Making It Legal:

Leadership expert Ken Blanchard once said, “Feedback is the breakfast of champions.” But if you’re working solo (or in a small company), where will that feedback come from?

Small and solo businesses can get feedback in several ways:

1. A Board of Directors. If there is more than one owner in your company, you have automatic access to a “board of directors.” Directors are usually people within your company who have executive authority to make major decisions. As noted in the E-Myth post, “Do You Need a Board of Directors?” a board of directors can help develop business plans, handle policy issues, focus overall business strategy and monitor a company’s financial strength. However, when you bring in a board of directors, this will be the team that decides and implements change for your company. Decisions will be mandated by a majority.
2. A Board of Advisors. Advisory board members don’t have a legal responsibility to your company. And you don’t have a legal responsibility to take the advice they give. However, as Bert Martinez points out in “The Value of the Board of Advisors,” they still have at least a “moral” responsibility to give you the best advice possible. A board of advisors can provide you with objective opinions, credibility and the value of learning from OPE (other people’s experiences).
3. A Mastermind Group. Whereas a board of advisors convenes to focus on your business, a mastermind group convenes to help each of the members of the group. Consider it a peer advisory team. But like a board of advisors, you don’t want people who will rubber-stamp your ideas and plans. There’s a delicate balance in finding the right people: they need to be supportive yet also willing to challenge you. And you need to be willing to listen to the challenges and concerns they raise.

Whichever way you choose, don’t overlook the power of feedback. Steve Jobs suggests that you “ask for feedback from people with diverse backgrounds. For each one will tell you one useful thing.”

Whether Gen X’ers like it or not, Gen Y is nipping at their heels — entrepreneurially, that is. So I’m pleased to announce that Making It Legal made the grade  of 50 Best Blogs for Young Entrepreneurs! At No. 6, we’re in the Top 10!  (Pay no attention to the fact that our Tools and Resources category was mentioned first).    We’re in illustrious company, including:

• Small Business Trends
• Seth Godin’s Blog

And fellow/sister Entrepreneur blogs:

• Daily Dose
• Networking Entrepreneur
• News You Can Use

Congrats to all!

Sorry for the inconvenience–my segment on “Avoiding Business Divorce” has been moved to Thursday, Aug. 5, at 10:30 a.m. (ET) If you can’t listen in live to our business partnership discussion, make sure you check back in for the replay.

Have questions about business partnerships you’d want to “Ask The Business Lawyer”?  Listen in–on 8/5 at 10:30 a.m. Eastern, I’ll be on BlogTalkRadio, speaking with The Sassy Ladies about “Business Prenups: How They Can Save Your Business From Going Bust!”

Business partners are like spouses: Choose the wrong one, and you’re in for a hellish ride. Your business partner can boom or bust your business. Find out how to make the right choice for you, and why written business partner agreements are vital to your business health.  Avoid business divorce by handling it right from the start.

Q: What kinds of legal issues do I need to be aware of in my business? And, do all attorneys charge for consultations? I went to one attorney who wanted to charge me $60 for a consultation.

A: Not sure where you’re located or what stage your business is in, so it’s hard to tell you what should be on your horizon. In many situations, law can be counterintuitive–and the principles can vary from topic to topic, so that’s why it’s good to get guidance from the outset to put that foundation in place. Many businesses are able to put that foundation in place with their lawyers and, for the most part, they run on their own, with a few check-ins with their lawyers during the year.

The most common legal issues tend to be:

• Working with business partners
• Agreements with clients and vendors/suppliers
• Office leases
• Hiring, firing and managing employees
• Collecting bad debts

As to legal fees, some attorneys charge for consultations and some don’t–so it’s a good policy to ask in advance. Before you balk at the charges, realize that there is a value in paying someone to help you get to the heart of what you need done in far less time than it would take you to do it yourself. 

You’ve already encountered one of the main obstacles to doing your own legal work: You don’t have the time to educate yourself, and certainly not to the point where you might feel you can handle your own legal work competently. And frankly, it’s not a valuable use of your time to try to train yourself to become an “instant attorney”–if you really loved doing legal work, you would have become an attorney. Your strengths lie elsewhere.

Q: I am starting an online retail store. I thought about filing my status as a sole proprietor.  Eventually I will change my status to an LLC when I have a physical store. Should I go ahead and file as a sole proprietor or should I just file as an LLC now?

A: Particularly for those doing business online, I encourage entrepreneurs NOT to do business as sole proprietors. Your business will have global reach being online, and I think having an LLC is an important layer of protection–separate and apart from insurance. This way, should anything happen, whether with customers, designers or others, your personal assets are shielded. If the only reason not to form the LLC is the cost (In some states, the cost for LLC formation can substantially exceed those for forming a corporation), then you may want to look at whether an S Corp will serve you better, or shift your timing so that you have adequate startup capital to give your business a solid foundation.

As you probably know, one of the great advantages for businesses in outsourcing to independent contractors is that they don’t have to pay the whole array of taxes that they do for employees. As the IRS has pointed out . . .

“Companies must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to employees.  They don’t generally have to withhold or pay any taxes on payments to independent contractors. ”

When you’re an employee, the company you work for (as noted above) pays to the government a portion of the taxes on your income. You are responsible for paying in the other part. However, when you’re an independent contractor, you bear the full responsibility of paying in both “portions” of your taxes: The portion you pay in as your own employer and the portion you pay in as if you were an employee.

But here’s one of the reasons why the IRS is starting to crack down on independent contractors.

Independent contractors have developed a reputation for not paying  their full tax burden.  Let’s face it: A check for $1,000 comes in–the landlord is itching to get paid, you need a new computer, and there are other bills to pay, leaving you with approximately $7.47 in “walking-around money.”  Where’s the money to pay taxes? Many independent professionals figure they’ll calculate taxes and worry about it on April 15.

But what happens if you don’t have enough on hand to pay that tax bill?  Say hello to “penalties and interest”–which become an ever-losing battle where you try to salvage a leaky boat by scooping out the water one bucket at a time.

Here’s a system I found helpful that I learned at one of T. Harv Eker’s Millionaire Mind seminars:

Every time money comes into your business, set aside a certain amount right away for taxes in a separate account. Take it right off the top. Don’t think about it–just do it. The percentage you may want to set aside depends on where you’re living (in New York City where I live, I should probably start setting aside 40 percent to 50 percent; for other states, your tax burden may only be about 20 percent). Having a regular system forces you to do two things:

1. Set aside money to take care of tax obligations
2. Look very carefully at your budgeting process

If the thought of taking 30 percent off the top makes you choke and cry with frustration because you can’t meet your bills, it’s time to look at where you can cut expenses and where you can increase income. Maybe this exercise will make you realize that you’ve been undercharging all these years! 

Q: I can’t believe it–my former business partner has been smearing me around town! I was recently partnering with someone on a real estate deal. She ultimately pulled out of it, which created a lot of problems for me.

Although I was really upset at the time, I took the high road, put my nose to the grindstone and plowed ahead with the deal to make it happen. Because we’re in same community, I’ve gotten wind that this ex-partner is starting to badmouth me around town. After having been reasonably gracious about the lousy way she left our deal, I’m really angry to find out that she’s taking the low road. Can I sue her for being a malicious bigmouth?

A: The legal area of defamation, which includes libel (for written statements) and slander (for oral statements),  can be a tricky area.  In order to succeed in a libel or slander case, you usually have to prove that a spoken or written statement was false and was made to a third party.  Depending on whether the statement pertains to business-related activities, you may also have to prove that you’ve suffered actual damage from the statements being made.  Sometimes, a strongly worded attorney’s letter (often called a “cease and desist” letter) can put a stop to the statements if they’re still being made.  However, you may need to back that up with actual litigation if the letter isn’t enough.

As defamation law is a specialized area, you will want to speak to a lawyer who really focuses on this area.  You can find defamation attorneys from your local bar association–one good way to look is to see if the bar association has any committees on defamation, First Amendment or tort issues–those practitioners will likely know this area better and can give you more specific guidance about your situation.

In all my years dealing with contract disputes, I found that “not getting what they expected” is one of the top three reasons clients don’t pay. But, like Freud asked about women, “What do clients want?”

If you are a freelancer or independent professional providing services (especially to other business owners), take heed. Managing expectations is a simple thing to do, but it’s not easy. It requires that you give a lot of thought to the services you’re going to provide, how you will provide them and the anticipated time frame. If you don’t know your business, you can’t communicate this to your clients. And perhaps more important, you’ll want your agreement with your clients (yes, you should have one) to be an accurate reflection of what you’re prepared to do.

Mapping out client expectations is one of the important tools that I provide my program, “How to Train Your Clients to Pay You.”

As long as you’re providing a valuable service, you deserve to get paid for it. Learn how to shore up possible miscommunications with your clients, so that you can get the job done and have their check in hand.

“Can I get my employees to sign a non-compete?” I’m often asked. Unless you’ve thought through this special kind of legal provision carefully, they are often struck down.

A non-compete clause essentially prevents your worker from entering into a competing business or working for a competing business when he or she leaves your employ.  While that may seem fair to you–”why should I let my employee learn on my job and take all my stuff and go to another position?”–courts tend to have a different perspective.

Essentially, courts are concerned (especially with the job market nowadays) that workers will be unable to find other employment with a non-compete provision looming over their heads. And they are messy. If you’re going to insist that an employee sign a noncompete provision, you need to be prepared to enforce it. And when you’re hiring employees, the last thing you need is to get embroiled in litigation with this person’s prior employer. As Lauren Ellerman, Esq. points out in her blog: “Chances are if you are looking to hire someone with experience in any profession, they may come with a non-compete agreement.”

As a business owner, you’ll want to focus carefully on what your real concerns are. Is the concern that the employee will take your client list or poach sensitive information? There are other kinds of provisions you can include in your employment agreements or employment manuals that will protect against specific harms and stand a much better chance of being upheld in court.

The Associated Press reported yesterday that there was little sign (from its analysis) that former New York state Gov. Elliot Spitzer used taxpayer money or campaign funds to subsidize his visits with prostitutes. His state-issued credit card also showed no outward sign of having been abused for extracurricular pursuits.

I can’t say whether he used public funds or not, and federal investigators have yet to comment. But it started me on a stream-of-consciousness series of questions in a business context: How easy would it be to disguise (bury) those kinds of transactions? What if Spitzer were my employee? What kinds of safeguards would I want to have in place? Here’s what I came up with:

• Make sure that the person in your company writing the checks is not the person reconciling the statements (unless you, the business owner, are holding both positions).
• Restict the number of people who have company bank cards or company credit cards.
• Ask for receipts from employees for all business-related purchases.
• Always review bank statements (once reconciled) and financial statements–don’t abdicate that responsibility, even if you delegate the minutiae of it
• Hire outside advisors (such as accountants) who can direct a practiced (and objective) eye over your company’s financial condition.

I don’t remember who said, “never believe anything you see in print,” but the same can easily apply to e-mail. Perhaps even more so. So often we get bombarded by e-mail messages, offers for products and cries for help that we may accept as true without doing even a molecule of due diligence and checking around to ensure that:
1. The source who sent it to us is legitimate, and
2. the offer/request is valid.

Here, from Virtual Hosting Blog, is a list of “Top 20 Hilarious and Creative Internet Scams.” I’m not sure I’d call them “hilarious,” and it’s a shame that creativity has been used in such a warped way. I also wonder–why aren’t the plaintive emails from the high-ranking Nigerian officials seeking a place to park procurement contract funds on the list?