What Does It Mean To Retire - a/k/a The Dangers Of Imprecise Contracts

Defining, or redefining, “retirement” is not just a topic of commercials for annuities or RVs. It is a question so meaningful that the Court of Appeals has recently issued an opinion in which a central issue was the definition of the word.

The ubiquitous Google provides a good starting point for an analysis. A Google search for definitions of the meaning of retirement quickly yielded 14 different results. These definitions share some common themes, but they also have some very distinct differences.

This illustrates the problem of using, but not defining, the word “retirement” as part of a contract. As with any legal issue, where a contract leaves a term undefined there is an opening for a dispute that may need the intervention of the courts for resolution.

In an unpublished opinion in the matter of Nardi v. Satellite Servs., Inc., the Court of Appeals took on the issue of defining retirement. As a matter of background, the plaintiff was a former employee of the defendant. As part of an employment agreement, plaintiff was entitled to certain rights if his employment ended by virtue of “retirement.” The plaintiff left the defendant and went to work for another company, he alleged that he had “retired” and was entitled to certain benefits as defined by the contract. The defendants disagreed, alleging that “retirement” meant that the plaintiff was required to stop working in any occupation. In this matter, the Court of Appeals agreed with the plaintiff:

Resolution of this issue turns on the meaning of the word “retirement,” which is not defined in the contract. Defendants argue that “retirement” means that plaintiff was required to stop working in any occupation. However, the word “retirement” means “removal or withdrawal from an office or active service.” Random House Webster’s College Dictionary (1997). As noted by the trial court, however, today Americans often continue working in some capacity after they have begun drawing retirement benefits from a previous employer. See Derr v Murphy Motor Freight Lines, 452 Mich 375, 391 n 6 (Mallett, J.); 550 NW2d 759, amended 453 Mich 1204 (1996). Therefore, the modern understanding of the word “retirement” is an employee’s withdrawal from a particular “office” to collect vested benefits that have accrued to the employee, usually from years of faithful service. The contract’s other provisions support this definition of the word “retirement.”

Keep in mind that this is an unpublished opinion, so it is not binding as a matter of legal precedent, but it is informative on this issue. Moreover, it illustrates the problem that can occur when a contract does not expressly define a key term.

In the employment arena, or with regard to succession planning (such as buy-sell agreements and shareholder agreements), I suggest you take the opportunity to review your agreements. Is the word “retirement” used without definition? Are other key terms undefined?

What other practical advice can you take away? Spending the time with a qualified attorney to carefully draft significant documents may add to the up-front expense of a project. But the additional cost of litigation that can be the direct result from a dispute based on an imprecise contract will far outweigh the benefits of any slight cost savings from trying to cut corners when creating the agreements that will affect you and your business for years to come.

Who's Next In Line? Hopefully Many

Let's review - the time to work on a succession plan is now, not after the death or disability of a business owner. The key, though, is not just putting a plan on paper, but crafting a plan that will meet the practical challenges of arranging for an orderly and effective transfer of ownership and management.

In other words, make sure your buy-sell agreement will work.

To that end, Barry S. Cain, managing director for the Family Business Center at the accounting and consulting firm Blackman Kallick, has recently posted a fine article that focuses on the need for diversity in succession planning.

The key to the long-term success of your business lies in a word widely used in business today, although usually in a different context: diversity. Because the future is full of uncertainty, it’s extremely risky to pin all your hopes on one successor, even if a relative is waiting in the wings. The future of your business will be best assured if you have choices ... and good ones, at that.

Some of the key ideas covered in the article by Mr. Cain include:

• The need to have options for the next generation of leaders for the business. Choosing only one successor is very risky. If that individual is not ready when the time comes, either due to changes over time in the needs of the business or because of changes in the professional or family life of the successor, then the succession plan for the business is in peril.

• Mr. Cain also suggests that the next generation of leaders for the business need not come from within the family bloodline. This idea is obviously directly aimed at family businesses, but the idea of looking outside the organization can also be well-applied to most closely held companies.

One other important related topic that is not addressed in the article is the need to maintain appropriate financing arrangements for the buy-sell agreement, through sufficient life and disability insurance or otherwise. Don't let your succession plan fail because there are not sufficient assets to pay for the transfer of ownership to move the plan forward.

Special thanks to author Paul Brown and his New York Times small business tool kit for bringing the article by Mr. Cain to my attention.

Negligent Dancing (and other lurking workplace dangers)

A Chicago court is hearing a case based on an allegation of “negligent dancing”:

A Chicago woman is suing a man she claims flipped her into the air and dropped her on her head in a jitterbug-style dance move at a company event.

Her attorney, David M. Baum, said Prange should be accountable for the alleged injuries caused by "negligent dancing."

Why do I include this in a legal blog? First, because in scouring the internet for current legal topics I got drawn in by the headline.

But beyond the attention-grabbing caption, there are some legal lessons to be learned here.

For businesspeople, perhaps the most important is that your exposure to liability is probably greater than you think. Make sure to take the prudent steps to protect yourself and your company, including using the optimal entity (usually something that provides true limited liability protection, such as an LLC or corporation, not merely a certificate of assumed name filed with the county), always maintaining corporate formalities and keep your corporate records up to date to protect corporate integrity, and making sure you always have proper insurance in place, including any insurance needed for special events.

As usual, it all comes back to planning. Many hazards, such as the threat of being injured or exposed to liability as a result of a “negligent dancing” incident, are hard to predict. The best way to limit the damage from dangers, foreseen and unforeseeable, is to have the proper planning documents in place personally (such as a durable power of attorney, will, and medical power of attorney) and professionally (such as buy-sell agreement, fully funded by insurance, or a carefully drafted operating agreement). Don’t delay – contact your trusted attorney to start planning, or take a few minutes to review your plan, today.

Ditch the DBA

For most businesses, doing business under an assumed name certificate filed with the county makes as much sense as using a rotary telephone. It may get the job done, but it is has many drawbacks and there are far more attractive alternatives.

Lets start with the basics. An individual can file an assumed name certificate with the county that allows that person to do business in the county under an assumed name. The form is simple and the filing fee is small. That may sound appealing until you realize that there are few benefits, and many downsides, to structuring your business in this method.

One significant drawback to an assumed name certificate is that it does not provide the business owner with any limited liability protection. In contrast, for businesses that are formed in a way that provides limited liability protection, such as corporations and limited liability companies (“LLC”s), you are not personally liable for most debts and obligations of the business. If you do business under an assumed name filed with a county, you do not have this protection. You are the business, the business is not considered a separate entity, and you are liable for the obligations of the company.

In the past, using a business that provided limited liability protection, such as a “C” corporation, meant also having the cost of “double taxation,” meaning that income was taxed upon receipt by the corporation, and taxed again on distribution to the owners. However, there are now many forms of entities, such as S Corporations or LLCs, which allow a business to have true limited liability protection and enjoy the benefits of “partnership” or “flow-through” style taxation, as opposed to traditional “corporate” style taxation.

There are many other advantages to using a company that provides limited liability protection, such as an LLC, including the ability of the company to continue in existence after the death of an owner, increased options for succession planning and integration with an owner’s estate plan, potential options for tax planning, and value in the form of perceived legitimacy from third parties when dealing with an established company. Also keep in mind that businesses operating an assumed name should file the certificate in every county in which they transact business, in contrast to an LLC or corporation which is protected by a single statewide filing.

If you are a business owner currently using an assumed name certificate filed with the county and you have questions about converting to a more favorable form, or you are considering starting a new business and you have questions about choosing the proper form, I encourage you to contact me or your local trusted business attorney.

Do You Plan To Work Forever?

Nobody lives and works forever so succession is inevitable for every business. But owners can get so busy in the day-to-day workings of the business that they never set aside the time to plan for the future.

If you’ve worked hard to build a business, make sure you have also put together a plan for an orderly transfer of ownership. Poor or non-existent planning has resulted in the end of many businesses and, particularly in the case of family owned businesses, can lead to financial problems and even breaking families apart. Failing to plan can also result in excessive estate taxes and in some cases the need to sell the company or valuable assets in order to pay taxes, administration expenses and debts.

A key part of a succession plan is often a buy-sell agreement, sometimes referred to as a shareholders agreement. This agreement can be used to provide a market for each owner’s interest in the event of certain triggering events (such as death or disability), promote continuity and stability, potentially freeze the value of an owner’s interest for business or estate tax purposes, help to retain S-corporation status and serve as a way to resolve a dispute or deadlock among owners. If nothing else, the agreement can be used to lay the groundwork for long-term planning.

Planning is a process, and it’s never too early to start. To preserve your business for the future, do the practical thing and start working on you succession plan today. To further address this topic or to talk about the options that are available, please contact me to continue the discussion.