Atlanta Business Attorney Blog

During these troubled financial times in Georgia, we have noticed a huge increase in Garnishment actions being filed in Atlanta, Georgia courts. In some instances, the Garnishments are incorrect or have been placed on the wrong accounts. The biggest mistakes that we have seen occur, however, are when small businesses ignore the garnishment rather than hiring an Atlanta business lawyer as soon as possible.

A good Atlanta business lawyer will review the garnishment action to determine the proper course of action so that the innocent small business owner is not suddenly paying the debts of one of its employees. Just recently a Georgia small business owner called me because his company’s bank accounts had been seized for the debt of one of the business’ employees. The problem arose when the small business ignored the initial garnishment action. The employee claimed that he did not owe the money, so the business wrote the Judgment holder a letter claiming that the debt was wrong. When the Georgia small business did not file an official response to the garnishment action, the Judgment holder was able to bring an action against the Georgia small business itself for the money of its employee.

The recent case of TBF Fin. LLC v. Houston, A09A0380, 09 FCDR 2286 (07/17/09), is a good example of how a business lawyer can help someone who has suddenly been garnished. Because the rules relating to garnishment actions are very strict, the lawyer was able to argue that the Judgment holder did not take the proper notification steps required under the law, and, as a result, the garnishment action was dismissed.

If you are a starting a georgia corporation and considering a catchy
trade name, it is extremely important that any contracts you sign list
the actual name of your corporation. In forming new corporations, our
clients often come up with a catchy name after we incorporate their
business that they want to use instead of their corporate name.

Generally speaking, there is nothing wrong with this. If the name is
a good one, it could mean a great deal of money for the new business
from a marketing perspective. As long as the client follows three
simple rules.

A recent Georgia Court of Appeals case highlights for everyone three
important rules. In Yim v. J’s Fashion Accessories Inc. A09A1369.
As Mr. Benjamin Yim found out the hard way, if you do not properly use
your trade name, you will be held personally responsible for any
contracts you enter into. That is exactly what happened Mr. Yim.

Continue reading "Using Trade Names in Georgia" »

The Georgia Court of Appeals recently released the decision of Kitchen v. Insuramerica Corp., case number A08A1986, in which it found that a former employee had an enforceable contract with the Georgia corporation that had employed him for the transfer of a 25% interest in stock in the corporation’s subsidiaries. This case illustrates the importance of both parties agreeing on all of the material terms of a contract, which is known as a “meeting of the minds.” In the Kitchen case, the Georgia Court of Appeals states that the enforceability of a contract is tested by “whether it is expressed in language sufficiently plain and explicit to convey what the parties agreed upon.” It is also important to keep in mind that courts decide contract cases based on the specific facts of each case.

In the Kitchen case, the parties had agreed that the employee would receive a 25% interest in the corporation’s subsidiaries as part of the compensation for his employment with the company. The material terms of the agreement were laid out in a letter that was signed by both parties, which further showed their agreement. The Georgia Court of Appeals in Kitchens found that the letter clearly described the material terms of the stock transfer by providing: (1) the employee would work for the corporation and its subsidiaries in a certain position; (2) that by a certain date, the employee would receive 25% of the corporation’s subsidiaries’ outstanding stock; and (3) a formula for calculating the employee’s “ownership equity.” Additionally, the Georgia Court of Appeals found that the rest of the letter provides enough additional detail on the agreement for it to be enforceable even though there may be some uncertainty as to other aspects of the agreement.

In the Kitchens case, it appears that the letter signed by both parties governed the relationship between the Georgia corporation and the employee. In the absence of this letter, there likely would have been a different result. This case illustrates that it is good practice for contracting parties to sign a contract which includes the basic terms of the agreement. This contract needs to include all of the important terms. The more detail the parties agree on and include in the contract, the less likely a dispute will arise later on.

In a case of first impression, the Georgia Court of Appeals decided that Georgia employees who participate in their Georgia company’s ESOP can qualify for certain shareholder rights in their company even though they do not hold actual shares in the company. In this case, the former part-owner of Kelley Manufacturing Co.’s ("KMC") had retired and two employees within the KMC stepped up to become the new Chairman of the Board of Directors (“Chairman”) and Chief Executive Officer (“CEO”). Over the course of a few months, the former owner became dissatisfied at how the new Chairman and CEO were running the business. Using proxies from the other employees, he had the Chairman and CEO removed from office. While the employees were fired from their positions within the company, they still held onto their interests in the ESOP.

OCGA § 14-2-140 (27) defines "shareholder" as "the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation." OCGA § 14-2-1602 (g) also provides that, for "purposes of this Code section, ‘shareholder’ includes a beneficial owner whose shares are held in a voting trust or by a nominee on his behalf." In this case, the fired employees did not technically fall under these definitions, because 100 % of the shares of KMC are owned by the ESOP, which is the registered owner in corporate documents. There was no nominee or voting trust on file with KMC regarding these shares. The statement of account issued yearly to each ESOP participant, however, reflects that the account is measured in "shares" vested in that participant. Also, the ESOP participants were referred to as shareholders.

The Georgia Court of Appeals was persuaded by case law from other states around the country that have found that ESOP participants are the beneficial owners of shares in a company and entitled to exercise shareholders’ rights, including inspection of the corporate records.

BUSINESS LAW: Corporate Documents, Shareholder’s Rights; CIVIL PRACTICE: Standing; GOVERNMENT: Pre-emption; EMPLOYMENT: ERISA
Kelley Mfg. Co. v. Martin
A08A1891 (civil case)
February 20, 2009
Smith, Presiding Judge.
09 FCDR 631 (03/13/09)

Most small business owners form what are called “pass-through” entities. Two examples of a “pass-through” entity are S-corporations and Limited Liability Companies. A pass-through entity means that, for tax purposes, the income of the business passes through to the business owners, and the business owners are taxed themselves. Large corporations such as Coke are C-corporations and the corporations are taxed on the profits that are generated, and then taxed again on the money that is passed onto the shareholders.

As a general rule, forming a Georgia corporation or LLC does not provide liability protection to its business owners for tax liabilities. This rule was made clear in the case of Littriello v. United States, 484 F.3d 372 (6th Cir. 2007). In this case, the Plaintiff, Frank Littriello, challenged the validity of the Treasury Department’s “check-the-box” regulations, 26 C.F.R. §§ 301.7701-1 to 301.7701-3. Littriello had incorporated several separate LLC’s, and he was the sole owner of each LLC. The operations of the LLC resulted in unpaid federal employment taxes totaling $1,077,000. Of course, the Internal Revenue Service brought actions against Littriello personally for these unpaid taxes. One of Littriello’s arguments to the Court was that the IRS had disregarded the separate existence of an LLC under state law. In their seven page opinion, the Court discussed the history of the “check-the-box” regulations and the difference between pass-through taxation and corporate taxation. After an extensive analysis, the Court found that the IRS may seek unpaid employment taxes from the sole owner of an LLC.

Despite being around for almost two decades, many Atlanta business owners still have questions about the extent of protection an LLC provides to its owners in contract disputes. Fortunately, Georgia appellate courts are upholding the corporate veil of the LLC. In the case of Milk v. Total Pay and HR Solutions, Inc., 634 S.E.2d 208 (Ga. App. 2006), Joseph Milk formed Burrito Joe’s Holding, LLC (“Burrito Joe’s”) to open a fast food Mexican restaurant in Canton, Georgia. Milk was the sole managing member and Jay McGhee and Frank Struck were to manage the restaurant without compensation with the goal of eventually becoming LLC members if the restaurant was successful. The managers entered into a client-service agreement on behalf of Burrito Joe’s with Total Pay and HR Solutions, Inc. (“Total Pay”). However, the restaurant never operated at a profit and was closed due to mounting financial difficulties. Total Pay brought suit in the trial court against Burrito Joe’s and Milk for damages. Fortunately for Milk, the Court of Appeals noted that LLCs have a legal existence separate from their owners just like any other corporation. As Milk’s signature did not appear on the agreement with Total Pay and no evidence was introduced on the record that Milk ever executed a note personally guaranteeing the payment of payroll services, the Court of Appeals maintained the corporate veil of the LLC in favor of its owner.

In this case, Milk never prepared a written operating agreement, and Total Pay argued that the Milk should be personally liable because he did not have a written operating agreement. The Court, however, reinforced its longstanding corporate law principle and applied it to LLCs, stating that Georgia officers and shareholders are not personally liable for corporate acts until such time that the corporate veil has been successfully pierced. The Court also found that the filing of the Articles of Organization with the Secretary of State were conclusive proof that all conditions of the formation of the LLC had been satisfied. There was no requirement for an operating agreement to be typed up and therefore, the lack of an operating agreement was not a proper basis to pierce the corporate veil.

As a general rule, when a Georgia corporation (which would include a Limited Liability Company) is formed, it becomes a living entity that “exists” separate from its owners. The Georgia Corporate Code allows the corporation’s owners to operate a business under a legal “veil” of protection. That veil can provide certain layers of protection from certain kinds of liability.

There are three broad categories of potential liability: tort, contract, and tax. An example of a “tort liability” would be an employee causing an automobile accident while working for the corporation. Contract liability arises out of a breach of a contract between the corporation and an individual or another business. An example of a tax liability would be the corporation making a sale and it fails to collect the necessary sales tax.

If Georgia business owners take the right steps, they can shield themselves from a variety of liabilities by incorporating their business in Georgia. Incorporating, however, is just the first step. Many business owners fall prey to self-help incorporation services and find themselves in legal trouble later. Competent legal counsel can make sure that business owners do the right things to stay incorporated.

Georgia recognizes certain business entities, such as Limited Liability Corporations (“LLC”), S-Corporations, and C-Corporations, as “legal persons” separate from the individuals who form them. People organize these entities for a variety of reasons, one of which may be to stem their personal liability and protect their individual assets. As business attorneys in Atlanta, one of the most frequent mistakes we see in business cases is the failure of a business owner to properly sign agreements in a corporate capacity. Thus, these unsuspecting small business owners make themselves personally liable for whatever agreement they are entering into thereby defeating the very purpose of setting up the corporation in the first place.

In order to lessen the risk of exposing themselves to personal liability, representatives and agents of such entities in Georgia should ALWAYS sign contracts in a format that includes: (1) the person’s name, (2) the entity he represents, and (3) the person’s title with the company (such as owner, vice president, etc)..

Example that may create personal liability: “John Doe” or “John Doe, President.”

Example that doesn’t appear to create personal liability: “Fulton Corp., by John Doe, CEO” or “DeKalb LLC, by John Doe, Managing Member.”

So before you sign that next vendor agreement or sales contract, pause and make sure all of your efforts in setting up and properly maintaining your corporate immunity veil are complete by taking the very basic action of signing your name properly on all contracts and agreements in such a way it is clear that you are acting on behalf of the company, and not yourself.