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 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.

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.

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.

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.

I am not a licensed accountant (nor do I play one on TV), but IRS rules exist in a weird twilight zone between accountancy and law. The Internal Revenue Code is, after all, a law, promulgated by legislators. But most legislators probably don’t have the background or knowledge base to be mucking about in this area . . . which is why the code is such an incomprehensible behemoth to all but the most sophisticated of those who know how to play its game.

Nonetheless, here are some tidbits about taking a home office deduction that I just learned . . . so I thought I’d share:

The home office deduction sounds like it would be a great thing for small business owners. After all, many of us work at home, and it’s not as though the IRS is always so generous when it comes to deductions for the “little guys.” Deducting a portion of rent/mortgage interest, utilities, insurance, repairs, etc., is a very delicious prospect.

However, there’s a catch (you knew there would be, didn’t you?).

• The part you are deducting must be used exclusively for a trade or business. Not occasionally, or even often, but exclusively. That’s why it’s such a red flag for auditing the tax returns for small business owners.
• The home office must be the principal place of business for your company. Not the place where you bring your paperwork after a busy day in the office because you won’t be interrupted by annoying phone calls. If there’s no other location where you can handle the administration or management of your company, your home office may very well qualify.
• [And this is the new morsel I learned] If you deduct home office expenses, you may not get the full benefits of the tax exclusions when you sell your residence. Carving out a portion of your home for the business deductions in effect disqualifies it from the deductions you get from considering it part of your residential property.

Like most IRS rules, the home office deduction can be laden with traps for the unwary. Speak to your accountant to see whether it really will be worth your while to claim a home office deduction. You may find that the headaches of segregating your space for home/business use may be too great for the risk of getting flagged . . . or that the tax benefits upon selling your house may outweigh what you could claim for the home office.

It’s hard to let go of a dream.  But when that dream becomes a money pit, it’s no longer a dream:  It’s a nightmare.  How can you close it and let it go “gently into that good night?” (with apologies to Dylan Thomas)

The short and obvious answer is:  It depends.  It depends on when you started your business and whether you’ve filed all necessary tax returns.  It depends on whether there are creditors waiting to get paid.  It depends whether you’re a corporation or an LLC.

Assuming there are no creditors and all taxes have been paid, dissolving the company is usually a matter of filing a few forms with the secretary of state of your state and confirming with the state taxing authorities that no taxes are owed (it’s a slightly simpler process if you’re an LLC because your profits and losses would already have shown up on Schedule C of your tax return).

Don’t expect to avoid having to account for your taxes if you didn’t make any money.  Chances are, you earned something, so you’ll have to make a note of that.  But if your business expenses exceeded your business income, it may end up being  a wash.  Speak to your accountant and your attorney about the best way to handle the situation.

NOTE:  Make sure to have that conversation before the end of the year–some states charge companies an annual “franchise” tax (a nominal tax for the privilege of doing business in the state), and the tax is levied as of the beginning of the year.  A little pre-planning to ensure good timing can save you money.

Does your business have a privacy policy? If not, depending on your business, you could find yourself on the wrong side of the law . . . or of customer expectations.

Here’s a handy article with links to sites you should know, such as Privacy Rights Clearinghouse, plus six tips to keep in mind as you consider developing your privacy policy:

1. Take inventory of the personal information you collect and store. This also includes any trade secrets of other businesses that you may possess.

2. Analyze how safely you use and store this data. Don’t make it easy for hackers by scrimping on data security.

3. Make sure you’re complying with industry or federal laws. Strong privacy policies and practices may be mandatory if your business is governed by certain government or industry regulations.

4. Post a privacy policy that is clear and comprehensive.

5. Have your policy reviewed by an attorney or by a privacy seal program.

6. If you have employees, make sure their personal information is protected, too.

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.