BUSINESS PLANNING THROUGH ECONOMIC TURMOIL

Difficult business economic times can lead to hard decisions by a business owner. With economic problems growing, you might be inclined to contract your business.  Unfortunately, there are a myriad of issues and problems with this seemingly simple task. Make sure the pill is not worse than the disease.  A recent article by Martin M. Shenkman gave a very good overview of some various traps to avoid and what to think about.  Portions of his article are below.
Businesses, FLPs and LLCs. Owners faced with severe cash demands that have experienced dramatic portfolio declines, loss of jobs, or other losses may consider drawing funds out of family controlled entities. There are dangers of simply paying for personal expenses from business entities, or making undocumented distributions. Such transactions can have a myriad of negative consequences.

Most significantly, the integrity of the entity can be compromised.  This could subvert any asset protection benefits the entity provided, thus exposing remaining personal assets to risk that an owner can ill afford. Distributions from entities for which equity interests have been given to children or other heirs may support an IRS argument that the gifted equity interests should be included in the donor's estate since the payment of personal expenses, or loans/distributions that mirror personal cash flow needs, demonstrates a significant retained interest.

Can you Fire a Partner because Business is Bad and Getting Worse?  When business was humming, marginal partners may have been profitable. Now they may not even be tolerable. Can you fire a partner?
While a severe measure, such action may become necessary. Since there may be no right under state law to remove a partner, the provisions of the partnership agreement are essential to consider.
So start by reviewing all governing documents (employment agreement, shareholders' agreement, etc.).
What do the agreements provide for?
Is there a mechanism to force a buyout or termination?
Evaluate the risk that a terminated partner may claim age discrimination.
Get a Non-Compete Agreement with a Terminated Employee/Partner. Will the non-compete clauses in the partnership or employment agreement protect your business? The law governing non-compete agreements is constantly evolving, and varies by state. So caution is always in order.
 
In a recent California case, for example, Edwards v. Arthur Andersen, LLP, S147190 (Cal. Aug. 7 2008), the court upheld a California statute limiting non-compete agreements.  In this case the employee signed a non-compete when he began employment as a tax accountant in which he agreed that, for 18-months after termination he would not perform similar services for any owners of his employer and that for 12 months after termination he would not solicit any of the employer's owners.
The court found that the non-competition agreement was invalid because it restricted the employee's ability to practice his profession in violation of the statute.

Get a Release/Termination Agreement from a Terminated Partner/Employee.  If you're terminating an employee or partner, it has become common practice to make a severance payment to obtain a release of claims to hopefully avoid the issues outlined above. But releases are not a guarantee against a lawsuit. Give the employee reasonable time to review the release. The release should be understandable (if you cannot read it without crib notes, it won't past muster).  Use captions, define technical terms, etc.

Some claims can only be waived if they are expressly noted in the release or termination agreement, such as the waiver of age based claims under the EEOC or the Older Workers Benefit Protection Act (OWBPA).  Some claims cannot be waived in a termination agreement with an employee, such as claims under the Fair Labor Standards Act (FLSA) so that these should be excluded.