Making It Legal:

When you start a business and it doesn’t do well, there can be consequences. Financial ones, especially. If you want to stick it to your creditors and walk away from the whole depressing, unprofitable endeavor, you can–that is, you have the ability to, provided that you’ve formed a limited liability entity, and “fraud” is not among the reasons for the business failure. I have my own feelings about whether that’s an honorable way to conduct business . . . but that’s not a legal issue.

Can you stick it to your creditors and start a new business by using the same entity? That’s this week’s issue:

Q.: I own an LLC that started in 2005. I have now stopped operating this business since it was not successful. I owe suppliers more than $40,000. Some of the suppliers have stopped collection, but some still continue to try collecting the debt. I want to keep this LLC to start another business because it has a few years’ worth of history, which can help in dealing with new suppliers. Should I form a new LLC for my new business or continue with the current one and try to negotiate with them when this new business is profitable?

A.: If you have outstanding debts with your current LLC and want to continue to use it, the history that will show up when you try to approach new suppliers is all of the debt you didn’t pay in connection with the earlier, unsuccessful business activities. Once the actively collecting suppliers start to file lawsuits against your LLC, that litigation will be a matter of public record for all to check. Your history with your current LLC, such as it is, is a bad credit history. That can be worse than having no credit history.

Why on earth would you want to saddle new business activities with that association? If you want your new business venture to have a fresh start, start with a new entity.

However, that doesn’t mean there won’t be lingering issues concerning your current debt. If you gave any personal guaranties for the business debt, you can’t get out from under it simply because the company isn’t operating. That will come out of your personal pocket. In deciding whether to give you any credit, new suppliers may also ask whether you have owned any other companies . . . in which case your prior history of “walking away” might come to light.

Your best bet is to speak to a business attorney and a financial advisor to make sure you get your house in order in clearing up the past with the old business and starting the new one. Make sure you have a solid business plan in place so you can evaluate whether the new venture is really worth pursuing and whether you’ll be able to keep current with your obligations to creditors this time.

Those who are NCIS fans may recognize the line from the episode “Driven,” where an AI-operated car supposedly kills one of its inventors.  The criminal shenanigans are only tangential to why I mention the issue.

The episode opens with the NCIS team sitting through sexual harassment awareness training. Like a lovingly dysfunctional family, the team members regularly head slap and pinch one another and make stupid/suggestive comments about each other. Abby, the young forensic scientist, is prone to Goth clothing, blaring heavy metal music while she runs experiments and, well, giving people a hug. She’s very sweet. The way 6-year olds are sweet when they want to hug you.  There’s no sexual overtone or predatory intent.  They want to hug you because you look sad. Or they’re overjoyed that you came through a dangerous situation safely.  Or they’re just happy to be with you.

As an adult, however, Abby is horrified and dismayed when she learns that not only is her predilection for affection frowned upon, it’s considered “Code Red” behavior according to the NCIS employment attorney. For the rest of the episode, she warily asks “permission to hug?” when her natural inclination strikes. [Special Agent Gibbs, the father figure of the group, paternally responds with, "Abby, you never have to ask for permission with me." Awwww.]

It’s a great episode and I love the show (obviously). But there are lessons to be learned from it in the real world–especially when it comes to employees and sexual harassment awareness. Although the environment among the NCIS team would probably make most employment attorneys’ hair curl, there is one key factor that makes the lax behavior OK: consent. NCIS is a work of fiction . . . but every character is comfortable with the back-slapping, double entendre-filled environment.

That’s not always the case in the real world. A colleague told me about a client construction company whose culture had radically changed over the past decade. Once populated with 90 percent men and 10 percent women, the company was now about 60 percent men (many of whom were out in the field) and 40 percent women. The kinds of jokes, comments and touching that might have been OK for a while (or were endured for the sake of keeping a job) were no longer tolerated. Consent was NOT granted or, once granted, had been withdrawn. 

Unfortunately, one of the employees “didn’t get the memo.” He had an easygoing relationship with his female assistant (25 years his junior).  They used to banter about (her) social life and (his) married life. He took this as a green light to be “really good friends.” But when he sent her bouquets of roses (”She was upset about breaking up with her boyfriend!” he cried) and called her repeatedly on the weekend (she answered none of the calls), he crossed a line. He didn’t have her consent to take their “friendship” a step further. As a consequence, he made her feel extremely uncomfortable. His employer is furious–and terrified of the repercussions. The employee is currently the subject of a sexual harassment investigation.

That’s why attorneys get all hot under the collar about establishing bright-line tests for acceptable workplace behavior. In a personal relationship, we learn over time where people’s boundary lines are. Unless we do something completely obnoxious (or harmful), if we step over the line we get a stern talking to . . . and then all is forgiven.  We don’t often get those second chances in the workplace. Who’s to say whether “You look MAH-velous!” might be taken as complimentary or creepy? We can’t know for sure, until we r-e-a-l-l-y know the other person.  So much depends on the tone, manner and surroundings in which it’s said. Being cautious by nature, attorneys will advise, “say nothing at all, rather than say something and stick your foot in a legal cow pie.” As consent can ge given . . . and taken away . . . better to err on the side of caution.

Talking to an underperforming employee ranks right up there with telling a boyfriend he’s not pulling his weight in a relationship. Blecch. Not something you really look forward to. But if you don’t nip the situation in the bud early, it will fester until it reaches ugly proportions. You need to handle the situation directly, and tactfully. The boyfriend may get mad if you handle the situation poorly . . . but the employee could get litigious.

In her “A” response to the “Q” posed in a recent issue of the New York Enterprise Report, Barbara Kurka of the Katz Media Group offered these suggestions for turning the situation around:

1. Think before you speak. This is a delicate situation that needs to take place in a private setting and not be done in a rush. If you’re not prepared to explain, dispassionately, how the employee is not measuring up and what she can do to improve, you’re not ready for the conversation.
2. Know your standards. What does underperformance mean in your company? For that position? Are you using objective standards to measure performance (e.g., sales figures, renewed contracts)? What does the position require? The less objective your standards are, the more you could be wandering into a potential discrimination situation.
3. How long has the employee been underperforming? Is this a chronic problem or a situational problem? If it’s chronic, perhaps the employee isn’t right for the job. Or perhaps the company standards and benchmarks have not been clear. If the problem arose recently, look at the factors that might have had an impact: industry conditions, lack of cooperation from other employees or personal problems. While you want to listen attentively, you want to be sure to steer the conversation back to “what will get the employee to meet our standards?” You don’t want to get embroiled in sorry sagas of personal problems.
4. Decide what you’re willing to do to help the situation. Are you willing to provide more training or other resources to help the employee improve? Within what (realistic) time frame do you want to see improvement?
5. Confirm your conversation in writing. Make a plan for improvement that both you and the employee feel comfortable agreeing to, and set realistic goals for achieving it. Follow up on deadlines and timetables.

Like many employee-related situations, difficult conversations can lead you into thorny legal issues. Get some coaching from your company’s employment attorney to learn the right way to conduct them.

Hear ye, hear ye: All those who want to be spoon-fed, get out of the entrepreneurship business! I was asked, “what’s the most popular business nowadays?” as if following the popularity bandwagon is the magic bullet for $$$$$.  It ain’t. Some rules about starting a business:

1. Know something about the business industry, or be able to pay someone who does.
2. Choose something that you can really get excited about.There are often long, dark days in an entrepreneur’s life, and you’ll need that passion to sustain you so that you don’t throw in the towel prematurely.
3. If you’re jumping on a really “hot” business trend, chances are you’ve already missed the wave. It’s like buying stocks.  By the time the general public gets around to saying, “We should invest in Google,” and the pundits have enough data to analyze it, the peak time for the “big hit” is long gone.
4. There’s no formula for getting rich quick.Two people could choose to start the exact same business:One does well; the other fails.There are too many variables to predict what will “take” and what won’t.One person could choose a popular business and fail; someone else could choose a more obscure business and succeed.
5. Do your own flippin’ research. Someone could hand you a pre-set model for doing business (e.g., a franchise), and you could still botch it. Starting a business isn’t like buying a lottery ticket. You have to expect to invest time and money if you want the big payoff. Your time will be well-spent learning about entrepreneurship, the industry you want to work in and how to measure (financially) whether this will be a sound use of your resources. Only you can come to that decision for yourself.

As if there weren’t enough issues to put into our employee manuals, the internet and Web 2.0 have made them proliferate.Each time there’s a new technology, lawyers have to evaluate: “Is it covered under our current policies?” And, not being the one to say “sure!”–and be wrong –voila! A new policy is born.

The latest addition that I’ve just come across is the employee WiFi use policy. As noted in Matthew Hegarty’s article in the October 2008 New York Enterprise Report, employers need to be on the lookout for unauthorized access to their networks. Given that so many more employees are working remotely (from a home office or just on the road, on the train while commuting, etc.), there are more places and opportunities for hackers to breach your system.

Here are a couple of items that Hegarty suggested:

• Use complex passwords. These are passwords that have a mix of letters, numbers and cases (UPPER and lower)
• Change passwords every 60-90 days.
• Use a Virtual Private Network. This is a private network that can be accessed online but requires a login sequence to access.
• Ensure encryption of wireless traffic (see Wi-Fi.org)

Speak to your IT professional about your options for wireless network security.

Remember the days when real estate seemed invincible, defying the laws of gravity? Well, the joke’s on us, and now many real estate investors are scrambling to dump their properties so that they don’t go down the valuation toilet with them.

Q: I bought some property and put 25 percent down; the owner financed the balance. After three years, the mortgage is down to $190,000, but the property may be only worth $190,000. The property is sort of break-even with tenants in, but if I lose them or can’t fill it in the future, it could start to drain me. Can I simply give the property back to the owner?

A.: The extent of your exposure depends on the wording of the mortgage note and other documents that sealed your deal when you bought the property. If you bought it in your name individually, it’s possible that the former owner/current mortgagor could come after your other assets (namely, your other real estate investments) depending on whether you own those individually as well. In these times, the former owner may not want the property back–after all, if you’ve found it enough of an albatross, the former owner might prefer the regular (cash) mortgage payments to owning property on which there will be maintenance obligations and expenses (not to mention taxes). Depending on the interest rate of your owner financing, you might want to explore other mortgage (bank) options–just to get a sense of the going rate that’s being offered. Review the documents with a real estate attorney to get a clear (and realistic) sense of your options–and what they’ll cost you.

In tough economic times, it’s tempting to look at payroll and ask, “Who can we cut?” It’s like looking in the mirror, realizing that you’re overweight and immediately choosing liposuction as a fat-reduction measure. There are alternatives to drastically cutting your work force–especially as these are the very people you will need to rebound when times improve. See if any of these creative ideas can be applied to your company:

• Tighten your belt. You hear the heroic stories of the small band of loyal employees who took a pay cut when times were tough and were amply rewarded when things turned around. If each role in the company is indispensable to your functioning smoothly, speak to your employees to see whether they would be willing to accept a 10 percent to 20 percent pay cut for the time being. You may find that people would rather earn a little less than be unemployed altogether.
• Reduce expenses by going virtual. Sometimes, it’s not so much the employee costs; it’s the other costs of “housing” them that add up (such as rent, utilities, IT infrastructure). Have a good, long look at your overhead expenses to examine whether your company could “go virtual” with a network of home offices, move into smaller space and/or use Web 2.0 tools for greater efficiency.
• Outsource certain business functions. Yes, this is the one that may mean cutting staff, but it doesn’t mean you have to cut productivity. It’s often the roles that don’t involve a lot of face time with customers that can be outsourced effectively–such as accounting, marketing and administration. And outsourcing doesn’t have to mean sending the work over to India (or outside U.S. borders): You may find virtual assistant firms right in your neighborhood that would be delighted to help at a price below your employee plus overhead costs.

Whatever method you choose, be sure to speak to your employment attorney so you address the situation without stepping into any discrimination-related legal cow pies.

I wish I knew the answer.

That’s why I’m attending the Fourth Annual Small Business Summit on Feb. 3 in New York City–”the only small business summit BY small business FOR small business.”  Exchange ideas with experts and peers; connect with potential new alliances; find the resources and customers you’re seeking.  Visit the Small Business Summit site for more information and registration.  I hope to see you there.

D is also for “pawning your DEBT onto someone else.”  I am mightily relieved that this fellow is not my husband:

Q.:  I own a business and run it as a DBA. Can I sell it to my spouse? And can my spouse assume all the debt attached to the business?  What do you gain by selling a debt-ridden business to your spouse (unless maybe you’re getting divorced)?

A.:  You cannot sell a DBA business to anyone–not even your spouse.  There’s no business to sell, because the DBA is just another name for you.  Without a business entity, the debt is in your name and you will need your creditors’ permission to transfer it. Otherwise, you could technically be engaging in fraud.  Even if you could transfer the business to her, does it really matter?  If you’re married filing jointly, the debt will show up on your tax returns regardless of whether it’s in your name or hers. 

Are things so bad between you that you’d really want to stick it to your wife by selling her this debt-ridden albatross?  If so, you may need legal counsel of a very different nature.

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) 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.

It’s only Jan. 2 (there was no WAY I was going to touch the computer yesterday), and already I’ve encountered a prime example of plus ça change, plus c’est la même chose, or, for those of you Yogi Berra fans, it’s déjà vu all over again.In short, same s**t, different year.

My New Year’s wish for you is that you put a little planning behind your business dreams this year, and make sure you have the financial muscle to back it up. Clear goal + action steps = positive results. It’s not that I mind answering the same questions over and over that has my feathers ruffled (so much for that New Year’s resolution to stay calm and centered!); it’s that people are still trying to start their businesses on the cheap, without the proper planning.

Especially in this economy, folks, EVERY DOLLAR IS PRECIOUS. Eisenhower said it best: When you fail to plan, you plan to fail. When you don’t have a plan for putting the building blocks in properly, you’re establishing your business on a very shaky foundation. And if you don’t have the money for proper help, you sure as sugar aren’t going to have it to fend off a lawsuit or fix a problem when things go wrong.

Q.: I want to start a network of blogs that makes money via reviews and affiliate sales as well as creating and selling my own information products. I would love to have an attorney deal with all the paperwork but I just can’t afford it right now. Do I need to register this as a business right now? Is there a simpler way of setting up a business (where can I find a step-by-step guide)?

A.: Here’s the quick and dirty answer. You don’t have to form a business entity to be in business. HOWEVER, if you don’t, you place all your personal assets at risk. No step-by-step guide can give you the targeted guidance you need to choose the entity that’s really right for you. Making the wrong choice can cost you in fees and taxes along the road.

You mention that you can’t afford an attorney–do you even know how much one would cost to help you with (at least) the business formation? If you can’t scrape together the funds to do even this, then you may not have enough to launch your business. As January is about new beginnings, take this month too work out a plan for what you will do, what it will cost, how revenue will come your way, and within what time frame. Otherwise, you’ll be squandering your most valuable (and limited) resource: cash.