Business Planning

In the contemporary workplace, email is an essential and efficient form of communication. Whether it's used internally among staff members, or for exchanges with vendors and customers, email is a necessary business tool. At the same time, misuse of this technology can expose an organization to legal and reputational risks as well as security breaches. For this reason, it is crucial to put a formal email policy in place.

First, an email policy should clarify whether you intend to monitor email usage. It is also necessary to establish what is acceptable use of the system, whether personal emails are permissible, and the type of content that is appropriate. In this regard, the policy should prohibit any communication that may be  considered harassment or discrimination such as lewd or racist jokes. In addition, the email policy should expressly state how confidential information should be shared in order to protect the business' intellectual property.

By having employees read and sign the email policy, a business can protect itself from liability if a message with inappropriate content is transmitted. Further, it personal emails are not permitted, employees are more likely to conduct themselves in a professional manner. Because personal emails tend to be more informal and unprofessional, these messages pose a risk to the company's image if they are accidentally sent to customers. Lastly, email that is used for non-business reasons is a distraction that can adversely affect productivity.

The Takeaway

In order for a policy to be effective, it is necessary to provide training to all the employees, enforce it consistently and implement a monitoring system to detect misuse of the email system. Ultimately, establishing formal email policy and providing it to all employees will ensure a business remains productive and efficient. If an employee violates the policy, a company will also have the ability to take disciplinary action. Lastly, a well designed policy will ensure the company's image and brand is protected.

Many business owners believe it's best to incorporate in their home state, but there are often business and tax advantages available in other states. In particular, Delaware and Nevada are attractive to those who are looking to form a corporation. These so-called corporate haven states are considered to be business friendly.

The State of Delaware is well regarded for its supportive business and corporate laws, said to be among the most favorable in the United States. In addition, the state has a judicial body, the Court of Chancery, that is dedicated to business matters. This exclusive focus allows the court to hear cases quickly and efficiently.

Delaware also features a government agency that is focused on supporting businesses, the Division of Corporations. In particular, this agency has streamlined procedures for incorporating that allow businesses to hit the ground running. The Division boasts long hours and provides new businesses with easy access to important resources.

Lastly, the tax law in Delaware is amenable to corporations. A corporation that is formed, but does not conduct business, in the state is not liable for corporate income tax. Moreover, there is no personal income tax for those domiciled in the state or for shareholders that do not reside in Delaware.

Nevada is the second most popular state in which to incorporate. The state's business law affords favorable treatment to corporations. In particular, owners and managers of a corporation are rarely held responsible for the actions of the corporation in the state. Nevada also offers advantageous tax treatment to corporations with no personal income, franchise or corporate income tax.

Depending upon the exigencies of your business,  incorporating in Delaware or Nevada might be the best alternative. By engaging the services of an experienced business and tax law attorney, you can take advantage of these corporate safe havens.

There are a number of steps involved in forming a corporation from selecting a name, obtaining the necessary licenses and permits, paying certain fees, and filing foundational documents with the appropriate state agency. While an attorney can help prepare and file the required papers, the owners, officer and directors should have a basic understanding of these documents.

Articles of Incorporation

The first underlying document is the Articles of Incorporation which states the corporate name, and the  purpose of the business. This is typically a generic statement to the effect that the corporation will conduct any lawful business in the state in accordance with its objectives.  In addition, the type and amount of stock that will be issued (common or preferred) must be established. This document should contain any other pertinent information, including the name and address of a registered agent.

Corporate By-laws

By-laws are the formal rules regarding the day-today operations of a corporation. This document outlines the corporate structure and establishes the rights and powers of the shareholders, officers and directors. By-laws specify how officers and directors are nominated and elected as well as their responsibilities. In addition this document should clarify how disputes among the parties will be resolved. By-laws establish where and when meetings will be held, whether quarterly, annually or at other times, what constitutes a quorum, as well as voting and proxy rules. Lastly, this document should also contain information on the issuance of shares of stock and other operational details.

Meeting Minutes

After the corporate existence has begun, an initial organizational meeting of the principals must be held in order to adopt by-laws, elect directors, issue stock, and to conduct any other business. All of these activities must be memorialized in meeting minutes, which must also be prepared during any subsequent meetings.

Stock Certificates

Stock certificates are the record of any stock that was initially issued.

Once these foundational documents are in place, a corporation is also required to keep complete and accurate books and records of account and must maintain a record containing the names and addresses of all shareholders. All of these documents may fall under different names and the applicable laws vary from state to state. Because this is a complicated process and one that requires careful analysis, you are well advised to engage the services of an experienced business law attorney to help prepare and file the necessary foundational documents.

Goodwill is an asset that is an intangible part of a business being purchased. In spite of its intangibility, goodwill may be worth more than concrete assets, such as property, buildings, machinery or inventory. Goodwill is the essence of the company's value to its customers, clients, and employees and, as such, is invaluable to any buyer. It is easier, as many people intending to purchase a business will tell you, to maintain goodwill than to establish it, since, among other things, goodwill takes time to build. Purchasing a business that already has established goodwill in the community can give the new owner a strong competitive edge. 

What Intangible Assets Compose Goodwill? 

Prospective buyers and sellers should be aware of the various aspects of goodwill. Not all will apply to every business, but aspects of goodwill include:

• Brand name
• Solid customer base
• Good customer relations
• Good employee relations
• Patents or proprietary technology
• General reputation
• Future sales projection

Goodwill is a saleable asset, presumed to generate sales revenue and customer continuity. Having been established over years of honest and efficient behavior by the previous owner, it is transferable to the buyer, assuming the buyer maintains the pre-established excellent business practices.

 How Is Goodwill Established?

As mentioned, goodwill can only be established over a period of years during which it is nourished and maintained. In business, it is assumed that expenditures have been involved in creating and preserving goodwill. Steps taken to do this include: 

• Healthy and continuous investment in promotion
• Maintenance of necessary quantity of high quality customer supplies
• Support of excellent relationships with both customers and suppliers
• Maintenance of efficient and respectful management and employees relationships
• Establishment and maintenance of corporate identity and image
• Keeping up an appropriate location

How Is Goodwill Evaluated?

 There is no set price for goodwill, though it very definitely features in sales negotiations. Generally speaking, goodwill is reflected in the amount in excess of the firm's total value of assets and liabilities. In well-established businesses, goodwill may be reflected in a price several times higher than the firm's physical assets alone would be reasonably worth.

There are several complex methods by which business goodwill can be calculated so it is essential to have a highly competent business attorney involved in the negotiation process. 

An executor is responsible for the administration of an estate. The executor’s signature carries the same weight of the person whose estate is being administered. He or she must pay the deceased’s debts and then distribute the remaining assets of the estate. If any of the assets of the estate earn money, an executor must manage those assets responsibly. The process of doing so can be intimidating for an individual who has never done so before.

After a person passes away, the executor must locate the will and file it with the local probate office. Copies of the death certificate should be obtained and sent to banks, creditors, and relevant government agencies like social security. He or she should set up a new bank account in the name of the estate. All income received for the deceased, such as remaining paychecks, rents from investment properties, and the collection of outstanding loans receivable, should go into this separate bank account. Bills that need to be paid, like mortgage payments or tax bills, can be paid from this account. Assets should be maintained for the benefit of the estate’s heirs. An executor is under no obligation to contribute to an estate’s assets to pay the estate’s expenses.

An inventory of assets should be compiled and maintained by the executor at all times. An accounting of the estate’s assets, debts, income, and expenses should also be available upon request. If probate is not necessary to distribute the assets of an estate, the executor can elect not to enter probate. Assets may need to be sold in order to be distributed to the heirs. Only the executor can transfer title on behalf of an estate. If an estate becomes insolvent, the executor must declare bankruptcy on behalf of the estate. After debts are paid and assets are distributed, an executor must dispose of any property remaining. He or she may be required to hire an attorney and appear in court on behalf of the estate if the will is challenged. For all of this trouble, an executor is permitted to take a fee from the estate’s assets. However, because the executor of an estate is usually a close family member, it is not uncommon for the executor to waive this fee. If any of these responsibilities are overwhelming for an executor, he or she may elect not to accept the position, or, if he or she has already accepted, may resign at any time.

A limited liability company is a very popular business form that combines some of the best features of a corporation and a partnership.  Like a partnership, an LLC is taxed through its individual members.  Like a corporation, it provides limited liability to its members.  In most situations, the personal assets of LLC members cannot be reached for the debts or liabilities of the business.  But, also similar to a corporation, there are certain scenarios where personal assets can be reached.  Most LLCs have more than one member.  In recent years, a variation called the single member LLC has become widely used.  As the name suggests, these LLCs have only one member.  While the structure and organizational requirements of single member LLCs are essentially the same as ordinary LLCs, there has been some uncertainty as to whether these businesses afford their members the same type of limited liability.

Initially, not all states recognized single member LLCs.  Now, all fifty states and Washington, D.C. recognize these business forms and have statutes governing them.  Generally, single member LLCs provide personal asset protection to their members for the liabilities of the business.  But, they do not always provide the reverse protection that a corporation or ordinary LLC includes.  In the case of an ordinary LLC, the personal creditors of the member cannot go after that member’s share without what is referred to as a “charging order”.  A charging order is a legal device that allows the creditor to place a lien on the member’s LLC interest.  The member’s interest is essentially any distributions made to them by the LLC.  Therefore, creditors can collect the members interest but not outright and not without jumping through a number of hoops.  In the case of a single member LLC, the charging order protection may not be provided.  While some states like Wyoming have specific laws making the charging order protection applicable to these types of businesses, other states, like California and New York, have made no decisions distinguishing ordinary LLCs from single member LLCs.  Therefore, in these states it is important to remember that legislation and judicial decisions have the potential to cause serious problems for business owners in the future. 

When wrestling with matters of business formation there are many factors that need to be considered and the advice of a seasoned business law attorney can help.  Contact our office for a consultation today.

As a minority business investor, it is essential to have an investment strategy that will maximize your returns. Once an investment decision is made, it is critical that a target business will enhance value of a broader investment portfolio.  At the same time, many minority investors are also business owners who know what makes for a successful enterprise. This post is a discussion of what minority investors should look for in a privately held business.

What makes for a great minority investment?

Since a minority investor has a significant but non-controlling ownership interest in a business, the first rule of thumb is to invest in business enterprises that you understand and with which you are comfortable. At the same time, great investments can also be found outside your business comfort zone provided that you have good management skills and the acuity to understand your target's business model.

Investing in a small business starts at the top,  that is with the owners. Accordingly, getting to know the owner and understanding how they do business is critical in your decision-making process. One key attribute you should look for in an entrepreneur is passion. Without it, he or she will lack the vision to steer the company toward success. It is also wise that you exercise caution by conducting background checks particularly with an eye toward ascertaining any legal actions in which the owner and other key people have been involved.

Of course, it's not only a matter of the people, it's about the numbers. The onus is on you to do your own due diligence, perform your own research and undertake an analysis of the proposed business plan. An investment proposal can be filled with numbers that amount to nothing more than smoke and mirrors. It's your job to ensure the numbers add up.

Level of Investment

Once you've done your homework on the target business, you need to decide how much to invest and how closely you will be aligned with the entity. Determining how much to invest is really a matter of risk management. In order to safeguard your investment, it is critical to negotiate a deal that is mutually beneficial. In particular, you should consider having an exit strategy with an understanding that your investment will be repaid by a certain date at an agreed upon rate of return.

You must also decide whether you will have no active participation in the decision-making and operations of the business or if you will be involved in the management of the entity. Even as a minority investor, your stake in the business may be significant enough to warrant having a seat at the table in order to advise on policy and evaluate management's performance.

Business Categories

As a minority investor, there are many business categories to consider that depend on your investment strategy. For example, investing in a start-up tends to be high-risk since management may not have a track record of success or a proven business model. Nonetheless, start-ups can also offer great rewards if they are breaking ground in a new business method or technology. The caveat is that the majority of start-ups are short-lived and destined for failure within the first 5 years.

If you are looking for a growth opportunity, there are business enterprises that have successfully launched but need another infusion of capital to grow. These businesses have an initial track record that will allow you to determine if your investment will be rewarded, even if it is subordinated to original investors. On the other hand, opportunities can also be found in companies that have stopped growing because of insufficient capital but still have a solid business plan.

For investors with a greater appetite for risk, companies that are failing can be ripe for a turn- around, provided that your stake comes with a hand in the decision-making and that the business fundamentals remain sound. Even bankrupt entities with cash flow potential offer investment opportunities for investors who are willing to have a high level of involvement.

The Bottom Line

For the minority investor, the nature of investing is high-risk, and every opportunity is unique - some offer greater rewards as well as higher risks. Your ability to make a decision on the merits of a business plan depends on your capacity to be a good business manager as well as a shrewd dealmaker. Investing in a privately held business requires a lot of up-front sweat equity in researching your target company, analyzing financial reports, evaluating the businesses track record, and ascertaining management's skills.

In particular, investing in a closely held business is an investment in the owners as well as the business. These entrepreneurs need to be innovative and have the ingenuity and passion to grow the business. In the final analysis, investors and owners need to be honest partners and strike a deal that is a win-win. The goal for both parties is to ensure the enterprise is successful and offers a worthwhile return on investment.

If you do your homework, your investment in privately-held businesses can be quite lucrative. That being said, it's always in your best interest as a minority investor to have a lawyer on your side of the table to craft an investment agreement, advise you of your responsibilities and shield you from potential litigation.

A 501(c)(3) nonprofit is one of a class of 29 different types of tax-exempt, nonprofit organizations under section 501(c) of the tax code. Most charitable organizations that receive donations from individuals in the United States are organized as 501(c)(3) nonprofits. The 501(c)(3) status is the most coveted type of nonprofit status because donations to these organizations can be deducted from income for tax purposes by the donors. This makes fundraising significantly easier.

501(c)(3) tax exemptions are reserved for businesses that operate for religious, scientific, literary, charitable, or educational purposes. They are also permitted when the organization provides services to test products for public safety, aims to prevent cruelty against children and animals, or fosters national or international amateur sporting competitions. A group trying to convince an American city to host the Olympics can be a 501(c)(3) even if it is not a charity in the traditional sense. In order to qualify as a religious organization, a church must comply with the rules outlined in IRS publication 1828 or risk losing its tax exempt status. All 501(c)(3) organizations are prohibited from engaging in supporting political candidates, and there are hard limits to the amount of lobbying a charitable organization may make to influence legislation.

To qualify as a 501c)(3), an organization must include in its articles of incorporation or bylaws restrictions on its power to operate for profit. Without this restriction, the organization’s tax exempt status will be denied, both by the Internal Revenue Service and by the state government. A 501(c)(3) company must receive a substantial portion of its funding by soliciting donations from the general public or government grants. If the organization raises most of its money by selling products or providing services, it cannot operate as a 501(c)(3), even if all the money raised is used for charitable purposes, though for small fundraisers, like carwashes or bake sales, exceptions may be permitted. An organization that receives significant income from private donations and government grants is called a public charity. Another type of 501(c)(3) is a private foundation, which is also tax exempt, and which may also receive tax-deductible donations. Private foundations, however, earn the bulk of their money through investments and endowments. This money is then donated to other charitable organizations.

Not every small business needs to form an LLC in order to function. A child selling lemonade by the side of the road has no use for a Tax ID number. It doesn’t seem practical to set up a new business entity to host a garage sale or a Tupperware party. As a venture starts to grow from a hobby to a full-time job, however, there are questions every business owner should ask to determine whether it is best to incorporate the business into a legal entity.

Do I need to protect my personal assets?

The greater the risk of being sued, the more necessary it becomes to file the necessary paperwork to form a Limited Liability company. This will limit the owner’s financial liability to the assets invested in the business. This means that, if a business gets sued, the business owner’s personal assets, like his or her home, automobile, personal bank accounts, and belongings, may not be targeted by the lawsuit. Common lawsuits of concern are for the satisfaction of contracts and leases and personal injury claims for accidents on the premises. Similarly, a bank may not seek a business owner’s assets to repay a loan unless the business owner signs a personal guarantee. Banks often require such a guarantee for new businesses that have no credit history.

Do I need flexibility in my obligation to pay income taxes?

A C corporation, which is a type of Limited Liability Company, has the flexibility to shift the business’s tax burden from one year to another. Normal business expenses and salaries can be deducted from a business’s taxes that may ultimately reduce a business owner’s tax burden depending on the income he or she derives from the business and from other sources.

Do I need to protect my company name?

In most states, companies register their names with the state to ensure that only one business can operate under that name. This is important for branding and marketing purposes. Adding LLC to the end of a company’s name can also add legitimacy to a new business, thus enhancing the brand.

Do I want to sell all or part of the business?

Ownership of an LLC or corporation can be shifted easily compared to those of a sole proprietorship. Adding partners and selling the business can be difficult if there are no lines between where the business ends and the owner begins. Once a business is incorporated, it lasts until it is dissolved, meaning it continues to be an asset for a business owner’s estate after the individual passes on.

Automobile deductions: Whether an individual uses a personal vehicle for his or her own business or company owns a vehicle, the depreciation of value and costs associated with that vehicle may be deducted from the company’s income at year's end. A taxpayer must keep track of all of these expenses and document them by maintaining receipts and records of expenditures in order to claim the deduction. Alternatively, a business may declare standard deductions for the vehicle based on the mileage of the vehicle. In 2015, this standard deduction is 57.5 cents for every business mile driven. If a vehicle is driven for both business and personal use, the IRS will require a taxpayer to identify the percentage of use dedicated to business.

Capital expenses: Also called startup costs, the IRS allows a business to deduct up to $5,000from its income in its first year of expenses for expenditures made before the doors of the business opened. Any capital expenses remaining after the first $5,000may be deducted in equal increments over the next 15 years.

Legal and professional fees: Fees paid to professionals like lawyers, accountants, and consultants, may be deducted from a company’s income each year. If the benefit of a professional’s advice is spread out over a number of years, the tax deduction must also be spread equally over the same period. The cost of books or tuition for classes to help avoid legal or professional costs may also be deducted.

Bad debt: A business may deduct the losses suffered as a result of a customer who fails to make payment for goods sold. However, a business that deals in providing a service may not deduct the time devoted to a client or customer who does not pay. A service business may deduct expenses made in an attempt to help that customer or client.

Business entertaining:The cost of meals or entertainment purchased for business purposes must be documented by receipts in order to maintain the right to deduct the cost from income for tax purposes. Only 50 percent of the total cost of entertainment expenses may be deducted.

Interest: If a business operates on a business loan or a line of credit, the interest on that loan may be deducted from income for tax purposes.

Normal business expenses: The cost of advertising, new equipment, depreciation of existing equipment, moving expenses, business cards, office supplies, travel expenses, coffee and beverages, software, casualty and theft losses, postage, business association dues, and all other business expenses can be deducted.

Relationships between employers and employees are regulated under various federal laws. It is essential to be aware of these regulations. Those who violate their provisions risk lawsuits and penalties for failure to comply.

Family Medical Leave Act 

Under the Family Medical Leave Act, or FMLA, an employee is afforded up to 12 weeks of unpaid leave to recover from pregnancy, serious illness, or to aid a sick family member.  No adverse employment actions are permitted upon return.  That means after 12 weeks of such leave, an employee must be permitted to return to their previous position with no reduction of hours or pay.

Federal Minimum Wage

The federal minimum wage is presently $7.25 an hour. Some local governments have increased the minimum wage above the federal level. For non-salaried, non-commissioned employees, an employer is required to pay one and a half times the normal hourly wage for any hours worked in excess of 40 hours a week.

Harassment and Discrimination

An employee has the right to work in a place free from harassment and discrimination.  Sexual harassment can take the form of unwelcome sexual advances or a hostile work environment. Adverse employment actions taken for the reason of race, religion, gender, and in some states, sexual orientation, may result in a lawsuit. It is also against the law for an employee who files a lawsuit for workplace discrimination, sexual harassment or another wrong doing to face retaliation for whistleblowing.

Federal Occupational Safety and Health Administration

Under Federal Occupational Safety and Health Administration (OSHA) regulations, an employee has the right to work in an environment free of dangerous conditions, safety hazards and toxic substances. Employees dealing with potentially dangerous equipment must be trained to use it safely, and all employees should undergo training on workplace safety. The OSHA handbook has 19 subsections, each dealing with a specific topic such as fire prevention, heavy machinery, hazardous materials and walking/working surfaces.

National Labor Rights Act

The National Labor Rights Act, or NLRA, allows employees to organize a union to negotiate working conditions and compensation through collective bargaining and the use of strikes.  The NLRA does not apply to public employees, domestic employees, agricultural employees, railroad employees, airline employees, supervisors, management, independent contractors or close relatives of the owners of the company that employs them.