In this issue: Asset Protection for the Business Owner "How Much is Enough?"

1. In This Issue:
• Asset Protection for the Business Owner
• How Much Is Enough?
• We’re Moving!
Volume 3, Issue 1 March 2015
Corporations and limited liability companies (LLCs) are
legal entities, separate and distinct from the people
who create and own them. (Owners are called corporate
“shareholders” or LLC “members.”)
Asset Protection for
the Business Owner
Do not ignore corporate formalities
if you want to avoid creditors poking
into your personal assets.
The MendenFreiman
A Report on Legal Issues Affecting
Privately Held Businesses and Personal Wealth
Continued on page 2

2. The MendenFreiman Advisorpage 2
Continued from page 1
One of the principal advantages of forming
a corporation or an LLC is that as a separate
entity (unlike partnerships and sole
proprietorships), its liabilities are distinct
from the liabilities of its owners. This
means that people who own the corporation
or LLC are protected from being held
personally responsible for the debts and
obligations of the business. This protection
is commonly referred to as “inside
liability protection.” Alternatively, if the
owners incur personal debts, the assets
of the business would typically not be
immediately available to the owners’
creditors to satisfy those debts. This
advantage of forming business entities is
known as “outside liability protection.”
However, in certain situations, courts
can ignore the limited liability status of a
corporation or LLC and hold its officers,
directors, and shareholders or members
personally liable for its debts. When
this happens, it is called “piercing the
corporate veil.” Once the corporate veil
is pierced, creditors can reach the personal
assets of the business owner (including
homes, bank accounts, investments and
other assets) to satisfy the debts of the
company.
Piercing the corporate veil most
commonly occurs when a court finds
there is no significant difference between a
business and its owners or that the entity
is, in essence, a fraud or sham. This
“alter-ego doctrine” which allows a court
to ignore the existence of a separate entity
in order to avoid an unjust outcome
is most commonly used against small,
closely held businesses because of
the informality often found in the
administration and management of those
businesses. To avoid this outcome, business
owners should take the following steps
to maintain the distinct identity of their
entities and ensure that a court will not
pierce the corporate veil:
1. Maintain the corporate formalities.
Small businesses are less likely to observe
corporate formalities than larger companies,
which makes them more vulnerable to a
piercing of their corporate veil. To avoid
trouble, it is best to play it safe. It is important
for small corporations and LLCs to comply
with the rules governing formation and
maintenance of a corporation, including:
• adopting company bylaws (for a
corporation) or an operating agreement
(for an LLC);
• making sure officers and agents abide
by and follow the provisions in the
bylaws or operating agreement;
• holding annual meetings of directors
and shareholders of corporations (or
managers and members of LLCs – if
the operating agreement requires it);
• keeping accurate, detailed records
(called “minutes”) of important
decisions that are made at the
meetings; and
• conduct all business (i.e., advertise
goods and services, execute contracts,
issue invoices, pay bills) in the name
of the business, not the owners.
2. Avoid commingling of funds.
Small business owners may be more
likely than their larger counterparts to
commingle their personal assets with those
of the corporation or LLC. For instance,
if the owner pays personal bills from the
business checking account, deposits checks
made out to the business in his personal
account, or does not maintain separate bank
accounts for the business, a court could
decide that there is not a sufficient financial
distinction between the business and
the owner. This is called “commingling
of assets.” To avoid such a finding,
corporations and LLCs should keep separate
financial records and maintain their own
bank accounts; and the owners should
never use the company account for personal
use or deposit checks payable to the
company in a personal account (or vice versa).
3. Properly capitalize the business.
Another factor courts look at to determine
whether the limited liability protection of the
corporation or LLC should apply is whether
the business was “grossly undercapitalized.”
If a court finds that the corporation or LLC
never had enough funds to properly conduct
business, such that it was never really a
separate entity that could survive on its own,
it may find that piercing the corporate veil is
appropriate. In making this determination,
courts will look at factors such as a
corporation’s or LLC’s cash flow, debt-to-
equity ratio and financing sources.
Accordingly, any operating business should
be capitalized in a sufficient manner to keep
it running. (A holding entity will not have
this problem unless it begins to conduct
business with third parties.)
4. Avoid fraudulent or wrongful actions.
Piercing the corporate veil is what is known
as an “equitable remedy,” which means
that the courts have the discretion to impose
the remedy in the interest of justice and
fairness. Accordingly, if the owner(s)
recklessly borrowed and lost money; made
ANNOUNCING
OUR NEW SENIOR
ASSOCIATE,
JEFFREY J. MEEK!
MendenFreiman is pleased to
announce that Jeffrey J. Meek has
joined the firm as a senior associate.
As a member of the firm’s business,
estate planning, and trust and estate
administration practice areas, Jeff will
provide comprehensive business,
tax and estate planning counsel
to high-net-worth individuals
and families, as well as privately
held businesses.
Please join us in
welcoming Jeff!

3. business deals knowing the business could
not pay the invoices; or otherwise acted
recklessly or dishonestly, a court could find
financial fraud was perpetrated. Then the
limited liability protection of the corporation
or LLC should not apply.
5. Diversify ownership of LLCs.
In some states, courts have ignored the
existence of an LLC simply because it was a
“single-member LLC,” meaning it only had
one member. For this reason, it is a good
idea for an LLC to have more than one
member, even if the second member is
another business entity or trust. If having
multiple members is not possible, then it is
a good idea to form or organize the LLC in
a state that offers specific protection for
single-member LLCs.
6. Maintain state registrations.
In most cases, states require an “annual
report” be filed and an annual fee paid for
any corporation or LLC in order to maintain
the existence of the entity. If the corpora-
tion or LLC falls into “inactive” status or
is administratively dissolved due to lack
of annual maintenance, the courts will not
recognize it as a distinct entity; and it can no
longer seek the protection afforded it by the
laws of the state. Accordingly, it is essential
to keep up to date with these annual filings.
While these recommendations are
not intended to be an exhaustive list of
necessary actions to avoid “piercing the
corporate veil,” they do provide a summary
of actions that can be taken in order to
ensure entities established to help protect a
business owner’s personal assets are fully
utilized and properly administered. If the
business leadership culture embraces these
housekeeping details, the owners will have
gone a long way toward keeping creditors
out of their personal pockets. However, if
owners ignore their corporations or LLCs,
creditors will ignore them as well.
If you have any questions regarding
corporate and/or limited liability formalities
or need help maintaining your annual
minutes or annual reports, please contact us
at http://mendenfreiman.com/contact.php
MendenFreiman 2015
That is the question
we sometimes hear
from our high-net-
worth clients as they
consider how much
of their wealth they
should set aside for
their children.
There are now nearly 1.8 million US
households with assets of $3 million or
more, according to a report issued by US
Trust. Many of these families will wrestle
with how to set up an inheritance that
gives their children a good start in life but
does not inhibit their independence and
ability to thrive.
MendenFreiman often works with clients
who have created first-generation wealth –
they have become prosperous through their
own sweat and ingenuity.
A common concern expressed by these
clients is that if they leave too much money
to their children, they may not instill their
revered values of a strong work ethic and
giving back to the community. It seems this
concern is becoming more pronounced in
recent years – perhaps as a result of media
attention on some of the antics of trust-
fund babies such as Paris Hilton and the
Kardashian offspring.
But we have also seen high-profile
examples of wealthy people who are
determined not to handicap their children
with too much of a good thing. Warren
Buffett said he wanted his children to have
enough money to feel as though they could
do anything “but not so much that they could
do nothing.” Buffett feels strongly that his
family should be a good steward of its
wealth, and he has involved his children in
the charitable foundations he supports.
There are a number of ways to structure
the transfer of wealth to children so it has
boundaries, but we usually suggest that
clients begin this process by thinking
about their own values, their relationships
with their children, and their children’s
relationships with each other.
No two families are alike. What would
constitute a financial safety net for some
children might be largess for others.
Continued on page 4
Volume 3, Issue 1 page 3
How much
is enough?
Even rich people are
surprisingly cautious
about leaving money
to their kids.
We are pleased to announce that
Lawrence (Larry) H. Freiman, Paige P.
Baker, and Jim R. Kanner have been
recognized as 2015 Georgia
Super Lawyers.
Associate Nathan T. Johns was also
selected as a “Rising Star” among
Georgia’s Super Lawyers.

4. Continued from page 3
We have had several wealthy clients
establish an inheritance limit for their
children. These limits have tended to range
from $1 or $2 million on the low end to
$10 million on the upper end. We have
seen clients with assets of several hundred
million dollars establish a $10-million-
per-child limit. To be sure, there are many
cases where our wealthy clients do not cap
their children’s inheritance but focus rather
on how to structure their inheritance in a
way that promotes their core values and
furthers their legacy planning objectives.
Once clients decide how much, the
discussion turns to how to do it. Most
often, with clients of relatively modest
wealth, we see them establish trust funds
that distribute assets to their children on a
staged schedule — for example, a third at
age 25, a third at age 30 and a third at age
35. Wealthier clients frequently will forego
the age-based distribution schedule in
favor of an inheritance trust that can span
the generations while empowering
a trustee to provide for the family under a
specified set of guidelines.
There are many variations on trust
funds we will not go into here, but one
device that sometimes makes the news
is the incentive trust. The recipient in a
typical incentive trust must hit certain
targets to qualify for trust distributions,
such as graduating from college. In order
to encourage kids to work, an incentive
trust might link distributions to the
amount of money children earn.
While incentive trusts may be well
intentioned, they can have unexpected
consequences. A common incentive tactic
is to require a trust beneficiary to earn a
certain amount of money to qualify for
distributions. The idea is to ensure the
beneficiary engages in a career and earns
a living rather than relying on the trust
funds for lifestyle support. However, this
incentive might reward a child who made
loads of money selling luxury cars on a
part-time basis instead of one who is a
high-achieving and hardworking public
school teacher or cancer researcher.
For this reason, we encourage clients to
think long and hard before creating a set of
trust rules that may not ultimately further
their legacy planning objectives.
Studies have shown that the foundation
of a good estate plan is communication
between generations. We counsel many
of our clients to sit down with their adult
children to discuss family values, review
key elements of their estate plan, and
introduce family advisers.
Recently, we had an experience where
we were privileged to join our clients, their
three young-adult children, their CPA and
their financial adviser for such a family
meeting. Among other things, the family
had a very candid discussion centered
on what core values are important to
the parents and how the children can
perpetuate these values in the face of a
large inheritance.
Clients should talk about these issues
early on in the estate planning process.
They will likely come up with a plan
that validates their values and gives their
children the right measure of help.
A version of the article was published by Business
Insider on December 17, 2014, and is available online
at http://www.businessinsider.com/rich-people-
leaving-less-money-to-kids-2014-12
MendenFreiman 2015
Business can be complicated. Life can be complicated. Simplifying the
“complicated” is what makes MendenFreiman distinctively different.
Our attorneys have strong tax, accounting and financial backgrounds which
create an opportunity to analyze each client situation from a number of points
of view. We not only relish the opportunity to apply what we know to solving
complex client problems, but to do that in a caring and supportive way.
Services include Business Representation and Transactions, Mergers and
Acquisitions, Estate Planning, Wills and Trusts, and Estate Administration.
Two Ravinia Drive, Suite 1200, Atlanta, GA 30346 www.mendenfreiman.com
Phone: (770) 379-1450 | Fax: (770) 379-1455
WEA
LTH MANA
GER
GeorgiaTrend
LEGAL ELITE
We’re
moving!
MendenFreiman is pleased to announce that
we will soon relocate to a new office within
the Central Perimeter area. Effective April 24, 2015,
you will be able to find us at 5565 Glenridge
Connector, NE, Suite 850, Atlanta, GA 30342.
We look forward to assisting
you at our new location.
RISING STAR