Making It Legal:

When leaving a business partnership, entrepreneurs often overlook the fact that untangling the details of the business can go on for months after the date of departure. Here’s one of the problems that can arise if you haven’t worked the appropriate safeguards into the exiting process:

Q: We separated from our former business partner in the 3rd quarter 2008, at which time he took over the entire company. Earlier this year he told us he would need to file an ‘08 tax extension for the company because he wasn’t able to pay any amount owed at filing time AND he still owed the CPA from the last year’s services. We also found out that he has not provided the CPA with any of the company’s tax documents from ‘08 and has missed the corporate extension deadlines. 

Even though we filed for an extension, paid an estimated amount and have submitted all our personal tax documents to the CPA (we all use the same guy), our personal tax filing is in limbo pending information from the company’s filings.

How can we move forward and what can we do to force our ex-partner to get the paperwork in?

A: Assuming you have the right provisions in your business separation agreement, your former partner is in breach of contract. The next step is to send a lawyer’s letter demanding copies of the company’s financial statements and possibly threatening a lawsuit to compel him to turn over the documents. There’s no reason he can’t run basic P&Ls, balance sheets, etc., to at least give you a baseline (unless, of course, he hasn’t done any bookkeeping since you left him). That said, you may have the ability to amend your tax returns once you get this information, so all is not lost–but it is inconvenient. It might be worth exploring with your accountants whether you can “extrapolate” the company’s earnings (bearing in mind that you were only present for three quarters of the year) from what you knew of the company’s financial situation as of the date you parted company. Ideally, the ex-partner should be held liable for any costs and fees you may have to incur if he didn’t meet his contractual obligations.

You may also want to reach out to an independent accountant for guidance, just to be sure that your CPA is giving you fair and unbiased advice, and isn’t tainted by any conflict of interest.

Here’s an encouraging story about how someone fought back against a Twitter-jacker–and won!  StartUp Nation founder Rich Sloan outlines how he found out that someone had co-opted StartUp Nation’s identity on Twitter and the steps he took to resolve the situation . . . and without incurring huge legal fees.  Read through the comments, too, as they provide sound advice about the need to monitor your company name and trademarks on a regular basis.

With so much stuff on the internet available and ripoff-able, what steps can we take to fight back?

Q: I have several blogs, and I wrote several articles that I have published to article directories. Doing research on my topics I found my article posted on another website and another author put his name to it. I e-mailed the author and he said he didn’t put that there, he never saw the article, and I asked him to take it down. Well, it’s still there.  What should I do?

A: If the article is still there, it could be for a couple of reasons: 1. Either the “author” is telling fibs, thinking you won’t do anything or 2. there’s a technological glitch somewhere that the “author” doesn’t have access to correct.

Under Section 512 of the Digital Millennium Copyright Act, you can write to the website/blog service provider to alert the provider to the situation.  Be sure to include the following information:

1. Your name, address and electronic signature.
2. The infringing materials and their internet location or, if the service provider is an “information location tool” such as a search engine, the reference or link to the infringing materials
3. Sufficient information to identify the copyrighted works (e.g., the title and link to the article)
4. A statement by the copyright owner (you) that you have a good-faith belief that there is no legal basis for the use of the materials complained about, and
5. A statement that the notice you’re sending is accurate and, under penalty of perjury, that the complaining party is authorized to act on the behalf of the owner (e.g., the “owner” may be your company and you’re the president; or if you’re one and the same, say that you are bringing the complaint individually and you are the individual owner).

Once you send the notice, the service provider is required to remove, or disable access to, the material.

I first met David Greer, angel investor and entrepreneur, when he weighed in on my Business Partnership Central blog on the importance of having a written shareholders’ agreement–and how that freed him up (when he sold out his interest) to sail the Mediterranean for two years (drool).

Now he offers some handy insights to follow up on my post, ”How to Speed-Read an NDA,” which I’m delighted to share with you.  David writes:

Thanks so much for the article on NDAs. As an angel investor and entrepreneur, I see those all the time, and I am often required to sign them.

Under the “Confidential Information” section, I also look for who is disclosing to whom. I have seen “one way” NDAs. That is, the information disclosed to me is confidential, but the information that I disclose is not. As I see so many technologies and companies, I am very careful about information I disclose and to whom, making sure that I do mark confidential information as confidential. That doesn’t help if I’ve signed an NDA where the other party isn’t going to keep my information confidential. One of those little “gotchas” that you can pick up in a quick reading of an NDA.

“Can I? Can I?” I hear you asking. Well, you’re asking the wrong question. The issue is not whether you can download your client contracts from the internet, it’s whether you should.  And once you do (because you know you’re going to do it, right?), how can you get the best use out of doing so?

Downloading agreements from the internet is good for starting to educate yourself about the kinds of terms you might want to include in agreements with your clients. But here are two significant things the online agreements (even the ones you pay for) can’t tell you:

• They can’t tell you whether there are any provisions in the contract that could hurt you.
• They can’t tell you whether there are any provisions that are missing that could help you.

Poke around the internet all you like; but in the end, only you can decide which business terms are best for you. What specific products or services will you provide to your clients? Within what time frame do you want to be paid? What happens if you’re not paid in a timely manner? Have a look at my program, How to Train Your Clients to Pay You, to get the lowdown on the important decisions you’ll need to make. And once you’ve made those decisions, have your attorney wrap them up in a nice, neat legal bow to protect you properly.

Non-disclosure agreements (NDAs) have many uses. You may have a fabulous idea and want to protect it as you share it with potential investors. Or you may be on the receiving end of one, as this article, “How to Speed Read an NDA,” anticipates.  Written by my colleague, IP attorney Terence Church, Esq., the article gives you a brief rundown of the top six issues you’ll want to see in any NDA you sign. 

Of course, this leaves aside the issue of whether you really should be doing business with someone who shoves an NDA under your nose 2 minutes before you’re about to begin a meeting with him or her and expects you to sign it without the benefit of discussing it with your legal counsel. If he or she won’t give you the time to review it carefully (assuming you’re an entrepreneur who takes her contract obligations seriously), you may want to take your business elsewhere. If you’re in a line–or at a stage–of business where NDAs are common, speak to your attorney to get guidance in advance about how best to handle these kinds of situations if they arise.

I was recently contacted by a business owner who felt that he was being cheated by his business partner.  He had nothing specific to go on . . . just a gut feeling . . . and there was no paperwork.  What could he do to protect his investment?

Whether or not he was actually being cheated, there are important steps that business owners can take to monitor what’s going on in their company.

1. Have an open conversation:  It may be tough to do if you’re already concerned about being lied to.  Depending on the size of your investment and your commitment to the company, you may want to bring in a mediator or someone experienced with coaching people through partnership issues.
2. Watch your numbers – -regularly:  Engage a qualified accountant to review the financial books and records–the P&L, income statements and cash-flow journals (as well as bank statements, canceled checks, credit card statements, etc.)  These should give you an idea of how money is actually being spent in the business.  As a business owner, you should be familiar with these financial documents (especially the reports) and review them regularly as a matter of good business “hygiene.”
3. Get copies of documents:  Obtain a copy of the formation documents for the company that were filed with the secretary of state of your state.  Realize, though, that some states don’t require the identities of the owners to be listed on them . . . so don’t get upset if you don’t see your name there.
4. Hire counsel to patch up the gaping holes: Engage an attorney who has experience with business owner relations to review the “paperwork” you’re supposed to be provided and to create the shareholder’s (or operating) agreement for the company.
5. Consider whether to stay the course.  Suspicion breeds mistrust . . . which leads to a contentious and fractured business relationship.  If you can’t trust, why would you want to stay in business with this person?  If there’s no paperwork yet, and before enmeshing yourself further with an untrustworthy partner, you may want to pull out of the venture altogether, recoup what you can of the investment and take your money elsewhere.  This is a thorny area, so let your attorney help you do so as cleanly as possible.

Well, friends, I almost fell for it–and I want to prevent you from doing the same.

I received an e-mail from (what seemed to be) PayPal, saying that my account had been placed on hold because of a “reason to beleive that your account was accessed by a third party.” See the clever language, below. It looks like PayPal, seems to show the company’s concern for me (thanks, PayPal!) and ties right into a concern people have about online transactions–that somehow, my account was hacked and will be misused.

Guess what–IT’S NOT FROM PAYPAL!

Somehow, I had the presence of mind to call PayPal instead of clicking through the links . . . only to learn that, yes, the e-mail was a spoof. Had it been a real e-mail, it would have been personalized and addressed specifically to me (and not just through my e-mail address).

In any event, save yourself the trouble–should you receive e-mails that ask for account verification, always call the company or institution to find out if it’s legit and, if so, how best to handle it.

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.

A sad tale of woe crossed my desk.  Seems that, a couple of months ago, an unsuspecting entrepreneur from Mexico bought into a U.S. franchise to import products to Mexico. She sent her 25 percent deposit (many thousands of dollars) to reserve the franchise for her city, but the franchisor cannot get the documents that she requires to import the franchisor’s products. According to the agreement she signed, the 25 percent is nonrefundable . . . but can she recover anyway because the mistake was not her fault?

The short and obvious answer is: It depends.

Franchises are strange and furry creatures. They involve a lot of regulation and disclosure to establish them. They also require a certain degree of rigor in creating the business model to ensure consistency in the franchise results. Whether or not “Melinda” can recover her money depends on the actual wording of the franchise agreement. It also depends on the laws of the state that governs her agreement (often called “governing law” or “jurisdiction”).

Contract principles generally provide that if there’s a problem or mistake that the parties weren’t aware of at the time they signed the agreement, it’s not fair for one or the other to be SOL. Courts may allow the contract to be “rescinded”–like a “do-over” in kickball. Everyone goes back to where they were when they started–no lost points, no gained advantage. But now you have to factor in the cost of an attorney to bring this claim for you.

Because franchise laws vary from state to state, it’s always advisable to consult an attorney who specializes in franchises in the state where the agreement is decided. And do it BEFORE you sign the paperwork, so that you know the risks of getting involved in this venture, and what your recourse will be if problems arise.

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.

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.