Making It Legal:

I just returned from Miami Beach, where I spoke on the subject of “Social Media for Corporate Executives” with fellow (sister?) Entrepreneur blogger Lena West. [Check out her Tech Forward blog if you haven't already.]

Blogging is fun, blogging is new, blogging is strategic, and blogging raises hairs on the backs of the necks of attorneys, who see blogging as a cauldron of liability waiting to bubble over. There’s a way to balance the interests of free speech, on the one hand, and employee control on the other. How you handle that can depend on whether you want employees blogging on behalf of your company or whether you want to be sure you’re not tomorrow’s front-page news in connection with their personal blogs. Here’s a short video clip from attorney Cliff Ennico on SBTV on the subject.

You’ve either had them or have worked with them: the employees from hell. They tend to do very little productive work and spend their time making a nuisance of themselves. And they know just enough about the law to “play the game.” They have you boxed into a corner so that you can’t fire them for fear of a lawsuit.

One of the best ways to deal with them? Don’t hire them in the first place. Fortune Small Business has seven handy tips for avoiding employee problems, such as:

1. Know the laws. There are lots of federal laws that may or may not affect you, depending on how many employees you have. An employment attorney can coach you through this, too.

2. Create an employee handbook. It helps prevent potentially fishy (and discriminatory) situations by ensuring that you treat your employees equally.

3. Avoid time-bound contracts. If you commit to keeping someone as an employee for a certain period of time, you can’t fire her sooner without penality.

4. Leave a paper trail. The more evidence you have in writing of problems with an employee, the stronger your case.

5. Move out, not around. If an employee is causing problems, moving her to another position could aggravate the situation, not alleviate it.

6. Choose wisely. Make the right choice at the outset by clearly thinking through your hiring needs.

7. Don’t stick your head in the sand. Address personnel issues immediately. Seek the advice of counsel to make sure you’re handling the situations correctly.

Here’s a scenario for you: You’re the sole owner of a corporation and have no employees. Every once in a while you find yourself a bit short, so you let the company pay for some of your personal expenses, such as dry cleaning, spa treatments and house cleaning services. You’re not depriving a business partner or any employees of a salary so, in essence, it’s your money to do with as you like. Right?

Wrong.

Because your business is a separate entity, you need to think of it as if it were another person entirely. For example, you wouldn’t just walk into the florist shop next door and take money out of its cash register for your manicures, would you? No (at least I hope not). And you wouldn’t just poke your nose into your friend’s handbag to take money out of her wallet–you’d ask for permission. Likewise, for tax and legal reasons, you need to “ask” your corporation for permission to take funds for your personal use.

How do you do this? By writing a check to yourself from the business account for your salary (or draw), depositing the check into your personal account, and using the funds from there.

Having the company pay directly for your personal expenses can get you into a world of trouble. If your corporation or LLC is sued by creditors for nonpayment, it could be found that you “stripped” the corporation of the money needed to meet these obligations by using corporate money for your personal expenses. As a result, a court might consider your corporation a “sham.” A court then could ignore the limited liability protection your corporation is supposed to provide and pierce it (known in legal terms as “piercing the corporate veil”) to reach your personal assets for repaying the creditors. Another grave danger is when business owners use one checking account for both business and personal expenses. This becomes known as “commingling funds”–also a no-no, and also grounds for disregarding the personal asset protection that a corporation can provide.

Even for businesses operating as sole proprietorships, where your personal assets are at risk anyway, it’s a far better practice to open a separate bank account for your business activities. Face it: It really doesn’t take that long to write yourself a check to deposit into your personal account. Plus, you’ll receive two important benefits:

1. You’ll start to develop the kind of business mindset your company needs in order to grow and
   
2. You’ll save a great deal on accounting fees, because the separation between business and personal (and what’s legitimately tax-deductible) will be that much clearer.

My husband receives a lot of “flag-waving” e-mails from his friends, some of which annoy me because they often end with the chorus of, “It’s all the fault of the politicians!” or “blame the lawyers!” But there was one–when taken out of its “(sigh) for the good ol’ days when Mom just stayed home to raise the kids and we didn’t have so many laws” context–made me stop and think.

There are a lot of laws that business owners need to follow. There are laws concerning how to form the entity that is your company, how to handle decision-making in your business partnership and what rate of interest you can charge on your contracts. There are many, many laws about how to deal with your employees. And there are volumes of laws about the taxes a business is required to pay. Relatively few taxes were imposed 100 years ago. And while I’m not a proponent of going back to “days of yore,” I do admit that running a business is made more complicated as a result. That’s why it’s so crucial for business owners to have a good advisory team. The basics include an accountant, an attorney, a banker and an insurance broker. For no one person can know everything there is to know about building and running a successful enterprise, especially when there are so many taxes floating around (which, if not paid timely or properly, could cost you penalities and interest). Do you know which ones in this list you are responsible for?

• Accounts receivable tax
• Building permit tax
• CDL license tax
• Cigarette tax
• Corporate income tax
• Excise taxes
• Federal Income tax
• Federal unemployment tax (FUTA)
• Food license tax
• Fuel permit tax
• Gross receipts tax
• Inventory tax
• IRS interest charges/IRS penalties (tax on top of tax)
• Liquor tax
• Luxury taxes
• Medicare tax
• Property tax
• Real estate tax
• Service charge tax
• Social Security tax
• Road usage tax
• Sales tax
• State income tax
• State unemployment tax (SUTA)
• Telephone federal excise tax
• Telephone federal universal service fee tax
• Telephone federal, state and local surcharge taxes
• Telephone minimum usage surcharge tax
• Telephone recurring and nonrecurring charges tax

• Telephone
• State and local tax
• Telephone usage charge tax
• Utility taxes
• Vehicle license registration tax
• Vehicle sales tax
• Well permit tax
• Workers compensation tax

Franchises can be an attractive way to start a business. There’s already a system in place; you know (if you’ve done your due diligence) it’s a proven, profitable model; and the franchisor provides you with ready resources.

But “fools rush in where angels fear to tread,” said English poet Alexander Pope. And franchises can be a particularly thorny business model if you don’t investigate them carefully. They are subject to a lot of regulations, and the fine print (you know, that microscopic text filled with legalese) will hurt you if you are not aware of its provisions. As Iowa business attorney Rush Nigut points out in his post on franchises, “Four Things That Make You Go Hmmm . . . ,” there are some red flags that should make you not only think twice about investing in a particular franchise, but stop in your tracks, turn 180 degrees, and walk the other way. Read on to find out that they are!

Lest my previous post be construed as just a plug to pay lawyer fees for no reason, here’s the primary reason that kind of corporate housekeeping is so important:

You risk exposing your personal assets to creditors if you don’t do them.

What? Wasn’t protecting your personal assets the whole point of forming an LLC or corporation? Yes, but formation is only one part of it. There’s maintenance as well. Legally, most states have laws providing that the owners and managers of a business (e.g., the shareholders and directors if a corporation and the members if an LLC) have an annual meeting. At the annual meeting, you are supposed to choose who will run the company for the following year. Even if you’re a solopreneur and hold all the posts, you’re supposed to have a meeting to confirm the decision. If you don’t, you are technically in violation of the law and have just given your creditors a basis for ignoring the limited liability shield you spent good money to establish.

For other reasons why it’s good business practice to prepare minutes at least annually, check out my article, “The Simple But Powerful Reasons for Corporate Minutes,” on my Wise Counsel Press site.

One last tidbit to explain why minutes are good: Potential purchasers of your business look for them as part of their due duiligence. If you’ve gone without them for a number of years, the sloppy record keeping may dissuade the purchasers altogether or reduce the price you could get for your company.

Happy New Year.

With the new year comes the sweeping out of the old, which is where your corporate housekeeping comes into play. Many entrepreneurs think their legal work is done once they’ve incorporated or formed a limited liability company. Not so. Most states’ statutes require you to compile a written record of your major activities at least once a year (called “annual minutes”). Nina Yablok’s Bizblawg gives a nice summary of what to do.

I’m not sure how to document “unanimous written consent.” Consult your business attorney, who can tell you what should be included and how it should be worded. Better yet, don’t do it yourself–delegate it.

Transitioning a business is never easy under the best of circumstances; having a family succession plan is even thornier.  After all, you are entrusting your life’s work to people who, years ago, may have (1) stolen your boyfriend (or favorite party dress or Johnny Mathis album), (2) crashed the station wagon while carousing after a high school football game, or (3) been the family egghead who played Etch-A-Sketch at the dinner table and seemed to relate better to the dog.  The serious business considerations mixed with family dynamics/emotions can result in a volatile cocktail. 

Here’s the goal:  to make sure that you, the founder, get the financial security and value you want from turning over your business, while ensuring that the next generation receives a healthy business that will sustain them as they take it forward. 

How can you get there?  Keep these key issues in mind:

1. Know what it’s worth and what it will cost.  Be fair and objective, as if you were selling the business to an outsider.  Get outside advisors to help you determine the value of your company as it stands now . . . and where there might be room for improvement.  Also, there’s bound to be a tax bite somewhere.  Make sure you get the right advisors on board so that you’re prepared for what it will be and how it will get paid.
2. Know your options and why you’re choosing them.  You may want to leave a legacy but you’re not doing anyone any favors if you’re saddling your kids with an albatross (and career path) that they really don’t want for themselves.  If you want to leave an enduring mark on the planet (and that’s your reason for turning the business over to family), you may be better off selling the business and using the money to build a hospital wing (or other charitable purpose).  Make sure you have a long, deep conversation with your company’s intended heirs to ensure that they have what it takes to truly build the business (and not run it into the ground).
3. Know what you want to do with your life.  After pouring your blood, sweat, and tears into this company, give some thought to “is there life after business transition?”  And if so, what does that life look like?  If your idea of transition is handling the company over to your niece but then micromanaging it (and her) like a nudnik mother-in-law, think again.  Leave your ego and the desire to be the eminence grise, the power behind the throne, at the door.  Better yet, choose another throne to sit yourself on.