What Happens to Your Business if Something Happens to You: Part One

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Owning a business can be very rewarding. It also can be very confusing when thinking about how to plan for the future. Before you read this post, there are a couple things you need to know:

• THIS IS COMPLICATED. You need a PLAN to be developed with the guidance of an attorney who understands BOTH business issues and estate issues.
• If own a business, you can control decision makers of ownership issues or you can leave them up to the court

Part 1-Who makes ownership decisions

1. What are ownership decisions?
   • Sole proprietorships- EVERYTHING is an “ownership” decision. The sole proprietorship is indistinguishable from the owner.
   • Business entity
     • Corporation-shareholder decisions (governed by Bylaws and Iowa Code §490)
       1. Election or removal of Directors (Iowa Code §490.728(1))
       2. Derivative Actions against on behalf of the company- which could include a suit against the company’s officers or directors (Iowa Code §490.741)
       3. Amendment to Bylaws including change to number of directors (Iowa Code §490.1020(1))
       4. Accounting records and Minutes of meetings (Iowa Code §490.1601(2) and (Iowa Code §490.1620))
       5. Approval or rejection of dissolution of the Company (Iowa Code §490.1202)
       6. Approval or rejection of sale of assets of company (Iowa Code §490.1202)
       7. Approval or rejection of Merger with other company (Iowa Code §490.1104(2))Corporation-shareholder decisions (governed by Bylaws and Iowa Code §490)
     • Limited liability company (governed by Operating Agreement and Iowa Code §489)
       1. NOT admitted as a Member
          • There is NO requirement in Iowa law that the Estate or the Trustee be admitted as a member. Unless the Operating Agreement provides otherwise, the Estate or Trustee is only admitted with the consent of ALL other members ((Iowa Code §489.401(4))
          • If NOT admitted as a Member the transferee only obtains the ECONOMIC interest in the LLC. No right to participate in management or access to records EXCEPT as necessary to file taxes and court reports (Iowa Code §489.502, Iowa Code §489.410 and Iowa Code §490.504)
       2. ADMITTED as a Member
          • Member Managed- Each member has full and equal rights in ALL of company’s activities (Iowa Code §489.407(2)).
          • Manager Managed (unless otherwise specified in the Operating Agreement) Each admitted member has the right to
            1. Elect or remove managers by majority vote §489.407(e))Sale of assets of company (Iowa Code §489.407(d)(1))
            2. Consent of the Members is required for:
               • Sale of assets of a company (Iowa Code §489.407(d)(1))
               • Merger with other company (Iowa Code §489.407(d)(2))
               • Amendment to Operating Agreement including change to number of Managers (Iowa Code §489.407(d)(4))
               • Dissolution of the company (Iowa Code §489.701(1)(b))
            3. Accounting records and Minutes of meetings, PROVIDED they are related to a “member’s interest as a member” (Iowa Code §489.410(2)(b)) NOTE this is more limited than a shareholder’s rights to information.
2. Who decides? IT DEPENDS ON WHO “OWNS” THE BUSINESS
   • Sole proprietorship- Holder of a power of attorney for business matters, or a personal representative (conservator, executor, or administrator) succeeds to “ownership” for the purposes of ownership decisions.
   • Business entity
     • If owned individually
       1. Power of Attorney- depends on the terms of the document issuing the power. In general a holder of a Power of Attorney has the right to exercise all voting and ownership rights of the Principal (Iowa Code §633B.206(1-5))
       2. Conservator-has the right to exercise all voting privileges (Iowa Code §633.646(3)) Appointment of a Conservator supersedes the Power of Attorney (Iowa Code 633B.108(2))
       3. Executor (if there’s a Will):
          • General Rule- The Executor is a fiduciary and must act in the best interests of the beneficiary. It is common practice to specify the powers of an Executor in the Will.
          • The Will determines who will be the ultimate owner of the business. In the absence of a provision to the contrary all property is required to be distributed pro rata.
          • Surviving spouse- Regardless of provisions of the Will to the contrary a Surviving Spouse gets 1/3 of the estate (Iowa Code §633.238). Determination of composition of the share of surviving spouse is by mutual consent or by court determination (Iowa Code §633.247)
       4. Administrator (if there’s NO Will)
          • Determination of WHO is Administrator is left to the determination of the court- any “qualified” person may be Administrator (Iowa Code §633.227).
          • Surviving Spouse gets everything (including stock) if there’s no children or if all the children are also children of the surviving spouse (Iowa Code §633.211)
          • Surviving Spouse gets HALF (including stock) if there’s children of the decedent who are NOT children of the surviving spouse (Iowa Code §633.212)
     • If owned by a Trust
       1. The Trustee makes all decisions on ownership issues (Iowa Code §633A.4402(3))
       2. The Trust continues even after the death of the grantor. Powers can be exercised by successor Trustees.
       3. The terms of the trust will designate future owners.
3. Buy/Sell Agreements may control ownership and the transferring of a company, therefore controlling “ownership issues.”
4. CONCLUSION:
   • THIS IS COMPLICATED. You need a PLAN to be developed with the guidance of an attorney who understands BOTH business issues and estate issues.
   • If own a business you can control ownership issues or you can leave them up to the court
     • You can appoint a power of attorney; or A COURT appointed conservator will make the decisions
     • You could appoint an Executor in a Will; or a COURT can appoint an administrator
     • You could establish a trust to own the business with the appointment of a successor trustee
     • You could establish a Buy/Sell agreement with an appropriate buyer.
   • If you have a co-owner in the business, BOTH/ALL of you should investigate these issues.

We realize that this is a lot of information to take in. At Kreamer Law Firm, we can aid you in planning for the future of your business. Please feel free to contact us with any questions you have by visiting our website, www.kreamerlaw.com, or calling us at (515)727-0900.