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The Mistake of a Business Regarding Do-It-Yourself (DIY)

In an era of do-it-yourself videos and a worldwide library of information available on the internet, engaging in a do-it-yourself project seems relatively easy. Especially considering that a lot of us remember our information being obtained generally from looking up books in a library according to the Dewey Decimal System or in the Encyclopedias that were sold by door-to-door salesmen to your parents. But, even with the amount of information currently available, a do-it-yourself project should be undertaken with caution. When you complete do-it-yourself legal projects on your own, it is not uncommon that you end up with a larger legal bill than had you first sought legal counsel.

Hypothetical 1:  Jack and Jill are married, and equally own a business together, Paint Your Self Portrait, Inc. They obtain S-Corp tax status from the IRS for their business. Then they get divorced, and decide that Jack will have 60% ownership of the business and Jill will have a 40% ownership. However, in the event that one of them wants to leave the business, they agree that the purchase price will be 50% of the value of the business. They sign an agreement that they draft themselves stating such.

Consequence:  In order to accomplish Jack and Jill’s goals, Paint Your Self Portrait, Inc. would have to issue two classes of stock. Different classes of stock are not allowed in a corporation that is taxed as an S-Corporation. The consequences are severe because without the S-Corporation tax status, the business is taxed as a C-Corporation, which generally speaking means that the owners are taxed twice.

Hypothetical 2:  Charlotte and Webb organize their business Charlotte’s Webb LLC in 2010. They simply file the articles of organization with the MN Secretary of State. There is no operating agreement and there is no buy-sell agreement (note: a buy-sell agreement is the business partners prenuptial agreement). Rather, the parties just know that Charlotte has a 60% ownership and Webb has a 40% ownership. In 2020, Charlotte passes away. Webb believes he now is a 100% owner of the business.

Consequence:  Charlotte’s spouse, Chris, is now Webb’s new business partner, which shocks Webb as he just assumed that if Charlotte died, he would then gain her 60% ownership. Chris is shocked when she is informed that Charlotte’s ownership interest is only 50% because under the new LLC laws which automatically went into effect for Charlotte’s Webb LLC on January 1, 2018, without an operating agreement stating that Charlotte was a 60% owner, Charlotte was only a 50% owner and Webb was a 50% owner.

Spangler and de Stefano, PLLP assists business owners with most aspects of their business, including corporate formation and compliance, contracts and leases, and buy-sell agreements.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.