The Legal Play Blog

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A receivership is a legal process through which a “receiver” (or trustee) is given limited control over an individual’s or entity’s assets in order to protect those assets and ensure they can be used in transactions with creditors.

Receiverships are typically requested by creditors and ordered by the court, though they may be established by a regulatory body, such as the FDIC, or requested by a private party. The court may also appoint a person as the receiver when ordering the receivership, but not always. In some instances, the court may request the parties involved to agree on a receiver, who then steps into the role.

When Is a Receivership Needed?

Receiverships are usually requested by a creditor seeking payment from a borrower in default. Once requested, they are authorized through a court order or an order through a regulatory body. Creditors ask for a receivership in order to protect the assets owed to them.

Other instances when a receivership may be required include:

• During a bankruptcy case – During bankruptcy proceedings, the court may appoint a receiver to manage the bankrupt entity’s assets and oversee their liquidation. By entrusting the assets to a receiver, creditors know their interests are protected by an independent third party.
• When an entity’s principals cannot negotiate a decision – If partners or shareholders dispute the ownership of assets within the entity or cannot otherwise come to an important business-related decision, they may request a receivership. In this instance, the receiver acts as an impartial manager for the entity’s assets while its principals work through their disagreement. This is common for businesses heading toward bankruptcy and in the process of liquidating assets.

• When mismanagement of a trust or estate is suspected – Receiverships may necessary in the case of family disputes over the management of trusts or the assets in a decedent’s estate. Parties who suspect trust or estate assets are being misused or not allocated according to the grantor’s or decedent’s wishes may motion the court to appoint a receiver to manage the assets according to estate documents or private agreements.

• When a company has acted fraudulently – If a company is suspected of fraud, a government regulator may order a receivership to prevent assets from being lost or hidden from creditors. When a receiver is appointed during a fraud case, they may be given expanded powers to discover litigation and attain financial documentation.

What Can a Receiver Do with the Assets They Are Trusted With?

The court (or regulator) dictates the terms of the receivership upon its creation. Among these terms are the powers granted to the receiver, which may include:

• Making any decisions allowed under an entity’s charter, articles or bylaws or allowed by any previous agreements or estate documents
• Taking any actions deemed necessary to manage the company’s business affairs
• Purchasing or leasing vehicles, equipment or other materials necessary to run the business
• Making payments to creditors
• Making any payments necessary to preserve the receivership’s assets
• Borrowing funds to maintain the company’s operations
• Engaging in legal action, or responding to legal action against the business
• Paying out – or cease paying out – dividends to shareholders
• Redistributing disbursements to beneficiaries per agreement and court order

In the case of a receivership of business assets, the company’s original owners remain the material owners of the entity, but their powers are greatly limited once a receivership is instituted. In the case of a trust or an estate, the powers of the trustee or executor may be greatly limited or temporarily removed during receivership.

What Are the Receiver’s Responsibilities?

Receivers are expected to act as good stewards for the assets they are trusted with. This includes:

• Making decisions that protect the assets and property
• Observing concepts like fair market value (FMV) when liquidating assets
• Ensuring a company operates within the bounds of all government regulations
• Collecting funds from asset liquidation and pay out creditors
• Help steer the entity toward a period of recovery
• Observing all provisions in the court order authorizing the receivership

Receivers are empowered by the courts to essentially act as the entity’s primary decision maker, but this comes with major responsibilities.

Qualities to Look for in a Receiver

Receiverships consolidate a great deal of decision-making power into a single individual. Given their role, receivers should bring the following qualities to the case:

• Prior experience as a receiver – Receiverships demand a breadth of skills (accounting, business management, communication, legal) that are difficult to find in a single person. If an individual has proven themselves in prior receivership roles in the past, they will be better prepared to manage future receiverships. Our staff includes accounting and legal professionals who have performed in receivership roles for decades – including receiverships where judges sought us out in particular.
• Legal experience – Receivers must be certified accountants before they can take on a receivership position. However, some receiverships involve complex legal matters like executing or responding to litigation. Receivers are also expected to observe all applicable regulations when making their decisions, and these regulations may have legal consequences. A receiver who can provide specialized legal knowledge can consider the financial and legal consequences of every decision.
• Trustworthiness – Receivers may have considerable latitude in how they manage a company’s affairs. They must also serve as an impartial third party. Trust is an important quality in a receiver as they must put aside their personal biases when acting in the role. The courts will look for an established accountant or attorney – preferably one with past receivership experience – to ensure the receiver is trustworthy.
• A steady demeanor – Receivers are frequently thrust into the middle of situations where emotions are running high. Shareholders may hotly contest which assets to liquidate if they are facing bankruptcy. There may be legal action between the entity’s principals, so their legal teams may not even get along. Receivers are expected to manage these emotions as they make the best decisions for the business.

Receiverships Are a Powerful Solution for Protecting Assets and Creditors 

Receiverships are a valuable asset-protection tool and can resolve deadlocks that may hold up bankruptcy proceedings, fraud cases, or internal disputes within a company. Though typically court-ordered, receiverships are also appropriate for private parties looking for an impartial, expert asset manager while important decisions are negotiated.

If your case requires a knowledgeable receiver that offers accounting and legal expertise, the May Firm can provide receivership services grounded in decades of experience.

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Everyone’s got an opinion on taxes, but only tax attorneys are qualified to give an expert opinion that holds legal weight. There are many scenarios where seeking a tax attorney’s guidance is beneficial, including the following examples:

• You need to know if a transaction qualifies as income or triggers a deduction
• You need to verify that your tax returns have been properly completed and filed
• You need to know what the tax implications are of a transaction before it is made
• You need to know if any tax complications may affect a transaction
• You need protection from tax penalties in case a transaction is revised by the IRS

In short, tax opinions by a qualified tax attorney are an important planning and protection tool for individuals and businesses. They can cover a broad range of tax-related topics and can guide people through complicated tax situations.

Why are Tax Attorneys Best Qualified to Provide Tax Opinions?

A tax accountant – even a CPA – is an excellent professional to work with for tax preparation and some tax planning services. However, tax attorneys are the experts to consult with when your tax picture is uncertain. Here is why:

• Protection in case your transaction’s categorization is disputed – In some instances, if a taxpayer files their taxes in accordance with their attorney’s advice, they will be protected from harsh penalties if that guidance turns out to be incorrect. This protection is extended to tax preparers, so if your taxes are professionally prepared and filed following the guidance of a tax attorney, both the taxpayer and their preparation specialist are protected.
• Advanced knowledge of tax laws and provisions – Tax attorneys are deeply familiar with the tax code, at the federal and state levels. They are also familiar with certain localities’ tax codes, typically in the areas where they practice. Tax attorneys also understand legal procedure when it comes to tax regulation and possible future disputes. While accountants understand how best to code the transaction or deduction on tax forms, tax attorneys understand how to argue use of that code.
  

A Few Examples of Transactions That Need a Tax Opinion 

Tax opinions can be provided for most tax questions or concerns. Experienced tax attorneys have worked with enough clients on enough cases to provide useful guidance in an array of situations. A few common examples include:

• 1031 like-kind exchanges – 1031 like-kind exchanges come into play when selling and purchasing investment real estate. With a 1031 exchange, taxpayers may defer their capital gains taxes if they follow the qualifying rules under the IRS’s 1031 provision. These rules can be complicated (the property must qualify as like-kind, for instance) and if they aren’t followed, it can be costly.
• Business mergers and acquisitions – Business mergers and acquisitions have far-reaching and highly complex tax implications. Buyers need to know the tax basis of any assets they are purchasing to track gains or losses. Net operating losses (NOL) must be calculated and allocated to offset future tax burdens. Tax credits (carryover and refundable) and deferments are also a point of consideration, as they may be passed on to the acquiring business.
• Bankruptcies – Bankruptcies come with their own set of tax-related challenges, as people filing bankruptcy must plan how to satisfy creditors while also maintaining tax payments. Our firm regularly assists bankruptcy filers with arranging their finances, signing contracts, and negotiating with both the IRS and creditors to ensure all requirements are met. This requires plenty of informed tax opinions to get right.

These are only a few examples to illustrate when a tax opinion makes sense. As every taxpayer’s situation is unique, tax attorneys are ready to provide guidance on any tax question a client may have.

Tax attorneys may provide their opinions with varying levels of confidence. For example, an attorney may use prior case law and the tax code to demonstrate clear authority behind their opinion. When tax attorneys are confident, they will use language such as “will” and “likely”. In situations where the picture is less certain, an attorney may clarify that their opinion “should” hold or that there’s a better than 50/50 chance of it being correct. If the attorney’s opinion isn’t based on clear authority but may possibly be substantiated in court, the opinion is referred to as “non-frivolous.”

The degree of protection conferred by an attorney’s opinion depends on the confidence with which they provide it.

Three Reasons Why a Tax Opinion May Be Needed

An attorney’s tax opinion can provide valuable insight and protection, and is therefore needed in the following situations:

• When peace of mind is required – Tax opinions can provide valuable peace of mind to taxpayers facing a challenging tax situation. An attorney can help their clients achieve this peace of mind by offering informed guidance and protection from IRS penalties.
• When a contract requires it – Some parties to an agreement may require an official tax opinion regarding certain provisions in the contract before they sign.
• When it’s induced by a third party – A taxpayer may be induced to acquire an attorney’s tax opinion if there are questions, concerns, or scrutiny regarding their taxes.

Tax Concerns or Questions? An Attorney’s Tax Opinion Can Provide Needed Guidance

Whether you need a tax opinion for your own planning purposes or as part of another transaction, a trusted tax attorney can provide it. Our firm frequently helps taxpayers navigate transactions that will likely trigger tax consequences. We are well-prepared to provide an official tax opinion to those seeking clarity and peace of mind.

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To begin, all business entities, partnerships, limited liability corporations (LLCs) and corporations must maintain important documentation that specifies how the entity is to be run. These entity documents may be referred to as:

• An operating agreement or a company agreement (LLCs)
• A partnership agreement (general and limited partnerships)
• Articles of incorporation (incorporated entities)
• The bylaws (also corporations)

These documents differ slightly, but they serve the same purpose – to establish a high-level understanding of how your business is organized and who can make which decisions. You will need this documentation to do business with other organizations and to support any transactions your business is involved with.

Our practice regularly assists business owners with their entity documentation. It can be complex, so what follows is a guide to the entity documentation you will need when forming your business.

Limited Liability Corporations: The Operating or Company Agreement

LLCs are governed by an operating or company agreement that defines the following:

• The LLC members and the equity they own in the business
• Who is authorized to do what (for example, who can transact with a business account)
• How membership voting is handled and how membership votes are counted
• How membership meetings are arranged
• The LLC’s entity and type of tax structure
• The buyout provisions, in case a member wishes to buy or sell additional equity

Ideally, the operating agreement will be created when the LLC is first formed, but it can also be developed after the LLC is created, as long as all members agree to its provisions. Most states do not require the LLC to file an operating agreement, but if an operating agreement isn’t on file with the state, the state’s own provisions will take precedence if there are questions about how the LLC should operate.

A common question asked is whether a single-member LLC needs an operating agreement. The answer is yes. Operating agreements are important, even for single-member LLCs. The sole member of an LLC presumably has complete control of the business and can perform everything necessary to run the company. However, other parties – including banks and other lending institutions – will need verification that this is the case. An operating agreement provides this verification and confirms who may make transactions on behalf of the LLC.

Partnerships: The Partnership Agreement

Partnership agreements are similar to operating agreements but include additional provisions that identify the role each partner will serve for the business. Overall, partnership agreements typically include the following:

• The type of partnership – whether a general partnership or limited partnership
• Who will serve as the general partner and as limited partners
• Each partner’s contributions and ownership stake
• Each partner’s duties and areas of control
• How the partners are paid (distributions, dividends, profits, etc.)
• Whether new partners can join, any limitations to joining new partners, as well as the process for doing so
• The requirements that must be met for a partner to leave, and whether or not a buyout is required
• Partnership dissolution and wind up
• How disputes among partners are handled

Every partnership agreement is slightly different, as the exact provisions are governed by the type of partnership and the wishes of the partners. For example, our practice regularly establishes family limited partnerships (FLPs) for the family-owned businesses we serve. There are a couple of unique provisions that may be written into FLPs, such as:

• The business is not required to make distributions to partners
• Limited partners may not take control over the business, under any circumstances
• Certain conflicts of interest are understandable and excused 

With these provisions, the idea is to give the general partner maximum control over the business while limiting the liability other partners face.

We recommend FLPs for estate planning reasons, as limited partners receive a large federal tax discount on their share of the company’s assets. This discount can be up to 30 percent for some people.

This is just one example – partnerships can be customized to fit the partners’ (and company’s) needs. A business lawyer can help fine-tune the agreement to fit these preferences.

Corporations: The Bylaws and Articles of Incorporation

Corporate entities are governed by a pair of documents – articles of incorporation and the bylaws. Here is a brief summary of each document:

• Articles of incorporation – The articles of incorporation are mostly used by external parties (such as lending organizations) and must be filed with the state. They must include the company’s name, the type of corporate entity and other identifying information. This document is quick to put together, but it must be perfectly accurate, as it will be used to verify the company’s processes, ownership, and status.
• The bylaws – The bylaws are primarily for internal use, as they describe how the corporation organizes its shareholder meetings, when those meetings are to be held, who the company’s directors and officers are, what happens in the instance of a director vacancy, when and how directors may be removed, the board’s responsibilities, how the company may issue stock, how disputes are handled, and dissolution and wind up procedures. In the bylaws, owners may establish how many directors are required to establish a quorum (the number needed to officially meet or vote). The bylaws can also specify what constitutes a majority for voting purposes, and whether agreements may be made outside of meetings.

Your company’s bylaws have a major impact on how your business is run internally and who ultimately makes high level decisions. As such, it is an important document to get right, so it is recommended that you author your company’s bylaws during entity formation.

Other Entity Documents a Business Should Keep

Many business owners think that once the entity is established with the proper documentation, that’s it. No further documentation (hard copy or electronic) is necessary. This is not the case.

In corporations, directors will hold meetings to discuss and make certain decisions. These meetings should be documented in meeting minutes. If a meeting cannot be held, a Consent in Lieu of Meeting may be required. LLCs, even single member LLCs, are required to keep documentation consenting to certain actions taken. In corporations, if a board is deadlocked on a decision or it is unclear whether an action they have taken will be accepted by the shareholders, the shareholders can enter into a Shareholder Resolution, which must also be drafted and signed by the required shareholder percentage. That percentage should be explained in the corporation’s bylaws.

If assets are transferred (often in LLCs or Partnerships), there must be Assignments of Interest or Buy/Sell Agreements.

Not all actions or transactions require documentation, but there are those that do. Certain transactions must be documented for tax purposes or when stakeholders wish to see documentation supporting an action that was taken.

If you aren’t sure whether, or how, to document an action, an attorney can offer guidance.

A Reputable Business Attorney Can Help with Business Legalities and Entity Documentation

Entity documentation makes your business official in the eyes of outside parties. It is also necessary for establishing your company’s management and decision-making procedures and confirming that all formalities have been met to make a transaction official.

Whether your business already exists or is being formed, a business attorney can help you customize your entity documentation to meet your shareholders’ and company’s needs.