Conflict of Interest Between Managers and Shareholders

Corporate managers and shareholders can sometimes find themselves in a conflict of interest. The goal of being a good manager is being able to spot these potential conflicts and to remedy the situation before a serious problem arises.

The biggest conflict between managers and shareholders is going to be money. Here is the most common scenario. A corporation is profitable. In fact, the corporation is more profitable than expected. Therefore, the corporation has a cash surplus, if you will. Managers would want this money as a financial bonus and the shareholders would want this money as a stock dividend. What to do? What to do?

Mangers will argue that without their leadership and managerial ability, the corporation would not have been as profitable. The shareholders will argue that without their money, the corporation would not have been able to invest in its growth, and therefore, would not have reached that level of prosperity. Who should get the money?

Another situation arises when the managers are also shareholders. This may lead a particular manager to push the opposite way of his/her position. For example, if a shareholder manager would get more money from a stock dividend than from a bonus, this shareholder manager might vote in favor of a stock dividend, not because he/she believes that stockholders should be rewarded for their investment, but because it will mean more money for that particular manager. What if only that one manger is a stock holder?

Before you try to wrap your head around all the possible situations, let me inform you that there is no right answer to this scenario. If you do not give a dividend to the shareholders, you may find your stock undervalued by disgruntled stockholders and your stock as a less attractive purchase. If you do not give your managers a bonus, managers may leave your company or not work as hard as they normally do. Usually, managers are under contract, therefore their job performance is linked to their continued employment, however, if a manager is not being rewarded for his/her hard work, what is the incentive in staying?

Looking at it from a strictly economic point of view, it might be advantageous to give a little money to both parties. However, in the end, the profitable of your company rests in the hands of managers. Be sure to treat both parties well and you should avoid these potential problems.

How Much has the Office Changed Since our Parents Were Running Corporations

It is extremely amazing how much the face of running a corporation has changed. With the internet boom, the rise of computers, and the advancement of electronic technology, corporate governance has changed dramatically.

Things used to be very structured. You were to always be in the office before your boss and were to always leave after him/her. You had to always be in the office, period. All of the processes were slow and information took a very long time to acquire.

Nowadays, it is rare day when you are in the office. Most of the time communications to and from your office are done on a PDA, smart phone, e-mail, and or fax machine. Corporate employees today have to be movers and shakers. Corporations today support free thinkers; people who “think outside the box” are valuable assets to a corporation.

This is not to say that the way things were done on the past was ineffective. Many corporations became extremely profitable by doing things the “old way.” However, you have to admit that the average age of a corporate CEO has dropped dramatically. It used to be that you work for a company for 30+ years and you were slowly promoted through the ranks. Now, people in their early twenties are starting and maintaining profitable business empires.

Many things have changes, but no matter how many formalities change, one thing will remain constant in the corporate structure: the potential to make money.

Legal Considerations for Entrepreneurs When Starting a Business

Entrepreneurs will face many hurdles when starting a new venture and/or business. Many will be tempted to plow right into the matter without first researching laws and regulations regarding their particular business.

I am going to let you in on a little secret, many entrepreneurs are dead before they even make their first sale! Why, you may ask? These entrepreneurs are in trouble because they made the classic mistake of not seeking the help of professionals. If you, as an entrepreneur, have the requisite knowledge of the law to begin and maintain your venture and/or business without fear of having done something inconsistent with the law, then you should be fine. However, most new entrepreneurs will just start a business without thinking of the ramifications of a bad contract, a badly negotiated lease, failure to properly incorporate and or organize, and/or failure to obtain financial assistance (whether it an accountant, financial advisor, bank, etc.), to name a few.

The most popular excuse used by entrepreneurs is that lawyers and accountants cost too much. Using this line of thinking, these people try to handle complex legal and financial matters for themselves and, most of the time, end up with a problem that will cost more to fix than it would have originally cost to avoid the problem. These types of entrepreneurs practice “stepping over dollars to pick up dimes.” I suggest you not be one of these entrepreneurs.

Do not fall into a legal and/or financial pit that could have been easily avoided. Starting a business is not as easy as opening the doors to your shop. There exists many state and federal considerations (whether they are taxes, permits, licenses, incorporation or organization or registration, proper accounting, employee matters, and/or stock issues, to name a few) an entrepreneur needs to consider before “starting a business.” Do not ruin your business before it starts by avoiding proper legal and financial assistance.

Do Not Be Fooled By Incorporation Fees

If you are planning to form a corporation, you have many options as to where to form. You may know that Delaware is a popular state in which to incorporate. Put basically, Delaware laws are very corporate friendly. I will get into the specifics in another post. Back to the point, many states advertise that you should incorporate in their state because the fees are less than other states.

Although this may be true, you have to consider where you are going to be doing most of your business. For example, Nevada demands a relatively inexpensive fee to incorporate. However, if you are doing all of your business in California, and merely incorporated in Nevada to save on the incorporation fees, consider this; in order to do business in a state other than the state in which you incorporated, you have to file for a foreign corporation certificate. This basically means that you incorporated in another state and want to do business in the present state.

What is the big deal with filing for a foreign corporation certificate? A foreign corporation certificate costs money, and has a yearly maintenance fee. So before you incorporate in a state to “save money” think about how much the foreign corporation fee is and do some serious calculations to determine whether you are really saving any money!

Another popular advertisement by states is the tax advantage pitch. Some states have a smaller tax rate than others. However, money earned in one state is taxed in that state. Therefore, seriously weigh the advantages of forming out of state against the disadvantages, and do not be duped by “money saving” sales pitches that may end up costing you in the long run.

There is a popular saying among entrepreneurs, “do not step over dollars to pick up dimes.” I implore you to avoid doing the same thing!

Reverse Piercing and the Myth of Limited Liability – Beware of the Alter Ego!

A novel situation has presented itself in recent court decisions. In 2004, the New York Court of Appeals ruled in favor of granting a new type of remedy, “reverse piercing.” Piercing the corporate veil is a fancy way of saying that the shareholders of an entity are personally liable for the debts and liabilities of that entity. This means that if the entity does not have enough money to pay all debts and liabilities, creditors came attack a shareholder’s personal holdings.

Reverse piercing is different. In a reverse piercing situation, an entity is held liable for the debts and liabilities of its shareholders. This is an amazing theory because the whole point of a limited liability entity is to protect the personal assets of its shareholders and vice versa. In other words, the shareholders and the business are two completely separate entities. However, many of the factors used by the court to determine whether an entity should be pierced are used in determining whether a reverse piercing should take place.

The main inquiry is whether the individual shareholder is the alter ego of the entity. In other words, are the two distinguishable (in a legal sense)? In the New York case, the defendants were sued by two creditors. The defendants contracted to buy a house and formed a corporation for the purpose of buying the house. The defendants, and not the defendant’s corporation, paid the property taxes and mortgage principle and interest on the house. The defendants then deducted the payment of these taxes and mortgage interest from their, and not the corporation’s, tax return. The court concluded that the defendants bought the house in a way to avoid the creditors’ claims, and the defendants utterly controlled and completely dominated the corporation. As such, the court held that the defendants were the alter ego of the corporation, and the house purchased by the corporation (and therefore the property of the corporation) was subject to the creditors’ claims.

Let this be a lesson to all you aspiring entrepreneurs! If you have a corporation, or any legal limited liability entity, make sure that you keep the entities affairs separate from your personal affairs. If you do commingle these affairs, you may be subject to personal liability or, under a reverse piercing theory, your entity may be liable for your personal debts and liabilities.