Review Your Old LLC Operating Agreement: No More Tax Matters Partner

There have been a series of changes over the past year in federal regulations that impact your old LLC operating agreement. Since I see on a regular basis operating agreements that do not incorporate the changes in the regulations, I thought I would mention a key change in this post. With the new regulations there is no longer a “tax matters partner” which you will see in most operating agreements. Instead, the LLC (partnership) must designate a Partnership Representative (the “PR”) who does not need to be a partner. The PR is similar to, but is different from, the tax matters partner. Formerly, the LLC/partnership was required to designate a tax matters partner to act as a liaison between the partnership and the IRS. That tax matters partner was required to be a general partner and could be an individual or an entity. The tax matters partner had the authority to bind the partnership, but not to bind other partners in the partnership. Also, a partner that was not the tax matters partner had rights during an examination, including certain notification rights and the right to participate in the proceeding.

Under the changes this past year, the PR is not required to be a partner, and can be any person (including an individual or an entity) with a substantial presence in the U.S. The PR has the sole authority to bind the partnership, and ALL partners and the partnership and its partners are bound by the actions of the PR and any final decision in a proceeding brought under the new regulations. In addition, the new regulations do not include a statutory right to notice of, or to participate in, the partnership-level proceeding for any person other than the partnership and the PR. If a partnership does not designate a PR, the IRS may select any person as the partnership representative, with certain limitations. A disregarded entity can also be the PR.

LLC members should consider amending their operating agreements because the powers of the PR with respect to the members/partners can be adjusted through the operating agreement. For example, a member/partner generally should have the right to approve or participate in certain actions of the PR. In addition, partners generally should have notification by the PR regarding certain events. Finally, the PR generally will want to be indemnified by the partnership for actions performed and costs incurred in good faith in the capacity as the PR. Keep in mind there is no requirement that the IRS communicate with the partners so these may be important provisions to amend in the operating agreement.

Be sure to talk with your tax accountant or your business/tax attorney regarding these issues.

Filing LLC and Corporations Never Easier in Iowa

Last May we announced that we were a part of a pilot program the Iowa Secretary of State’s office launched for fast track filing of limited liability companies (LLCs) and corporations. I am happy to report that the filing system has worked like an absolute gem. Now it is truly more convenient than ever to get your business formed within the State of Iowa. Our turnaround time for preparing and filing LLCs and corporations has been dramatically reduced. In my years of practice I must admit that this is one of the best projects a government office has pulled off. I give Iowa Secretary of State’s office major kudos for their work.

If you want to learn more about how we can help you set up your Iowa small business please see our Iowa Small Business Formation Services page for information. I know you’ll love the level of service we provide to new business owners.  We still offer in-person meetings for those that want to discuss their business set-up directly with a lawyer but we are also just an email or call away. Even if you don’t live in the Des Moines area we can still help you set up your Iowa business. We have clients from all over the State of Iowa. We look forward to working with you.

Iowa Lawmakers Looking to Politicize our Courts?

Let’s get down to brass tacks. The main reason Republican lawmakers in Iowa are looking to change the way Iowa judges are selected is because they want protection for social issues like an anti-abortion bill they hope to pass this legislative session and due to the Iowa Supreme Court decision in Varnum from several years ago where the Iowa Supreme Court ruled that non-religious, civil marriage, is available to everyone. Since Varnum, special interests worked hard to oust Iowa Supreme Court justices. And now, these special interests are setting their sights on changing the process for the Judicial Nominating Commission that ultimately appoints judges in Iowa. Under the current system, Iowa lawyers elect one-half of the commissioners to the Judicial District Nominating Commissions while the governor appoints the other half of the members. Lawmakers want to change this so that lawyers no longer elect one-half of the commissioners but rather lawmakers from the political parties would nominate the other half.

Unfortunately, there is a perception on the part of some conservative lawmakers that “left-leaning” democratic lawyers control the judicial nominating commission and therefore are preventing conservative candidates from nomination. The actual facts though paint a different story. Currently, registered Republican lawyers hold the majority of positions on the Judicial Nominating Commissions. When you combine that with the fact that the last two Republican governor(s) have appointed conservatives with their appointments, 12 of the 14 Judicial District Nominating Commissions are currently controlled by registered Republicans. In the other two districts, the votes are split evenly.

But our judges should not be selected on the basis of political control. It should be based upon merit. It is about candidates who have the best qualifications, rather than the best political connections. We have long had an excellent system of justice in Iowa. Like any lawyer or the public, I do not agree with every decision issued by our judges. However, it is my belief that our judges do their best to make our court system fair and impartial. On survey after survey, Iowa courts have ranked high in judicial fairness nationally. Moreover, the positive feedback from Iowa lawyers on the Iowa State Bar Association surveys demonstrates the high quality of work performed by our justices. Even Governor Reynolds has admitted that she has had no problem with the candidates that have been brought to her. If it ain’t broke, don’t fix it.

My partner (and current Iowa State Bar Association President) Tom Levis has an excellent letter addressing the judicial nominating commission issues. I encourage you to read it and we also encourage you to reach out to your lawmakers and let them know that we do not want our judicial system increasingly politicized. We have enough issues and problems in Washington with political squabbling. Let’s keep that out of our Iowa court system.


Interesting Developments for Non-Competes and Trade Secrets

A major area of our trial and business law practice consists of non-compete and trade secrets law. We hear all the time from people that believe Iowa is a “right to work” state so that means non-competes are not upheld under Iowa law, right? Wrong.

Non-competes are upheld in cases where the scope and duration of the restrictive period is reasonably necessary to protect the employer’s interest as compared to the employee’s interest. Whether the non-compete will be upheld various greatly on the wording of the agreement and the position held by the employee.

But in a recent article from Seyfarth Shaw on some of the top developments in trade secret, non-compete law and computer fraud, I found it really interesting that government agencies are increasing the scrutiny of non-compete agreements. This is especially true in the case of certain franchises who had “no poach” provisions in their agreements. Lots of times these policies are used to prevent lower-wage workers from moving to higher paying jobs. Often fast food franchise operators have been found to have these sorts of provisions in their agreements. Attorney generals in several states alleged these provisions limited the earning potential of these lower wage employees and many franchisors decided to remove the clauses in the agreements due to pressure from the attorney generals.

Please be sure to read the article link for other interesting developments including a $700 million to a technology start-up In Texas for damages in a misappropriation of trade secrets case.

The Dilemma of a Start-Up Franchise

I recently had the distinction of reviewing a franchise agreement for the very first prospective franchisee in a franchise. My review revealed there were still many issues to work out in the agreement and with the system in general to make it reasonable for the franchisee. But the potential opportunity was very intriguing to the prospective franchisee due to the financial success of the underlying business. Sometimes it is difficult to balance the legal issues (what I know from past experiences with franchises that have failed) v. prospects of financial success (i.e.the potential for a significant return on investment particularly with a new or inexperienced franchisor).

So what’s a lawyer to do?

In this case, we’re working with the franchisor to make some improvements to the agreements and system. We are asking that they provide us the proper information, disclosures and details. There must be some willingness on the other side to do this. In the early stages I think it’s absolutely critical for a new franchise to listen to that new prospective franchisee for input. It doesn’t mean the new franchisor should just give in to a franchisee. We were prepared to discuss the business case for how our suggested changes would benefit both sides.

So the dialogue is critical particularly with new or inexperienced franchisors. The framework of discussions should be more than what is best for the potential franchisee, but also, what is helpful for the entire franchise long term. If a new franchise won’t work with you on negotiations then it may very well be in your best interest to walk away from a deal. You don’t need to be the guinea pig. Let someone else take that risk. Be willing to walk away. Your savings may depend on it.

Do You Need to Take Risks to be in Business?

If you’re not a risk taker, you should get the hell out of business.

– Ray Kroc

I read the above quote today, and wondered, is this true? Do you really need to be a risk taker to be in business? And, if you don’t take risks you should actually get the hell out of business. Because as a business lawyer, our whole being is about reducing risks for clients, not advocating for it.

I have worked with entrepreneurs for 24 years as a lawyer. During that time I have also started and run some of my own businesses as well. Perhaps even some would have considered starting this blog a risk when I did so back in 2006. But never have I looked at risk quite the same way as Ray Kroc professed in the above quote. I do believe that business owners must take and accept certain calculated risks. And sure, I have worked with my fair share of business owners who leap first and worry about the consequences later. But generally the most successful business owners have a plan or a system that they know or have proven will work. They may have invested capital, which could be considered risky to some, but almost always those business owners knew they could expect a return from that investment. It wasn’t just a shot in the dark.

So in my mind the best business people are “calculated risk takers”. They don’t just gamble. In my experience, the successful business person actually finds ways to reduce risks as they move forward with their business.

Just thoughts for an entrepreneur to ponder.


Iowa LLC and Incorporation Fast Track Filing Services

I am excited to announce that I have been a part of a pilot project through the Iowa Secretary of State’s office which now enables our law firm to offer online fast track limited liability company (LLC) and incorporation filing services. Now it is more convenient than ever to get the legal assistance you need in setting up your Iowa business. Not only can you get legal advice you deserve from an Iowa business lawyer when you set up your business but you’ll be able to get that filing completed immediately rather than waiting for days or weeks before your business entity is actually registered.

We have already used the new system beginning its very first day, and we were able to complete a project in one day where we filed 40 LLCs on behalf of a client with unique needs  and all were registered the VERY SAME DAY with the Iowa Secretary of State.

I encourage you to check out the information on our Iowa Small Business Formation Services to see how we can help you set up your business quickly and properly. Frankly, I think you’ll be amazed at the level of service we can now provide to new business owners.  We still offer in-person meetings for those that want to discuss their business set-up directly with a lawyer but we are also just an email or call away. Even if you don’t live in the Des Moines area we can still help you set up your Iowa business. We have clients from all over the State of Iowa. We look forward to working with you.

Michigan State $500 Million Settlement Should be a Wake Up Call for Business and Organizational Leaders

On our new Brick Gentry Trial Team Blog I write about how the $500,000,000 settlement Michigan State is paying to the young women sexually abused by Larry Nassar sends a strong message to business and organizational leaders.


I know it is a really simple message. But organizations consistently minimize, hide or ignore bad behavior. It is incumbent upon organizational leaders to step up and do the right thing when wrongdoing occurs.

Buying a Franchise: Is it Really a Proven Business Model?

One of the things I hear over and over from distressed franchisees is that they purchased a franchise because it was a “proven business model.” Now, I don’t blame most franchisees for this thought process as they head into their franchise business purchase.  The franchise industry has done a remarkable job of marketing itself where people are preconceived to believe franchises are proven business models. Second, some franchises have been in business for a long time which naturally leads someone to believe it is a proven business model. After all, a franchise would not be in business for a long time if it were not proven, right?

But here are some important things to consider when buying a franchise:

  • Please know and understand that franchises fail at approximately the same rate as other business opportunities. When you understand this fact you will know that franchises are not necessarily “proven business models.” Even franchisees from very successful franchises do fail. DO NOT go into a franchise opportunity thinking you will be successful based upon the business model alone.
  • How long has the franchise been in business? If the franchise is relatively new, does it have a history of operating multiple locations as an independent business? How successful were those independent businesses? If the franchisor has not operated multiple locations in a successful manner, how can the business model possibly been proven?
  • Is the franchise business model trending in the right direction? There are many franchises that have been in existence for many years, sometimes decades. But be careful. Some of these franchises are not trending in the right direction. They are losing franchisees. Franchisees are struggling. If you see a franchise that used to have multiple locations in your area, but now it is down to one, that could be a really bad sign. You need to investigate and perform due diligence on the trends of the franchise and how franchisees are doing financially.

The issue is that all franchisors are not created equal. There’s no guarantee that the franchisor has developed a successful business model or is able to sustain that business model into the future. In fact, many franchise business models are not successful at all. The truth is many franchises out on the market may have no real system, no brand recognition, no marketing plan or perhaps even little to no business experience with the franchise owners.

Don’t get into the mindset that you’ll receive a turnkey operation that will run itself. You will need to work your tail off to make your franchise operations work. If you don’t, you are almost sure to fail. Unfortunately, I’ve seen way too many people who didn’t understand this before they bought a franchise. Franchising does not guarantee success. Don’t automatically assume that just because a business has franchised that it is successful, or that the franchise can create success for you. Because at the end of the day your success will most assuredly rest upon your shoulders.

How to Spot and Run a Successful Franchise

This article on how 5 Successful Owners Tell How They Spot and Run a Successful Franchise is from Australia but just because it is from “Down Under” doesn’t mean the words of wisdom aren’t applicable in the United States. One of the better ideas I took from this article is the importance of local engagement. I think a lot of times franchisees are attracted to a franchise because it may be a regional or national brand, which is understandable, but ultimate success is still determined on how well you connect your franchise business to the local community. As one of the experts quoted states:

“The most successful franchises often demonstrate the highest commitment to engaging with local communities both online and offline, creating value for existing and new customers through sharing customer stories/experiences, value-add promotions and retention campaigns – which may need to differ depending on the local catchment.”

Another point to strongly consider is the franchisor’s unique selling point. You need to know your competitors and the nature of the LOCAL market. What works in San Diego may or may not work in Des Moines, Iowa.

Hat tip to Joel Libava a/k/a The Franchise King for posting this article. Be sure to check out his Franchise Business University online.