Making It Legal:

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.

Yes, legalese is its own language. Like the Latin spoken at the Vatican, it’s truly understood only by a few.

So for the rest of us, here’s a handy definition of a term relevant to all business owners (whether a corporation or an LLC):

“piercing the corporate veil“

It’s considered a privilege to be able to do business in a way that creditors can’t get to your personal assets. But some business owners abuse the privilege. In those situations, a court will let a creditor ignore the fact that you’ve formed a corporation (or an LLC)–the “corporate veil”–and hold you personally responsible for the debts you’ve accumulated.

Are you treating the business like your own personal slush fund, paying out personal expenses through the business? That’s a problem. Have you failed to comply with corporate paperwork and the niceties of annual minutes? That’s another strike against you. For more on this, go to my site, WiseCounselPress.com, and check out the article “The Simple But Powerful Reasons for Corporate Minutes.”

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.

From the “I-couldn’t-have-said-it-more-thoroughly-myself” department, here is a series of helpful posts from Texas attorney Ryan Roberts (”The Startup Lawyer”) on the ins and outs of leasing office space (and not getting ripped off in the process).

Part 1: Why much of what is in a lease is not boilerplate, despite the microscopic print. Understanding the ways that commercial real estate brokers (whom Roberts refers to as “tenant reps”) can help your business… and when they might not be putting your interests first.

Part 2: Fourteen provisions to consider negotiating before your company signs a commercial lease for office space.

Part 3: Eight of the not-so-obvious terms that can bite you if you don’t address them.

You may have had these nasty tidbits enter your inbox: e-mails that seem to come from reputable companies (I got a host of them from “Citibank”) that tout the anti-hacking and identity-theft measures they’re taking. “In order to ensure your security, we need you to verify your contact information by clicking on the link below… etc.” The logo seems in order; it’s written in that “I want to be friendlybut I’m too stiff because my legal and compliance departments were-all over this letter” tone. You are (or at least think you were, at some point), a customer. Makes sense that you should receive it. So you click.

Sadly, all too many people and companies find that, upon doing so, they’ve been “phished.” “Phishing” (according to Webopedia) is a term that means “the act of sending an e-mail to a user falsely claiming to be an established legitimate enterprise in an attempt to scam the user into surrendering private information that will be used for identity theft.” The U.S. Senate has recognized the problem, and Sen. Olympia Snowe (R-ME) recently introduced legislation to provide the Federal Trade Commission with authority to enforce the prohibition against phishing (Of course, whether it authorizes the funding to pay for the enforcement is another matter). (See S. 2661 in the 110th Congress, 2nd session).

Highlights of the Anti-Phishing Consumer Protection Act of 2008 include:

• Prohibiting deceptive domain names (this means using a name like “Citidank” and posing as a banking institution);
• Prohibiting domain name registrars from interfering with efforts to discover the identity of “phishers” who have obtained deceptive domain names;
• Allowing all state attorneys general, aggrieved trademark holders and affected internet service providers to bring lawsuits against the culprits (note, though, individual lawsuits are not expressly permitted, and it would probably be too costly for an individual to investigate and bring a lawsuit against a “phisher”); and
• Restricting damages from exceeding $2 million (except in special circumstances).

The moral of the story: Don’t click on everything you see. Confirm all requests for private information by telephone–and do not use the number you see in that e-mail (it, too, could be a scam). Ask that the request be sent to you by “snail” mail.

Whatever I may want to say about the current occupant of the Oval Office and those seeking to sit in his chair, I wouldn’t want the job. Not for a million squillion dollars. Whether it’s brass balls or sheer insanity that makes people want the post, I’ll tip my hat to them for tenacity and courage. My life couldn’t withstand such intense scrutiny (thank God there was no Facebook when I was in college!).

So, in honor of the day, and the people who have served (and will serve) in the office of president of the United States (POTUS), here are some tidbits about the job and how it works:

• Who were all the presidents?
• Qualifications for the office
• The executive branch and Cabinet
• Duties and powers
• The Electoral College
• History of the White House and video tours (with the president as tour guide!)

Here’s a scenario for you: You’re the sole owner of a corporation and have no employees. Every once in a while you find yourself a bit short, so you let the company pay for some of your personal expenses, such as dry cleaning, spa treatments and house cleaning services. You’re not depriving a business partner or any employees of a salary so, in essence, it’s your money to do with as you like. Right?

Wrong.

Because your business is a separate entity, you need to think of it as if it were another person entirely. For example, you wouldn’t just walk into the florist shop next door and take money out of its cash register for your manicures, would you? No (at least I hope not). And you wouldn’t just poke your nose into your friend’s handbag to take money out of her wallet–you’d ask for permission. Likewise, for tax and legal reasons, you need to “ask” your corporation for permission to take funds for your personal use.

How do you do this? By writing a check to yourself from the business account for your salary (or draw), depositing the check into your personal account, and using the funds from there.

Having the company pay directly for your personal expenses can get you into a world of trouble. If your corporation or LLC is sued by creditors for nonpayment, it could be found that you “stripped” the corporation of the money needed to meet these obligations by using corporate money for your personal expenses. As a result, a court might consider your corporation a “sham.” A court then could ignore the limited liability protection your corporation is supposed to provide and pierce it (known in legal terms as “piercing the corporate veil”) to reach your personal assets for repaying the creditors. Another grave danger is when business owners use one checking account for both business and personal expenses. This becomes known as “commingling funds”–also a no-no, and also grounds for disregarding the personal asset protection that a corporation can provide.

Even for businesses operating as sole proprietorships, where your personal assets are at risk anyway, it’s a far better practice to open a separate bank account for your business activities. Face it: It really doesn’t take that long to write yourself a check to deposit into your personal account. Plus, you’ll receive two important benefits:

1. You’ll start to develop the kind of business mindset your company needs in order to grow and
   
2. You’ll save a great deal on accounting fees, because the separation between business and personal (and what’s legitimately tax-deductible) will be that much clearer.

Have you ever felt “forced” to do something you really don’t want to do? Attending a family function for your in-laws, contributing to a particular charity you don’t care about for a colleague, sitting through Wagner’s Ring Cycle (or a WWE wrestling match) for your significant other–all come to mind. Now imagine if you had to do this monthly. Chances are, you wouldn’t keep it up. You’d find excuses not to go, muster less and less enthusiasm for it and, eventually, find a way to put it out of your mind altogether.

Observing the “formalities” of running a corporation (and, to a lesser extent, a limited liability company) can engender similar feelings in a number of business owners. I’ve met entrepreneurs who were dragged to me kicking and screaming by their accountants (or spouses) to form a corporation. They didn’t want to do it, didn’t want to spend the money, and they  certainly didn’t want to be responsible for holding board meetings, taking minutes, or documenting major decisions made on behalf of the company. So they didn’t.

But in failing to do so, they put themselves and their personal assets at risk. In “Piercing the Corporate Veil and How to Avoid It,” Teri Rasmussen ably points out the dangers of getting lackadaisical with the “niceties” of running a corporation. Although her focus is on Ohio cases, the basic principles apply. Owning and running a corporation is a privilege. The corporate law requirements are not optional. And they should not be dismissed by saying, “They’re not a big deal.” If you don’t handle these matters properly, your business creditors could make a case for coming after your personal assets.

What are some of the vulnerable spots for entrepreneurs, especially in companies with multiple owners?

• When the president (who is not the only officer of the company) makes all the decisions, including how money will be spent.
• Inability to name the members of the board.
• No corporate records.
• Substantial payments being made to family members (for “loans” or “services rendered”) without documentation to support a business reason for them.
• Failure to file corporate tax returns.
• Paying salaries to the owners while the financial records of the company are inaccurate and in arrears.

It’s easy to lose track of these issues and to see them as yet another burden of business ownership. So delegate it. A competent business attorney can help prepare this documentation for you (plus, prod you as to when you should do so).

Much as I swore I would not begin Chanukah/Christmas shopping before Thanksgiving (I am blessed with Jewish family and Catholic in-laws, so I get it from all sides), I did. The lure of the catalogs I received in the mail, and avoiding the lines, the stress and the rush, were too great. After sifting through dozens of catalogs and circling items, I spent a good few hours online and made all my purchases. I haven’t received everything yet, nor have I wrapped it, but I’m done with shopping already!

So I say now. What happens if something arrives that doesn’t meet my specifications? Or wasn’t what I ordered? Or was broken? Or, contrary to the enticing photo in the catalog, simply wasn’t “all that” in person?

Many large businesses post their return policies on their websites. Many small businesses don’t have one, and therein lies the danger. Massachusetts attorney Michael Goldstein examines what it takes for you, as an “injured” purchaser, to be able to sue an internet retailer in your home state. One significant factor is known in legalese as “jurisdiction.” Has the shabby seller established a business presence in your state? Or made a concerted effort to attract customers from your area? If so, you may be able to haul them into court in your neighborhood.

On the flip side, if you’re the internet retailer, the last thing you want is to get hauled into court in every little town and vale across the country. If someone is going to be so dissatisfied that he or she wants to sue, you want this to happen in your backyard so that you are spared the expense of schlepping all over the place. That’s where having website terms and conditions come into play. They make it clear where disputes will be resolved–it’s a condition of the privilege of purchasing from your site.

Most purchasers don’t even focus on those terms when making a purchase. But they’re there. Usually introduced by language such as: “Welcome to BlahBlahBlah.com. The Company and its affiliates provide their services to you subject to the following conditions. If you visit or shop at BlahBlahBlah.com, you accept these conditions.” If you purchase from that site, you agree to resolve disputes wherever the retailer chooses. Consider the following: Amazon.com (Washington state); Sephora (California); Target (Minnesota); Office Depot (Florida–OK, not exactly for holiday presents… but you get the point).

Why not provide your business with the same leverage and protections? For other website terms that you might want to consider, see my own Words to the Wise newsletter article (just released last week!) at Wise Counsel Press: “‘Attention Internet Shoppers: Your Website Terms and Conditions.” It’s free to subscribe, and you’ll receive a special report, Top 10 Legal Pitfalls, just for doing so!

I recently gave a teleclass on intellectual property issues for small business owners.  One of the questions that came up is whether it’s okay to use someone else’s content (in this case, transcribing a podcast and posting it in its entirety) on your own blog as long as you give the proper attribution. 

The short answer is no (“What?!â€? horrified bloggers exclaim).  The general rule is that any time you want to take someone else’s content and use it you need to ask for permission.  Why?  Because the right to control the distribution of the content is part of the monopoly of copyright rights that one gets for being the creator of the work.  In this case, the creator of the podcast has the sole right to make whatever other uses of the work she chooses.  She can turn the podcast contents into a CD, a book, a PDF transcript, a workshop.  Only the original author can do that. 

However, there is a small exception known as “fair use�.  It’s the exception that bloggers hang their blogging hats on (and sometimes, their necks, if they’re not careful).  Fair Use looks at the reason, context and amount of the content you take.  It’s like the big Celebrity Fit Club scales, weighing and balancing different factors.  If you take someone else’s content for reasons or news or commentary, the scales tend to tip in your favor; if you take content to sell off in your own products, the scales tip away from you.  If you use just a tiny portion of the overall whole content to make your point, that’s more acceptable; if you transcribe the entire podcast and post it for free on your website – probably not kosher. 

So play it safe, because a cease and desist letter is a nasty thing to receive in the mail.  If you have any doubts about the amount of content you want to use, ask for permission from the authors before you take their content.  The best that can happen is that they say yes!

I had a query about using confidentiality agreements.  “Cee� asked: 

<<i have every person i deal with sign confidentiality. but i have found that it does not really protect you because unless you are willing to pour tons of money into a lawsuit, and most small people dont have tons of money, then what can you do?>> 

The first question I have for Cee is what’s IN your agreement?  Most confidentiality agreements that I see downloaded from the Internet (where many entrepreneurs get their legal advice) have more holes than Swiss cheese.  They may be 1-pagers that simply say “we acknowledge that we’re sharing information and agree not to disclose it.� 

That’s not enough!  A good confidentiality agreement contains a lot more, such as: 

• Identifying the specific information that will be considered confidential 
• Detailing the actions OTHER THAN mere disclosure that will be considered a violation – such as doing an end run around you and “doing the dealâ€? with someone else (called “non-circumventionâ€?) 
• Limiting the number or identity of people within the company who have a right to know the information 
• Imposing confidentiality requirements on third parties (such as subcontractors) 
• Providing TEETH in the agreement!!!  (Can you hear my frustration?).   

One of the fatal flaws of most canned confidentiality agreements is that they don’t spell out what happens if the other side divulges the information.  (Acchhh – if I had a nickel for every lousy confidentiality agreement I’ve seen . . . .).  That’s where entrepreneurs and small business owners lead the fox right into the proverbial hen house.  There need to be penalties for bad behavior (improperly disclosing information).  Such as the right to bring an expedited lawsuit (called “injunctive reliefâ€?), the right to have your attorneys’ fees paid if found in your favor, the right to bring the lawsuit in your local courthouse (“jurisdiction and venueâ€?).  All of these things can make it v-e-r-y unpleasant for a party – especially one overseas — who has the inclination to pirate your valuable intellectual property. 

Confidentiality agreements can’t necessarily prevent the need to bring a lawsuit to enforce them.  But, if properly worded, they can make the process swifter (and less expensive); plus, a clearer case of infringement with a well-written agreement might make your case a more tempting one for an attorney to take on a contingency fee basis (in which case, you don’t have to front the legal fees).   

Final words:  especially if you are negotiating with an overseas company, do your due diligence!!  Find out if the company is reputable.  Learn about the customs of doing business (just how informal is it?).  Is there a culture of pirating? 

To those who say, “I can’t afford the due diligence,� I ask, “can you afford not to do it?�

One of the great things about the Digital Age is the ease of doing business online for entrepreneurs and small businesses.  Raking in great profits no longer requires investing in major real estate leases, huge inventory (and where would you PUT it?), or hiring extensive sales teams.  But operational simplicity does not necessarily equal legal simplicity.   

Has your Internet business put the right legal building blocks in place?  Do you have “Terms and Conditions�?  A privacy policy?  Do you know what they are or what should be included?  If not, march yourself right over to a good attorney’s office to find out – you can get in BIG trouble across the country, in places you never heard of, if you’re not careful.  And for a good overview about what to include in your legalese, check out Imke Ratschko’s “Pimp Your Site (with Legalese)� article!