6 Critical Steps for Avoiding Business Litigation Liability

Set up an LLC. The State of Texas provides for the creation of limited liability companies (LLCs), and for the registering and operation in-state of LLCs created in other jurisdictions. Properly operated, and absent fraud and willfully bad behavior, the LLC shields its Members from liability and judgments. Those who obtain judgments against an LLC Member have to file a charging order with the court to try and obtain payment on the judgment, and the charging order only applies to LLC distributions to that Member. If there are no such distributions, for instance, if the LLC is putting its profits back into the company, then the judgment holder is out of luck. Additionally, where someone holds multiple investment properties or other separate assets, they can place each of those assets into a separate series of a Texas series LLC, and each series is protected from any liabilities of other series.

Make sure you have an operating agreement. Many people create their companies online, and get a Certificate of Formation, but never create an operating agreement (or Bylaws or Articles) for their entity. But if you don’t have an operating agreement, the State of Texas has one for you in its Business Operations Code, and you may not like its one-size-fits-all provisions. So be sure and create an operating agreement when you form your LLC or other form of company. An attorney can do this for you for a relatively small fee, and tailor it to reflect your wishes, including a succession plan. The operating agreement is an enforceable contract, and if you end up in litigation, wouldn’t you rather be enforcing a contract that you had designed in your favor to reflect how you want to operate your business and where you want the profits to go, rather than enforcing a generic contract provided by the Code?

Include emergency management provisions. Especially where you have a single-Member LLC or one with very few Members, situations can arise where no member is able to operate the company at a critical time.  For example, say a coronavirus pandemic has stranded one Member on a quarantined cruise ship with poor access to internet or cell service, and the other Member is in ICU following a car wreck, and the LLC has no other employees: who is going to finish the work on the big branding project for the Fortune 500 company by the deadline? Make sure your operating agreement provides for Substitute Members in the event of an emergency. The agreement can also provide for who obtains your Member interest, or its financial value as an assignee, in the event of your incapacity or your exit from this worldly stage on to the next great adventure.

Always file your franchise tax report, taxes, & Public Information Report every year. The State of Texas places yearly filing requirements on companies registered in the State. For example, for an LLC, you will need to file an annual public information report updating your most basic structural information for the public database, an annual franchise tax report, and pay any franchise taxes due. If you fail to make these annual filings in a timely way, your LLC falls into tax and/or administrative forfeiture status, and you lose the limited liability protection that an LLC offer. The Members become personally liable on company obligations. And if you are involved in litigation, it is the time period during which the subject of the litigation arose that governs. So if that is when your LLC was out of status, you are personally liable. The State also requires that you keep your registered agent name and address current.

Document changes to your company structure or other important aspects of the company.  Any material changes to company Members/partners/shareholders, management, procedures, or assets) should be documented and the documentation should be kept with your other business records. If you have bought out a Member of the LLC via handshake and an exchange of cash or maybe IP or other capital, and failed to document it in any way, you don’t want that allegedly former Member successfully suing you for a share of the company and its profits because all of the company paperwork still says that there are the two Members with equal rights in the company. Also be sure to document amendments to procedures, actions taken by unanimous written consent, and acquisitions or divestments or property. The documents can be fairly simple, so long as they are clear, and are signed. An attorney can help you in documenting company actions.

Read your contracts and abide by them. Operating agreements and other contracts are enforceable. If you don’t understand a contract you are asked to sign, don’t sign it; or if some of its provisions seem sketchy to you, they probably are. An attorney can help you review the contract and pinpoint concerns and red flags before you sign. You or your attorney can negotiate more favorable terms. Don’t do anything by oral agreement; any verbal understandings you think you have won’t help you when it comes time to litigate and the written contract is presented. Many people don’t take contracts seriously and think the long provisions in the contract don’t apply to them, and then they are surprised when they lose a court case and are ordered to pay tens of thousands or more in a judgment. Don’t let that person be you. Get attorney help when you need before you sign a contract.

By Jen Green, Burch Law