 Aloha, and welcome to Business in Hawaii with Reg Baker. We air live every Thursday at 2 o'clock from 2 to 2.30, and we are a program that talks about positive stories in Hawaii, success stories that we have experienced here in Hawaii. We broadcast live from downtown Hololulu in the Pioneer Plaza in the studios of ThinkTec Hawaii in beautiful downtown Hololulu. I like Hololulu. So we're going to be talking to a successful attorney in town who just opened his practice and he's spending a lot of time working with small and mid-sized businesses, Wells, other clients, but I wanted to mention just one article that I saw that came up again. It's been in the news repeatedly, and it was actually the trigger of why I wanted to start this show about a year ago. CNBC came out with another one of their surveys, and they do this every year. And Hawaii is ranked 49th out of 50 for places to do business in the country. And that may be the case. I'm not going to argue with the rankings. We've had that ranking now for a while, so this is nothing new. It's just same old, same old. But I do want to just mention that there are reasons that we want to have businesses in Hawaii. We need to take this 49th ranking and use it as a reason to not try. We do have success in Hawaii. We've got a lot of successful business people and companies in Hawaii that are doing quite well. And I think that if we just take a look at what the PBN does every year, with the fastest 50, we take a look at what the SBA does with their awards every year, and Hawaii business and the Chamber of Commerce, they all recognize successful businesses. We do have a lot of good stories to tell. So I think that we just need to get away from the rhetoric a little bit and look at the positive instead of dwelling on the negative. Now one of those positives today is going to be an attorney that I've got some experience with. And we are going to talk a little bit about him personally and how he's gotten into the practice. And then we're going to spend a little bit of the show talking about LLCs and how you have to be careful. They're very popular. A lot of businesses have them. They use them, but they can be a little tricky. So, Jeff, welcome to the show. It's good to have you here. Thanks for that. All right. Now tell us a little bit about yourself. What's the name of your firm and what type of clients do you have? Just me. I'm the law officer, Jefferson S. Willard, Esquire. And a lot of my litigation, mainly litigation, I don't do any transactional. Some trial work, I still have some. I was a prosecutor here in the city several years back. And then so I still do some criminal defense. But a lot of my stuff I'm transitioning towards a lot more business clients. So then in business, the litigation often comes up like you said with LLCs and when they're shutting down. When they're not done right. But now you've been in Hawaii for a while though, right? Been in Hawaii for close to 20 years. I came here in the Navy. And you had an interesting career in the Navy, too. You got to travel quite a bit. Yeah, travel a lot. I was, I went to the Navy as I was an intelligence. I was a cryptologist, crypto linguist. The Navy taught me Vietnamese, sent me to school for Vietnamese, taught me Japanese. I went to Monterey, the Presidio in Monterey. It was called the Defense Language Institute for Vietnamese. And then they sent me to Vietnam to search for Missing Americans. Interesting, what years were you in Vietnam? Got there in 95. I got to Hawaii at the Joint Task Force. Searching for Missing Americans back then. It was called Joint Task Force, Full Accounting. And 95, and I was here in there until 99, I guess. That must've been tough duty. I was in Vietnam in 74 and 75. And I was there for the evacuation of Saigon. And I know, I guess, finding some of the remains is some of the folks that maybe we left behind. Anyway, we have to go back and bring them home. I think when we first started, that was the impetus. You know, when Congress first set up the Joint Task Force was, you know, when you care enough to send the very best is what they said, you know, they would have, they had a Joint Task Force of all, you know, hand-picked is what we said. But now, J-PAC, which is down on Hickam, it goes pretty much all over the world searching for American military remains. And, you know, Congress has found fit that this is one of the primary reasons, one of the primary, it's important enough to send good men. Critically important. I mean, nobody wants to go to war if there's no chance of them coming back. So there's gotta always be that hope that you're gonna come home again one way or another. You know, so I can certainly appreciate that. But after you were in the Navy for a while, then you got out and, well, you went right into the prosecutor's office? I was, yeah, I got out, used the GI Bill to go to college here, UH Manoa. Well, I started at KCC, then went to UH Manoa. And then after, you know, UH undergrad, I went directly into UH Law School. You know, because I had the GI Bill, I didn't have to work. And so I was able to make good grades, and so I was able to get into a good graduate degree program. And I think that's one of those things that's probably underestimated about the GI Bill is how much it helps you in your graduate, getting into a graduate degree. Well, I wouldn't be where I am today without the GI Bill. And although I took a different track, I started at HCC, and then went to Manoa. So, you know, we've got some similarities, and the GI Bill makes a world of difference too. Yeah. It helped out a lot. And so you graduated from the law school here, and then went into prosecuting office then? Actually, I went, me and my wife, I convinced my wife that we should go to Vietnam and work for a Vietnamese law firm. Wow, that must have taken a lot of convincing. It did. It did. And then as soon as we were over there a couple, about six months, and she convinced me that we should come back. It's tough. I guess having that international law experience is kind of interesting because they tend to do things a little bit differently, maybe? They do, they do. I remember, I think I was, yeah, there was, sometimes I say the law is kind of a cultural practice. As far as the rule of law in courtrooms in Vietnam, the example that stands out the most is we had a maritime dispute where the Vietnamese judge said, Mr. Willard, if we were in America, you would have won, but we're not. I guess different laws and different borders tends to shift around a little bit. A little bit, yeah. Well, that's interesting. And so then your wife, or I guess, you both decided to come back to Hawaii? Yeah, we came back to Hawaii and then I had met Doug Chen and Peter Carlisle while I was in law school. And then when I came back, I put in my application to prosecutor's office under Peter. And the day I got off the plane from Vietnam, I got a call from Doug. Oh, great. Simon was good then. Yeah, yeah. All right, and how long were you there? It was about four years, I think, something like that. It was for the ending of Peter's time there and then for about a year and a half under Keith. Keith Connorshiro. So you know a lot of the court systems here and the local ways of how things work and now you're out on your own? Yep, me and some friends from the prosecutor started our own law firm and it was really a great experience. And then as I started transitioning more into civil, I wanted to spend less time in courtrooms and more time in the office doing. And so the original group that you started with tended to go more on the criminal side? Yeah, yeah, yeah, we did. Because that was what we... That's your comfort zone. That's what's our comfort zone. All right, so now then you went into the civil and now you're also starting to expand into the business side. Right, so more in the business side now I haven't seen a lot of clients and I'm not sure if it's, I haven't been doing it long enough to know if it's a trend but a lot of these LLCs, when they begin to wind down, there's a lot of problems. I mean, probably the biggest is lack of operating agreements but that tends to cause many other problems. They are very popular. I mean, I know a lot and I specialize in that small and mid-sized business market space and I know that predominantly, at least in the last 10, 15 years, the majority of the companies that are getting set up are done under that LLC umbrella. It's, you know, I think most people would need a particular reason not to file an LLC. You know, if they wanted to have separate types of stock then they would go C corporation or if they, you know, but I think if you don't have any idea what kind of business, if you don't have any reason not to do an LLC, you probably should do an LLC. And what are, I guess the LLC itself is a fairly simple process to set up. It's very simple. You can, a lot of people do it themselves online. Basically just, you know, you go to the DCCA website and then, you know, which I think it's the state of Hawaii. I'm not sure what the website is, but you just file and then you don't need articles, or you do file the articles in the corporation, you get your, during the process, you can also get a federal EIN, you know, you need to get your GET, that's just kind of a separate process. That'd be the one. And they have the business action center right down on Nimitz. It can also help you with that process and they can, you know, help you with the GET application and get whatever business license you need and they can walk you through some of that. And I think they even can help explain how to get the even if you need it. But if you've got, if it's a single member, do you still not need the federal ID or can you use your sole security number for that? I mean, I don't, I guess, I don't know what to guess. I know when I do tax returns for the single member LLC, we don't even use the EFIN, we just use the sole security number of the single member and it's an ignored entity. And so it makes this tax return process a lot easier. But once they have two members, then you can't do that anymore and then you have to file a separate tax return, then you need to have that EFIN. You know, so I guess a little bit more tricky. I think of this, even the sole member, the single member managed LLCs that I've set up, I've always gotten EFIN. You got them. Yeah, I always get EFIN. It's probably best to have it and not need it. I think the banks appreciate it. Yeah, the more the banks can get, the more they're happy. The more happy my bank is, the more happy I am. As long as they keep writing those, they're clearing the checks and writing the loans. Very good. So other than working with the small businesses on the LLCs, do you do any other types of services your firm offers? Yeah, along with the LLCs comes a lot of tax stuff and some tax appeals. Dealing with the, as a litigator, doing tax appeals, what I've found is that approaching an appeal to the tax court and doing appropriate discovery and investigation depositions, it's very effective. And I believe it, so far for me it's been very effective. When it gets tricky these days with going with full discovery because there's so many different things that have to be included in that discovery process, right? Well, and also when you start requesting discovery from the state, they start requesting discovery from your client. And then if your client doesn't have it, or if he's, yeah, it'd have to have the right client and it has to be a litigation stance case from the beginning. Right, so in some of the tax appeal work that you do, I guess what triggers that or what triggers people to come to you is if they get a letter from either the IRS or department taxation, challenging a position or saying they owe additional taxes or maybe they are even looking back several years and then trying to collect more than you know, what was originally reported or whatever those circumstances are. When they get these letters, that's when the client needs to come to you and say, hey, what do I do? Hope, yeah, yes, absolutely. As soon as they get that letter, hopefully they already have a CPA and they contact their CPA and their CPA would, you know, if their CPA feels it's necessary to get a lawyer involved with the CPA would contact a lawyer. Because if you get a final assessment, you only have 30 days to appeal. Gotta be quick. Right. Yeah, and it's unless you really know what you're doing it's probably not a good idea to get on the phone or start shooting off emails or letters or something because they can make situation a little bit worse if you're not handling it properly. Yes. Yeah, very good. Well, we're gonna take a short break, but when we come back I wanna spend a little bit more time on the LLCs and how we set it up, what the different requirements are and then I guess some of the challenges that you have found in shutting them down because there's some risks there and that was kind of the nature of the show today is to talk about those risks. But this is Reg Baker, business in Hawaii. We're gonna take a short break. We're talking with Jeff Willard today on some of the risky elements of an LLC, particularly when we shut down. So we'll be right back. Hi, my name is Kim Lau and I'm the host of Hawaii Rising. You can watch me every other Monday at 4 p.m. Aloha. My name is John Wahee. And I actually had a small part to do with what's happening today. Served actually in public office. But if you don't already know that, here's a chance to learn more about what's happening in our state by joining me for a talk story with John Wahee every other Monday. Thank you. And I look forward to your seeing us in the future. Aloha, everyone. I'm Maria Mera and I'm here to invite you to my bilingual show, Viva Hawaii on Thintech Hawaii, every other Monday at 3 p.m. We are here to talk about news, issues and events local and around the world. Join me. Aloha. Aloha, and welcome back to Business in Hawaii with Reg Baker. We're talking today with Jeff Willard, who's an attorney. He's been in practice for a while now and he comes from the prosecutor's office but he's focusing a little bit more on the civil and the business side of things. And we're gonna talk a little bit about LLCs and I guess we know how popular they are but we have to make sure that they're done right, particularly when we start shutting them down. So I guess, I don't know if there's any statistics on this, Jeff, but I know that a majority of small businesses that have started in the last 10 years have leaned towards the LLC side, which means they're pretty popular, but they're easy to set up is one reason they don't cost a lot. They're easy to maintain. I think you have to just do one annual report but it's still an entity. It's still something that has to be respected and treated and not co-mingled with other assets. So how necessary is it to have regular meetings and minutes and that sort of thing for an LLC? Is it as important in that environment as is for say a partnership or a C Corp? The meetings and the minutes are not as important. Have I found, say for instance, like a 501C3, the meetings and minutes are the, that's the heart of the organization and that's what's gonna keep your status. But for an LLC, it's very easy to set up and it's easy to maintain. It's a disregarded entity and it provides an amount of, depending on how you choose to structure it, provides an amount of liability, particularly. And in order to increase the strength of that limited liability, it's best to treat it, although it's ignored for tax purposes, it still is a legal entity. And so they need to have their own checking account and you don't wanna co-mingle funds and you wanna keep everything as clean and distinct as possible. Exactly. When they first, when our legislature, I think in 96, when they put together the RLLC statute, it said that failure to adhere to the basic principles or accounting, things like that, was not a reason to pierce the corporate veil. Not a reason to get past liability. But in I think 2006, there was an amendment that into the 420 HRS 428 and 428, I think, that's two that says that the RLLC must follow the corporate structure and must have meetings and minutes. But at the same time, there's no case in Hawaii so far where an RLLC has, where somebody has pierced the corporate veil and RLLC for failing to adhere to the corporate structure or not that I know of. Well, but nonetheless, I mean, even though it may not be specifically required, or maybe it hasn't been challenged yet, it never hurts to have that. It just provides a little extra protection. Well, and also it's gonna come down to your Schedule C. If you're ignoring the corporate structure, or if you're co-mangling, or if you're not keeping track of the company, then when you're doing your Schedule C, you're gonna have problems with your account. Yeah, when the accounting gets a little messed up. Now, so we've got this RLLC. It's been operating, maybe a business owner that's set it up themselves. Now, is there articles of incorporation, or what are the operating agreement? How necessary is that? Well, the articles incorporation are absolutely necessary. It's not a corporation without it. For an RLLC, there's no requirement for an operating agreement. But if you don't have an operating agreement and you have a multi-member RLLC, well, actually you do have an operating. If you don't have an operating agreement, then the default operating agreement is the HRS-428. And it has some very strict provisions. For instance, that all members must take equal shares. It requires, and the RLLC statute itself requires that you can't give yourself a distribution from your RLLC that will prevent you from being able to pay your debts. That's always, but. So even if you don't have a written one that you created yourself, by default, you have one through HRS-428. Yes. HRS is Hawaii Revised Statue. Right, right. So, and that may not be what you want. You might not want to give, there might be different contributions by different members that, you know, some members are more active, less active, and you might not want to give equal distributions all the time. Hypothetically, if I had an LLLC single member and I don't have an operating agreement, and therefore the default is 428, if I wanted to bring in a minority shareholder or a member that has maybe 10%, I got 90 because I need some help and I want to reward them, that really doesn't matter because I don't have an operating agreement. 428 says we have to be equal. Right, you would have to create an operating agreement and then that might become part of the negotiation for hiring your new partner. All right, so if there's any company that's out there that does not have an operating agreement and has an LLLC with more than one member, they better get in touch with you and we gotta figure this out and get it fixed. Yeah, it's better. The disassociation, when they start breaking down and if there's no operating agreement, disassociation can become very litigious and I sometimes refer to as a divorce court of the business world. All right, well, let's talk about that for a minute because nobody sets up an LLLC with the intent of shutting it down anytime soon, but if you've had an LLLC for a while and you've been trying this business, as a matter of fact, I would imagine that there are people out there that have multiple LLCs and they have different, I mean, a lot of times I see people for different reasons have different properties and different LLCs and different companies and LLCs, but when the point comes where they have to start shutting them down or they sell the property or they dissolve, now there's some risks involved in that if they don't do it properly. In multiple member LLCs particularly, if one member wants to leave and if it's an at will, so you can schedule, you create your LLC for either a term of years or at will and if it's an at will LLC and somebody wants to disassociate, it's possible that they could completely take down the LLC if they wanted to, if they cared to, but at the very least they would have to, they need an equalizing distribution. They need to understand that they still carry a fiduciary duty for I think six months, maybe it's 90 days depending on the situation and that's for representation purposes. Your fiduciary duty to the corporation follows those type of duty of loyalty and care. Some of the examples I've seen where disassociating members have taken equipment or taken property, sometimes intellectual property. So in theory, somebody could say, well let's form an LLC, I'm gonna bring in a bunch of this equipment for the kitchen, I'm gonna bring in this bunch of equipment for the dining area and we're gonna try this thing and it doesn't work and then they take their stuff and go home, that could be a problem if it's not done properly. If they didn't do a proper winding down, either according to their operating agreement or according to the statute, then they may be liable for, personally liable for monies that they have misspent or distributions that they have taken that were not in accordance with either the law or the statute and also if they start up their own, say for instance a kitchen like you said or if they start up their own business, now they're competing in violation of fiduciary duty possibly in violation of deceptive trade practices, HRS 480 if possible there, that that turns into a whole different thing. I hope everybody's catching these Hawaii revised statute 480, 428. Sorry, there's a lot of that. But I mean, that's what you're here for. People don't have to remember that, they just reach out to you and you've got all that up here. Yeah, I'm sorry to use it. Yeah. No, but I would imagine that, and you mentioned it's comparable to a divorce proceeding, I guess, but when partners get together on form and LLC and they do something, there could be two or three of them, four of them, and then one decides to leave or two or you know, it can get pretty complicated. And if they don't have that operating agreement, it defaults back to the 428. Defaults back to 428, and as long as everybody is amicable in their separation. That always happens, right? Right, right. So that's what happens, yeah. If they're not amicable, if there's a problem, then they don't have an operating agreement, then everybody probably needs a lawyer. It's funny, everybody's amicable until they don't get what they want, and they don't become so friendly. Right, yeah. I think the reason somebody called it the divorce court of business laws, because business law typically is about money, but when it comes to breaking apart your partnership, sometimes it becomes about principle. That gets in the way sometimes. The other scenario that could be complicated is that if you've got a very successful business and there could be two or three members, and then all of a sudden one of them passes away, and then maybe the child or the spouse wants it or doesn't want it, there better be some provisions in the operating agreement and how to handle that, right? For the family, right, the family, there's as far as estate planning with an LLC that's a version of very particular things that I'm not, I know enough to know that I don't know. But you know enough to find out. Right, right, right. But I think that when they become much more successful and then what happens often is one member will find a client or several clients who want that member to disassociate from the LLC and just only represent those clients on whatever it is, that is most likely that's gonna be a violation of your fiduciary duty. You gotta be careful. Now we're in the final few seconds of the show and we're gonna have to wrap up here pretty quick. Any real short final words you wanna leave with the audience or the viewers today? I mean I would just say that if there was anything you would know the statute, know the law, and... And if you don't, that's what you're here for. Right, right. Very good. Well, there is risk involved, but this is Reg Baker, business in Hawaii. We've had a very interesting and somewhat scary conversation with Jeff today, Jeff Willard, who's an attorney and we were talking about LLCs and some of the risks involved. But if you have any questions, Jeff has got a website. What is that website? JeffersonWillard.com. All right, just reach out and Jeff can help you with your issues. Thank you for being here today. We'll see you next Thursday at two o'clock. Aloha.