finally, even if the partnership agreement provides for dissolution and wind-down, it may be a good idea to draft and execute a dissolution agreement, which we discuss in detail below. Dissolution of a Partnership Without an Agreement It is common for there to be no partnership agreement. While this fact complicates matters, it does not necessarily mean that you cannot properly dissolve a business partnership. At the outset, have a candid and professional discussion with your partners about dissolving the partnership. Texas statutes provide for dissolution by a majority vote. However, if you are unable to secure a majority vote to dissolve, then you will need to file for judicial dissolution pursuant to Texas law. For the sake of discussion, in this guide, we will assume that a majority of the partners vote to dissolve the partnership. Upon a vote of dissolution, you should draft and adopt a dissolution of partnership agreement. The dissolution agreement will lay out the steps for wind-down and what part of those steps each partner is responsible for. A well-drafted dissolution of partnership agreement will contain the following provisions: A method to calculate and value the partnership; How to determine when and what to pay each commercial partner or creditor; How much to pay each partner upon dissolution; What specific assets are distributed to particular partners; How to complete unfinished partnership business and terminate partnership contracts; Partner indemnification; Escrow for outstanding liabilities;  Assignment of wind down responsibilities to partners; and Remedies for breach. While not an exhaustive list, the above represents an orderly dissolution and wind-down of your partnership. Also bear in mind that if your partnership is a general partnership concluding all commercial business, properly terminating contracts, providing for indemnities, and setting up an escrow is particularly important. Under Texas law, generally, partners may be liable for a general partnership’s debts even if they are separated from the partnership. Wind Down Under Texas Law Even if you have a partnership agreement in Texas or draft and execute a dissolution agreement, it is very important that you also consult the Texas statutes and follow their wind-down provisions. Texas does not require general partnerships to file Articles of Dissolution.  However, Texas wind down statutes generally requires the business to: Cease operations except those that are necessary for wind down; Collect and sell all business property; Apply property and other business assets to satisfy all partnership obligations and liabilities; and Perform any other acts necessary for dissolution. Note that while the Texas statutes do not require a general partnership to give notice of its dissolution to creditors and commercial partners, we encourage you to do so. Notifying your commercial partners and creditors is not only the right thing to do but can also provide a defense to any future claim against the partnership or you as a former partner. Common Pitfalls of Dissolution and Wind Down The worst thing you can do when you decide to dissolve a partnership is simply turn off the lights and stop answering the phone. Your partnership was actively engaged in commerce, and it incurred obligations and liabilities. These obligations and liabilities must be honored, and failure to follow proper dissolution and wind-down procedures can affect your personal assets and your ability to engage in future business ventures or get financing. This also applies if you have unwilling partners who do not want to dissolve the partnership. In that case, you will need to involve a Texas court to make sure that your obligations and liabilities are finalized despite the messy partnership status you might leave behind with your other partners. We Can Help Dissolve Your Partnership At Massingill Attorneys At Law, we’re no strangers to assisting business owners with leaving a partnership—with or without an agreement. We pride ourselves on representing businesses through their entire life—from inception to dissolution. In addition, with decades of business law experience, we have the nuanced skills to bring even the most unwilling partners to the table and achieve an orderly wind down. Contact us today to see how we can help your business.

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| Read Time: 4 minutes | Business Law

Piercing the Corporate Veil: What to Know

Most small business owners make the mistake of assuming that once they have set up a corporation or limited liability company, they and their personal assets are protected from liability. As a result, they do not take any further action to sustain limited liability protection. Or worse, they take actions that weaken limited liability protection. In this guide, we will discuss what limited liability protection is (in other words “the veil”) and how courts allow “piercing the corporate veil.” For ease, we will use the term “business” interchangeably when discussing the limited liability of a corporation or a limited liability company (LLC). What Is the Corporate Veil? The corporate veil is the limited liability protection that stands between a business’s officers, directors, managers, owners, and all their personal assets and the business’s creditors, claimants, and contractual partners. The legal idea is that a business is its own legal person, with its own rights, duties, liabilities, and assets. Therefore, a business can enter into a contract and open a bank account. It can also take out a loan or buy real estate. In the alternative, the business is liable for its actions. Third parties can sue the business for its activities, debts, and defaults. When a business fails, it must answer for its commercial activities and it is liable for damages. That said, only its assets are subject to the civil claim, while the owners are typically shielded through the business’s limited liability protection. This is a powerful tool provided by law. Even so, the law asks something of the owners in return. The law expects that the owners will respect the “personhood” of the business. That means: Operating the business through its governing documents; Using business bank accounts for business purposes only; Not borrowing business funds for personal use; Not mixing personal funds or assets with business funds or assets (i.e., co-mingling); and Not using business assets for personal use (e.g., taking the business truck on a camping trip, etc.). If you engage in any of the above activities, you weaken the business’s limited liability protection for you and your personal assets. What Does Piercing the Corporate Veil Mean?  In general, courts are reluctant to pierce the corporate veil because to do so would discourage business enterprise, which often involves assessment of risk. Individuals are less likely to take on a risky business venture if they and their personal assets are vulnerable. When that happens, commerce suffers. Therefore, piercing the corporate veil is an extreme measure used in very limited circumstances. Unfortunately, it most often occurs to small businesses or with a multi-business enterprise operating for a common purpose (i.e., a master business with several subsidiaries). When a court decides to pierce the corporate veil, it disregards the “personhood” of the business and holds the owners liable for any judgment against the business. As a result, judgment creditors can seize, sell, or place a lien on an owner’s assets. The Law: How Is the Corporate Veil Pierced in Texas? There are nuances to the Texas law on piercing the corporate veil, and we urge you to consult closely with an attorney if you have questions. In this regard, Massingill Attorneys & Counselors at Law can help. Nevertheless, courts will generally pierce the corporate veil under the following circumstances: As an alter ego—the business is a mere tool or conduit of a natural person; To prevent the perpetration of fraud—the business is used to enter into a contract it cannot fulfill; and Sustaining the business’s limited liability protection would be unjust—preventing money from being reached by a creditor that was transferred from the business to an owner. Texas does have several other standards under which it can pierce the corporate veil, but the above represent the most common, with the “alter ego” basis being by far the most frequent.  As well, the above standards apply to piercing the veil of a multi-business enterprise. In that situation, when a court holds a subsidiary liable, the judgment creditor may seek to pierce the veil of the subsidiary to reach the master business. In these cases, the courts look at whether there are overlapping officers, assets, accounts, and operational structures. If the court finds enough of these contacts between the master and subsidiary, the subsidiary’s veil may be pierced. How to Preserve the Corporate Veil We mentioned that many small business owners—once they form the business—start thinking that a corporation or limited liability company, simply by existing, will always protect them and their personal assets from liability. Usually, this is the case. However, it is responsible business practice and smart personal behavior to take these steps to bolster your business’s limited liability protection: Respect the business’s governing document by holding regular meetings, recording minutes and resolutions, and maintaining the business’s state registrations; Maintain distinct bank accounts for the business and yourself; Engage in strict and frequent accounting of the business’s finances and accounts; Do not use business assets for personal use, and do not use personal assets for business use; All loans from the business to you or a third party should be in writing and meet minimum commercial standards (e.g., interest rate, payment terms, payment frequency, etc.); and With a multi-business enterprise, keep each business separate and distinct with regard to all of the above points. This list is not extraordinary but rather good and basic business governance and practice. Maintaining these standards consistently will go a long way to sustaining the limited liability protection afforded to you by your business. How We Can Help Massingill Attorneys & Counselors at Law serves as legal counsel to hundreds of small businesses. We have shepherded business owners and their dreams from inception to success. To do so, we anticipate and prepare for risk through properly establishing businesses and guiding them in governance, operation, and commercial relationships. Contact us to see how we can help your business maintain its legal and commercial stance.

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| Read Time: 4 minutes | Business Law

Why Buyout Provisions Are Essential to Your Texas Partnership Agreement

People enter into small business partnerships based on a common interest and a common vision. The hope for the future of your business tends to drive all decisions. But these halcyon days almost always pass and difficulties and disagreements arise. Therefore, the smartest foundational business decision you can make is to hope for the best and prepare for the worst. That decision naturally results in establishing a buyout agreement (also known as a buy-sell agreement) between you and your business partners at the outset of your business venture. The core purpose of a buyout agreement is to protect the future of your business and preserve the value of the ownership interests. In this guide, we will discuss both unforeseen and foreseen events that trigger a buyout and the essential elements of a partnership buyout agreement. Events Causing a Buyout You can place buyout situations in two general categories: unforeseen events and foreseen events. Each of these consists of several types, and each triggers a buyout method. Unforeseen Events The most common types of unforeseen events are: Death—the death of a business partner through which an heir of the estate may obtain the business interest; Disability—the disability of a business partner through which a custodian or guardian may obtain control of the business interest; Divorce—the divorce of a business partner through which the ex-spouse may obtain the business interest; and Bankruptcy—a liquidation or reorganization of the debt of a business partner through which a third party may obtain the business interest.  Each one of these events removes your known business partner and replaces them with an unknown or unwanted third-party business partner. Clearly, you would like to have a say in who your business partner is. Through a partnership buyout agreement, you have the opportunity to do so. Unforeseen events are bought out through a “right of first refusal” (ROFR). The ROFR grants you, as the remaining business partner, the opportunity to buy out the departing partner’s ownership interest. Foreseen Events These events can be reasonably anticipated and are not subject to the unknowns of life. General foreseen events are: Vision differences—a business partner disagrees on the future of the business; Loss of interest—a business partner is not pulling their weight and is otherwise not engaged; The need for cash—for good or bad, a business partner needs an infusion of cash (e.g., to settle a civil suit or buy a vacation home); and Bad faith/operational paralysis—underlying tensions have erupted into a willful desire by a business partner to destroy the business through inaction or worse. Any of these events eliminates the mutuality of the partnership. When mutuality is destroyed, the option to exit as a partner or to exit your partner should be available. In these events, the buyout mechanism is called (depending on who is acting) a “put” or a “call”. A put means that the partner that desires to exit the business forces the other partners or the business to buy their ownership interest. A call means that the non-existing partner or business unilaterally buys the interest of another partner and forces them out of the business. Note that the non-acting partner cannot prevent a put or a call; this point is extremely important. As you can see, the correct partnership buy-sell agreement can manage both unforeseen and foreseen events to the benefit of the business and all involved. A Buyout Agreement’s Essential Terms Partnership buyout agreements can exist as stand-alone agreements or as terms in a business’s governing documents. Partnerships and limited liability companies incorporate the buyout agreement into the partnership agreement or the operating agreement. Corporations treat the partnership buyout agreements as stand-alone agreements commonly called “shareholders’ agreements.” There are four essential provisions of a buyout agreement: Notice—upon a triggering event (e.g., death, a need for cash, etc.), the business partners have a certain amount of time to act whether by a ROFR or to respond to a put or call; Valuation—the formula that has been agreed upon to value the ownership interest; Payment—the terms to purchase the ownership interest; and Lookback—a period of time to participate in the turn-around sale of the business after a call is exercised. At this point, we will explain each one of the above in a bit more depth. However, each requires extended consideration with a legal professional, and Massingill Attorneys & Counselors at Law can provide such guidance. A notice provision prevents surprises and allows each party to act fairly and without undue pressure. It creates an atmosphere of honesty and transparency. Valuation is critical in that each party can have widely divergent valuations. This kind of dispute, without an agreed valuation mechanism, can cause operational paralysis. Common valuation methods include the “book value” of the business or hiring a business appraiser. We also recommend including a tie-breaking method for valuation (i.e., if two appraisers disagree, then they appoint a third who determines value). Payment provisions allow for saleability. Requiring the purchase to be all cash is equally unreasonable as a promissory note payable over 30 years. Under common buyout payment terms, a cash down payment and a short promissory note for the balance appropriately balances the needs of the parties. Lookback prevents a partner from calling another’s ownership interest and then capitalizing on that purchase by selling the whole business shortly thereafter. This provision allows the bought-out partner to realize some of the business sale gains for a period of time after the call event. How We Can Help A good partnership buyout agreement will positively impact your ownership interest’s value and the health of your business. Massingill Attorneys & Counselors at Law have decades of legal experience that can help you craft a customized partnership buyout agreement for your company. Contact us today to see what we can do for you and your business.

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| Read Time: 4 minutes | Business Law

What Are Your Rights When Your Business Partner Is Trying to Sabotage Your Business?

When we think of workplace sabotage, a disgruntled employee sabotaging the company usually comes to mind. But sabotage can also happen at the partner level. It is distressing, to say the least when your once-trusted partner is sabotaging the business you built together. At one point you both were of common mind with a common vision looking to build a profitable business. But now the relationship has soured to the point where your business partner’s actions amount to sabotage at work, and it has to stop immediately. In this guide, we outline what corporate sabotage looks like and the options available to stop it. What Does Business Sabotage Look Like? We think of workplace sabotage as a clear and intentional act. However, some less obvious acts can also amount to sabotage. Therefore, we will outline both the less obvious acts as well as those clear intentional acts that equate to sabotage. For whatever reason, perhaps through a build-up of tacit disagreements or maybe one big blow-up, your business partner’s enthusiasm is not what it used to be. As a result, they may not show up to work on time, pay the business’s bills, or not return customer phone calls. Even worse, they could be too permissive in sharing confidential business information. All of these actions can amount to less obvious forms of sabotage in the workplace. On the other side of the coin, are more clear acts of sabotage such as: Diverting business opportunities—giving company business to another person; Self-dealing—taking the business’s opportunities for themselves; Disparagement/Interference—speaking poorly of the business or disrupting a commercial relationship; Disclosure—intentionally disclosing company trade secrets, internal information, or intellectual property; and Violating contracts—breaching the terms of an employment, confidentiality, or non-compete contract, or the governing documents of the business (e.g., partnership agreement, operating agreement, shareholder agreement, bylaws, etc.). The above represent the hallmarks of corporate sabotage and are not justifiable actions of a business partner under any circumstances.  Now that you have a clear idea of what constitutes business sabotage, what can you do? Options to Stop Business Sabotage To swiftly stop business sabotage, you must consider all of your options. Turning to the courts is the most obvious choice. But courts take time, and it may be too late once a court remedy is in place. As such, let’s look at non-court options first, and after that, we’ll consider the court options. Finally, we will put the two together into a plan of action. Contractual Options Check to see if your business partner has any contractual obligations to you or the business. The terms of a contract often provide a remedy to business sabotage. Four common contracts could help: Employment contracts, Confidentiality contracts, Non-compete contracts, and The business’s governing documents. Employment contracts set out the duties, performance standards, and obligations of an employee (note: your partner can be an employee of the business). Confidentiality agreements impose duties of confidentiality and define confidential information. Non-compete agreements specifically outline what your business partner can and cannot do outside of the business. All of these agreements will usually contain remedies—such as an injunction (i.e., a court order to stop) or liquidated damages (i.e., a fixed amount to be paid upon breach of the contract). If any of these agreements are in place, the first step is to notify your business partner of the terms of those agreements that they are violating. Notification, in and of itself, can often stop the sabotage. However, if the notice does not stop your partner’s behavior, then having a contract that your business partner is breaching can make your life easier in a civil action.   Lastly, while the business’s governing documents might have some of the above terms, more importantly, they may also have a buyout provision. A buyout provision can put an end to sabotage because you can usually force your partner from the business through the buyout mechanism. This is often the most effective way to end corporate sabotage quickly. Common Legal Options   If there are no contracts in place (including a buyout provision in the governing documents), then your options are likely limited to civil action remedies. To that end, your business partner has two duties to the business: a duty of loyalty and fiduciary duty. All civil actions against your business partner for sabotage are based on these two duties. A duty of loyalty means that the interests of the business come before your partner’s personal interests or the interests of their colleagues. Thus, if your partner diverts an opportunity to their child, it could be a breach of their duty of loyalty. A fiduciary duty means that your business partner is required to perform their obligations and execute their duties with the utmost care and good faith. Thus, lackadaisical or careless behavior could be a breach of fiduciary duty.  As mentioned above, the civil causes of action are diversion, self-dealing, disparagement, or disclosure. They are grouped into three general categories: Tortious interference of contract—intentionally disrupting a commercial relationship; Conversion—stealing business property (e.g., secrets, money, etc.); Civil conspiracy—working with a third party to harm the business. The remedies for civil actions can include injunctive relief, monetary damages, punitive damages (e.g., some statutes award triple damages), and attorney fees. However, all these remedies, except perhaps injunctive relief, take a lot of time, and therefore, the relief may be too late. How We Can Help You need to stop your partner’s sabotage at work immediately to prevent lasting damage to your business. Massingill Attorneys & Counselors at Law understands the urgency of stopping workplace sabotage. With our decades of business law experience, we have a third way to help. We can use both contractual obligations and civil legal remedies to bring the parties to the table. At that point, it is our skill and experience as seasoned counselors at law that can open the parties to a settlement—right then and there. These negotiations take a high degree of knowledge and nuanced understanding of business and the law and how they...

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| Read Time: 4 minutes | Business Law

Why You Should Have an LLC Operating Agreement in Texas

The creation of the limited liability company (LLC) as a business entity was transformative for small businesses. It took the best of the C corporation and partnership models and also perfected the intentions behind the S corporation. However, an LLC without an operating agreement is but a shell. To truly realize the potential that an LLC business model provides, a well-drafted Texas LLC operating agreement is essential. What Is an LLC Operating Agreement? A Texas LLC operating agreement is a written document that sets out the rights and obligations of the members of an LLC for its operation, governance, and distribution of economic benefits. The nature and attraction of an operating agreement are that you can basically design it as you like. There are model operating agreements with standard terms that can be customized to fit your business. On the other hand, more seasoned business persons sometimes form an LLC but adopt corporate bylaws as the operating agreement because they are more comfortable with “corporate” language. Operating agreements could also be tailored to mirror a general partnership agreement. Nevertheless, in whatever form, an operating agreement is a binding contract between its members, and courts will generally honor it.   Why Do I Need an Operating Agreement? A well-written operating agreement will reduce or largely eliminate member disputes. To that end, providing members with a clear procedure of how to handle business matters is an operating agreement’s power. As a result, it increases operational efficiency both for internal affairs and external activities. When considering Texas LLC operating agreement requirements, experience shows there are several common flashpoints between LLC members that a well-drafted version can help resolve. We will discuss each of those flashpoints below. LLC Management The overwhelming majority of LLCs are small businesses started by individuals who know each other well. In the early days of an enterprise’s existence, everyone typically assumes they will get along and that the business vision for the LLC is shared and harmonious. But inevitably, business visions and operational opinions change. Absent an operating agreement, changes of opinion can cause major trouble in the form of operational paralysis where members cannot agree on how to proceed — or they begin to exert undue influence over each other. A well-crafted operating agreement can help avoid such crises. Here are a few examples of how it can work to maintain order: The LLC can appoint a manager who will have control over the day-to-day affairs of the LLC, only requiring member voting on select matters (e.g., taking out a business loan, buying real property, etc.).   Certain business decisions can require different voting thresholds (e.g., three-quarters vote to approve any purchase over $10,000.00, or a simple majority vote to purchase new company software, etc.).  Voting interests don’t always have to match economic interests. An operating agreement can provide for an even allocation of the economic interests but then have a different allocation of voting rights.  The point is to structure the management powers and voting rights to avoid paralysis or leveraging and embody them in an operating agreement. Member Admissions and Dissociations Because LLCs are small businesses, outlining how members are admitted and how they are dissociated can prevent major disputes. An operating agreement can offer several possible methods for both of these events. Admission of new members should require a specific vote and set forth any required capital contribution. A voluntary sale or transfer of an existing member’s ownership interest should provide other existing members an opportunity to purchase that offered portion before it is sold or transferred (i.e., a right of first refusal – “ROFR”).   Involuntary membership interest transfers (e.g., death, divorce, etc.) should also provide for an existing member ROFR.  In the event of a buy-out (i.e., forcing out a member) the operating agreement could provide for the valuation and purchase method of the membership interest. When a member wants to leave an LLC, he can force the LLC or its remaining members to buy their interest under the same valuation and purchase provisions. When any of these events go unaddressed in a proper operating agreement, it can significantly disrupt LLC operations. Therefore, careful control of admissions and dissociations of members is critical to an LLC’s functionality and efficiency.  Conflicts of Interest Often an LLC member’s relationship with another business can come into conflict with the LLC. For instance, an LLC member’s secondary business can fulfill a commercial need for the LLC but also enrich that member. Or, the LLC’s business may directly compete with a member’s secondary business venture. However, all members can peacefully coexist if the operating agreement addresses these issues properly. For example, the operating agreement could either require dissociation from the competing business or allow competition under clearly outlined conditions.  What if I Do Not Get an Operating Agreement? If you do not get an operating agreement, your LLC will be governed by the Texas Limited Liability Act. However, these statutes are skeletal in substance and clumsy in their application. While better than nothing, try to avoid relying on the statutes if at all possible. Unsurprisingly, a lack of guidance by statute usually results in litigation. Therefore, do not put yourself in a position where important LLC business matters are governed by a generic statute that fails to take into account your company’s specific needs. A well-crafted LLC operating agreement in Texas that takes into account the personalities and visions of its members can keep it from operational paralysis, disruption, and litigation.  How We Can Help Massingill Attorneys at Law have decades of experience counseling small business owners and start-ups in laying the proper foundation for success. We have the experience to craft a Texas LLC operating agreement that embodies all the best aspects of model agreements but is also uniquely tailored to you and your business partners’ needs. Contact us today to see how we can help craft the future of your LLC.    

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| Read Time: 4 minutes | Business Law

Breach of Contract in Texas: What to Know and Steps to Consider

Contracts form the foundation of all economic transactions, whether international commercial deals or weekly mowing of the front lawn. However, things don’t always go as planned. Therefore, when you rely on the other party to perform and they fail to do so, there could be a breach of contract and a claim for damages. In that event, what do you do? Elements of Texas Breach of Contract Law To start, let’s look at the elements of a breach of contract claim. Texas breach of contract law has a very straightforward test. A claim exists when: There is a valid contract between the parties, You have performed your obligations under the contract, The other party has not performed their obligations under the contract, and You have suffered damages.  This is a great starting point to understand whether you have a claim for breach of contract in Texas. We will go through each element in more detail below. What Is a Valid Contract? The Texas test for a valid contract is: One party makes an offer The other party accepts the offer There is a meeting of the minds on the transaction Consideration is exchanged Again, we will flesh out the details a little bit for each of these four elements. First, an offer must be clear and intentional, giving the other party a chance to accept it. Second, the acceptance must be unconditional (e.g., an acceptance with a condition is a counter-offer and not an acceptance). Third, for a meeting of the minds, the parties must have come to the same agreement on the subject matter of the contract. Finally, “consideration”  is a legal term of art that essentially means that each party has given something up in exchange for a future benefit. For example, consideration could be money, a good or service, a promise to do something, or a promise not to do something.  As a brief side note, most contracts can be oral. Even so, certain contracts must be in writing to be enforceable (e.g. contracts for real property, performance that requires a year or more, etc.). Consult with a Texas contract lawyer today to learn the nuances of how Texas contract laws can impact your case. Contact us online or give us a call at (512) 410-0343 to schedule your free consultation. You Have Performed Under the Contract Before you can seek compensation for a breach of contract, you have to prove that you had performed all your obligations under the contract at the time of the breach. This point is important—if you are also in breach of the contract, the other party can use that as a defense for its failure to perform. The Other Party Has Not Performed Under the Contract This part of the test is extremely important. A breach of contract means the failure to perform has deprived the non-breaching party of the benefit of the contract. Examples of a breach of contract may be: Shipping the wrong widgets A delivery that arrives a week later than contracted The failure to repaint the outside of a house as promised in a sales contract These errors cut straight to the heart of the contract and what was bargained for. Also bear in mind that even though the other party has not performed, you may not be excused from performing yourself under the contract unless the breach by the other side was “material.” Material means that the very purpose of the contract is destroyed and non-performance renders the rest of the contract useless. You Have Suffered Damages The first question in any breach of contract case is, What are the actual damages? In other words, can you quantify, in economic terms, how much the breach of contract has cost you? This cost can take the form of: Lost income Lost business opportunities Property damage Repairs This list is not exhaustive, but it does give you an idea of what the law is looking for. Thus quantifying your damages is essential. Even so, actual damages are not the only damages you can seek. There are other types of damages, including: Reliance damages: If you ended up in a worse position because you relied on the other side’s promises, you can seek compensation for losses you suffer as a result. For example, if you contracted to buy equipment and you had to pay another seller more to obtain it, you could seek compensation for the difference. Specific performance: If money damages won’t be able to fairly compensate you for your loss, you can ask the court to order the other party to fulfill their obligations under the contract. For example, if you had a contract to buy your dream home and the seller breached the contract by backing out, the court may order them to complete the sale.  Liquidated damages: Sometimes a contract will include a provision outlining a fixed amount that a breaching party will pay. This typically occurs when the parties anticipate that the damages for failure to perform will be difficult to qualify. Finally, there are still rarer forms of damages such as “restitution,” “quantum meruit,” and “equitable performance.” Your attorney can advise you on whether these types of damages might apply to your claim.  They Breached the Contract – Now What? If you think the other party breached the contract, then there are some very concrete steps you can take to protect your interests. Start with the contract itself and check its terms. First, is there a provision that a party must give notice of a breach to the other party? This is a relatively common contract clause meaning that if no notice is given, there may not yet be a breach.  Second, what form does notice need to take—written or oral? Notice provisions are critical because failure to give proper notice can be a defense by the breaching party.  Third, is there a cure period? Some contracts give a party time to cure (i.e., “fix”) a breach. If there is a cure period...

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| Read Time: 3 minutes | Estate Planning

Holographic Wills in Texas: What You Should Know

Not all states recognize handwritten wills—also known as holographic wills—as valid. Every state has its own rules, so a will can be valid in one place but not another. Handwritten wills in Texas are not only valid but just as effective as a typed will. That being said, a handwritten will is not the most reliable way to transfer property at death. It’s best to work with an experienced estate planning attorney who can create a typed will that satisfies all state requirements as well as your wishes.  Holographic Will Definition A holographic will is a will that is handwritten and signed by the person creating it (the testator). The requirements for a valid holographic will vary by state.  Requirements of Texas Holographic Wills Creating a holographic will that a court will honor is not so simple. There are still legal requirements for the will to be valid. A holographic will in Texas is valid only if: The will is handwritten entirely by the testator, The will is signed by the testator, and The testator had testamentary capacity and intent at the time he or she created the will. Let’s break all of these requirements down further. Handwritten by the Testator The testator must handwrite the entire will. The will is invalid if someone else writes it and the testator just signs it. Additionally, any part of the will that is typed will be disregarded. Only handwriting will satisfy this requirement for holographic wills in Texas.  Signed by the Testator The testator’s signature doesn’t have to be his or her full name. An “X” or some other identifying mark made by the testator will suffice as a signature. Testamentary Capacity and Intent Testamentary capacity is the testator’s mental ability to create a will. This is sometimes called being of “sound mind.” To establish testamentary capacity, the testator must have the ability to do the following: Understand that he or she is creating a will, Understand the effect of creating a will, Know what property he or she has, Be able to identify family members, and  Mentally process that he or she is creating a will and forming a reasonable judgment about it.  Testamentary intent is the testator’s intent to create a will and distribute his or her property at death. The court can find evidence of testamentary intent if the testator uses language like “I give,” “I bequeath,” or “I transfer,” when creating the holographic will. The testator must also accurately describe the property he or she wants to transfer and identify the person, people, or entity who will receive it. Including a date on the will is another indication of the testator’s intent to create a valid will.   A holographic will in Texas is effective until the testator revokes it.   What Happens If a Holographic Will is Invalid? If the holographic will does not meet the requirements, the testator’s assets will transfer according to Texas intestate succession law. Under this law, there is a hierarchy of family members that will inherit the assets, depending on who survives the testator. The first person in line to inherit is the testator’s spouse, then children, then parents, and so on. Unfortunately, this can result in family members getting assets that the testator did not intend for them to inherit—or being left out. Is a Holographic Will a Good Idea?  While it may be tempting to handwrite a will, it is not the most secure way to transfer property and provide for family members.  Holographic wills are problematic for several reasons. First, the testator typically does not know the requirements for a valid holographic will in Texas. This means that the court will need to intervene to interpret the testator’s intent and determine if what the testator created is even valid. Second, holographic wills open the door for beneficiaries of the estate or other interested parties to contest the will (i.e., argue that it is not valid). This can lead to long delays in administering the estate and strain relationships within the family.  Certainly, a holographic will is better than nothing, particularly if there is an emergency situation. However, a thorough, comprehensive, and well-drafted will is best.  Contact Massingill Attorneys & Counselors at Law for Help Drafting Your Will Relying on a handwritten will in Texas is risky. Although it might be the fastest and cheapest way to plan now, it could cost your estate more in the long run. If the goal is to provide for your family, avoid a holographic will.  Our estate planning attorneys can draft a will that meets your unique needs and satisfies your wishes. Whether you need a simple will or require something more complex, we have the experience to create a will that suits you. Our clients continue to give us five-star reviews on Google, which we credit to our personalized approach. Contact us today to schedule an appointment.

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| Read Time: 4 minutes | Estate Planning

What Are an Estate Executor’s Responsibilities in Texas?

When someone passes away, the executor is in charge of handling the decedent’s estate. From finding assets to paying taxes to distributing real estate, the executor has a lot to do. Let’s walk through the different responsibilities of an executor of an estate.  What Is an Executor of a Will? An executor, sometimes called an administrator or personal representative, is a person or entity who settles the affairs of someone’s estate after they die. In some cases, the decedent will appoint an executor under his or her will. If there is no will or no executor is chosen under the will, the probate court will appoint an executor of the estate. In Texas, there is both dependent and independent estate administration. The default is dependent administration, where the court has strict supervision over the probate process. On the other hand, independent administration does not have court oversight, and the process is much simpler. With either type of administration, the executor of an estate still has the same responsibilities and fiduciary duty.  What Is the Executor’s Fiduciary Duty? When administering the estate, the executor has a fiduciary duty to the estate, heirs, and beneficiaries. Heirs are people related to the decedent who inherits, while beneficiaries can be anyone or an entity.  Duty of Loyalty The duty of loyalty means that the executor can act only in the best interest of the estate, heirs, and beneficiaries. For example, the executor cannot use estate assets for their personal benefit, pay themselves unnecessarily large fees, or take a profit from business dealings with the estate. Duty of Prudence The duty of prudence is the obligation to act with care, diligence, and caution when administering the estate. The executor must act as a “prudent person” would, meaning with the same care and skill that a person would use if handling their own affairs. Duty of Preserving Estate Assets This duty requires managing the estate assets appropriately. For example, the executor may need to get sufficient insurance coverage for certain assets and keep a separate bank account solely for money that belongs to the estate. What Are the Responsibilities of the Executor of an Estate? Once the executor receives letters from the probate court granting authority to serve as the executor, that’s when the duties and obligations kick in. The executor has responsibilities to the beneficiaries as well as the estate. Identify the Assets A person’s estate is basically everything they own (i.e. their assets). There are both probate and non-probate assets. Probate assets are those titled solely in the name of the decedent, and these assets go through the probate administration process. Non-probate assets can be anything from jointly owned property to accounts with a beneficiary designation (e.g. life insurance). These types of assets do not go through probate because they automatically transfer to someone else once the decedent passes away. The executor must identify all the decedent’s assets to come up with a complete picture of the estate. An accurate inventory of assets is necessary to properly transfer property and satisfy financial obligations. An ongoing responsibility of the executor is to account for any action involving the estate assets. For example, if the estate makes a payment or sells property, the executor must keep track through what is known as accounting. Pay Debts and Taxes An executor of a will must pay any debts and taxes of the decedent and the estate. All creditors must be notified of the decedent’s death and given the opportunity to bring forth any legitimate claims. The executor is responsible for filing final tax returns and paying any outstanding amounts for both the decedent and the estate. Even at death, you can’t escape taxes. Distribute Assets Estate assets can be distributed to heirs and beneficiaries only once all financial obligations of the estate are satisfied. The executor of a will has the responsibility to locate and notify all beneficiaries that the estate is under administration. Next, the executor must ensure all beneficiaries and heirs receive what they’re entitled to under the will. Not everyone leaves a will or accounts for all their assets in their will. In that case, the remaining assets transfer to the beneficiaries according to Texas intestate law. Basically, there is a hierarchy of who gets leftover assets, starting with the decedent’s spouse, then children, then parents. Miscellaneous Responsibilities Ultimately, the executor must do whatever is necessary to wind up the decedent’s life. However, since all estates are unique, there are some responsibilities that one executor may have that others will not. For instance, if the decedent was a business owner, there may be very strict steps to take as part of the succession plan for the company. Here are some other examples: File a wrongful death lawsuit; Notify the Social Security Administration or state agency of the decedent’s death, if receiving benefits; and Finalize any pending lawsuits involving the decedent. These responsibilities are tricky to navigate, so contact Massingill Attorneys & Counselors at Law if you need assistance. Talk with One of Our Estate Planning Attorneys Today Whether you’re the executor or beneficiary of an estate in Texas, we’re here to help. Our estate planning attorneys can answer your questions and guide you through the estate administration process. Through a personalized approach and ongoing communication with our clients, we continually earn five–star Google ratings. Contact us today to schedule a consultation.

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| Read Time: 4 minutes | Estate Planning

What Are the Requirements of a Valid Will in Texas?

A last will and testament is a foundational estate planning document. In a will, you can lay out how you want your assets distributed upon your death. You also name an executor who will oversee your estate. While this concept is straightforward in principle, there are many factors to consider when drafting a will. Most importantly, you need to know whether the document meets Texas will requirements under state law. At Massingill Attorneys & Counselors at Law, we help individuals and families of all net worth levels and backgrounds create effective estate plans. We can help you clarify your wishes, decreasing the likelihood of any unnecessary familial disputes in the future. What Are the Requirements for a Will to Be Valid? On one hand, Texas lawmakers want to encourage people to draft wills because they provide much-needed clarity when settling someone’s estate. However, at the same time, there is often a lot at stake after someone passes on, which can lead to unanticipated drama. Thus, Texas law imposes a few requirements to draft a valid will. Will Capacity Requirements First, the testator (the person creating the will) must have the legal capacity to create a will. This requires that they are at least 18 years old, are married, or are a member of the United States military. Second, the testator must possess the testamentary capacity necessary to execute a valid will. This requires that at the time they draft the will, they command an understanding of: The fact that they are creating a will; The practical and legal effect of creating a will; The property they own; The people who are related to them; and The fact that making a will eventually results in the permanent transfer of assets. Additionally, the testator must have the capacity to make reasonable judgments about the matters contained in the will. Generally, Texas will requirements include the need for the testator’s signature on the document. However, if they are unable to sign the will, the testator can designate someone to sign on their behalf. There is no notary requirement for a Texas will. Will Witness Requirements Most Texas wills must be executed in the presence of two credible witnesses over the age of 14. A credible person is someone who does not stand to benefit from the provisions of the will. Each witness must sign, indicating they witnessed the testator sign the will. The major exception to the witness requirements is for holographic wills. Undue Influence In addition to the above, a testator must be free from undue influence when executing a will. Undue influence is a legal term referring to a situation in which someone successfully influences the testator to include something in their will they didn’t initially want to include. For example, if someone told you that they are happy to take care of you as long as you leave them your house in your will, they may have exercised undue influence over you if that was not your original intention. Are Handwritten Wills Valid in Texas? Yes, holographic wills are valid in Texas, provided they are properly executed. A holographic will is one that is entirely in the testator’s own handwriting, meaning no part of the will can be typed or in anyone else’s handwriting. These are often used on an emergency basis when someone does not have the time or ability to get to a Texas estate planning attorney. There is no witness or notary requirement for a holographic will. While holographic wills do not need to contain the date of execution, it is always a good idea to do so. While holographic wills may seem like the easiest type of will to create, they also frequently give rise to will contests. A will contest is when someone challenges the validity of a will for any reason. Estate planning laws are complex, and when someone writes their own will they may use inaccurate or inconsistent phrasing. This can lead to ambiguity, and ambiguity typically results in will challenges. If someone who was not mentioned in the will believes they should have been included, they may challenge the validity of a handwritten will. And if the language is not airtight, they may succeed in invalidating the will. Limitations of Wills While wills are the cornerstone of any Texas estate plan, they are rarely sufficient on their own. In a will, you can determine how the court will distribute your property after you die, name a guardian for any minor children (or adult children experiencing disabilities), and name an executor to oversee your estate. However, all assets in your will must pass through probate and are subject to federal estate tax. Thus, many families also consider other estate planning tools, such as trusts, which can allow for the more orderly and cost-efficient transfer of assets. Similarly, a will only takes effect after you die. If you suddenly become incapacitated, the person you named as an executor has no legal authority to conduct business on your behalf. This is where a power of attorney comes in. A power of attorney gives you the ability to name another person to handle your financial affairs if you become unable to do so. When thinking about creating a will, it is important to pinpoint what you are trying to accomplish. Often, you’ll find that a will can only get you part of the way to your desired goals. You may need to use other estate planning tools that work in conjunction with the will. A Texas estate planning attorney can help you better understand how each of these pieces fits together. They can work with you to develop an effective estate plan. Schedule a Free Consultation with a Texas Estate Planning Lawyer Today If you do not yet have a will, or it’s been years since you updated your will, reach out to Massingill Attorneys & Counselors at Law. At Massingill Attorneys & Counselors at Law, we have extensive experience working with families, helping them develop...

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