Making It Legal:

I was sitting with a colleague, Matt Clifford of The Island Financial Group last week, chatting about a range of things: the economy, is the administration’s Stimulus Package truly stimulating (or is it a handout), and how small business owners can protect themselves.

Our conversation then moved to “whom can you trust?” With the seemingly pervasive attitude of fear, how can business owners protect themselves in areas where they might not have enough experience (e.g., financial planning, accounting and law)? How can they feel comfortable trusting those professional specialists? For starters, we came up with a list of Top 5 questions to ask those who will become part of their trusted advisor team.

Choosing a Financial Planner:

1. What does “financial planner” mean to you? What will you be doing for me? Manage/invest my money? Write a plan? Set goals?Sell insurance? Some combination of the above?
2. What’s the breakdown (in percentages) of your own income? How much comes from money management fees? Fees for plan creation? Selling insurance?
3. How can you help me create a lifestyle for myself and my future? How can you help me take the money I accumulate and turn it into an income I can live on?
4. How will you help me protect what we put together? What will you/we do to protect against the effects of inflation, market downturns, disability, prolonged illnesses and more dependents (e.g., caring for parents or siblings)?
5. Tell me a story: How were you able to help someone in similar circumstances to mine?

Choosing an Accountant:

1. How will you act as my advisor? Are you just filing my taxes or is there more you’ll do?
2. How can you help my company meet its financial and tax goals?
3. Can you help me determine the profitability/feasibility of major financial decisions, such as buying equipment, business acquisition or business expansion?
4. What is your background and experience with companies in my industry? With my revenue levels? With the particular issues my company is facing?
5. Do you have your certified professional accountant (CPA) designation, and will that be important for the kind of work I’ll need done?

Choosing an Attorney:

1. What is your background and experience with companies in my industry? With my revenue levels? With the particular issues my company is facing?
2. How do you charge for your services? Hourly rates? Flat fees? What are those rates/fees? Do you require monthly retainer payments or do you charge on a project basis? How can you help me keep my legal fees and costs down once I’ve hired you?
3. Who will be doing the actual work on my matters? You? Or someone else in your firm? (Make sure you meet those people, too)
4. How will you keep me informed about the progress of my matters? Should I call you periodically? E-mail check-ins? How quickly can I expect to hear from you in response to my call or email?
5. Tell me a story: How were you able to help someone in similar circumstances to mine?

For more details on how to hire an attorney, when you’ll want to have one on your team and how to manage the relationship so that it works for you, I’ve created a program, How to Choose and Use Attorneys, available through my site GreatBusinessLawResources.com. It comes with a handy checklist/questionnaire to make sure you ask the attorney–and yourself–all of the pertinent questions you want the answers to when you’re pre-screening.

. . . but you can’t pick your partner’s nose. (Or can you?)

I received an inquiry from someone who, I’m sorry to say, is going at this bass-ackwards. She’s chosen a business partner, but not the kind of business she wants to set up. She wants to control all the decisions, but seems more concerned with the type of partnership agreement she needs. She wants to know “What type of business with a partner is best for me?”

A.: Wrong question. You could have a business partner who’s great for a consulting firm and lousy for a baby clothing manufacturer. You need to start with what kind of business you want to have, then look at whom you need to help you get that business off the ground. If you want to control the roost, you may not be suited for partnership . . . and may be better served by delegating to employees (or outsourced staff).

In addition, choosing a business partner is a decision of paramount importance, as I discuss in my BusinessPartnershipCentral.com blog. How you come to that decision (and whom you choose) should be the result of careful planning and consideration–not the fulcrum around which all else spins.

I’m not saying that people don’t deserve a living wage, but when you add that to the cost of employee taxes, benefits, insurance and all of the risks that companies take on by hiring staff, it’s no surprise that in this economy, small business owners are thinking twice about it.

Here’s a short list of what you can expect to pay/file/provide:

1. Withhold Federal income tax from the employee’s salary.
2. Withhold Social Security and Medicare taxes (know as FICA–Federal Insurance Contributions Act).
3. Pay an amount equal to 1 + 2, above.
4. Pay federal unemployment insurance (from the Federal Unemployment Tax Act/FUTA)
5. Pay state unemployment insurance.
6. Pay state disability insurance.

Optional, but sometimes provided:

1. Health insurance coverage (medical, dental, vision, prescription)
2. Paid vacation days
3. Paid sick days
4. Paid personal days
5. Fringe benefits

Then you have all of the personnel and “is the employee a fit?” issues to consider when actually making that hire. For more information on that topic, have a look at the article I wrote recently for The EMyth Insider, “How to Hire Employees Safely.” Don’t forget to click on the link to get your free copy of my special report, Top 10 Reasons Employees Get Fired.

With the ease of internet communication comes the ease of creating a mountain of problems. Identity theft, data hacking and misuse, and lack of security top the list. If your company holds onto any personally identifiable information, you should consider developing policies for dealing with it.

They don’t have to be complicated. This about the data that businesses collect about you, and how you would want them to handle it. Monte Enbyskhas developed a short list to help you be smart and responsible when it comes to privacy:

1. Take inventory of the personal information you collect and store.
2. Analyze how safely you use and store this data.
3. Make sure you’re complying with industry regulations or federal laws.
4. Post a privacy policy that is clear and comprehensive.
5. Have your policy reviewed by an attorney or by a privacy seal program (Need I say more?)
6. If you have employees, protect their personal information and carefully screen and restrict those with access to personal data.

I try to be generous with the information I share. But the short of it is this: I “sell” my expertise. Maybe you sell stuffed animals. Or face cream. Or jackhammers. Or website design. With all of my years of expertise, I take the vast subject that is “The Law” and implement for my clients it in the form of agreements (among other things).

(Marketing experts may take issue with how I describe what I sell, but that’s not the point here).

The point is: If you don’t want to give away your product or service for free, don’t go to an expert in another field and schnuckle around for freebies. Another way of saying this is: If you value being protected against lawsuits and recognize that there is expertise “out there” that you lack and that could protect you, that expertise has a value. And we honor that value in our capitalist system by providing something of value (namely, money) in exchange for it.

(Note: This isn’t meant to start a debate on whether the Obama stimulus/bailout bill is leading us toward socialism).

Today’s rant is brought to us by the letter “O” “One thing I want to include in my agreement is______; how do I phrase it?” For example:

• “I need an exclusivity clause”
• “I need something that talks about my owning what someone else is making for me”
• “I need verbiage about my being able to kick out my business partner if he doesn’t pull his weight”

Unless you expect to give handouts to others, do the right thing. Include in your budget a bit for legal and other professional fees. The karma of professionalism will come back to bless you.

You’ve reached a point where you’re ready to tear your hair out. You’re pulled in 17 different directions and, try as you might, you haven’t found a way to manufacture the 28-hour day. Much as it’s daunting, you’re staring down an inescapable fact: In order to grow your business, you . . . need . . . staff. But what kind? In-house or outsource? Full-time or part-time? Hourly or project-based?

Part of that decision you’ll base on the cost. Here are some of the pros and cons of the different options, nicely outlined by Linda Coleman at BizTaxTalk.com (Note: She looks at it from the perspective of the worker choosing how to be hired):

Employee:
Pros: Always at your beck and call/dedicated work force

Cons: You pay for the privilege with employment taxes, benefits and increased risk of employment liabilities (discrimination suits, employee theft, time for supervision and training)

W-2 “Consultant” (someone hired out to you by a broker or third-party service):
Pros: Can get full-time staff without the need to offer benefits (the broker may do so); mitigates the risk of IRS penalties for choosing the wrong employment category

Cons: You pay a higher fee to the employment broker who provides you with the employee; cost could be prohibitive<

1099 Sole Proprietor:
Pros: You only pay for what you need when you need it; no need to account for employment taxes/withholding or benefits

Cons: Big risk that the IRS (and state tax authorities) will consider your 1099 proprietor an employee and thus subject you to penalties and interest for late taxes–even if you have an agreement stating that the worker is an independent contractor (the IRS will disregard form over substance)

Independent Contractor (B2B):
Pros: By hiring a corporation or LLC to provide the services you need, you can avoid getting caught in the employee/contractor “net”; no need to account for employment taxes/withholding or benefits

Cons: Independent contractors are independent businesses with their own client base; service may not be immediate.

This climate is exceptionally frustrating for entrepreneurs–a lot of the taxpayer stimulus money that was supposed to be sent to the banks to make loans to small businesses is being held up either in legislative approvals or by the banks themselves, which are tightening access to credit like a noose. I know many small-business owners whose lines of credit were frozen, reduced or closed altogether, despite excellent credit history.

But even in the best of times, entrepreneurship can be an expensive proposition–and not necessarily a quick fix to a financial crunch. If you’re tapped out, you’ll need to use other people’s money. But to get that (through angel investors or microloans like those through Count Me In’s program), you’ll have to have a very well-thought-out business plan. Investors will want to know about your background and expertise. What have you done in the past that makes you well-suited to run your business? Do you have a well-thought-out plan for your infrastructure? Do you need to shift your business model, or is yours the kind that should do well in this economy (and if so, why and how do you know?)?

Consider calling your local Small Business Administration office directly to find out about loan programs or other incentives for women business owners; also, your local small business development center may have information (If you do a Google search for your state and “sbdc” you may find ones close to your area). Sometimes funding information is hard to uncover online but may be available when you develop an in-person relationship.

You’d think that would be self-explanatory. But with the proliferation of the internet, holistic products and that gray area of “wellness,” who’s to say?

Today’s Basic Training entrepreneur already had a website selling a product that’s 100 percent natural. She didn’t disclose the product to me but says that it could be perceived as medicine (and she even used it that way). She was more concerned with her website text. But there are several more significant issues she needs to consider with holistic products before she gets to that stage:

1. Has she set up her business as either a corporation or LLC (not as a sole proprietor)?
2. Does she need special permissions from the state to sell her kind of products?
3. Does she have the right liability insurance in place to guard against any customer claims or complaints?

All of that needs to be in place before (or while) she worries about developing the website content. Otherwise, she could find herself totally exposed if a disgruntled customer chooses to sue over a health-related issue.

With two brothers, I was raised that I had to share. “Share and share alike,” I was told, even though at age 10, I really wanted to hoard the last few Ring-Dings for myself. When entrepreneurs get involved in business partnerships, they tend to be sharers, wanting the good for all. But when a giver meets a taker, you have a personality conflict . . . and a potentially serious tax problem on your hands. Here’s how the unpleasant scenario can play out (I’ve seen it happen.):

Anna and Barb went into business together as 50/50 partners. When business was tight, Barb often needed more than her 50 percent share. Anna had more personal financial resources and, out of friendship, she let Barb have what she needed–after all, how could Anna say, “No, Barb, you may not have the money you need to make your mortgage/car/insurance payment this month”? What kind of person would I be if I let a friend lose her house in foreclosure?”

Anna had a rude awakening when time came to file their taxes. As 50/50 partners, Anna and Barb received equal credit for the income that the business earned. However, they were also equally responsible for paying taxes on their 50 percent share of the business income–even though Barb took more cash out of the business. The net result for Anna was that she had to pay taxes on money she never actually received.

Luckily, these two entrepreneurs didn’t need to learn that lesson twice. Anna and Barb got squared away and made Anna “whole.” Barb got professional help to get a handle on her personal budget. The company hired a bookkeeper to play money gatekeeper and write the checks to the owners for their draw. Both owners agreed not to use company bankcards to withdraw cash for their personal use.

Other owners I’ve encountered had a hard time letting that lesson sink in. Partly, this is why:

• Financial illiteracy. They didn’t truly understand the impact their actions had on the financial and tax situation for the business (and, ultimately, themselves).
• No referee. It can be tough to tell a close associate no, especially when the need is dire and you don’t want to face having to shut down the business or kick someone out. Agreeing to abide by what a third party decrees can be an easier way to ensure that fairness prevails.
• No proactive planning. By addressing the previous year’s taxes after the first of the year (e.g., 2008 taxes after January 1, 2009), they have left themselves no time to rectify any mistakes or problems for tax year 2008. The time to keep an eye on potential tax problems for 2008 is in 2008. With the right accountants, they could have monitored their tax situation proactively to see if any shifts in their planning were necessary.

Check in with me later this month when I discuss how to find the accountant who’s right for your business.

We entrepreneurs have certainly faced kinder, gentler economic climates in our day. Cash–and cash flow–are king (or queen–choose the sovereign of your choice).

Here are some of the top tips offered by Mike McDerment, founder and CEO of FreshBooks, an online invoicing and time-tracking service:

1. Bill clients early.
2. Make bill-paying simple.
3. Request partial payments earlier in the project.
4. Use online recurring invoices.
5. Create a system for automatic late-payment reminders.
6. Keep employee morale up.

Finally, a favorite tip of mine: Have a written agreement outlining your payment terms.

People are getting smart about creating communities online. If you can get people to join, and you provide a benefit at a reasonable cost, chances are you’ll be on your way to building a nice annuity stream. The problem comes (as it does in other kinds of businesses) when the founders want to “sweeten the pot” by offering miniscule ownership interests in the company. I don’t recommend it, and I’ll explain why:

Q.: My business sells memberships. There is a lifetime membership option available that is rather expensive, but I thought that if I included one share of the business in this option, it might make it more appealing. Can I include a share of the business in one of the membership types and is this legal?

A.: This can be done legally, but you run into more complications than it’s worth. Not a great way to go. First, unless you have a locked-in, airtight plan to go public (or have a horde of dedicated followers to the “cause”), the dollar value of your one share will probably not be significant enough to entice people to “buy.” You can’t trade it on the open market. There will probably be restrictions on how and to whom it can be sold. Sure, your members will have a slip of paper saying they own a piece of the company . . . but so what? It doesn’t (and shouldn’t) give them a say in what’s going on.

Second, unless you plan your stock issuance carefully, you could run out of stock to give. If you have 100 shares of stock and want to give one to each lifetime membership purchaser, you’ll lose control of your company if more than 49 sign up for the membership. You don’t want the inmates running the asylum.

Finally, if the members will not actively participate in running the company, they would be considered investors under the securities law . . . in which case you’d want to have a host of securities disclosures and documents for them to sign. This can get extremely expensive when it comes to legal fees.

Better to consider other “sweeteners,” such as exclusive opportunities to hobnob with bigwigs, special offers only to big spenders, etc. And make sure you price that lifetime membership high enough that you don’t wish the member would drop dead yesterday.

Franchising can seem like the goose that laid the golden egg. Have an idea, get a system, roll it out, let other people pay you for it. Sit with your feet up sipping mai-tais by the beach, and watch your bank account go ka-CHING.Now for the reality check. Creating a franchise that other people pay for is difficult. You need a clear-cut system of operations that other people can pick up and run. You need to be able to provide manuals and training. And, given the ugly, scheming history of many early franchise frauds, you can bet there’s a boatload of regulations and registrations you need to file with the state and/or federal trade commissions.

So to Andy, who wants to know “How do I franchise my hair salon? Where do I start? I want to do something like Sam’s, but haircuts only”–all I can say is this:

Go to your local business library to start work on a business plan–and speak to an attorney and an accountant in your area who are familiar with the franchising process. Decide whether you have the capital to invest in getting this kind of venture up and running.