Employees or Independent Contactors: Are you in Compliance?

Businesses today use diverse workforces to accomplish their goals, including full- and part-time employees as well as independent contractors. The trouble is, many business misclassify employees as independent contractors and end up in trouble.

According to the American Business Bureau, “By some estimates, contingent or temporary workers could reach 30-50 percent of the U.S. workforce. A federal study contends that an estimated 3.4 million employees are classified as independent contractors when they should be reported as employees. A 2009 study by the treasury inspector general estimated that misclassification costs the United States $54 billion in underpayment of employment taxes and $15 billion in unpaid FICA and unemployment taxes.”

Employee vs. Independent contractor
Let’s start with a definition of that will help clear up the difference between and employee and an independent contractor. Some of the questions you might ask yourself to distinguish and employee versus a general contractor include:
• Can the person choose to work without fear of losing employment?
• Can he or she be discharged or dismissed at any time?
• Does the person supplies his or her own equipment, materials, tools or computer?
• Does the person control the hours they work?
• Do you or the person supply all materials needed to complete the job?
• Is the work temporary or permanent?

Here are a couple examples of independent contractors:
• A web maintenance person who works a few hours a month on your behalf on your website but has many other clients.
• A freelance bookkeeper who works a few hours a month to handle your billing and budgeting and who works on behalf of many other businesses.

Here are a couple of examples of employees:
• A full time sales person who hours that you set – 30 hours per week or more – selling goods or services on behalf of your business and does not work for other employers.
• An office manager who works more than 30 hours per week and does not provide these services to other employers.

Keep a few things in mind.
• There is no such thing as a 1099 employee.
• An employee who is given a W-2 must undergo screening under the Legal Arizona Workers Act and complete an I-9.
• Independent contractor status is difficult to prove these days.
• One of the greatest risks is that a contractor will be injured working for you and claim you as his or her employer.

The trouble with misclassifying workers is that employees are often denied access to critical benefits and protections they are legally entitled to, including minimum wage, overtime compensation, family and medical leave, unemployment insurance and safe workplaces. Here’s the really tricky part … it also means the IRS and State are receiving lower tax revenues, so they tend to look VERY closely at worker classifications. In fact, the federal government has increased the number of auditors working to weed out these misclassifications and penalties can be severe for businesses found to not be in compliance with the law.

Here are some the recent court cases that show just how severe penalties can be:
• Vizcaino v. Microsoft, which resulted in a settlement of $97 million
• Estrada v. FedEx, which brought a verdict for drivers, $5 million compensation and $13 million in attorneys’ fees

Once the federal government gets involved, cases of misclassification can take years to settle. For example, FedEx was under scrutiny for many years before a decision was reached… the IRS found the company misclassified employees, owed $319 million in back taxes and penalties for tax years 2004-2006. The decision was later rescinded but it resulted in plenty of time and money lost for the company.

If you are interested, you can read more about the issue at:
Fair Labor Standards Act “Suffer or Permit” Standard
IRS website

Keep in mind that these laws are set in stone, so if you have questions regarding the status of a worker, or are preparing to hire a new worker, talk to an HR professional or a business attorney like me before making any final classifications.

Asset Protection Basics

What is Asset Protection Anyway?

Asset protection planning is about protecting your assets in good times, so you can walk away with those assets if something goes wrong financially. The people who use asset protection plans most commonly are people likely to get sued, such as real estate developers and investors, physicians and business owners whose business involves liability or lawsuit risks. But even an average Joe or Jane can get caught up in a difficult situation, so if you have something to protect then asset protection should at least cross your mind.

Be Careful!

Many people are concerned about having their assets taken from them by creditors. This is about planning for future claims not current ones. If there are already existing claims against you it is too late. There is no strategy that will protect you against an existing creditor at that point. If you attempt to move assets to avoid paying a claim, you risk being liable for a “fraudulent conveyance” and that is a big no-no. Not only can the transfer be undone, in most states, including Arizona, it can be a misdemeanor or felony crime! Clients ask lawyers about transferring assets after they learn about a claim all of the time. The correct and appropriate advice is that you should do your best to defend and settle the claim. If you are being told to hide your assets, run away.

There is a trade-off The challenge in estate planning is that you cannot always have your cake and eat it, too. The more asset protection you get, the more it will cost you and less flexibility you will have. So the first question is determining what level of asset protection you need for you and your assets.

Not everyone has creditors lurking at their doorstep, but the potential is always there. Figure out whether you might face such creditors at some point as a starting point.

What Asset Protection is Not
If you ask people what they think asset protection is, most will say it is a way to shield all of your assets from creditors or some “off-shore” thing. While shielding your assets is the goal, the actuality is that asset protection planning is a way to minimize the extent that assets are available to creditors or to discourage them from pursuing a claim. Look at it this way: if no asset protection is in place then 100% of your assets are available to the creditor. So, while asset protection may not be a total shield, any legitimate efforts made to reduce the extent of claims against you assets is a victory. Any settlement of a claim for less than the claim is really the goal of asset protection planning.

Basic Asset protection steps
1. Liability Insurance. This is the first line of defense. Not only should you have basic coverage you should obtain an “umbrella” policy on your homeowners policy. It is relatively inexpensive for the coverage and is well worth it.
2. Business Liability coverage. If you own a business this is a must. Discuss with your agent what types of coverage you need for the risks involved in running your business. Even if a claim is made that has no merit, most policies will cover the cost of defense which is a huge benefit if you are sued.
3. Take advantage of the Homestead Exemption for your home. If you have cash (I know, not everyone does…) use it to make improvements on your home or to pay down the mortgage to the level of your homestead exemption.
4. Retirement Plans. If covered by Federal law and under some states laws, these accounts are exempt from creditors.
5. Life Insurance. Many states, including Arizona, have exemptions that protect life insurance and annuities from creditors.

Business Asset Protection
1. Create an LLC or other entity. Stop running your business as a sole proprietor because that puts all of your assets at risk, both business and personal.
2. Divide your business into multiple entities. It may be possible to split up your business into separate entities and protect them from claims against the other. For example, you might consider holding real estate in one entity and the operations of the business in another.
3. Caution: Using a business entity does not provide protection against personal guarantees or your own negligence or intentional misconduct. Also the protection of the entity is usually from a “charging order.” That is like a lien against the income and assets that cannot be used until there is a distribution. So, while your creditor cannot get the income or a distribution – neither can you.

More Complex Strategies
If you are in a profession or business where the exposure to risk is higher, then you may need to explore more complex asset protection strategies. The cost of developing and implementing these strategies is much higher and involve giving up some level of access or control of your assets. The theory of asset protection at this level is if you do not have access, then neither do your creditors. It is all about moving assets as far from you as is feasible.
1. Create Irrevocable Trusts for family members. As long as the transfer or gift to an irrevocable trust cannot be considered a fraudulent conveyance, this puts assets out of your hands although it may be subject to the claims against the beneficiary’s interests.
2. Keep all or some of the benefits of an irrevocable trust. If you transfer all of your interest in an asset to an irrevocable trust, it is not available to the creditors. There are other trusts that allow you to keep some interest in such a trust. Examples include a “qualified personal residence trust” (“QPRT”), charitable remainder trust (“CRT”), and a grantor-retained annuity trust (“GRAT”) or a Special Power of Appointment Trust (“SPAT”).
Domestic Asset Protection Trust. This type of trust is created for your own benefit. A handful of states allow protection even when the person who forms the trust is a beneficiary. The most common used states are Nevada and Delaware. Specific rules apply to these trusts. The law on these trusts for non-residents is still unsettled so creating carries the risk they just may not work. While most legal advisors believe there is good reason to believe the courts will honor these trusts, constitutional issues are implicated particularly when the person who creates the trust is not a residence of the state where the trust is formed. Again, the mere fact that such a trust is created may be enough to discourage all but the biggest and well-funded creditors.
4. Marital Agreements. If one spouse is in a profession or business that carries a high risk of liability, one option is to divide the assets between the spouses. The business assets to one spouse and the investment assets to the other. This has implications in community property states and creates potential divorce and income tax basis issues.
5. Foreign Trusts. If you are reading this blog, this probably is not a viable or reasonable option for you.

Conclusion
For most people, the basic steps of asset protection should be sufficient. If your level of risk is higher because of your business or profession, using a combination of trusts and business entities provides more protection. These steps require a detailed analysis of your particular situation and advice from your legal advisor.

For more information about Poulos Law Firm asset protection planning contact:
Gregory C. Poulos
Poulos Law Firm, PLLC
Work: 623-252-0292
Email: gpoulos@nullrjdcreative.com

Business Exit Strategy

Most business owners are so focused on short-term issues that they forget to make decisions and plans for how they will exit their business. But every business owner needs a business exit strategy.

Many assume that the decision to exit the business is voluntary. Most often, however, an owner is forced to leave the business because of incapacity or death. It is not enough to build your business and create value. You must have an exit strategy to get that value out of the business to benefit your retirement or your family when and how you want.

IF YOU ARE LIKE MOST BUSINESS OWNERS:

  • Your wealth is tied up in your business.
  • Your income is also dependent upon your business.
  • The business is dependent upon you for its continued success.

If this sounds familiar, there are strategies available that you can use to help you transfer and protect your business wealth. This type of planning, also commonly referred to as “business succession planning”

No matter what particular exit strategy you chose, the best exit strategy is one that is planned and the sooner an exit strategy is chosen, the better. An exit strategy can take years to execute successfully.

The Poulos Law firm can help you get started on your exit plan with strategies including buy-sell agreements, preparation and documentation for selling the business, key employee incentive agreements, and drafting your estate planning documents such as wills and trusts.

Business & Legal Risk Assessment

Why is Risk Management Necessary?

Risk is a part of everyday business life. You will encounter many types of risk in your small business. Every business encounters risks, some of which are predictable and under your control, and others which are unpredictable and uncontrollable. Some will have a minimal impact and you can manage them easily; others may threaten the very existence of your business.

A Business and Legal Risk Assessment involves identifying, analyzing, and taking steps to reduce or eliminate the exposures to loss faced by your business.

A Risk Assessment is vital for your small businesses, since some common types of losses such as property damage, liability claims, employee claims breach of contract claims and disputes with co-owners can destroy what may have taken you years to build. Such losses and liabilities can affect day-to-day operations, reduce profits, and cause financial hardship severe enough to cripple or bankrupt your small business.

Wouldn’t you prefer to minimize those things that may negatively affect your business and identify identifying those things that will help to achieve the goals and objectives of your business? A Risk Assessment will help you do that.

What Larger Businesses Do?

Larger businesses employ a full-time risk manager to identify risks and take the necessary steps to protect their company. You do not have that luxury. Instead, the responsibility for risk management falls on your shoulders. Your decision depends on whether you are you an ostrich or a businessperson.

Why you NEED a Risk Assessment – The Benefits

Your Small businesses can expect many benefits from applying risk management principles in a structured and systematic way. These include:
• Improved communication between you and your staff
• Improved relationships with your clients, employees, suppliers and contractors
• Stronger business planning and achievement of objectives and goals
• Reduced litigation potential
• Increased competitive advantage
• Enhanced quality of product or service
• Increased efficiency and productivity

Why you SHOULD – good business practices

There are many reasons why you should apply risk management and these include:
• Increased transparency in financial management
• Enhanced staff confidence in a secure and safe work environment
• Enhanced client confidence in the quality and integrity of a product or service
• Protection of assets and the longer-term viability of the business.

Why you HAVE TO – legal compliance

There are many legal regulatory requirements relating to risk management and these include:
• Employment Laws
• Contractual obligations
• Insurance requirements
• Financial reporting requirements

Where You Might be at Risk

• Structures, Agreements and Insurance
• Dealing with Co-Owners and Partners
• Employee Issues
• Business Operations
• Advertising and Intellectual Property

Structures, Agreements and Insurance

• Inappropriate business structures for asset protection and tax minimization
• Inadequate or unenforceable Business Succession Planning
• Inability to recover loans to businesses where the business becomes insolvent
• Rights and obligations pursuant to continuing agreements (e.g. Leases)
• Lack of adequate insurance or under insurance

Dealing with Co-owners and Partners

• Implications from the death, illness or disability of a key person or employee
• Unsuspected or early retirement of a co-owner
• Disputes between co-owners
• The sale of a co-owners shares or interest in a business without notice or consent

Employee Issues

• Disputes with employees
• Competition from former employees and loss of key customers or trade secrets
• Disclosure of confidential information

Business Operations

• Inadequate or lacking Standard Contract Terms & Conditions and contracting procedures
• Unlimited liability to third parties and customers
• Exposure to fraud and theft
• Financial stress due to bad debtors and inability to recover debt collection costs
• Liability in negligence and/or strict liability cases
• Compliance with industry specific legislation

Advertising and Intellectual Property

• False or misleading statements or warranties in advertising
• Difficulties in enforcing Intellectual Property rights where rights are not properly protected
• Unintentional infringement of Intellectual Property rights of third parties on websites.

The Poulos Law Firm offers a comprehensive Business Risk Assessment service resulting in a detailed report identifying the risks faced by your business and providing advice and recommendations for minimizing or avoiding those risks in future.

Starting-a-Business-Arizona

Starting a Business-Arizona Checklist

Business Checklist

Starting-a-Business-Arizona
Starting a business in Arizona isn’t complicated, but you don’t want to miss any of the steps. Follow this simple checklist to make sure you’ve thought your way through all the steps.

Write a Business Plan

Form goals and objectives for your new company. Start with a detailed outline of what you plan to accomplish. You don’t necessarily need a formal plan unless you will seek a business loan, but you must do something if you plan to succeed. Even a properly done One Page Business plan can help.

Choose A Name

When you decide on a name for the business entity and search it on the internet (Google it) to see if anyone else is using the name. Just because the Arizona Corporation Commission allows you to reserve a name does not protect you if the the name is already in use.

Purchase A Domain Name

If you will have a website that is the same as the entity name, you can purchase the domain name at this stage, or wait until after you’ve checked the name availability through the Arizona Corporation Commission owning a domain name does not give you any right to the name through the A.C.C. or through the Arizona Secretary of State. Domain names are completely separate from the A.C.C. and the Arizona Secretary of State. Having a website is essential in today’s business world of internet searches and social media. Register a URL that is memorable and relevant to your company and/or industry.

Funding

Whether you use your own savings or obtain loans, starting a business requires money. The lack of sufficient money is the number one reason businesses fail is lack of sufficient capital. Starting a business on a shoestring budget and hoping to bootstrap your way to success is bucking the odds. There are plenty of free counseling and training services available that can help you prepare a business plan, secure financing and more.

Choose a Location

Think about the people your business is designed to serve and then pick a location most convenient to them. Most successfully businesses are where there is the right traffic for that business. In retail businesses it is crucial – you are really in the real estate business when you own a store.

Determine Your Legal Structure

Are you creating a sole proprietorship, a partnership, a limited liability company (LLC), corporate, S corporation, nonprofit or cooperative? Note there is much confusion regarding some names. – “S” corp, “C” corp, and “501c3” corp are only federal tax designations. They do not indicate your legal structure , only how you pay your taxes. Arizona you would just form a corporation or a nonprofit corporation. LLC are popular entity structures for many small businesses. This can protect owners personal assets from business debts and liabilities if used properly. Incorporating can provide credibility and tax benefits

Get an Tax Identification Number (TIN)

A TIN is like a social security number for your business and you’ll need to obtain it from the IRS or your state revenue agency.

Choose a Tax Year

A calendar year runs consecutively from Jan. 1 – Dec. 31, a fiscal year is 12 consecutive months ending on the last day of any month except December.

Register to Pay State and Local Taxes

You might need to complete a transaction privilege tax application with the Arizona Department of Revenue. Check the ADOR website, www.azdor.gov, and the Arizona Commerce Authority Small Business Services website www.azcommerce.com for more information.

Insurance

You also may need to obtain insurance for your business. Coverage to consider includes general liability, umbrella coverage, workers’ compensation, unemployment and disability insurance. Don’t assume you do not need insurance if you are working from your home.

Obtain Business License and Permits

Arizona requires state and local licenses for many businesses.

Develop business collateral

Marketing material. Most buisnesses use customized letterhead, cards, and forms with their company name, logo and website for marketing and credibility. While there are many cheap printers on line, having a good relationship with a local printer could be a better idea for you.

Open a bank account and merchant account

To protect their corporate or LLC veil, businesses must maintain separate business and personal accounts and records. Establish a separate business bank account so your personal assets are not co-mingled with business funds. Banks may also require an Employer Identification Number (EIN) to open a business checking account. Your customers will want to pay you with no hassle. Depending on your expected volume of sales you may consider a merchant account. For lower transactions you might use PayPal or Square.

Hire Employees

Learn your legal obligations before you hire employees.

Identify where to get help

Know where and when to seek advice from other sources, such as attorneys and accountants, to assist you with specific questions about your business. Establish a board of advisors or mentors to help you along the way. This can be formal or informal. Getting guidance from a mentor or someone already successful is a smart way to go.

Follow government rules

Operating a business means satisfying ongoing government and legal requirements to maintain the company’s good standing

Poulos Law Firm has extensive experience helping businesses get started here in Arizona. We are happy to help with many of the steps in the process.

So You Just Want a Boiler Plate Contract?

Asking a lawyer to prepare a “boilerplate” contract is like fingers scratching the chalkboard. Lawyers hate this because it devalues their services. Clients only think they love them.

Why are you asking for that?

For some reason (actually I know the reason) lately I am being asked by clients to prepare a “boilerplate” contract for them. Why? Well I suspect the obvious – that they are looking to save money or control their costs. I suggest that working with your lawyer to avoid run away hourly fees is often a good thing, but doing that in exchange for a cookie cutter contract is short sighted.

What is boilerplate anyway?

Boilerplate clauses are contract provisions that do not bear any direct relationship to the subject matter of the contract. That is they do not speak to any specific needs of the parties to the transaction or their business goals. In theory these clauses could appear in any contract and not affect the terms of the transaction. They mostly affect the respective rights of the parties to the contract during the life of the contract and often afterward, particularly if there is a breach of the contract.

The basic idea is to use terms familiar to attorneys so that drafting the contract can take less time.

So What’s The Problem with Boilerplate?

Where should I start? First, as stated above, the boiler plate clauses mostly address legal rights not transactional one. In any contract you must make sure that the terms of your deal are being completely and fully addressed. No boilerplate contract is going to do that for you. Second, because they become so commonly used, boilerplate clauses are often overlooked and not scrutinized to make sure they apply to the particular deal or how you actually are doing business with the other side. Rest assured, if there is a problem, everyone is going to be looking at the boilerplate to determine their rights. That is a terrible time to find out mistakes were made or important points overlooked.

Sometimes the error can be as simple as a “cut and paste” error which results in mistaken names or irrelevant clauses. Other times, the error can be substantial and result in increased litigation over what the “boilerplate” even means! So much for standard language. These types of clauses really should only be used as a starting point to make sure that important issues are raised. Then the particulars have to be focused on.

If you have been lucky enough to avoid litigation over the terms of a contract, you are very fortunate. Most contract litigation involves just that – a dispute over the terms of the contract and whether they can avoid a breach, minimize damages or provide other remedies. It is an expensive way to find out what your “standard” contract really means.

Oh, and by the way, understand that in a hard case, the court may overlook or reinterpret the terms of your contract to fashion a relief for the party it feels should prevail. The more “boilerplate” your language looks, the more chance a court may find its own way to interpret it to find justice. Believe me, it happens.

So What are Some Boilerplate Clauses and What do they Mean?

Even with the potential problems it is good to know what some boilerplate clauses are, what they address and some potential concerns:

  • Costs and attorneys’ fees. In the event of a legal dispute, the party that loses must pay the prevailing party’s legal fees. Often clients think that this will result in an automatic award of fees if you win. Problem is that any particular judge or court has their own view of what “prevailing” means in the event of any less than a full victory or what it should have taken to obtain that.
  • Arbitration. Any disputes about the contract must be resolved through arbitration proceedings, not in a lawsuit. The common wisdom is that you can save legal fees through arbitration. This may be true, but arbitration is not necessarily inexpensive or likily to reach the right type of result. You need to consider the type of transaction you have.
  • Choice of law. In the event of a dispute, which State’s law will apply to your lawsuit. In a case with all parties in the same State this may not be an issue. The second an out of state party is involved this clause needs attention because states have different laws on contracts.
  • Jurisdiction. How would you like to fight a lawsuit in a different county or worse, in a different State. It can happen if this clause is overlooked.
  • Waiver. Sometimes a party gives the other party a break during the life of the contract. That party does not want this to become a permanent part of the contract. This clauses allows such temporary deviations.
  • Severability. If a court finds that one of your clauses is invalid, this clause will save the rest of the contract from being declared invalid. Otherwise the baby goes out with the bathwater…so to speak.
  • Integration. This clause prevents a party from claiming that there were other terms that you agreed to that were not in the written contract. It also usually provides that any changes have to be in writing. This is a good think unless you anticipate that you will be making may oral changes as you transact your business.
  • Notice. This is often overlooked or not specific enough. When the time comes to give the other party notice of a problem with the contract, you need to know how this can be done properly or risk the other side claiming that you failed to give prior notice. It also had to take into account that future notice locations may change.
  • Assignment. The last thing you want to find out is that the other party has transferred their rights under your contract to another party that you never dealt with.
  • force majeure (pronounced fors- mazhoor’; also referred to as “Acts of God”). This clause establishes that the agreement will be suspended in the event of unforeseen disasters (such as earthquakes, hurricanes, floods, and so on).
  • Headings. This is a silly clause that says that the headings of each paragraph are not to be given any meaning. No doubt, somewhere, litigation turned on this issue.
  • Jury trial waivers. The expense and time of a jury trial is huge. Most if not all commercial contracts contain this clause.
  • Limitations on damages. This is sometimes considered boilerplate, but experience shows that this will be a heavily negotiated clause if it inserted. No one really wants to leave any money on the table in the event of a dispute.
  • Warranties. If anyone thinks warranties are boilerplate, they are sorely mistaken. This is where a dispute is going to arise in many conflicts.
  • Indemnity. These clauses, too, are not boilerplate. This amounts to a potential guaranty of paying for certain costs in a dispute. Often insurance coverage concerns are relevant, but there is tremendous exposure here for the business owner
  • Applicable Law: Even if you end up litigating in a different jurisdiction, you may want your local law to apply. This clause will allow that.

So What is the Value of Boilerplate Clauses to You?

No question, the use of boilerplate clauses can reduce the drafting time of a contract. For any agreement that involves any significance to your business, thinking that you can use a boilerplate contract runs a tremendous risk that your contract may work against you in a big way. For most transactions other than the simplest ones, it will benefit you to understand what such clauses are for and what they address. Your contracts, however, should be constructed for you or your business specifically.

Legal Forms on the Web – Do you really need an attorney?

A weak maybe? There are, no doubt, situations where a simple form obtained free or at minimal cost on the web will suit your purposes. Caution is the watchword here. While there are many legal forms available on line, you have no assurance about the quality of these documents. They are often created to cover every conceivable situation and as a result, instead of being complete, leave many important issues unaddressed which can and, often do, come back to haunt you.

Having said that, reviewing these on line forms can save you money when you do meet with an attorney. If your situation calls for something other than a simple straightforward matter, maybe these simple forms will be sufficient. Before you use such a form, however, spend a little time considering any legal implications and potential liabilities if the form is inadequate. If you are thinking that you probably need to have an attorney review the documents, then you should be listening to your inner voice. The money you are saving now could be very costly

Saving Legal Fees with on line forms Using online forms can actually be a good way to reduce your legal fees when you do consult an attorney.

  • A good way to use on line forms is to use them to focus your attention on the issues that you should be discussing with the attorney. That way, you can give the attorney direction about what you want to accomplish.
  • Using an on line form can help you also think about answers to questions that the attorney might have which will result in an more efficient (and less costly) meeting.
  • If you have an outline or form that you think is appropriate and the attorney confirms that it is the correct form for your particular situation, you won’t have to pay the attorney to draft the agreement from whole cloth.

Do You Change Your Draw or Salary?

An article in the NY Times business section today poses an interesting cash flow question for small business.

Even if you are not having a collection problem there are times, especially in these times, that your cash flow will ebb and flow without reason. That can have a substantial impact on your sales targets and working capital.

At the same time, as the owner, you have probably set a salary or draw level based upon your revenue projections. If your sales are cyclical, this is also an issue about balancing what you are taking out of the business at any time as well.

The challenge is how to determine whether to continue to take that salary or draw when your business is experiencing the collection downward trends? This of course that you are monitoring your cash flows on a regular basis. Keeping an eye on accounts receivable and accounts payable is clearly something every business should be doing no matter how small.

The answer is probably different for everyone and there may not be a good answer at any particular time. Much of the answer may depend on whether you have confidence in your sales pipeline and can comfortably predict that cash flow will resume. This should require an analysis or projection by you of whether your orders are still coming in, whether you are still being asked for quotes or other indicia that your business is on track.

On the negative side, you may be experiencing issues that might reflect a different future for your business. You will have to address those issues right away.

Part of owning a small business is taking steps to navigate your financial ups and downs. Often, a variable that you can control is how much money you are taking out of the business at any given time. It would be an interesting discussion or thought process that many have probably already gone through

What About the Taxes on the Real Small Business Owners

Most small business owners do business as Sub S corporations or other pass through entities. Changing the corporate tax rate will not help them.

I know that most of my clients and business acquaintances do business in a form that passes net income through to their personal 1040’s where the tax is paid. But most of the political chatter we hear, view or read keeping talking about reducing corporate taxes. That will probably not have a significant effect on the small businesses whose tax structure is based upon their individual tax bracket. The two candidates position on this issues was recently raised in an AP article in the Washington Post http://wapo.st/JEeAq5. The article provides a quick analysis on the relative positions of Romney and Obama and how they will affect the actual taxes on small business owners with pass through income. The article concludes that under both candidates proposals, the big boys in C corps will get the biggest benefit.

It is pretty clear that despite the lip service, neither candidate is addressing the individual tax issues related to small business income. We all need to be alert, no matter what the election result, to review our business structure in the event of any tax changes. Assuming, of course, that Congress can ever agree on any.

10 Questions to Ask Before Family and Friends Become Business Partners | Entrepreneur.com

If there was a single piece of advice that I might give to clients who are considering going into business with friends or family it would be to seek out every other possibility. As an attorney who has spent a great deal of time in litigation unraveling the horrible consequences when these relationships fail. I cringe whenever potential clients think about doing this.

This excellent article poses a series of questions that, at a minimum, people should discuss with potential family or business partners BEFORE entering into the business relationships 10 Questions to Ask Before Family and Friends Become Business Partners | Entrepreneur.com.

The questions suggested by the article are challenging and sometimes difficult to raise, but their beauty lies in raising questions about the expectation of both sides. The excitement of a new small business and potential to make money with people you trust and maybe love can be overwhelming. As a result, decisions to go into business together are often made for the wrong reasons. Or, even worse, the reasons for going into the relationship are not the same for both parties.

When the stress of actually doing business enter the picture, and they will, the basis for the relationship is directly challenged. If the expectations were unspoken or misunderstood at the beginning, they will come out when things get hard. At that point, because of financial and relationship issues, things are going to go bad. And the shame is if this happens, the business is at risk and the relationship may lost forever.

So, as a final thought, look outside your friends and family if you can. If you cannot find someone else you can trust, treat the relationship as if you were entering into a relationship with an outsider. That perspective may save your business and your relationship someday.

Collecting your money – 5 Steps that can help cash flow

As a small business owner, collecting the money you are owed can be critical. In trying financial times like these, every dollar is important to maintaining your own credit and staying profitable. Because other businesses are also experiencing cash flow problems in this economy, many are managing by taking longer to pay their bills while they wait for their own income.

The consequences of even a few customers not paying can be dramatic for small business owners. You can take several steps at the beginning of a relationship with the customer that will increase the odds of being paid. Here are 5 steps that can help.

Step 1
At the beginning of any relationship with a new customer, you have the best opportunity to protect yourself. Before you offer any customer credit, it is a good idea to get a credit report done. If the customer will not consent (in writing, by the way) to your doing this then we suggest you make them a cash basis customer. While there may be some expense to you to get a report it is likely to be cheaper than extending credit that you never are paid back. If they balk or refuse – “cash only” is the only way to go.

Step 2
Make sure your forms provide protection for you in the event of nonpayment. Before you send out your first invoice you should have a completely filled out vendor form that provides you with details about the customer and most important – financial information including where they bank. A continuing personal guaranty for any corporate debt should be required as well. Your form should also make provisions for late charges and my favorite – attorney’s fees.

Step 3
Make a decision about when you will drop a customer if they are not paying. You should be tracking how many days late payments are. Your QuickBooks can age your receivables for you. When clients get to 30 days, contact them and talk about what is going on. If you think that the delay in paying is a temporary condition you probably want to continue to work with the customer, but keep them on a short leash. If you are sensing that the customer might be in a serious financial problem you have to consider making the difficult decision to cut them off. Communication is obviously important. When you make decisions about allowing the customer more time to pay, keep in mind that this decision will affect your profit margin not just your cash flow.

Step 4
“The check is in the mail” is a cliche that we all know to be meaningless. When confronted with this meet it head-on with an offer to accept a credit card payment or PayPal. You may also consider telling the client that you will send someone to pick up the check or cash.

Step 5
When in doubt…discount. While no one likes to reward clients for not paying, but sometimes having fewer dollars in your hand now is better than not being paid at all. Don’t be afraid to give a deep discount if your client is having problems. Giving up ten percent is a lot less than you will give up to a collection agent or law firm.

Notifying Tenants about a Foreclosure

If you have a renter who signed a lease and your property is at risk of foreclosure, that renter may have some protections and rights that you should be aware of.

Federal Law
In 2009 the federal law known as the “Helping Families Save Their Homes Act of 2009.” was enacted, with the aim of keeping tenants in a foreclosed home as long as they had a bona fide lease in place at the time of the recorded notice of foreclosure by the lender. This Act is subject, however, to a number of limitations and many tenants are still left without proper recourse after foreclosure. That law allows some tenants to finish out the term of their lease even after the foreclosure. For month to month tenants without a lease, they must be given at least 90 days advance notice of termination. This, of course is only if the federal law applies to the tenant’s specific facts. In part, the loan that is being foreclosed is a “federally related” home loan. The law protects “bona-fide tenants” as they are defined under that law.

Arizona Law
Arizona has a law that requires landlords to give written notice to tenants if the property to be rented if the foreclosure action was already initiated. Arizona Revised Statutes, §33-1331. If the landlord fails to provide the required notice, the tenant may terminate the lease, get a refund of the security deposit, and possibly obtain other relief. If the lease was entered into before the foreclosure action was started, then whatever rights exist will be determined by the lease itself – some leases contain clauses that specifically state that the Landlord may not allow the property to become the subject of a trustee’s sale.

Who has to tell the Tenant?
Not only might the landlord have an obligation to tell the renter, but if the building is managed by a realtor or property manager, they may have the obligation to communicate with the renter as well. The answer will depend on the type of tenancy and other relevant issues such as when the lease ends relative to the foreclosure date. The specific facts of each situation need to be properly analyzed before determined whether notice is needed or not.

Is Your Contract Notice provision up to date?

What is a Notice Provision Anyway?

Almost any contract that is properly drafted will have a “Notice” provision or clause. This clause states where the parties are agreeing to receive notices about matters relating to that contract. This clause is almost always treated as an afterthought. It is an item that should be periodically reviewed.

Why Does it Matter?

Unfortunately the first time the parties look at a contract after it is signed – is when something goes wrong and personal visits, email or telephone calls are not working to resolve the problem. At that point, the aggrieved party is going to want to give formal notice of its claim. Not only will the contract provide the address you agreed to use for notices, but if notice is sent to that address according to the procedure provided in the contract, your time to respond starts to run.

What you Should Do.

If you have moved and not updated your address, your rights under the contract may be jeopardized.There is much case law that holds parties to strict compliance with these clauses. Most contracts provide that you can change the address for notices, but you have to remember to do this. If the other party complies with the Notice provisions and you do not actually get the notice, your failure to keep it updates can be held against you.

If you Have to Give Notice

If a situation occurs where you have to notify the other party of your rights under the contract, pull it out and review what the contract says you have to do and follow that procedure to the letter. You might think that a email or fax might be sufficient. After all “I know they received it” seems to be a rational thought. Unfortunately, it may not be enough and if the contract does not permit notice that way – it is ineffective.

What about Electronic Notice?

While most business has moved into electronic communications, that does not mean that the law is keeping up. This is an ongoing discussion because general email services are not good providers of confirmation of receipt, confirmation of date or receipt or confirmation that the exact content has been transmitted. An email sent to the other party and to yourself, a common practice, is really not legally sufficient. There are some services such as RPost http://www.rpost.com/ and Verisign http://www.verisign.com/ which is now owned by Symantec which provide services that can confirm delivery and receipt of emails. These companies take the position that their services meet legal requirements. They well may, but I have not researched any cases challenging their claims and would not my clients to be involved in a test case.

Single Member Operating Agreements – Do you need one?

Well, if you live in a place where it rarely rains, might you still need an umbrella? Maybe, maybe not. But getting wet is definitely not as severe a consequence as having your corporate veil pierced and your personal assets exposed.

This question comes up a lot with small business owners. They file the proper documents for a limited liability company. Then they get their Articles and never look back. While the odds are small that there will be any consequence of such lack of attention to detail, if the day comes that a claim is filed, the first thing you will be looking for is those papers to show you have no liability.

Even in Arizona where an operating agreement is not required, failing or neglecting to have one just leaves another opportunity for you to be cross-examined about whether you were really operating a legitimate company or really a checkbook with a limited liability name on it.

The more you look and act like a corporate structure, the more immune your personal assets will be. A simple single member operating agreement is another step in the process of protecting yourself. It should not be expensive, but like that umbrella, is nice to have if and when it rains.

Do It Wrong and your Limited Liability Company will Not Protect You

There’s a reason it’s called a “Limited” Liability Company and not a “No Liability” Company. But just calling yourself an LLC and filing your articles of organization isn’t enough. If something goes wrong, that LLC alone won’t be enough to protect your personal assets. In fact, you may have completely overlooked creating an operating agreement, especially if you filed your own paperwork or hired a low-cost agency via the Internet.

Sure, there are advantages in LLC ownership, namely that there is flexibility in management and profits and losses can pass directly through to the owner’s personal income tax return while personal assets are shielded from liability. But if you don’t operate the LLC as a real and separate business, you may be asking for trouble.

You’ve likely heard the term “piercing the corporate veil.” When a disgruntled employee, customer, or anyone else who wants a piece of your pie chooses to sue you, that corporate veil is what protects your personal assets. However, if the court finds that you disregarded the corporate form, you’ll be left wide open.

Here are some things a court may consider:

  • Did you disregard LLC formalities?
  • Did you provide enough capital to run the business or remove capital, leaving the LLC bone dry?
  • Did you use the LLC bank account as your personal piggy bank?
  • Do you and your LLC share phone numbers, address, etc.?
  • Were your decisions to benefit you or the LLC?
  • Did you personally pay or guarantee the debts of the LLC?

So what can you do to protect your company’s limited liability? Keep your LLC papers and actions organized as if someone was looking over your shoulder. Make sure that you separate your personal stuff and your LLC: keep separate bank accounts, pay your business expenses from your LLC’s account, do not put personal funds in the LLC account, and do not use LLC funds for personal expenses. Set a percentage ownership for each owner and distribute profits accordingly, or draw an annual salary for each owner of the LLC.

By keeping everything very black and white, you’ll protect yourself and your LLC. Treat your company like the precious creation it is; it may surpass your own expectations in the long run, and such rewards are priceless.