(309) 306-1095 tom@collateralbase.com
How To Stop Check Kiting Scams

How To Stop Check Kiting Scams

How To Stop Check Kiting Scams

How To Stop Check Skitting ScamsCheck kiting is one of the many ways your financial securities can be violated.

 

It constitutes a type of bank fraud very popular in the early 2000’s, that was in its majority shut down by a regulation called check 21 act. 

Even though not as common as it used to be, check kiting is still present in many fraudulent transactions. Here we explain to you everything there is to know about this illegal procedure 

 

Definition of Check Kiting

Check kiting is the fraudulent procedure of deliberately issuing  a check for which there is not sufficient money to pay the stated amount.

The scheme usually involves several checking accounts at different banks. In effect, a bank deposits accessible money into an account while waiting for cash to be processed from an account at another bank when in actuality the other account holds no money.

Check kiting is always intentional. Those engaged in kiting have a detailed understanding of the bank’s timing, and will take advantage of it to withdraw cash just before the bank discovers that there is something wrong,  keeping ahead of the funds-clearing mechanism.

Check kiting schemes have resulted in multi-million dollar losses.

Elements to Check Kiting:

  • Having checking account A, and checking how to stop check skiting scamsaccount B from different banks,
  • Writing a check from checking account A, for which there is not sufficient cash in the payer’s account.
  • Deposit the fraudulent check in checking account B.
  • Withdraw the funds from checking account B.

 

Examples of Suspicious Circumstances That could lead to check kiting

 

This examples have been provided by regulatory agencies to help the identification of suspicious transactions that may indicate check kiting:

  •  Several accounts with similar names, owned or controlled by the same individual
  •  Regular or excessive drawings against uncollected funds
  •  Frequent daily negative ending balances or overdrafts
  •  Deposits of large checks drawn on nonlocal banks or foreign banks
  •  Frequent, large deposits drawn on the same institution
  • A large number of check deposits each day
  • A large proportion of cash in an account that has not yet cleared the paying bank
  • Deposits being made through multiple bank branches
  •  A low average daily balance in relation to deposit activity
  •  A low collected funds balance in relation to the book balance
  •  A volume of activity or large debits and credits inappropriate in relation to the nature of the business

Is check kiting the same as playing the float.

 

You may have heard of the expression playing the float, and don’t worry it’s not the same as check kiting.

Float refers to the amount of time it takes for money to move from one account to another. Meaning, Playing the float is the process of writing a check with no bank balance covering it, expecting the fund to be in the bank when the check clears.

In the past, it was easier to play the float, because the period of time between when a check was written by the payer and when the funds were transferred to the payee was longer. The Check 21 law had the practical effect of shortening that opportunity.

There is a fine line between playing the float and actual check kiting. Check kiting is the illegal act of knowingly writing a check from a bank account without sufficient funds and depositing it into another bank account. While playing the float is taking advantage of the funds-clearing time period to have to receive the sufficient funds to cover the check.

Check kiting is a fraud, playing the float is not. Playing the float doesn’t result in harsh penalties, while check kiting does.

 

Check 21 Act

 

Check 21 law, is a federal law to combat check kiting that became effective on October 28, 2004.

The Check Clearing for the 21st Century Act, or Check 21, is designed to enable banks to handle more checks electronically, instead of moving the original paper checks from the bank where the checks are deposited to the bank that pays them, making check processing faster and waymore efficient.

Check 21 act may seem like a very subtle and expected change, but its consequences are enormous.

It meant that not only could banks exchange the images between themselves, customers could deposit an image instead of a paper check as well.

Since its passing, the services have evolved exponentially, and the necessary computer hardware has improved and become less expensive and more available for all americans.

More importantly, Check 21 has allowed us to receive and have access to our funds sooner.

 

How to prevent Check Kiting

 

The entity harmed by check kiting is mostly the bank that has allowed funds to be withdrawn from the new checking account without first waiting for funds to arrive.

Banks fight  this by not allowing funds to be withdrawn from an account until a certain number of days have passed, by which time the lack of funds in the payer’s account will have been discovered.

But any individual could be subject to check kiting, as well. Here are some tips to prevent becoming a victim of check kiting:

1 . Only accept checks for the exact amount owed to you.

  • If a customer offers you a check for more than the amount they owe, then asks you to give them cash for the difference, and you accept and then the check is returned by the bank, you can become a participant in a check-kiting scheme unintentionally .
  • For online transactions a check kiter might send you payment, then inform you that they “accidentally” overpaid you. They’ll ask for you to pay the difference by wiring transfer or cash.

 

2. Wait until the check clears to refund the overpayment.

  • If someone overpays you with a check and wants a refund, tell them that you’ll gladly do it after the check clears.
  • Refuse to pay any refund until the check no longer says “pending” in your bank account.

 

3. Look into checks that clear your bank account out of sequence.

  • Checks out of sequence might indicate that someone has stolen a checkbook and is using your bank account for a check-kiting scheme.
  • Checks out of sequence could also indicate that someone has ordered checks on the account starting at a different number than the ones you’re currently using.

 

4. Restrict access to company checks if you’re a business owner.

  •  A check kiter can use your company checks for its check-kiting scheme without your knowledge
  • Keep all blank checks in a locked safe with restricted access.

How To Stop Check Skitting ScamsPenalties to Check kiting

Penalties for check kiting always vary depending on the case, but millions of dollars cases can end with sentences of more than 10 years in prison and enormous  fines. Smaller or first-time infractions can result in harsh penalties.

 

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

Fiduciary Duty Litigation

Fiduciary Duty Litigation

Fiduciary Duty Litigation in Corporate Law

 

Fiduciary Duty LitigationA fiduciary duty is an obligation that exists in a relationship in which one of the parties has the best interest when acting on the other party/es behalf. 

There are multiple types of fiduciary duties. Some examples can be the obligations between lawyers and clients; shareholders and directors; between business partners; and many others where special trust is part of the nature of the relationship, or a reliance on the one party exists to exercise its expertise or discretion on behalf of the others. 

Breaches to fiduciary duties are extremely common, especially in corporations. Here are all the details you should know about fiduciary duties and what to do when you have to appeal to litigation because a breach has occured.

 

Fiduciary Obligations

A fiduciary duty consists of two main fiduciary obligations.  

  • Duty of loyalty, the fiduciary prefers the beneficiary’s interests to his or her own 
  • Duty of care,  the fiduciary acts as a reasonably careful person would act under the same or similar circumstances safeguarding the beneficiaries’ interests.

Depending on the state’s legislation other duties such as the duty of good faith and the duty of acting according to law can also be considered. The failure of either of these duties may result in fiduciary duty litigation.

 

Who Is Part Of This Relationship

 

  • Fiduciary: The person who holds the obligation that exists in the relationship, Fiduciary Duty Litigationhaving best interest when acting on the other partiy/es behalf
  • Principal: The person to whom the fiduciary owes the duty

Who has fiduciary duties?

 

These are the persons the law denominates as fiduciaries, keep in mind states may differ in these considerations:

  • Partners: Business partners in a partnership owe each other a fiduciary duty. Some of these duties are to account for profits, property, opportunities, or other benefits derived by the partner, and to abstain from competing with the partnership.
  • LLC Managers: A duty to account to the LLC, and hold any property, profit or LLC benefit, as a trustee for the LLC; and, A duty to abstain from competing with the LLC; to refrain from negligent or reckless conduct, intentional misconduct, or knowingly violating the law.
  • Corporate Directors: The board of directors of a corporation owes duties to the corporation itself, and the shareholders. Directors must act in the best interest of the corporation and the shareholders
  • Corporate Officers: the fiduciary duty requires officers to apply their best business judgment, to act in good faith, and to promote the best interests of the corporation.
  • Controlling Stakeholders: As Someone who has a legitimate interest in serving the company so that the company performs well overall their duties are similar to the corporate officers one, as they may take decisions in the name of the company.

Breach of Fiduciary Duty Fiduciary Duty Litigation

Breaches of fiduciary duty happen when a binding fiduciary relationship is in effect and actions that are counterproductive to the interests of a specific client are taken, to benefit the fiduciary’s interests or the interests of a third party instead of a client’s.

A breach can also come from a failure to provide critical information that may lead to misunderstandings, or misinterpretations. Identification or disclosure of any potential conflicts of interest is important in fiduciary relationships because all types of conflicts can be a source for undesired intentions.

Elements Of a Breach Fiduciary Duty 

To be sure you have a case of breach of fiduciary duty, you must look for three essential elements: 

  • A duty existed, You must determine if the specific relationship in question created a fiduciary duty under the law
  • A breach of the duty occurred: You must prove that a breach occurred and that the defendant acted on his own behalf instead of in the best interests of the other parties. 
  • Damages were suffered: You must prove that the breach caused harm and compensation is available. 

Most common breaches of fiduciary duty

There are many ways in which fiduciaries may breach their duties. The most common breaches of fiduciary duty include:

  • Self Dealing, through conflict of interest business, transactions for personal gain or personal economic profits.
  • Usurpation of business or corporate opportunity
  • Misappropriation of corporate funds and property.
  • Neglect, business imprudence, or lack of necessary business skill.
  • Deficiently acting in the business owners, shareholders, or members best interest.
  • Failure to provide accurate corporate information.
  • Breach of confidentiality.
  • Misuse of superior knowledge.
  • Giving inappropriate advice or counsel 
  • Abusage of superior or influential position.

Fiduciary Duty Litigation

When a fiduciary duty has been breached, those affected can consult with a corporate litigation attorney about filing a lawsuit. 

If you believe you have a case for breach of fiduciary duty,  you should really know all your options, don’t forget litigation could worsen the situation.

While these types of disagreements need to be resolved, there are other alternatives, such as mediation. Be sure you consult it with an expert before making a final decision. 

Going to court can be time consuming, stressful and expensive and private disputes will become a matter of public record. All litigation processes are complex, and fiduciary duty litigation is not the exception.

You do not want to spend time and money going to court only to be unable to prevail and obtain the legal remedy you seek because you were unprepared, a fiduciary duty litigation attorney could make a difference in the result.

 

Key Points Of Fiduciary Duty You Should Know

  • A fiduciary is legally obligated to put their client’s best interests ahead of their own.
  • Fiduciary duties appear in a range of business relationships, including a trustee and a beneficiary, corporate board members and shareholders, and executors and legatees, but also in many civil relationships.
  • You may have heard the term investment fiduciary before, and it is anyone with legal responsibility for managing someone else’s money.
  • Fiduciary duties are both ethical and legal. 
  • A fiduciary must avoid any conflicts of interest between his own interests and the interests of the principal, as well as to avoid any conflicts that may arise between different clients of the fiduciary.

If you are looking for a Fiduciary Duty Attorney don’t hesitate to contact us.

 

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

What Is an Accredited Investor?

What Is an Accredited Investor?

What Is An Accredited Investor

accredited investor

What is an accredited investor?

An accredited investor is a person or legal entity with a special status under financial laws, who is allowed to participate in non-registered investments, since being considered an individual with the experience and means to participate in riskier investments and bear any potential losses.

The Securities and Exchange Commission (SEC) concedes companies and private funds the opportunity to not register certain investments as long as the firms sell these assets to accredited investors exclusively.

Who Is an Accredited Investor? 

In order to qualify as an accredited investor, a person must meet certain criteria involving his annual income and net worth.

  • Annual Income: The investor must have an annual income that exceeds $200,000 or $300,000 for joint incomes, for the last two years. The individual must also expect the same or higher revenue in the current financial year.
  • Net worth: The investor must have a net worth of $1 million or higher, either as an individual or jointly if married, at the time of purchase.  In the case of an entity, assets must be valued at $5 million or higher or have an owner who is considered an accredited investor.

However, entities formed for the sole purpose of purchasing unregistered securities will not be allowed accredited status. 

 

How do I become an accredited investor?

There’s no formal process of certification offered to prove you’re an accredited investor. There is no government agency to review an investor’s credentials, and no exam or certification exists stating that a person has become an accredited investor. Instead, it is on the companies selling the non-registered investments to verify the qualifications of the buyers. 

Typically, the investor is required to fill out a questionnaire that requires details of their annual income and their net worth attaching supporting documents like financial statements, account information and tax return. It is possible some companies require additional information, like letters from financial advisors and attorneys or credit reports.

 

Why do accredited investors exist?

The Securities and Exchange Commission (SEC) created this distinction to refer to individuals considered “sophisticated investors”, who are not in need of the same levels of financial protections the common investor does. 

Allowing only accredited investors to participate in offerings of non-registered securities has the purpose of:

  • Regulating companies against advertising to or soliciting investments from non-accredited investors.

 

  • Protecting the regular investors from getting into riskier projects, especially because they may not have the fund reserves to handle a loss

 

  • Making sure that those who meet the qualifications have the financial sophistication necessary to evaluate a private investment and potentially riskier opportunity 

 

  • Assuring that the risk of losing their investment falls on those who financially prepared to bear the situation.

Amendment to the Accredited Investor Definition

The SEC announced the adoption of amendments to the definition of “accredited investor,”. In efforts to “simplify, harmonize, and improve” the rules governing the private offering of securities while maintaining investor protections by adding new categories of qualifications, including

  • Individuals with professional certifications, designations or credentials issued by an accredited educational institution, which the SEC may designate from time to time; 

 

  •  Individuals who are “knowledgeable employees” of private funds;

 

  • Limited liability companies (LLCs) with $5 million in assets;

 

  • Entities, such as Indian tribes, governmental bodies, funds and entities organized under the laws of foreign countries, that own investments, in excess of $5 million

 

  • Family offices with at least $5 million in assets under management and their family clients; and

 

  • Spousals may pool their finances for the purpose of qualifying as accredited investors, describe as “spousal equivalent”

Here is the full text of the amendment  

The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.

The amendments to the accredited investor definition in Rule 501(a):

add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.  In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.  This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future.  Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;

include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;

clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;

add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;

add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and

add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

The amendment to Rule 215 replaces the existing definition with a cross-reference to the definition in Rule 501(a).

These amendments were announced on August 26, 2020, and they will take effect 60 days after publication in the Federal Register. 

If you are interested, here you can find SEC’s official Press release And if you have any questions about how accredited investors work, do not hesitate to contact us

 

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

Why Do You Need a Buy Sell Agreement Lawyer

Why Do You Need a Buy Sell Agreement Lawyer

Buy Sell Agreements

Buy Sell Agreement Lawyer

Why Do You Need a Buy Sell Agreement Lawyer?

A buy-sell agreement is a legally binding contract between the owners of a business where they agree on what happens to a partner’s shares in the event of life-changing situations that may result in chaos that could potentially ruin the business and bankrupt its owners, assuring the remaining owners that the business will carry on successfully.

A Buy Sell Agreement Lawyer Helps Transition the Business Ownership.

The Buy Sell agreement is also heard of as a buyout agreement, a business will, or a business prenup. Comparing a buy sell agreement with a prenuptial agreement is the most accurate comparison: In a prenuptial agreement, you can get out of the marriage under certain conditions. 

At the same time, you can protect your financial operations. A buy sell agreement offers the same rights, just with one small difference. In a Buy Sell agreement you can cover all the financial transactions between the business partners. This makes a buy sell agreement more reliable and more effective in terms of financial stability.

A buy sell agreement defines your rights when it comes to difficult situations.

Your partner can fall ill or become unable to operate the business the right way. In that case, a buy-sell agreement lowers your financial risks of bankruptcy or debt. You can protect yourself by signing an agreement that will keep your business intact.

Two Common Types of Buy Sell Agreements Are:

 

  • Cross-purchase agreement, and
  • Redemption agreement
  • A cross-purchase agreement happens when the remaining owners decide to purchase the shares of the business that is for sale. In this matter, it is important to know that the mechanism relies on a life insurance policy.
  • A redemption agreement is another form of a buy sell agreement. Here, we have a situation when the business entity buys the shares of the business. With a redemption agreement, the contract limits the ability of business owners to sell or transfer their ownership stakes in the business.

Some businesses decide on a mix of the two forms of agreements, with some portions available for purchase by individual partners and the remainder bought by the partnership. The importance of a buy sell agreement covers most of the financial risks that may occur in the business.

How to Know If a Buy Sell Agreement Is Right for Me

If you plan to start a business with a partner, a buy sell agreement can offer many protective points that can change your business perspective.

Many life situations are inevitable and we can rely on this kind of contract when the official regulations are necessary for business operations.

Your business partner may go ill or die, and that is when a buy sell agreement comes into effect. Your business capital will be protected and you can continue all the future business operations.

Here are some potential situations that a Buy Sell Agreement would prepare you for:

  1.  Personal Bankruptcy of one of the owners;
  2.  Business owner’s retirement;
  3.  Disability of one of the owners;
  4.  Irreparable disagreement between partners;
  5. Death of one of the owners.

Cross-purchase buy and sell agreements contribute to the rights of the business owners.

As a remaining business owner, you can buy the interests of the selling owner. This applies when a selling owner is no longer capable of maintaining their business obligations. 

Buy and sell agreements are also important in the method of determining the overall business value at the beginning of the business as well as when one of the business owners remains the only owner.

Careful drafting of a buy sell agreement can also eliminate or lower any potential estate taxes that apply at your death.

In the situation when you want to pass your ownership interest to one of your family members at your death, avoiding the estate tax is one of the possible outcomes.

What Can I Get From A Buy Sell Agreement?

A Fair Value Price for Shares

A Buy Sell Agreement is a perfect way to establish the Fair Value of your business individual stake. This agreement sets the figure ahead of time, preventing disagreements between partners about whether a buyout is or not fair.

Facilitates the break up of the partnership 

The Buy Sell Agreement minimizes the stress of the disintegration of the partnership, having designed a legally binding strategy to be followed in the case a partner exits the company 

Lets owners decide on the future of the shares

The Buy Sell agreement specifies who is entitled to your stake if you exist, preventing owners fighting over shares or third parties deciding on the future of your company. The uncertainty can be avoided with a well-crafted agreement.

Do I Need a Buy Sell Agreement Lawyer?

A buy sell agreement lawyer is necessary if you want to avoid state taxes and protect your business capital and operations. With a buy sell agreement, you will be able to buy shares of the business and prolong your business perspective.

A good buy sell agreement lawyer can help you draft the buy sell agreement that protects both your business partner’s interests and your interests. You will have the right to continue the business operations even in the case of illness or death of your partner. 

It is possible to stay protected and define a new business strategy with a buy sell agreement. A good buy and sell lawyer can help you craft and improve the right contract that protects you in the case of inevitable circumstances.

 

When Should I Make a Buy Sell Agreement?

The perfect moment to create a Buy Sell Agreement is way before the ownership transition, when all the owners are equally involved and an orderly transition can be planned for. 

Since at the time the buy sell agreement is being executed the owners may not even know who would be bought out, when and why. Hence, relationships between the owners would be presumably good so they would most likely come to an objective consensus on the terms.

If you wait for the triggering events to occur, relationships may be strained, and not having a solid buy sell agreement may result in conflict, potentially becoming extremely expensive for all the parties. 

Making sure that the terms of the buy-sell agreement are in writing and having the owners agree to those terms beforehand helps to eliminate the potential conflict. 

The buy sell agreements doesn’t need to be a separate document. It could be included in the company’s shareholders agreement or in the partnership agreement. 

The important thing is not to assume that you have one, and always make sure to keep it updated and clear in what your specific intentions are, amending the existing agreement or creating a new one if necessary. 

Do I Need a Buy Sell Agreement if I Am the Sole Proprietor of My Business?

Even if you are the only shareholder in your business, you should still consider to have a Buy Sell agreement to make sure your assets are protected in the face of any eventuality. 

The Buy Sell Agreement is a clear outline of your intentions for the future of your company that will be taken into consideration once you no longer have the power to voice it. You certainly would be saving your heirs, and employees unnecessary trouble.

What Important Things Should I Consider in My Buy Sell Agreement?

Avoid the use of Ambiguous Language

Since the purpose of your Buy Sell Agreement is to prepare for any possible eventuality involving one of the owners, you should make sure the statements in the agreement are the clearest possible so you prevent conflict between the stakeholders the moment the sale is executed. 

Unclear language in contracts tends to represent further conflict between the parties involved, which can only mean negative financial repercussions for you.  

Worst Case Scenarios Must be Considered

It doesn’t matter if probabilities are very low, you should have a Buy Sell Agreement that takes into consideration all the possible scenarios. You want to have every precautionary clause possible to assure you the best outcome.

Set the Objectives Of Your Business Straigh

All of the owners should not only understand, but also agree with the short and long term objectives of the company. If this concordance doesn’t happen and the owners have varying objectives it may be difficult to outline a good Buy Sell Agreement.

Beware of Taxes

You should get assessment on the tax consequences of shares exchanging, to prevent you and your business from losing a lot of money. A good Buy Sell Lawyer can guide you to make the right moves when it comes to avoiding getting wrecked by taxes.

If you are looking for a Buy Sell Agreement Lawyer don’t hesitate to contact us.

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

LLC Operating Agreements

LLC Operating Agreements

LLC Operating Agreements

LLC Operating Agreements in Illinois

What to Put Your Illinois Company’s Operating Agreement

LLC Operating AgreementAn Operating Agreement is the contract of your Illinois company’s life – which it really does not have. However, your company is a legal fiction of a person that has a beginning, called articles of organization for LLCs, and even an end, called a dissolution. The Operating Agreement is a long contract that explains how your company is managed, how new owners come into the business, how existing owners leave the business, and more.  Here’s an article all about operating agreements for your cannabis company.

Illinois Company Operating Agreements are Flexible

We have done scores of operating agreements, many for Illinois companies.  Illinois companies often require additional care in drafting their operating agreements because of the amount of money and free cash flows that they kick out during their operations. Therefore, it is very important to review and understand your cannabis company’s operating agreement.  Please read yours with a lawyer or advisor that is experienced in them and ask questions until you understand everything about how your cannabis company operates – hence the term Operating Agreement.

What are the elements of an Illinois LLC Operating Agreement

Operating agreements, for any company – not just Illinois businesses – have different sections, or articles. Like chapters in a book, articles in an operating agreement break down the contract into logical subgroups where specific things are discussed.  The common sections, or articles, in operating agreements that we use include:

  1. Recitals
  2. Formation of Company
  3. Members & Units
  4. Management of the Company
  5. Rights & Obligations of Members
  6. Actions of Members
  7. Contributions to the Company and Capital Accounts
  8. Allocations, tax and distributions
  9. transferability
  10. Issuance of Membership Interests
  11. Dissolution and Termination
  12. Books and Records
  13. Miscellaneous Provisions

 

Want a Custom Operating Agreement

Illinois Company Operating Agreements Basics

You may not know it, but your business is just a ball of contracts with all the rights of a person, from owning property, to entering into contracts, and even suing in court, but does not include the right to vote in public elections, but you can spend money on supporting the people running for office.  Don’t be so upset, America itself is basically a large corporation – most municipalities are actually corporations. See these useful informational tidbits? – everything you’ve come to expect from…

RELATED: Subscribe to Illinois Legalization News

learn all the differences between corporations and LLCs that may have huge impacts on your business if it raíces money, or just its day-to-day operations. 

This is another of our Fundraising.  If you are getting into the Illinois industry and you are under a million dollars for your dispensary team, or under 4 million for your craft or micro grower team – then this is the content for you,

You may not know it, but if you are in an LLC for your Illinois company, or on its application, then this is how your company as a legally fictional person literally operates.  It is the owners’ manual for your company – which basically means it is like the one for your car – in the glove box and probably not really read too closely. 

That is a mistake – corporate entities – whether LLCs or corps – can only do what their contracts say they can do. So it is not only quite crucial – but expletive deleted important to know how your company runs its operations and distribution’s of profits – to raising capital – to diluting your shares. 

 

Want a Custom Operating Agreement

Why are LLCs so popular now instead of corporations?

Because LLCs are flexible – you can have an operating agreement between the owners, called members of the LLC, that literally governs the whole life trajectory of the business.  We are going to discuss several different permutations of operating agreements depending on the goals of your business venture. 

Remember that LLCs are flexible? What does that mean? 

 from reading you Illinois company’s operating agreement I can tell:

  1. If it was set up to be sold to the highest bidder
  2. If it was to be a family business for generations
  3. If it was to operate a real estate business
  4. If it was to operate a big one time deal and then have parties part ways
  5. If the parties did not care what the other owners did
  6. If the the parties wanted specific duties to the business
  7. If it was to hold control in very specific ways – this could be a social equity operating agreement.
  8. If it was to be taxed as the business owner, an s-corp or a c-corp. 
  9. If the profits interest went to different things despite the ownership percentages
  10. How it would die – dissolution
  11. How the owners get in or out
  12. And that’s more than enough points to tell you about how flexible this contract is.

Isn’t that amazing one contract can be set up in almost any number of ways for your unique business situation – so please get your tax guy involved immediately and your corporate consultant and lawyer and discuss it to suit your company’s needs.  We can talk about your company’s needs to see what your objectives are – what your exit is – a big check list of things that if you want to get. LLCs are great because not only do they have the flexibility to do whatever your business really needs, they also have relaxed formalities and greater restrictions on transferability of ownership interests. 

You probably know that corporation’s ownership is referred to as “shares” in the company while LLCs have “units” of membership in the company. 

So why are these LLCs so popular – because about 50 years ago some business people in Wyoming asked, “Wouldn’t it be great if you can get all the protections of the corporate shield but not have to follow all the rules?”  Heck Yeah – it would. Only in America.

In an LLC you can set it up so that owners, shareholders in corporate speak, or members in LLC jargon, have no duty to one another.  Just be like – I did this – deal with it. That could be a part of the business. We have an operating agreement that we like to call the fugghetaboutit – because not only does it allow you to have the least amount of duties to your partners as a matter of law, but the freedom to leave the business on a moment’s notice, dissolve the business and leave it in the past. It’s the LLC for the deal when you got just one little thing to do.

Then you got the protect yah neck, son – that’s just a single member LLC – The operating agreement basically gives the liability shield and very little else.  I have seen these be just a few pages, but you get more people involved and watch the operating agreement grow into the dozens of pages, maybe over 100 depending on the exhibits attached. 

Then we have another operating agreement that I like to call the flip – this company is basically on a mission to be sold – the LLC comes with an exit so you are almost for sale from the day you go into business on the terms set by the operating agreement. In this format, we use the tag-along-drag-along clause as a term of the operating agreement to provide protections to the minority owner of the company the “tag along” to be “dragged along” in the full sale of the company, or substantially all of its assets. So you can see, both the minority owner and the majority owner are in agreement as to what will happen when the offer to buy comes along.

Then I have one called the generational wealth – where you have the business being able to have rights of first refusal to retain ownership – often inside a family owned business. It is a sticky wicket to get into or out of – and that’s the point.

There are so many variants that we can make up a new type of operating agreement that we could make, like a ‘give it to the people’ where the company agrees to an ESOP to become an employee owned company at a certain point in time in the future.  I guess we could set that one up for you. We’d have to research it though.

Remember that your company is just a ball of contracts related to a statute – a legally fictional person that gets to generate you money – but you’re responsible for bearing the risk as the entrepreneur. 

The reason you need an operating agreement when raising capital is because it tells your prospective investors exactly what your company is legally obligated to do.

That  is the plan – the operating agreement spells out how it will all go down.  From management, to new owners, to getting out of your ownership, dissolution of the company, everything. 

can you run your LLC like a corporation?

In corporation terms, an operating agreement blends shareholder agreements and bylaws all together – but in theory, an LLC could do bylaws separately – in theory.  And as we get to the intersection of these two different type of corporate entities businesses have at their disposal, we can finally answer of the question, can an LLC be run like a corporation?

So you can see that – yes, you can structure a LLC like it is a corporation – but it will be much more expensive than the couple page single member LLC operating agreement.  The operating agreement has to blend agreements about new owners, types of owners, officers and directors, voting rights, tax consequences – so many things.  

Conclusion on LLC Operating Agreements

So why not just start with a corporation?  You can, but they have greater formality, less flexibility, and easier exchange of your shares. An LLC can become a corporation – so if your first 5 years are expected to be you and your core team operating the business before it is geared up and sold, or who knows.  Then you can start to set up the corporation as best you can, but borrower the flexibility and lack of formality that the LLC has, plus get more restrictive ownership, to keep your team together until you are ready to become a full on corporation that ends up getting sold for stock – a corporation can still buy an LLC. 

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

What are valuation caps?

What are valuation caps?

A valuation cap is a term of a convertible note or a SAFE. It is also a great way to attract investors to any startup, providing them with an incentive to invest. Starting a successful financing round for your business will expose you to a slew of new terms. It is...

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

How To Raise Money Through A Private Placement Memorandum

How To Raise Money Through A Private Placement Memorandum

Private Placement Memorandum

Raising Money PPM

A PRivate Placement Memorandum (PPM) is a complex legal document that provides great detail into a company and offers a portion of its ownership for sale to an investor, often an Accredited Investor as defined under Regulation D for the SEC. 

Private Placement memorandums could be used to raise capital when a company cannot otherwise access the capital markets.  Perhaps a bank would not loan the company money, but an investor may for a stake in the game.  The PPM would provide detailed information of the equity state being offered in the business.

Private Placement Memorandums in the Cannabis Industry

PPMs are popular in the cannabis industry because of the lack of financing options resulting from its federal prohibition.

Why You Should NOT Use Templates for your PPM

using templates to do your private placement offering is okay – when you are in good hands and they have used such templates to craft and customize private placement offerings for the unique conditions of the specific business deal being offered. 

Unfortunately, some entrepreneurs want to keep legal and consulting costs to an absolute minimum and take a form they got on the internet and try to stick their names in the right places.  This could cause headaches and huge problems if anything goes wrong, which is more likely to happen when you are cutting corners instead of doing the due diligence required.

Here’s a link to Private Placement Memorandum Template Library

FINANCING YOUR BUSINESS THROUGH A PRIVATE PLACEMENT MEMORANDUM

As this article is written, small businesses are being ravaged by the effects of COVID-19. The Small Business Administration is stepping up with all kinds of offerings to help small businesses weather the storm. Still, times are very difficult and uncertain for business owners, and there’s a good chance that credit will be tight over the coming months. For prospective small business owners, the hardest part might be simply finding a bank that is even open and available to meet during the ongoing COVID-19 pandemic.

Fortunately, budding entrepreneurs don’t have to rely on taking on big, high interest loans from a bank. Instead, there is an alternative: the private placement memorandum, or PPM. The federal Securities and Exchange Commission (the “SEC”) provides this helpful guide on the legal basics of a PPMs. In this article, we’re going to go over some of the highlights of the PPM route, which will help you determine if a PPM is the right course for your business.

  1. What Is A PPM?

Generally, when someone wants to sell securities in a company, they have to go through the registration process with the SEC. This applies not only to the Googles and Facebooks of the world, but also to much smaller companies as well. After all, small businesses have shareholders too. 

A PPM is, in simple terms, a way to raise funds without going through the SEC’s burdensome registration process. Instead, you go directly to potential investors. This is a very common route for small businesses, even ones with pretty big budgets. For our Chicago-area readers, some of the city’s most famous and lucrative restaurants, such as Chicago Cut, are actually owned by a small group of shareholders. 

To raise money through a PPM, entrepreneurs can make use of Regulation D, Sections 504, 505, and 506, depending on certain conditions such as the amount of money being raised. Section 504 is limited to fundraises of under $1,000,000, and so is unlikely to be useful for people hoping to open a typical cannabis business, especially a craft grow cultivation facility. For most entrepreneurs, they’re going to be raising money from Accredited Investors.

  1. Accredited Investors & PPMs

Regulation D sets out the definition of an accredited investor. Different kinds of institutions (banks, LLCs, trusts) can be accredited investors, but in general you’re talking about wealthy individuals. These are individuals or couples who meet the following criteria:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)).

Private placements are risky by their nature- these are brand new companies fundraising with relatively little government oversight. Investors could very easily lose everything. That’s why it’s so important that accredited investors be sophisticated and financially capable of absorbing the full loss. A typical PPM doesn’t require much information from an accredited investor. They simply have to certify that they meet the criteria. Some entrepreneurs may want to get independent verification, such as bank statements or CPA letters, but that’s not necessary to meet the requirements of Regulation D.

 

  • Why Should I Try A PPM?

 

Starting a business is hard. We just finished submitting all of our clients for the State of Illinois’s competitive cannabis cultivation and transporter application process, and boy did we learn a lot. Your average craft grow facility can cost upwards of $4,000,000 to fully build out. Worse yet, many traditional banks are still reluctant to work with cannabis clients.

The PPM bypasses regulatory hurdles and allows you to go directly to individuals who want to get involved in the industry. These can be people in your community who you know, who have the money but don’t know how to get involved. Accredited investors can be wealthy lawyers, bankers, restauranteurs, real estate brokers, or any number of people who are simply your friends and neighbors.

We’ve put together a PPM package for our clients to help them get started in their entrepreneurial pursuits. The best part about a PPM is that it is highly customizable. You can sell ten shares at $300,000 each, a hundred shares at $10,000 each, or nearly any combination that best suits your needs. Moreover, you can raise money in multiple rounds. We’ve designed our package so that investors can contribute a small, initial sum to help cannabis entrepreneurs finance their application, with the second, larger round contingent on the company actually being awarded the license.

There are countless other ways to customize a PPM to suit your needs and the desires of the investors your hoping to recruit. If you’ve got a plan and a vision, but you don’t quite have the capital, a PPM could be just the solution you need.

Private Placement Memorandums Are Not General Solicitation 

A private placement, unless it is using 506(c), you do not solicit in general to people to raise the money. It is a private placement memorandum – it is a private offering of an ownership stake in your company. So it means that you have a few investors. Your first meeting is a general meeting to get to know if your investor is right for you.  Then you can follow up with them if they are interested in learning more. Often times your PPM includes investment from friends, family, close network connections that you and your business may have.  

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

David Silvers

David Silvers

Regulatory Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 


316 SW Washington Street, Suite 1A
Peoria, Illinois 61602

Phone: (309) 740-4033 || Email:  tom@collateralbase.com


150 S. Wacker Drive, Suite 2400,
Chicago IL, 60606 USA

Phone: 312-741-1009 || Email:  tom@collateralbase.com


3 Baldwin Green Common, Ste. 307

Woburn, MA 01801

Phone: 617-237-0299 || Email:  david@collateralbase.com