When husband and wife fight -- who has rights in a jointly owned business?

We practice family and civil/corporate law VA, MD and DC. An excellent, and not uncommon question, was asked of us recently regarding family disputes over a 50/50 owned husband and wife company.

My husband and I started an #S-Corp business 25 yrs ago. We are both 50% invested -- he is the president, and I am the vice president and treasurer. Can he block me from bank accounts (which he has done since Jan 2015)? He also terminated my job. Is this legal? We are still living together and married.

There is a common presumption that ownership = #management of the business. While most often this is the case, it is only because no one challenges the presumption. In fact you can own the company, and not have any right to participate in day-to-day operations. Put another way, consider the business you both started as a stock investment. Like any other stock, you enjoy the profit and dividends, but not necessarily the right to tell the CEO what to do.

Having said that, the controlling document that determines what your husband can, or cannot, do is called the "Article of Incorporation" (in an #LLC it's called an "Operating Agreement"). That document can only be updated or changed with the consent of the corporate board -- in this case, you and your husband. Because I imagine you have not given consent, likely the original Articles are still controlling. Get those Articles and read them. It will say therein who may do what in terms of (a) owning shares in the business, and (b) controlling day-to-day operations of the business.

As to the bank records -- that's another kettle of fish. This gets confusing because a bank is a third party -- that is, someone who must rely on an officer of the company to tell it what it can or cannot do. First, check that the bank account is a corporate account, and not a personal account. If he opened a personal account, then you have more serious issues. However, if the account is corporate, and in the name of the business, your problems are solved by bringing the Article of Incorporation, and a copy of the state annual filing showing you as an officer (vice president). That should be sufficient to compel the third party (in this case, the bank) to place you on the list of authorized users with rights to deposit and withdraw from the account. Of course, that depends on what the Articles say....

Bottom line, though, is that your husband has to understand the "nuclear button" option. If he is unable to work with you, then you need to split the company. As a 50% owner, you have legal entitlement to 50% of the company. Although he may get "scared" and attempt to take the money and hide it, or destroy the business in spite, in the end, the law is clear -- as a fiduciary of the company (that means a person in whose care the business is trusted), he cannot squander (waste), or destroy the value of the company, or embezzle funds from the company. For a general explanation of these terms, see Section 13.1-690A of the Virginia Stock Corporation Act (VSCA) and 13.1-1024.1A of the Virginia Limited Liability Company Act (VLLCA) which imposes a duty of care and fair dealings. DC and MD have similar codes.

Presumably, this has nothing to do with your marriage. However, it is naive to think that such tension would play-out without dire consequences to a relationship. That last paragraph would almost certainly involve court action. Our law firm just won a long fought LLC court case in DC predicated on the destruction of a company owned by two brothers. Family and business...when it goes bad...goes really bad.

If you need help with this, or you don't have Articles at all (whoops!), then give us a ring. We'd be glad to help.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com
2751 Prosperity Ave, Ste 150 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.	Lili O'connell, Esq. Charles Hatley, Esq.
1-800-579-9864	admin@hanoverlawpc.com

When can I subpoena a corporate officer?

I was recently asked a good question regarding corporate law. I thought I would share my answer here:

In Virginia I have a case where the named defendant is a corporation. We would like to depose the president of that company. My first thought was since he is not a named defendant we should subpoena him to the deposition. The opposing corporation said they would have him (president) there without the need of a subpoena, but only if we filed a "corporate" Notice to take his deposition? Has anyone heard of a "corporate" Notice? My thoughts are let's subpoena him and do a regular Notice. Please advise.

Alright -- I understand your confusion! Let me clarify a couple of points for you, and I think it will make sense. We handle quite a few civil litigation cases involving companies, and it is not uncommon to face what you are just now attempting to grasp.

Generally, when you want information about what and how a corporation acts, or what the corporation has done, you serve notice on the corporation for a deposition. Because the corporation itself is not an individual (obviously!), the company must send a representative, of the company's choosing, to be present at the deposition and answer your questions. The corporation has the right to select their own person, however, the individual sent must be able to answer the questions you are seeking. For this reason, it is common to outline the thrust of your inquiry when serving the corporation so they can send the right person (again, obviously). If you don't let them know what the nature (in general terms is fine) of your inquiry, they can't send the right person...and you usually waste a lot of time.

If you want a specific person to answer questions, then you must serve that person with a subpoena individually. However, if the person is protected behind the corporate veil, they have may present a valid motion to object to the subpoena, and you'll have to demonstrate why this person, and no other, is the right person to question in regards to the corporate matter. Remember, corporations can select their own person to send to a deposition -- they are not bound by what you want (so long as that person can answer the questions). Often, for this reason, the CEO, or other officers involved with the suit, are named in the actual filing. This ensures that they have to respond as party opponents and cannot hide behind the corporation. For the same reason, you will often find that corporations seek to remove named officers from suits ASAP to avoid just this problem (usually through some form of judgment on the pleadings prior to discovery being had).

You can beat a motion to quash your subpoena...sometimes. That's an entirely different kettle of fish -- and takes a bit of work. But don't be surprised to see such a motion if you try to get someone who lives behind the corporate veil.

If you need help with a civil case, give us a call! Glad to discuss the details and see what assistance we can provide. 703-402-2723 or 1-800-579-9864.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 150 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq.

How to Sell Shares as a Private Business - Rule 504 of the SEC

So you own a small business, and are contemplating obtaining investors? Good news -- It's possible! Bad news, you better know what the heck you're doing.

Care is required here. As a small company contemplating a Rule 504 filing under Regulation D of Security and Exchange Commission, you need to be sure you understand the rules. Generally, you want to be a corporation and not a limited liability company. No hard and fast rule, however, LLC's don't generally have shares, and usually the operating agreement reads more like a partnership than a corporation. Make sure you have a seasoned attorney review the LLC agreement BEFORE soliciting any investors. LLC vs. Corp. aside, let's take a moment to understand what Rule 504 is all about.

At a minimum, Rule 504 allows you to sell shares of your company to qualified investors (considered a "public offering") without having to file notices without the requirement of formal registration and regulation by the SEC. You are, however, still required to complete Form D (hence the name of the action: Rule 504 under Reg D) which provides certain minimal data to about the company. The SEC then enters that information into an online database accessible by any individual or organization that might want to reference or research the company. Although you are not required to file the Form D annually, each time you make a sale under a 504 offering, you SHOULD update the Form D to ensure the SEC information is current. If the information in the online database is off, you risk a fraud charge even under Rule 504. Be careful.

You qualify for a 504 filing if your company has has sold or plans to sell up $1 million in shares in a given 12 month period (hence the annual comment above), and your company is established (defined as having a clearly definable business plan, and some footprint in the market). Generally, shares sold under a 504 plan are restricted -- meaning, they cannot be resold on the open market without meeting further requirements. Those requirements are a bit complex, and generally relate to state regulations -- contact us if you need more information on that.

To find out more about 504 ops, visit the SEC website devoted to the same. It's a tad complex, but it gives a good background. See: SEC Rules for 504 filings.

If you need additional help with SEC matters, or business transactions, give me a ring! I'll be glad to discuss your individual situation, and see what steps make the most sense. Hanover Law: 703-402-2723 or SeanHanover@hanoverlawpc.com.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 580 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq.

Taxes: Reporting Business Income (when you are paid instead of the business)

I have a 1099 in my name, but the money was really for the business...

This is a common problem we see in tax filings of small businesses -- especially those involved with the Federal Government or consulting work. Frequently, a hiring company will refuse to pay corporation-to-corporation, and instead insists on paying in the name of the principal. Said a different way -- your business isn't paid for the work you've done -- you are paid directly.

This presents a serious problem. First, by paying you directly, it most likely changes the taxable bracket in which you fall. Secondly, by paying you directly, you are unable to claim business deductions from the amount - before it becomes income via a K1 or other vehicle.

The fix for this is not too complicated, but does take a little planning. First, you must report your income. The key is where. In this case, you must file a 1120S (1120S = corporate filing, sub-chapter S election -- if you need help understanding this, you need to contact us to discuss. You must elect sub-s status, it is not automatic. Technically, this applies to C corporations, also, however, handling partnerships may be a little different -- so chat with us first). The 1120S needs to reflect the income that should have been attributed to the company, but was paid to you directly (the principal). To the penny, this must be accurate.

Then, on your 1040, include the money from the 1099 as self-employed business income. You will complete Schedule C, indicating a business. Use the EIN from the 1120S. Show all income paid on the 1099 or W2, and deduct the entire amount. Under explanation, indicate that this money was accounted for in the 1120S that was filed for the corporation. You should, therefore, show the income and a 100% right off on your 1040, and an exact matching entry on the 1120S (income). This properly removes the amount from your 1040 personal income, and places it on the 1120S. Once you have completed the deductions on the 1120S, the remainder income will then come over as a K1 -- so you'll see at least part of the income again in the form of dividend income (the proper method for receiving any overage from the corporation).

Do you have a tax question? Give us a call at 703-402-2723 or 1-800-579-9864. Your initial consult is free, and we're happy to discuss tax matters in a way you can understand.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 580 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq.