Making It Legal:

Inspirational, thought-provoking and handy is this list of 101 Tips from 50 Small Business Bloggers, compiled by Gregory Go.  I particularly liked fellow attorney Anthony Cerminaro’s comment:  “If you don’t like what you’re doing, try something else.”  Kinda reminds me of the comedian Henny Youngman’s comments:  “If at first you don’t succeed … so much for skydiving.”

Q.: I have always been advised, by CPAs, that until a small company has a specific NET income of approximately $100,000, incorporating is out of the question.  The fees associated with Inc. may not be worth the trouble of incorporating. Wrong? If wrong, why? Thank you.

A.: A $100,000 threshold?  Hmmm.  Plenty of companies are incorporated every day for businesses that are just starting and have no income whatsoever.  Depending on your state, incorporation costs only about $300 to $800–and is a one-time expense–so I don’t see why a business earning a net income of, say, $50,000 wouldn’t be able to absorb that. In fact, the owners of small business corporations have been known to put a lot of expenses through the company, precisely so that they don’t show a lot of net income for taxation purposes.  The corporation could have a gross income of $250,000, but with salaries, rent, expenses, taxes, etc., it only shows a net income of (for example) $80,000 for income tax purposes.  Is that company too small to incorporate?  I don’t think so.

There are important legal reasons to incorporate.  A disgruntled vendor who sues you doesn’t care whether you’re earning $25,000 or $250,000  If you aren’t operating your business through a corporation (or limited liability company), your personal assets are at risk.  Or if a customer comes into your business, trips, falls and smashes her head open, you could be personally responsible for any damages.  Your earnings capacity isn’t the issue:  your asset protection is.

Finally, if you’re looking to work as an independent contractor, more and more companies want to be sure they’re dealing with corporations or LLCs so that there aren’t any misunderstandings about payroll taxes and entitlement to employee benefits.  You could find that there are fewer opportunities open to you–especially for longer-term projects–because bigger businesses don’t want to get caught in the IRS/Department of Labor’s net.

Why open yourself up to personal liability when you don’t need to?  Today’s query comes from someone wanting to know that fundamental first question: “What form of business should I be?”

Q.:  I’m wondering what kind of company you would recommend for me to register under for a clothing company. I was thinking going Limited Liability because I would not be personally responsible if companies came after me for some reasons and couldn’t take my personal assets. Which one would you recommend because I don’t really know how much money I’m going to make in the first year.

A.:  For all but a v-e-r-y few situations, I recommend that entrepreneurs form either a corporation or a limited liability company.  There are simply too many variables and pitfalls in starting and running a business . . . so why leave your personal assets exposed? 

Which form of limited liability entity you choose, though, depends on a number of factors:

• Where the business will be located
•  How many people will own the business
• The nationality of the business owners
• Whether you will involve passive investors in the company, or want to take the business public
• The federal, state, and local taxes that may be levied against the entity
• The costs of formation
• Your exit strategy and what you want to get out of the business

Before you take the step of forming the business, make sure you’ve taken the time to calculate the kind of financial investment you’ll have to make in startup and ongoing costs.  While 1st year’s revenue will be guesswork, you can have a more solid sense of what’s involved with the right financial planning.  It will also help you decide whether the venture will be worth the risk and financial investment.

When you’re in business by yourself, the math is easy.  But when you have multiple owners, how should you share the spoils?  That’s the nature of this week’s basic training post.

Q: How should I divide profits in an LLC?

A: Especially in an LLC, you have many options for how to divide your profits. There’s no hard-and-fast rule. The formula you choose can depend on a number of factors, including:

• The number of people actively involved in the day-to-day operations of the business
• Whether there are any passive investors who have contributed capital
• The extent to which the active owners are actively involved (e.g., are some full-time with the company, whereas others are only part-time?)
• The non-cash contributions the owners have contributed to the company (e.g., inventions, client lists or other intellectual property) and the value placed on that contribution
• The time commitment each owner is prepared to make to the business (are some in it for the long haul, whereas others want a quick ROI and to move on?)

It’s not something you want to take lightly, because it will guide the amount you’re required to pay someone to buy him or her out, should the time come. Best to speak to an attorney and an accountant in your area who can specifically guide you to the result that’s right for your company.

Your employees can become your next competitors if you don’t handle the relationship carefully . . . and by “carefully,” I mean having non-solicitation agreements and other understandings (in writing!) with your employees.

But some folks are “old-school,” or don’t want to spend the money.  As a result, their employees are considered working “at-will” and free to leave at any time.  From the perspective of the soon-to-be entrepreneur, can you take your employer’s clients?

Q:  We’ve been working for a company for more than a decade and have finally reached the point where we want to set up our own shop in the same industry. Most of the client relationships are with us, as the owner is very hands-off and many people don’t like him. We have no employment contracts. One of our concerns was transferring clients, specifically when is the earliest we could advisably do that? We’ve been moving forward with our plans, but we’ve realized that it would be far more practical for ourselves and for the clients, who otherwise could feel at sea, to be able to speak with them in advance.  How can we do so?

A:  While I appreciate your concerns about leaving clients “at sea,” employees do have a duty of loyalty to their employers in that you should not solicit clients, take files, etc., while still on the job (you can take your contact database), nor should you use “company property” (company phones, computers or make the announcement at a client  meeting or during your workday).

Best (safest) way to handle it is to get your ducks in a row, leave Friday afternoon, and contact everyone after you’ve left.  Do not use your work e-mail for these kinds of conversations. The longer the time delay between leaving your job and contacting the clients, the stronger your defense to a lawsuit that you took clients on company time.

Another way would be to contact clients on your own time (again, from your homes and not during workdays or hours) to let clients know you’re leaving and that you’ll be back in touch in a week or so to let them know where you’ve landed.  Two problems with that approach:  1. The client may want more information than it’s appropriate to give at that time . . . so if you’re concerned about their being “at sea,” that could leave them even more worried about how and when their needs will be handled; 2. There is a meaningful risk that if any of the clients lets the owner know (even inadvertently) that you’re leaving before you tell him, this could be bad for you and give the owner something to hang his hat on in litigation–whether or not you have an employment agreement).

A few more things to consider:

• Will your clients really be “at sea”–are they that fragile?–if they are notified after you leave?  It’s really so much cleaner if you can wait.

• Check the client agreements to make sure that there are no non-solicitation or exclusivity provisions in their contracts–for example, that if they are solicited by another agency (or by former employees of the agency), they’ll give the owner prior notice.

• Depending on the clients’ feelings of loyalty to the owner–if you tell them before you tell him, they might be put off in the sense of your not acting totally aboveboard and with integrity.  More of a character issue and their feeling of trust working with you going forward than a legal issue.

You may have plenty of opportunities to get it (legally) right . . . but not as many to hear me speak on the subject! 

For those of you near Brooklyn, N.Y., on July 15, stop by the Brooklyn Creative League, where I’ll be talking about everything you need to know about business law in 90 minutes.  (Well, not quite . . . but close!)  In this entertaining and lively session, I’ll provide entrepreneurs with an overview of the most common legal issues they will face as they start and build their businesses.  I’ll touch on:

• How to choose the right form of business
• Working with business partners
• What to look out for in your commercial leases
• How clear contracts make for happy clients/customers
• Intellectual property: what to protect and how to protect it
• Choosing the right attorney/advisory team

RSVP: Contact the Brooklyn Creative League at info@BrooklynCreativeLeague.com or (718) 576-2104.

Date:  Wednesday, July 15, 2009
Time:  9:30 to 11 a.m.
Location: Brooklyn Creative League, 540 President Street (between 3rd and 4th avenues)
(Take N/R Subway to Union Street)
Price:  Free for members; $10 non-members

Ready to chase your dreams of being an entrepreneur? Yes, I mean you. Why not you?

Listen in to this lively and informative interview of Robert Tuchman, author of YOUNG GUNS: The Fearless Entrepreneur’s Guide to Chasing Your Dreams and Breaking Out on Your Own. Robert talks about why the theme of “why not you?” has to resonate powerfully for budding business owners. He shares war stories (mistakes), lessons learned and benefits gleaned from having a solid professional team behind him . . .  even from the get-go.

For more information about Robert and the book, visit his website at www.YoungBusinessExecutives.com.

Today’s post deals with the conundrum, how to account for business expenses without a company bank account, and how to set up a company without business funds?

Q.:  “I recently formed an LLC to create an online store. Because I saved diligently I had enough money in my personal savings account to cover all setup costs for the company (ex: LLC formation, website development, logo creation, etc.). I have initially paid for all business-related expenses with my personal AMEX because I did not yet have a business bank account set up.

A lawyer told me that I would be able to account for the use of my personal AMEX/savings by issuing promissory notes from my business to my personal self. I wanted to know how you would suggest using my personal funds to fuel my startup and how I should properly account for this in my business books in order to keep my personal and business separate.”

A.: The attorney you spoke to had a good point: If you are treating the money you put into the company for startup as a loan and not as a capital contribution, a promissory note would be in order. Make sure you also provide for a reasonable interest rate–the IRS doesn’t look kindly upon no-interest loans. Somewhere between 4 percent and 6 percent is common–and state when the company will start making payments. In addition, you may want to have the LLC issue “minutes” (a brief write-up) acknowledging your contribution and confirming that the funds will be repaid.

However, as to setting up your books and deciding how much should be deemed a capital contribution and how much should be a loan (if any), it’s best to speak to your accountant. Definitely set up a separate bank account for the LLC.  Once that decision has been made, a bookkeeper can help you keep track of it.

. . . 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.

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.

You know . . . and I know . . . that faster is not always better, no matter how much the car companies try to push the “0 to 60 in 3.6 seconds” pitch. Think food, sex, rest, travel. You don’t necessarily want to rush these experiences. Quick, split-second decisions are not the best decisions. You want to take your time with certain issues, particularly those that have long-term ramifications: getting married, buying a home, forming a business.

This week’s query is from the “fast-is-better” department: What is the fastest way to get llc?”

A.: If you want fast, do it online. Can’t get faster than that.

But is a limited liability company (LLC) the right form of business for you, based on your goals and business plans? You won’t get that advice online.

Can an LLC give you the tax advantages you want, based on your personal situation? You won’t get that advice online.

Are there any state-specific formalities that need to be met in addition to the online filing? You may not get that advice online.

A client who filed her Delaware LLC through an online service was never told–as she wanted to do business in New York–that there were a whole set of other filing requirements and fees involved, amounting to an additional $2,000.

Yes, if you choose the “wrong” form of business, you can change it . . . but there may be significant tax implications, additional costs and legal paperwork to contend with. So why rush, when you can work with an advisor who will help you make a decision that’s right for you?

Ah, youth. I wish I had been so motivated to change the world when I was a teen. I was more concerned with how geeky I looked in braces and participating in nerdy things like student government. Here’s how this week’s teen wants to make a difference:

Q: I am trying to start up a robotics business but can’t find investors. Probably because I am thirteen. Any advice? Also, how old do you have to be in order to start up a business?

A.: Yes (for those of you Wonderama fans) . . . but according to the law, they’re not considered mentally competent until age 18. That’s not a slap in the face of teenagers–some of whom are exceptionally bright and brighter, in fact, than some adults–it’s a recognition that the human body is still in its maturation stages. So right, wrong, or indifferent, the law has a cut-off point at age 18. Under 18, you need a parent or guardian to start a business, sit on corporate boards and enter into contracts on your behalf–you can’t do it alone. [OK, there are exceptions for organizations such as Girl Scouts, etc., but that’s beyond the scope here]. Savvy investors know this, which is why (among other reasons) they would never dream of having discussions with a 13-year-old without counsel, parents and/or other witnesses present.