Making It Legal:

Q: Is there is a way for one to tell whether or not one is personally liable for a business credit card?

A: If the card is in your name along with a company name and the credit card statements are addressed to the company, that c-o-u-l-d be an indication that the account is in the company name alone. But that still wouldn’t answer the question of whether there’s a personal guaranty underlying it.

The best way to check is just to call the credit card company and ask. And see if it will provide you with a copy of the initial credit agreement that you signed. In the future, make sure you keep a copy of all credit card applications so that you know for sure.

Inc. magazine swears that there’s still angel investment funding out there for the right businesses.  Well, OK, maybe “swear” is too strong a word.  Still, the articles “Angels Are Still Interested” and “Angel Investing 2009” paint the picture that, while perhaps not quite roaring like a mighty river, angel investor financing is more than just a pathetic trickle.

Because angel investors are being far more cautious than in years past, entrepreneurs need to put far more thought into how they attract angels.  You need to:

• Have experienced people on your management team, preferably ones who have weathered economic volatility
• Revise your game plan to reflect the changed economic realities
• Do some soul-searching to see if you’re really passionate about your business idea
• Demonstrate an expert knowledge of your market and the discipline to follow thought

For more information on where to find these angels, check out Inc.’s guide to angel-investor networks, available in the hard copy of the magazine (sorry, folks), where you’ll also get more tips (like the ones above) from Kasey Wehrum about choosing the right angel . . . and getting chosen .

 Does this sound like you: “I’ll just work harder and sell more stuff/get more clients. That’ll turn my financials around.”

Well, as Jay Goltz says in his FSB article, “Why Small Businesses Fail,” working harder won’t fix a broken businesses model.  You’ll either face burnout, or worse, a bevy of legal headaches resulting from your inability to pay vendors, employees, and other creditors.

As frustrating and daunting as it may seem, “every business owner needs to be his or her own CFO,” says Goltz.  But how do you know what to look for?  How can you make more informed decisions?

One way, certainly, is to hire a CPA or CFO to help you interpret the numbers (and educate you in the process so that you know what you’re looking for).  Another, suggests Alan Badey, in his New York Enterprise Report article, “Uncover What Your Numbers Say About Your Business,” is to create a basic business dashboard so that you can see and analyze the numbers that substantially affect your bottom line.  These include:

• Using existing technology and systems
• Determining which areas/data are most valuable to track
• Comparing numbers not only month to month but year to year
• Sharing data with key employees

Your dashboard will help you better forecast and budget–and can help catch fraud, Badey writes.

Investors can be a real boon to your business, but no question–they’ll want a piece of the action.  What’s involved in issuing shares to them?

Q: We currently have a market cap of $200,000 (2,000 shares X $100 per share). We were wondering how to authorize new shares to new investors.

A: It’s not unusual for companies to issue new shares at some stage in their existence. This can happen when:

• You want to provide bonuses to employees or directors
• You’re issuing additional equity as part of a takeover of another company
• As in your case, you want to provide equity to new investors.

However, before you run to the secretary of state and fill out the forms to issue more shares (and to change your certificate of incorporation to reflect the increased number of authorized shares), you need to look carefully at a couple of matters. First, is there a shareholders’ agreement among the current owners?  You need to be sure that you properly document the shareholders’ approval of this transaction and follow the procedures in the agreement for admitting new shareholders.  If this transaction will dilute the profit percentages (and it likely will), the current shareholders may need to be specifically apprised of this effect that the transaction will have. Make sure your legal counsel helps you through this process. 

In addition, you’ll want to speak with your accountant to determine both the value of the shares and whether they will fall within the same class of shares as those already issued. If not, that, too, will need to be documented and squared away with the secretary of state of the state you’re incorporated in.

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.

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.

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.

Let’s face it. Not all of us are independently wealthy. Sometimes we need financing from others to help convert our dreams into tangible reality. But is it legal to give someone a “piece of the action” for finding a source of capital?

The answer, writes my colleague, Steve Furnari, Esq., is an unequivocal “no.” Read his terrific piece on “When Raising Investment Capital, Can You Pay Someone to Do it for You?” to guide you on how to go about doing this the right way.

From our own Entrepreneur.com comes this handy article by Sean Melvin, Esq. on what to look for in a small business loan package. As Melvin points out, the package usually “comprises three documents, including a loan agreement, a promissory note, and some form of guarantee and surety agreement.” Briefly,

1. The loan agreement contains the “representations and warranties” of the borrower. These are your promises to the bank that you’ve complied with certain conditions.
2. The promissory note details the principal and interest amounts owed and when payments are due, and it outlines the events that would allow the bank to declare your loan in default.
3. The guarantee/surety agreement is your promise to the bank that, if your business fails and can’t pay the money back, you’ll pay back the loan with your personal holdings.

The consequences of default on a loan can be serious–to both your business and personal credit. So make sure you review them with an attorney to fully understand the risks involved.

Aside from the “two sets of books” scenario that provides the fodder for tabloid headlines and old movies, I tend to think of bookkeeping as, well, mundane (apologies to bookkeepers nationwide as well as to my own, Debbie, who’s a real firecracker). Not something sexy, just something that has to get done. Like brushing your teeth or doing the laundry. Ho hum.

But Lynnea Bylund’s May Intelligence Report made me think differently about it. (Lynnea happens to be co-chair of the President’s Small Business Advisory Council.) Just look at the legal (and other) problems that can emerge because of lack of proper bookeeping:

• Losing income because you haven’t kept track of who hasn’t paid you.

• Not qualifying for a business loan because you have nonexistant or insufficent financial statements.

• Over-paying taxes due to overlooked deductions.

• Not being able to sell your business because you have no measure of what the business is worth.

• Losing sleep from stress and anxiety.

• Setting prices at a level that you think is profitable, but actually isn’t.

• Getting into trouble with the IRS or state tax agencies because of missed or inaccurate tax payments, or the inability to provide supporting documentation.

• Deciding to rent and signing the lease for a larger office, but not being able to pay the lease after three months because your financial projections were inaccurate.

• Getting into legal trouble because you are paying someone as 1099 contractor when he or she is in actuality an employee.

• Not focusing on the work and growth of a business because you have no system to accurately monitor its financial health.

• Spending nights and weekends trying to manage the books yourself without sufficient training or software.

• Missing opportunities for business growth and development because critical information is missing or inaccurate.

Any time you accept money from someone else to help your business grow, you should put that relationship in writing. Many a lawsuit has been brought because of misunderstandings about (1) how much would be provided, (2) when the money would be provided, (3) whether there were benchmarks that needed to be achieved in order to receive more money, and (4) how and when the money needed to be repaid.

From Business Week online is this helpful post from Karen Klein on the subject. And make sure you bring in your attorney to wrap up the legal details.

It’s never easy being a small business.  It’s hard enough to qualify for venture capital funding . . . and yet receiving it could disqualify you from other small business incentives through the Small Business Administration and other government programs.  It’s a “damned-if-you-do-damned-if-you-don’t” conundrum.

According to a recent report in the New York Times, Jason Altmire, a member of the U.S. House of Representatives (D-PA) proposed the Small Business Expansion Act of 2007  to enable small businesses to qualify for federal research grants without being penalized for accepting venture capital money.  VC funds are crucial for companies in the biotechnology arena, for example, that typically take years to generate revenues, which means they often have difficulty getting bank loans.   Venture capital can mean the difference between survival and failure.  

The White House and the Small Business Administration are critical of the bill.  They cite the concern that the legislation will give VC firms “them the potential to masquerade as small firms and tap into billions of dollars in federal research grants and contracts” — which are supposed to be set aside for “true” small businesses.

The legislation passed the House of Representatives at the end of September.  It has been sent to the Senate, where it was referred to the Committee on Small Business and Entrepreneurship — which (go figure) has both a Democrat site and a Republican site (don’t get me started on why the American taxpayer needs to pay for two sites to the same committee).