Making It Legal:

With all of the flurry about “credit crisis” and “ripple effect on small business,” some businesses may need to consider the option of bankruptcy if they can’t pay their debts in a timely fashion. Before you rush into that, however, realize that it’s a serious step that could leave a blot on your credit history for quite a few years (seven to 10, if not longer). You may be able to work out a better deal with your creditors by entering into a payment plan with them.

Attorney Robert Bovarnick has written a couple of articles outlining the banktupcy procedure and what you can expect from it:

About Chapter 7 (liquidation)

About Chapter 11 (reorganization)

In either event, make sure to speak to bankruptcy counsel first to get a full sense of your options.

Atten-SHUN! Welcome to “Basic Training,” a new spin on legal issues that I’m introducing in Making It Legal. We all know that entrepreneurship is not a smooth ride. There’s no magic bullet, no “instant formula” to which you can just add water and–POOF!–find you have a fully grown and functioning company.

Entrepreneurs ask me legal (and quite a few non-legal) questions constantly. Some legitimately don’t know what to do first. Or they need guidance to help them focus. However, others may be looking for the easy way out and for someone to do their homework for them. That is not the route to a strong business. (Once–only once–in college, I wrote a paper on Asian philosophy for a boyfriend. Never again. Best grade he ever got.)

The Q&As you’ll see in this column share one important thing in common: a need to get back to basics. Ergo, ‘Basic Training.’ I can’t do the legwork your business needs to get off the ground. No advisor can. You’re the one who needs to have the passion and the drive to make it work. You’ll find a little more “tough love” in this column than in my others, but sometimes that’s just what’s needed to get back on track. Like rebooting the computer. Or hitting the reset button. Even if you have to go back to square one, your business will be on surer footing with a solid foundation.
Besides, we can all learn from the issues and questions that other business owners raise.

So git yer gear, and let’s get started with three choice morsels.

Q: I wish to open a business about helping people, kinda like a shrink but not one. I consider myself to be like a muse and I am wondering what kind of credentials I have to have legally to operate this type of business. Do I have to go to school for something or not? I live in Florida. I actually want to help people. I have been to shrinks when I was younger and it was all about money, not about helping someone.

A: You need to give more careful thought to exactly how you want to help people and with which kinds of issues. “Shrinks” are licensed professionals, so yes, you’d have to go to school for that and pass your licensing exams. However, “coaches,” who sometimes perform a muse-like function, are not specifically licensed, although training courses are advisable. Once you have a clearer idea of what you want to do, you can start to build a business around it.

Q: I am seeking donors to help start my business, but I do not want to have loans or sell shares. If I receive money, will it be considered a personal gift to me and not the company if I do not repay it back? How is this treated for tax purposes?
A: Usually, a wanna-be business owner has to offer debt or equity for the privilege of receiving OPM (other people’s money). If you can find a generous donor, more power to you. However, there could be some serious tax ramifications, depending on who’s doing the donating. You’ll have income tax to contend with, and your donor may have gift tax issues. Talk to your accountant so that neither of you gets slammed.
Q: I want to create a business in clothing and merchandise like Calvin Klein, and also I want to form a film production company making hits such as Steven Spielberg does, and a vesting firm such as billionaire investors do, like Warren Buffet.

A: All three are lofty goals, but they involve totally and completely different businesses. Choose one and start from there. In addition, for the millions of entrepreneurs across the country, few have reached the levels of success of Calvin Klein, Steven Spielberg and Warren Buffet. Their success took many years and was hard-won. To emulate them, you might try reading their biographies or articles about them. Also look into your own store of talents to see whether your strengths truly lie in those areas.

I shouldn’t have to cross international borders to be reminded of something so simply “close to home,” but I wanted to thank BizLaunch Canada for a really good piece of advice: Get your advisors in a room together.

I remember the frustration a client went through when forming her business years ago. Together, we decided that forming an LLC would be in her best interests. She then spoke to her acocuntant, who pushed for an S Corp. She came back to me and explained the logic of the accountant, which didn’t seem right, based on what she had told me. Soon, this began to resemble a Wimbledon tennis match, with the client as the ball between the two advisors. Not a good situation.

So I took the bull by the horns, as it were, and got us in a room together. Turns out the client was divulging some things to me and others to the accountant. Based on the less-than-full information we each received, it was no surprise we came up with different approaches. Also, by sitting face-to-face, the accountant and I could speak in our technical language directly, without having to burden the client with being an imperfect translator. As a result, we were able to hash out the decision swiftly.

The client didn’t care which form of business she had–she just wanted to know that the decision was the right one for her, taking all factors into account. She also felt mightly relieved knowing that her trusted advisors were aligned on the best course of action for her. The investment in the advisors’ fees in the short run turned out to be a huge cost-saving device in the long run.

Last week, Small Business Adminsitration executives celebrated the anniversary of the passage of the Women’s Business Ownership Act of 1988.  According to an SBA press release, the pioneering legislation, also known as H.R. 5050, created the SBA’s Office of Women’s Business Ownership, the SBA’s Women’s Business Center (WBC) program, and the National Women’s Business Council (NWBC), which serves as an independent source of advice and counsel on economic issues of importance to women business owners.

The news release underscores the fact that:

SBA’s Women’s Business Center program, administered by its Office of Women’s Business Ownership, promotes the growth of women-owned businesses by providing business training and technical assistance, helping with access to credit and capital, and identifying federal contract and international trade opportunities. The program provided business counseling and training assistance to 148,106 individuals during fiscal year 2007.

Need I say more? Check out this article from my colleague, Anna Lieber, as seen in The New York Enterprise Report. All the more reason to have an employee manual to provide guidance on acceptable (and unacceptable) workplace behavior!

Yes, legalese is its own language. Like the Latin spoken at the Vatican, it’s truly understood only by a few.

So for the rest of us, here’s a handy definition of a term relevant to all business owners (whether a corporation or an LLC):

“piercing the corporate veil“

It’s considered a privilege to be able to do business in a way that creditors can’t get to your personal assets. But some business owners abuse the privilege. In those situations, a court will let a creditor ignore the fact that you’ve formed a corporation (or an LLC)–the “corporate veil”–and hold you personally responsible for the debts you’ve accumulated.

Are you treating the business like your own personal slush fund, paying out personal expenses through the business? That’s a problem. Have you failed to comply with corporate paperwork and the niceties of annual minutes? That’s another strike against you. For more on this, go to my site, WiseCounselPress.com, and check out the article “The Simple But Powerful Reasons for Corporate Minutes.”

It’s so easy to get sucked into an awkward spot when doing business with friends. It can start out as an exchange of expertise (a barter of the minds, if you will). Add in a dollop of friendly advice and MasterMinding. Mix together in a bowl . . . and watch the uglies emerge.

One colleague (”Joanne”) spent months helping her college friend, “Darla,” develop her website and blog. Joanne shared all sorts of valuable information about how to drive traffic, target influencers and handle the process of blogging so that itwouldn’t overwhelm the rest of Darla’s business. Joanne also thought she’d get something out of it: Darla has a lot of expertise in an industry that Joanne wanted to break into. So Darla seemed the perfect case study.

One day, Darla told Joanne that she had a potential client for her–another company wanting to start a blog. But there was a hitch: Darla wanted a finder’s fee. This got Joanne’s nose out of joint, given all she had done for Darla. For free. After a lot of back-and-forth, Darla says, “Oh, never mind–I’ll just help the client do it on my own. I’m not really competing with you, anyway, for the business.” Joanne was furious . . . and bewildered. After all the time she had spent with Darla–had she unwittingly ended up training her next competitor?

Here are some ways that Joanne could have managed the relationship better:

• Put a limit on the amount of time she was prepared to spend for free.
• Make it clear (ideally, in writing) that this would be a barter relationship and determine how she wanted to be “paid.”
• Given Darla just enough information to understand the process, but not so much that Darla could build a business on it.
• Treat Darla like any other client and have her sign a non-compete, saying she won’t use the infomation in connection with a competing business.

Any other suggestions?

The first Monday in September wasn’t always considered an official rest from work. According to the Department of Labor’s website, the first Labor Day holiday was celebrated on Tuesday, September 5, 1882, in New York City. Over time, the movement to recognize Labor Day grew–first with a handful of municipal ordinances, then state legislation. Finally, in 1894, Congress passed an act making the first Monday in September of each year a legal holiday.

Why care? Because of Labor Day’s history. Said Samuel Gompers, founder and longtime president of the American Federation of Labor:

“Labor Day differs in every essential way from the other holidays of the year in any country. All other holidays are in a more or less degree connected with conflicts and battles of man’s prowess over man, of strife and discord for greed and power, of glories achieved by one nation over another. Labor Day . . . is devoted to no man, living or dead, to no sect, race or nation.”

Rather, it celebrates the social and economic achievements of American workers, and the contributions they have made to the strength, prosperity and well-being of our country.