What Your Lawyer Doesn’t Realize Could Hurt Your Business

Lawyers are busy, harried folks who often rely on state sanctioned boilerplates when it comes to the agreements used by many of us SDMWVLGBTBEs (Small Disadvantaged or Disabled, Minority, Women, Veteran, Lesbian, Gay, Bisexual or Transgendered Business Enterprises) owners. Not all lawyers specialize in business law, and even those that do may not be familiar with regulations on state or federal certifications.  Sometimes, we even think we’ll save time and money by going through a legal advice web site to quickly form a Limited Liability Company (LLC) or partnership. Unfortunately, using standard forms can be the cause of significant problems when an SDMWVLGBT business enterprise applies for certification or submits revised agreements during an annual review.

Certification of SDMWVLGBT business enterprises generally requires that the business:

• Be 51% owned and operated by U.S. citizens or permanent legal residents who are minority group members; (individuals who are at least one quarter or 25 percent: Asian-Indian, Asian-Pacific, Black, Hispanic or Native American; and/or are women; and/or members of the veteran, LGBT or PWD [Person With Disabilities] communities);
• The minority owner or owners must be responsible for management of and control the daily operations of the business;
• Be physically located in the United States or one of its territories;
• Be for-profit

Long ago we talked about the issues of control and governance. Essentially, governance refers to the language in a business’s organizing documents that regulates its organizational management. Control, on the other hand, means that the diverse owner(s) has the authority and power to direct, determine or influence what happens in the business today and in the future.

So how can boilerplate language interfere with a business’s ability to get certified?

• If you have a one person sole proprietorship, LLC or corporation there’s nothing wrong  with using the word unanimous to define a voting agreement’s terms. But, if you have 51%  diverse ownership in an LLC or partnership then this language would effectively restrict your ability to govern your company. In fact, if the business involves a 51/49 split between diverse and non-diverse owner(s), a simple majority of 51% is all that should be required.
• If you’ve been in business for awhile and want to expand your business by bringing a new member into your existing LLC or partnership, be sure to review the new partnership or operating agreement carefully.  Make certain that the new agreement doesn’t accidentally change the diverse owner(s): position in terms of the most senior, or highest title; right to make final decisions (or manage those who might make other binding decisions); right to approve or accept new members/shareholders; or, right to determine the direction of the business. An inadvertent change could cause concerns with certifying agencies.  If you are a C-corporation selling stock, you’ll want your accountant and attorney to make sure that a sale of additional stock will not dilute the percentage of diverse business ownership.
• Many businesses have bylaws, typical in Corporations and LLCs, and its definition of a quorum can be critical.  When we were applying for an out-of-state certification, we were asked to clarify our voting procedures, because one certifying agency believed our majority stock owner could be out-voted. So, our bylaws were re-written in 2015 to clearly define a quorum as a majority of shareholders, and that each share of stock is equal to a single vote.  We are a WBE,  82% owned and operated by women  — since our primary owner holds the most stock, she can’t be out-voted.
• LLCs and Corporations have formal stock or share certificates issued to the share owners, and a ledger that tracks ownership of the shares.  Some companies have written shareholder agreements, and these agreements should reflect control by the diverse owner(s).  Simple majority – one share equals one vote – agreements might be the best option to discuss with legal representation.  And, your attorney can help you acquire the ledger materials and advise you how to keep them current.
• If there’s a buy/sell agreement between the owners of the business, the language in that agreement should be clear about the diverse owner(s) rights to authorize the sale of any portion of the company. S/he or they, should retain the exclusive right to approve new owners.
• It may seem odd that single owner LLCs require an operating agreement, but all certifiers require a copy of the operating agreement no matter how many LLC owners  or members there might be.
• If the company has loans from its owners, make sure your attorney drafts a loan agreement that details repayment terms and interest charges.  If the loan is from a non-diverse owner, ask your lawyer to include language that the person making the loan does not garner any additional control that is already established by the organizing documents or shareholder agreements.
• When there are multiple owners, your attorney should be cognizant of how any board of directors, managing partners or executive management positions are described in organizing documents. It is generally expected that the diverse owner will hold the highest titles, such as: Chief Executive Officer (CEO); Managing Partner; Chairperson; etc. If multiple diverse owners are involved, talk with your attorney about which owner should have the higher title … taking into consideration the skills and experience of the individuals and the responsibilities of the role being filled.
• Contributions in starting a business can be very important if there is more than one owner. If it is a 51/49% situation, the 51% owner’s contribution should be at least 51%. Not all start-up contributions have to be cash. An owner can contribute physical assets (e.g. equipment, vehicles, software, etc.), experience or expert knowledge or real estate.

Larger or older business entities may have changed how they operate, without changing their documentation.  Before applying for certification, it is a good idea to review all of these documents to make sure they adequately reflect the diverse ownership.  Part of the review should include verifying that there are no random clauses that infringe on the diverse owner’s rights to govern and control the business.

Don’t think that single owner LLCs and sole proprietorships are the only way to go.  They might be easiest to structure, but multiple owner LLCs, joint ventures, partnerships or C-corporations can be certified.  Choose an attorney familiar with a knowledge of business law and clearly communicate your certification goals. Then make sure s/he is aware of the governance and control issues that influence whether you and your business can become SDMWVLGBTBE certified.