Minnesota LLC Formation V: Member Control Agreement

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Member Control Agreement can be the most important governance document in the process of the LLC Formation because it may provide the LLC members with maximum governance flexibility, including overruling some provisions of the Minnesota Limited Liability Company Act.

In fact, a Member Control Agreement may completely reorganize the governance structure of an LLC away form the Act’s default corporate model.  Instead, the members of the LLC may choose to adopt a partnership-like governance model which may greatly facilitate the conduct of business, especially where there are few LLC members.

One of the least-known aspects of a Member Control Agreement is that a person, who is neither a member nor a party to a contribution agreement, may nevertheless be a party to a Member Control Agreement.  This provision may provide a new level of flexibility by incorporating in the Agreement persons who may have financial rights under the Agreement even though they do not possess the usual membership rights (such as voting).

Typically, a Member Control Agreement can regulate a wide range of ownership and management issues, including: transfer of membership interest; contributions of capital, property or services during and after the formation of an LLC, management and governance structure of an LLC, tax elections, distributions of cash and other assets, allocation of profit and loss, establishment and maintenance of bank accounts, books and records; access to books and records, valuation of membership interests, employment of members, dissolution and winding up of the LLC, et cetera. A Member Control Agreement may even re-determine the rights of dissenting members as provided in Minn. Stat. §322B.383 and Minn. Stat. §322B.386. Even this non-exclusive list of issues already emphasizes the significance of the Member Control Agreement to the operation of the LLC.

Precisely due to this significance, special requirements are imposed by the Act on the execution of a Member Control Agreement. In order to be valid, a Member Control Agreement must scrupulously follow the requirements of Minn. Stat. §322B.37.  Even then, the Agreement can only be enforced “by persons who are parties to it and is binding upon and enforceable against only those persons and other persons having knowledge of the existence of the member control agreement.” Minn. Stat. §322B.37, Subd. 3(a). Finally, special recordkeeping requirements are demanded by the Act, including filing of the Member Control Agreement with the required records of an LLC.  The records themselves must note that the members’ interests are governed by a Member Control Agreement.

Thus, a Member Control Agreement may provide a great business opportunity by allowing maximum flexibility in the governance structure of an LLC.  This opportunity, however, must be handled with care and knowledge of a legal professional; otherwise, it may turn into a litigation nightmare.  Therefore, you should retain a Minnesota business lawyer to advise you and ultimately draft the Agreement.

Sherayzen Law Office is an experienced business law firm with one of its primary concentrations in advising and creating business governance documents.  We can advise you with respect to whether you need a Member Control Agreement, help you negotiate the necessary provision, draft the Agreement, make sure it is properly executed, and establish the right recordkeeping procedures to comply with Minn. Stat. §322B.37.

Tax Rates on Capital Gains and Qualified Dividends through 2012

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Pursuant to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), which was singed into law on December 17, 2010, the tax cuts on capital gains and qualified dividends have been extended through the tax year 2012.

Generally, long-term capital gains of individuals will be taxed at a maximum rate of 15% through the tax year 2012.  The same is true for the qualified dividends received by individuals; this means that these dividends will be taxed at the same rates as long-term capital gains through the tax year 2012 (rather than being taxed as part of a taxpayer’s ordinary income at the relevant tax bracket).

Tax Lawyers Minneapolis | Tax Rates for Individual Taxpayers through 2012

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The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) was singed into law on December 17, 2010. Prior to the Act, the previous tax cuts were scheduled to expire and the marginal federal income tax rates for individuals were scheduled to return to 15%, 28%, 31%, 36% and 39.6%.  Under the Act, however, the marginal federal income tax rates for individuals will remain at the 10%, 15%, 25%, 28%, 33% and 35% graduated rates through the tax year 2012.

Keep in mind that the Act does not in any way alter the taxes that were enacted as part of the recent health care reform, such as 0.9% tax on wage income and 3.8% tax on investment income for higher-income individuals.  These taxes will be imposed in 2013.

Attorney Tax Minneapolis | Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

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On December 17, 2010, the President signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”).  The new law preserves the 2001 and 2003 tax cuts through the year 2012, reduces the estate tax to 35 percent and allows a $5 million individual exemption, cuts the  Social Security payroll taxes by 2 percentage points, and renews the alternative minimum tax patch for the tax years 2010 and 2011.  Additional provisions of the Act are devoted to renewing other tax incentives (such as the research and development credit and a 100% exclusion on gain from the sale of small business stock) that either already expired in the tax year 2009 or were scheduled to expire in the tax year 2010.

Look for more detailed explanation of the specific provisions of the Act on this website throughout this week!

Business Lawyers Minneapolis: Legal Fee Issues

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When you are about to hire a business lawyer in Minneapolis, you need to discuss the following top three legal fee issues:

1. Payment Structure

There are three main models of payment that lawyers use: hourly fee, contingency fee, and flat fee. The hourly fee is the most common form of business lawyer compensation in Minneapolis because it is fairly simple and, yet, flexible – the business attorney is paid only based on the time he spends on the case. If you are paying your business lawyer by the hour, the agreement should set out the hourly rates of the business attorney and anyone else in this attorney’s office who might work on the case.

A contingency fee, where a Minneapolis business attorney takes a percentage of the amount the client wins at the end of the case, is very rarely used by business attorneys in Minneapolis. In the unlikely case that this latter type of fee arrangement is used, the most important issue to understand is whether the business lawyer deducts the costs and expenses from the amount won before or after you pay the lawyer’s percentage. Obviously, you will pay more in attorney fees if your business lawyer deducts the litigation costs based on the latter scenario (i.e. after you pay the lawyer’s fee).

Finally, in a flat fee arrangement, you pay an agreed-upon amount of money per job/case. For example, you pay $5,000 to your business attorney to organize your corporation with all of the corresponding corporate documents. While a flat fee arrangement is possible in a small project, it is generally disliked by business lawyers in Minneapolis because it often lacks the necessary flexibility to account for the client’s individual legal situation. Usually, some sort of an additional payment arrangement is built into such fee agreements to make sure that the balance between the client’s legal needs and the business attorney’s fees is maintained.

Remember,out-of-pocket expenses (e.g. long-distance calls, mailing costs, photocopying fees, lodging, etc.) and litigation costs (such as court filing fees) are usually billed to you in addition to your business lawyer’s fees.

2. Retainer

Most business lawyers in Minneapolis require their client to pay a retainer. Retainer can mean two different fee arrangements. First, retainer may be the amount of money a client pays to guarantee the lawyer’s commitment to the case. Under this arrangement, the retainer is not a form of an advance payment for future work, but a non-refundable deposit to secure the lawyer’s availability. Second, a retainer is simply the amount of money a business attorney asks his client to pay in advance. In this scenario, the lawyer usually deposits the retainer in a client trust account and withdraws money from it for the work completed according to the fee agreement. The fee agreement should specify the amount of the retainer and when the lawyer can withdraw money form the client trust account (usually, on a monthly basis).

3. Timing of Billing

Usually, business attorneys in Minneapolis bill their clients on a monthly basis. Sometimes, however, when the project is not large, the fee agreement will specify that you will be billed upon completion of the case. In a flat-fee scenario, it is likely that the client will be obligated to pay either a half or even the whole amount immediately as a retainer. It is wise for a client to insist in paying some part of the fee upon completion of the case to retain a degree of control over the case completion.

Conclusion

Generally, before you sign the fee agreement, business lawyers in Minneapolis will discuss with you many more topics than what is covered in this article. The three issues explained here, however, are crucial to your understanding of how the business relationship with your Minneapolis business attorney will work. Before you sign the fee agreement with your business lawyer in Minneapolis, you should ask at least these three questions and make sure that the answers are complete and to your satisfaction.