1972, January, Pg. 7. Guidelines for Advising the Small Corporate Client.

• Author: by H. Harold Calkins

1 Colo.Law. 7

Colorado Lawyer

1972.

1972, January, Pg. 7.

Guidelines for Advising the Small Corporate Client

71972, January, Pg. 7Guidelines for Advising the Small Corporate Clientby H. Harold CalkinsH. Harold Calkins, Denver, is a partner in the firm of Calkins, Kramer, Grimshaw and Harring, and was the speaker at a recent Denver Bar Association topical luncheon on problems of the small corporation. As Mr. Calkins notes in his article, no attempt is made here to treat in depth the problems which confront the small corporation; the purpose of the article is merely to point out that these problems do exist. Future articles in The Colorado Lawyer will present possible solutions to specific problems.Incentive for this article came from the realization that many small corporate clients are not being fully served by their attorneys. Although large corporations have most of the problems described in this article, these corporations are usually managed by sophisticated businessmen, disciplined to routinely seek and follow the advice of their corporate counsel. This advantage is not generally available to managers of small corporations. Accordingly, some effort may properly be made by an attorney to suggest to the small corporate client the need for legal action. (This is permitted under the provisions of the Code of Professional Responsibility that states as part of Ethical Considerations to Canon 2: "The legal profession should assist laymen to recognize legal problems because such problems may not be self-revealing and often are not timely noticed.")

Modern corporation statutes have tended to relax the traditional formal requirements surrounding corporate activity, and many small corporations operate fairly well and do not encounter difficult problems, even without the benefit of the careful and constant supervision of an attorney.

Generally, however, a well-qualified attorney, properly informed concerning the activities of his corporate client and furnished with the necessary facts, can help the client avoid many problems.

The attorney's work will be facilitated if the corporate manager is an experienced businessman able to anticipate problems before they occur and willing to keep accurate records relating to the corporate activity. An experienced bookkeeper of the corporate auditor, if there is one, can alert the attorney to activities of the corporation which require some formal corporate action.

Resistance may be encountered from a corporate manager who resents the interference from or intrusion by an attorney. The manager may be habitually careless

8and lethargic, or he may be concerned about the cost of having the attorney regularly involved in the corporation's activity. This resistance may be overcome by describing to the corporate owners the problems which are almost certain to result from, for example, the unexpected, unplanned-for death of a substantial shareholder and key employee; these problems may very well result in forcing the liquidation of the business with a substantial economic loss to the surviving corporate owners and to the deceased owner's estate. A manager may be fairly advised that if the corporate activities have been carefully monitored by a competent attorney, the corporation will have a better chance of avoiding unfavorable adjustments in its tax returns in the event of an I.R.S. audit. Certainly if merger with or acquisition by a larger company is an object, the careful and regular supervision by an attorney will facilitate such a business rearrangement.

The problem areas which may be encountered by the small corporation seem to be separable into the following categories: income tax problems; security regulation problems; and shareholder or officer liability problems.

Income Tax ProblemsThe unadvised managers of a small corporation may easily effect transactions which have unintended and often costly income tax consequences. The following are examples: making transfers of property between themselves and the corporation; effecting inter-corporate rearrangements...