IS YOUR BUSINESS IN COMPLIANCE?
What Is Business Compliance?
While not the most glamorous aspect of running a business, complying with applicable rules and regulations is a must. Business compliance (known as “corporate compliance” for incorporated businesses) is critical for keeping your company in good standing with your state. The specifics of what you need to pay attention to depend on the legal structure of your company and where you’re registered to operate your business. The compliance requirements Limited Liability Companies (LLCs) and Corporations must meet can vary from state to state (and sometimes even from one municipality to another). I recommend you contact your lawyer and your accounting professional to make sure you understand what you need to do to stay compliant.
Consequences of Non-Compliance
One of the questions we hear from clients is, “What happens if I fail to meet requirements or don’t meet them on time?
For one, you risk piercing the corporate veil that protects your personal assets from liabilities of your business. If someone sues your LLC or Corporation, your home, personal checking account, retirement savings, etc. could become vulnerable if judgment is made against your business. Additionally, your state might impose late fees and levy interest on payments that you owe on certain filings and renewals. If you continue to neglect your business compliance obligations, the state might even dissolve your LLC or Corporation—leaving you without the liability protection and potential tax benefits they offer.
Your Small Business Compliance Checklist
- Maintain a registered agent: sometimes called a “resident agent” or “agent for service of process,” a registered agent is an entity (individual or company) officially recognized by your state to accept service of process on behalf of your business. “Accepting service of process” means the registered agent will receive important paperwork (such as notices to file your annual report or legal notices in the event your business becomes involved in a lawsuit) on behalf of your LLC or Corporation. By law, your business needs to have a registered agent as soon as you form an LLC or incorporate. Requirements vary from state to state, but usually, a registered agent must be a natural person and resident of the state or an entity having a business office and authorization to do business in the state. Failure to secure a registered agent or pay your designated registered agent’s fees could result in the Secretary of State considering your business defunct.
- File annual reports. Many states require LLCs and Corporations to submit an annual report either every year or every other year. Some states require it on a less frequent basis. To know what your state’s rules are, check with the Secretary of State’s office. Also, take note of the due date for filing your annual report. Your state might require it by the anniversary of your incorporation date, at the end of the calendar year, or when your annual tax statements are due. Plan ahead, so you’re not scrambling at the last minute.
- Pay your taxes. Don’t slip up by not paying the taxes applicable to your business (income taxes, sales tax, business taxes, or franchise taxes). You must pay them—and preferably on time—to keep your business in good standing.
- Renew business licenses and permits. If your business needs certain federal, state, county, or local licenses and permits to legally operate, you may need to renew them.
- Keep up with your corporate meeting minutes. If you’re running your business as an S Corporation or C Corporation, any time you hold a corporate meeting, you’ll need to record minutes from the meeting. Your corporate minutes should capture details such as time and place of meeting, who attended, who served as chair of the meeting, actions and decisions made, and signature of the person recording the minutes (and the date the minutes were issued).
- File for DBAs. If conducting business under a different name from your LLC or Corporation, you’ll need to file for a fictitious name, also known as a “trade name,” “assumed name,” or “DBA” (Doing Business As). A DBA makes it legal for you to use that fictitious name when expanding into a new area of business focus or operate another business or website that wouldn’t be well-represented by your current name.
- Record changes via Articles of Amendment. If you changed your company name or business address, have had members of your Board of Directors come or go, or authorized for more shares of your corporation to be sold, you must officially notify your state. You do this through “Articles of Amendment.”
- Don’t commingle business and personal finances. Avoid shades of gray with your finances. Maintain separate checking and credit card accounts for your business, so your revenue and expenses are distinguishable from your personal monies and transactions. I can’t emphasize how important this simple step is for compliance purposes—and for making tax-filing time “less taxing.”
- Register your business in each state you conduct business. To legally conduct business in a state besides the state where you formed your LLC or Corporation, you will need to get authorization. This typically means qualifying as a “foreign corporation” or LLC within the state in which you intend to do business. The form to do that might be called a “Statement and Designation by Foreign Corporation” (as in California) or known by some other name. Typically, you’ll need to file that documentation with the Secretary of State’s office. And, as in your home state, you may need to apply for specific licenses and permits as well.
PHONE 949-413-6535 WFB LEGAL CONSULTING, Inc.—Lawyer for Business– A BEST ASSET PROTECTION Services Group
The Occupational Health and Safety Regulation under the jurisdiction of WorkSafeBC requires that all small businesses have an occupational health and safety program. A health and safety program is a process for managing the prevention of work-related injuries and diseases in the workplace. As a small business owner and employer, you have a responsibility to your employees to ensure their health and safety in the workplace.
The scope of your health and safety program depends on the size of your business and the hazards at your particular workplace. Generally, a small business can state its health and safety policy and describe its program in a few pages. The following steps focus on the basics of a less formal program for smaller businesses; these key steps to a safe work environment will be the basic components of your health and safety program.
- Create a plan to control workplace hazards.
As an employer, you must identify hazards in your workplace and take steps to eliminate or minimize them. Develop a safety plan. Tell your employees what you will do to ensure their safety and what you expect from them. Make sure your employees have access to a first aid kit. For example, hazards can include: a cleaner working with heavy duty cleaning products, a mechanic working with large machinery or a warehouse manager stacking heavy boxes.
- Inspect your workplace.
Regularly check all equipment and tools to ensure that they are well maintained and safe to use. Also check storage areas and review safe work procedures. Are boxes in your storage area stacked in a safe manner? Are your employees instructed how to lift heavy goods without injuring themselves? Do your employees know where the fire exit is and where they should gather if there is a fire?
- Train your employees.
Proper training is necessary for all employees, especially if there is a risk for potential injury associated with a job. Provide written instructions and safe work procedures so they can check for themselves if they are unsure of a task or have forgotten part of their training. Supervise your employees to ensure that they are using their training to perform their job properly and safely. By not providing the correct training for your employees, you are not only endangering the safety of your employees, but you will be held liable for any incident and which could have serious consequences.
- Talk regularly with your employees.
Meet regularly with your staff and discuss health and safety issues. Encourage them to share their ideas and thoughts on how to improve safety in the workplace. You might even consider providing first aid training for staff so they are prepared to deal with emergency situations.
- Investigate incidents.
Even if an incident does not result in a serious injury, conduct an incident investigation to help determine why an incident happened so you can take steps to ensure that it will not recur.
- Maintain records.
Keep records of all first aid treatment, inspections, incident investigations, and training activities. This information can help you identify trends in unsafe conditions or work procedures, and defend against potential claims.
- Make safety a key part of your business.
Safety shouldn’t be an after-thought; it’s just as important to a successful business as customer service, inventory control, and financial planning. A commitment to health and safety makes good business sense because it’s the one way to protect your greatest resources — your people and your business.
WFB Legal Consulting, Inc.–A BEST ASSET PROTECTION Services Group–Lawyer for Business
One woman who frequently flew on Southwest was constantly disappointed with every aspect of the company’s operation. In fact, she became known as the “Pen Pal” because after every flight she wrote in with a complaint.
She didn’t like the fact that the company didn’t assign seats; she didn’t like the absence of a first-class section; she didn’t like not having a meal in flight; she didn’t like Southwest’s boarding procedure; she didn’t like the flight attendants’ sporty uniforms and the casual atmosphere.
Her last letter, reciting a litany of complaints, momentarily stumped Southwest’s customer relations people. They bumped it up to Herb’s [Kelleher, CEO of Southwest at the time] desk, with a note: ‘This one’s yours.’
In sixty seconds Kelleher wrote back and said, ‘Dear Mrs. Crabapple, We will miss you. Love, Herb.’”
The phrase “The customer is always right” was originally coined in 1909 by Harry Gordon Selfridge, the founder of Selfridge’s department store in London, and is typically used by businesses to convince customers that they will get good service at this company and convince employees to give customers good service.
Businesses should abandon this phrase because it may actually lead to worse customer service.
1: It Makes Employees Unhappy
Gordon Bethune is a brash Texan (as is Herb Kelleher, coincidentally) who is best known for turning Continental Airlines around “From Worst to First,” a story told in his book of the same title from 1998. He wanted to make sure that both customers and employees liked the way Continental treated them, so he made it very clear that the maxim “the customer is always right” didn’t hold sway at Continental.
In conflicts between employees and unruly customers he would consistently side with his people. Here’s how he put it:
When we run into customers that we can’t reel back in, our loyalty is with our employees. They have to put up with this stuff every day. Just because you buy a ticket does not give you the right to abuse our employees …
We run more than 3 million people through our books every month. One or two of those people are going to be unreasonable, demanding jerks. When it’s a choice between supporting your employees, who work with you every day and make your product what it is, or some irate jerk who demands a free ticket to Paris because you ran out of peanuts, whose side are you going to be on?
You can’t treat your employees like serfs. You have to value them … If they think that you won’t support them when a customer is out of line, even the smallest problem can cause resentment. So Bethune trusted his people over unreasonable customers. What I like about this attitude is that it balances employees and customers. The “always right” maxim squarely favors the customer which is a bad idea, because, as Bethune says, it causes resentment among employees.
Of course, there are plenty of examples of bad employees giving lousy customer service, but trying to solve this by declaring the customer “always right” is counter-productive.
2: It Gives Abrasive Customers an Unfair Advantage
Using the slogan “The customer is always right,” abusive customers can demand just about anything — they’re right by definition, aren’t they? This makes the employees’ jobs that much harder when trying to rein them in.
Also, it means that abusive people get better treatment and conditions than cooperative people. That always seemed wrong to me, and it makes much more sense to be nice to the nice customers to keep them coming back.
3: Some Customers Are Bad for Business
Most businesses think that “the more customers the better”. But some customers are quite simply bad for business.
Danish IT service provider Service Gruppen proudly tell this story:
One of our service technicians arrived at a customer’s site for a maintenance task, and to his great shock was treated very rudely by the customer. When he’d finished the task and returned to the office, he told management about his experience. They promptly cancelled the customer’s contract.
Just like Kelleher dismissed the irate lady who kept complaining (but somehow also kept flying on Southwest), Service Gruppen fired a bad customer. Note that it was not even a matter of a financial calculation — not a question of whether either company would make or lose money on that customer in the long run. It was a simple matter of respect and dignity and of treating their employees right.
4: It Results in Worse Customer Service
Rosenbluth International, a corporate travel agency since bought by American Express, took it even further. CEO Hal Rosenbluth wrote an excellent book about their approach called Put The Customer Second – Put your people first and watch’em kick butt.
Rosenbluth argues that when you put the employees first, they put the customers first. Put employees first and they will be happy at work. Employees who are happy at work give better customer service because:
- They care more about other people, including customers
- They have more energy
- They are happy, meaning they are more fun to talk to and interact with
- They are more motivated
On the other hand, when the company and management consistently side with customers instead of with employees, it sends a clear message that:
- Employees are not valued
- Treating employees fairly is not important
- Employees have no right to respect from customers
- Employees have to put up with everything from customers
When this attitude prevails, employees stop caring about service. At that point, genuinely good service is almost impossible — the best customers can hope for is fake good service. You know the kind I mean: courteous on the surface only.
5: Some Customers Are Just Plain Wrong
Herb Kelleher agrees, as this passage From Nuts! the excellent book about Southwest Airlines shows:
Herb Kelleher […] makes it clear that his employees come first — even if it means dismissing customers. But aren’t customers always right? “No, they are not,” Kelleher snaps. “And I think that’s one of the biggest betrayals of employees a boss can possibly commit. The customer is sometimes wrong. We don’t carry those sorts of customers. We write to them and say, ‘Fly somebody else. Don’t abuse our people.’”
If you still think that the customer is always right, read this story from Bethune’s book From Worst to First:
A Continental flight attendant once was offended by a passenger’s child wearing a hat with Nazi and KKK emblems on it. It was pretty offensive stuff, so the attendant went to the kid’s father and asked him to put away the hat. “No,” the guy said. “My kid can wear what he wants, and I don’t care who likes it.” The flight attendant went into the cockpit and got the first officer, who explained to the passenger the FAA regulation that makes it a crime to interfere with the duties of a crew member. The hat was causing other passengers and the crew discomfort, and that interfered with the flight attendant’s duties. The guy better put away the hat. He did, but he didn’t like it. He wrote many nasty letters. We made every effort to explain our policy and the federal air regulations, but he wasn’t hearing it. He even showed up in our executive suite to discuss the matter with me. I let him sit out there. I didn’t want to see him and I didn’t want to listen to him. He bought a ticket on our airplane, and that means we’ll take him where he wants to go. But if he’s going to be rude and offensive, he’s welcome to fly another airline.
The fact is that some customers are just plain wrong. Businesses are better off without them and managers who side with unreasonable customers over employees is a very bad idea. Such a formula can result in worse customer service.
Simply, a business needs to put its people first — and watch them put the customers first.
WFB Legal Consulting, Inc.–A BEST ASSET PROTECTION Services Group–Lawyer for Business
CALIFORNIA MEAL BREAKS: 4 THINGS EMPLOYERS SHOULD REMEMBER
Contribution by: Jordann Donskey
California has notoriously stringent wage and hour laws for employers. One particularly tricky area is related to meal break rules. Employers should make efforts to audit their policies and practices in relation to meal breaks to ensure compliance with wage and hour laws and prevent litigation.
Here are four things California employers should remember regarding meal breaks in order to avoid wage and hour penalties and fines:
- Meal Break Recordkeeping Requirements
Employers are encouraged to have written meal break policies, to train supervisors on how to enforce meal break compliance, and to keep accurate records of when meal breaks are taken. Recent California Wage Orders state that employers must keep accurate records for each employee, including time records showing when the employee begins and ends each work period and meal break. The required time records must show the actual hours worked by the employee, so employers should not rely on work schedules posted in advance. Employers are required to keep these records for at least three years, however, it is advisable to keep them at least five years due to longer statutes of limitations available to employees in California. The Division of Labor Standards Enforcement office takes the position that if an employer fails to maintain accurate time records, then an employee’s credible testimony of hours worked is sufficient to establish a wage claim. The burden is then on the employer to show that the hours claimed by the employee were not really worked.
- Timing of Meal Breaks
The ruling in Brinker Restaurant Group v. Superior Court clarified that employees must be given their first meal break “no later than the end of an employee’s fifth hour of work, and a second meal period no later than the end of an employee’s 10th hour of work.”
- Documented Procedures for Missed or Skipped Meal Breaks
Even if employers have proper policies in place for meal breaks, employees may claim that an employer knew that an employee was not taking his or her mandated meal breaks. Therefore, employers should implement a procedure for employees to notify the company if they are unable to take a meal break. In the event an employer faces allegations related to not providing a required break(s), the employer can refer to their “complaint procedure”, which requires employees to inform the employer of any potential violation.
- Paying Employees for Missed Meal Breaks
Beyond the complaint procedure mentioned above, employers should show that they have a system in place to correct any employer-related meal break violations. For example, if the employer confirms that the employee missed their break because of the rush of business or some other factor, the company should pay the employee a one hour “premium pay” penalty at the employee’s regular rate of pay. The company should record these payments as proof that it has an effective process in place to rectify missed breaks.
Federal Law: Paid versus Unpaid Breaks
Federal law requires employers to pay for hours worked, including certain time that an employer may designate as “breaks.” For example, if an employee has to work through a meal, that time must be paid. A receptionist who must cover the phones or wait for deliveries during lunch must be paid for that time, as must a paralegal who eats lunch at her desk while working or a repair person who grabs a quick bite while driving from one job to the next. Even if an employer refers to this time as a lunch break, the employee is still working and entitled to be paid.
Federal law also requires employers to pay for short breaks an employee is allowed to take during the day. Breaks lasting from five to 20 minutes are considered part of the workday, for which employees must be paid.
Employers do not have to pay for bona fide meal breaks, during which the employee is relieved of all duties for the purpose of eating a meal. An employee need not be allowed to leave the work site during a meal break, as long as the employee doesn’t have to do any work. Ordinarily, a meal break is “bona fide” if it lasts for at least 30 minutes, although shorter breaks may also qualify, depending on the circumstances.
These rules come into play only if an employer allows breaks. Federal law requires only that an employer pay for certain time, even if it is designated as a break. It does not require employers to offer break time in the first place.
WFB Legal Consulting, Inc.–A BEST ASSET PROTECTION Services Group–Lawyer for Business
Budgets are essential to manage your costs and keep your small business profitable throughout the year. Due to the dynamic nature of any small business, you can’t just set a budget in January and let it sit unchanged until the end of the year. Every month, take stock of your business’ performance and expenses and use that data from the prior month to update your budget.
Your monthly budget needs to provide you with enough detail so that you can identify potential cash crunches in the near future as well as opportunities to make the most out of extra cash. To get that level of detail, review the following key small business expenses to account for in your monthly budget.
- Vehicle Expenses
With the tax deadline rapidly approaching, you may now know that you’ll be able to deduct vehicle expenses for business purposes. Go beyond just the number of dollars spent for gas and include applicable vehicle registration fees, repairs, and insurance payments. Also, keep track of business miles driven because you can deduct 53.5 cents per mile in 2017.
- Advertising Expenses
Depending on your marketing budget and number of promotion projects that you have going on, you could be eating up your ad budget too fast (or even, too slow). Reconciling your monthly payments to advertisers allows you to fine tune your promotion efforts so that you have enough left for those peak periods, such as the summer or December holidays.
- Tax Payments
Your tax liability might take a big bite out of your budget, hurting your available cash on hand to pay suppliers and employees. Including all outgoing cash flows is a key part of building a budget for your small business, and tax payments are no exception.
As your small business grows, you’ll find yourself wishing that you could hire extra help to handle the extra work. But is it worth it to have full-time staff throughout the entire year? By keeping track of wages every month, you’ll be able to determine if you could be better served by part-time, seasonal, or contract workers during specific months. Plus, it helps you to be ready for Form 941 every quarter and its equivalent at the state level, if applicable.
- Expenses Related to Accounts Receivable
Your budget may have a category tracking one-time (or unusual) expenses. From that list, single out any charges for collecting money for sales made on credit, or write-offs from money that’s never recovered. Such charges will tell you the whole story about your sales numbers and whether or not you need to make changes to your policies for sales made on credit.
- Cash Outflows from Operating Activities
When doing a cash flow analysis, you want to break down cash inflows and outflows into operating, financing, and investment activities. Get in the habit of reconciling your cash flow balance by adding and subtracting applicable inflows, such as depreciation and decrease in inventory, and outflows from operating activities, such as increase in accounts receivable and decrease in accounts payable. In this way, you’ll have an indicator of potential cash crunches or opportunities for investment.
A number that’s too low for many months would indicate that you should start looking into forms of business financing. One that’s too high for many months, would point out that your small business could afford to invest in a new piece of equipment, hire a new employee, or spend a bit more for promotions.
- Loan Advances
If you have an existing term loan or line of working capital, write down how much you have used in the previous month. This allows you to evaluate your existing form of financing: Are you tapping into your line of credit only during certain months? Do you have adequate reserves for an emergency? Do you need to increase your limit?
As you can see, monitoring your business expenses is a great financial habit that allows you to make more informed decisions and reach your business goals. Depending on the size of your small business, hiring a bookkeeper to maintain your monthly budget and other financial documents, such as income statement and balance sheet, will free up your time and enable you to focus on the core activities of your operation.
WFB Legal Consulting, Inc.–A BEST ASSET PROTECTION Services Group–Lawyer for Business
If you have an impairment that substantially limits a major life activity, you might be covered under the Americans With Disabilities Act (ADA). Many people are confused about their rights and responsibilities if they have a covered disability, and whether or not they are, in fact, covered.
- Covered impairment
Your impairment can be physical or mental. Homosexuality, pregnancy, weight, and height are not considered disabilities. (Pregnancy is covered as a separate type of discrimination.) The disability doesn’t have to be permanent. Temporary impairments that take significantly longer than normal to heal, long-term impairments, or potentially long-term impairments of indefinite duration may be disabilities if they are severe.
- Covered employer
Your employer is only bound by the Americans With Disabilities Act if it has 15 or more employees. Your state, city or county may have anti-discrimination laws that apply to smaller employers.
- Major life activities
Your disability must substantially limit a major life activity, such as caring for yourself, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning, working, sitting, standing, lifting, thinking, concentrating, and interacting with others.
- Substantially limiting
In order to be covered, the disability must prohibit or significantly restrict your ability to perform a major life activity compared with average people. Courts will weigh the nature and severity, the duration or expected duration, and the permanent or long-term impact of the impairment.
- Ability to work
The impairment substantially limits the ability to work if it prevents or significantly restricts you from performing a class of jobs or a broad range of jobs in various classes (as opposed to your specific job).
- Record of disability
Even if you aren’t disabled currently, you might be protected if you have a record of disability. That means you either have a history of a substantially limiting impairment or have been mis-classified as having a substantially limiting impairment.
- Regarded as disabled
If your employer regards you as disabled, then you’re also protected against discrimination. You’re covered if you: have an impairment that doesn’t substantially limit major life activities, but your employer treats you as if you do; have an impairment that substantially limits major life activities only as a result of the attitudes of others toward your impairment; or have no impairment, but your employer treats you as if you do. A good example of this is if your supervisor suddenly assumes that you have AIDS because you lost weight.
- Drug addiction
You’re not covered if you’re currently using illegal drugs. If you have kicked the habit or the company only assumes you’re an addict, you’re protected.
If you need an accommodation in order to perform all the duties of your job, you need to request it from your employer. They can’t deny a reasonable accommodation unless it’s an undue hardship.
How do you prove discrimination based on disability? Biased comments by supervisors could be evidence that their decision was because of your disability. Referring to you as the “gimp,” saying they don’t want your image to represent the company, making fun of your disability, commenting that you’re causing the company’s insurance rates to go up, or similar statements could be direct evidence of disability discrimination.
Most supervisors aren’t that obvious. You can look at others treated differently under the same circumstances. If non-disabled people were kept on in a layoff and disabled employees are targeted, disability discrimination might be involved. If you become ill and are suddenly targeted for negative performance reviews and write-ups for stuff other employees do, too, then you might have a disability discrimination claim.
Anything that doesn’t affect you in the wallet is in the category of harassment. Your employer can’t make you miserable due to your disability to try to get you to quit. You can’t be called names and made fun of due to your disability either.
12 What to do?
If it’s harassment, you have to report it first under the company’s policy for reporting harassment and give them a chance to fix the situation. Only if they don’t fix it or if the harassment continues, can you file a charge of discrimination with the appropriate Federal or State agency.
If it’s an adverse employment action, like a denial of a promotion, a demotion, a suspension without pay, or a termination/layoff, you must file a charge of discrimination with the appropriate agency before you can sue.
- Light duty
Be careful if your company encourages you to apply for light duty. In order to be protected against disability discrimination, you have to be able to perform ALL the essential duties of your job (even if you need an accommodation to do so). Once you fill out papers saying that you can’t do something essential, you may no longer have a covered disability under the law.
- Medical leave
If you need occasional appointments for medical treatment, you might also qualify for intermittent Family and Medical Leave. If you take FMLA leave for a disability-related illness and need more time, then you might be entitled to a longer leave under the Americans With Disabilities Act as a reasonable accommodation.
If you’re presented with a severance agreement and think you’re targeted for layoff due to your disability, you might be able to negotiate a better severance package. When in doubt, read your handbook carefully. Follow all your company policies for requesting accommodations or medical leave. If you need help or feel you’ve been discriminated against due to your disability, contact an employment lawyer for business in your state to get advice.
Distribution Agreements: WHAT ARE THEY AND HOW DO THEY FUNCTION?
There are numerous ways in which manufacturers or owners of a product or service arrange to have it sold to the public or wholesalers further down the line of distribution. They may elect to sell “in house” by which outside and inside sales personnel seek to sell the product or service to the public or wholesalers. They may seek to use franchises who buy the product for resale to the public or other persons for a markup. They may seek to sell directly over the internet, using no local personnel or hiring local personnel merely to service customer complaints.
But by far the most common method is to utilize “distributors” who normally are independent entities who seek sales, pay their own expenses of business, and either buy the product for resale at a markup or simply process orders which are placed directly with the manufacturer and earn a commission predicated on placed or completed orders.
A start up manufacturing company or any company wanting to avoid the cost of setting up their own distribution (sales personnel, computers, supervisory personnel, materials, etc.) and/or not fully understanding the complex market they wish to enter may find it worthwhile to simply hire already existing experts (distributors) who make their living already selling similar or identical products in the markets sought to be exploited. Instead of spending hundreds of thousands a year to hire the best personnel in-house (if they are available) one can immediately hire an entire sales force and it appears a real bargain since guaranties are usually not part of the contract: one only pays for sales achieved.
From the distributor’s point of view, they get access to a product line and normally the sales materials and support needed to sell the product, and have none of the headaches of production, research and development, etc.
The ease and benefits of such an arrangement are one reason that tens of thousands of distributors exist in California alone and it is also a common method of business abroad. However, one very experienced distributor long represented by this firm, who had made many millions of dollars in his business and was considered one of the outstanding experts in his field, once commented to this writer that he would never advise his son to become a distributor. “You can’t win in the long run. If you aren’t good at sales, they eventually fire you. If you are good and build up their name and reputation, they figure it’s cheaper to go in house once you have established the market and you are fired. You must be good – but not too good. Sooner or later, you and the manufacturer will part ways and all the effort you made to build up good will – goes entirely to the manufacturer.”
The essence of the problem is quite simple. The distributor does not own the product, does not “own” the territory absent a powerful contract which protects the distributor and few distributors go to the trouble and time necessary to create and negotiate an effective contract. But when all is said and done, the only protection a distributor has for the territory and good will the distributor may have created for the product and the manufacturer – is the contract between the distributor and the manufacturer.
This is well recognized by various nations in Europe which have passed laws not allowing a distributor to be terminated minus a severance package or unless for good cause. Such statutory protection does not exist in the United Stated. The only way a distributor can achieve protection is by negotiating a good contract which provides for the types of protections described below.
This article shall briefly describe the basic contractual protections any distributor in the United States should seek in negotiating a new distribution relationship. Manufacturers have their own criteria, of course, and should consult the separate article on this website for guidance on the contract they should be seeking to create.
THE BASIC TERMS OF THE STANDARD DISTRIBUTION AGREEMENT
Territory is everything to a distributor. This is the location and/or the type of product in which distributor can sell. If it is an “exclusive territory” it means that only the distributor can sell into the territory. A nonexclusive territory means that either the manufacturer or other agents or both can sell into the territory and this can be disastrous for a distributor since there is little of value to the distributor in this type of arrangement – the manufacturer can destroy distributor’s business by simply underselling the distributor any time either directly or via another appointed distributor.
It is vital for the distributor to seek an exclusive territory, and that means exclusive to the point in which even the manufacturer or owner of the product is not allowed to sell into the territory.
A related but equally important issue is how the territory is to be protected from other persons selling into it, including other distributors who claim a customer is in “their” territory because inquiries were received directly from a customer.
OWNERSHIP OF PRODUCT: TERMS OF PAYMENT
The next important question is whether distributor must buy and resell the product and what credit terms, if any, are available for the distributor. Clearly the best situation is one in which distributor merely processes orders and gets free samples from the manufacturer as well as sales materials. Unfortunately, many manufacturers charge the distributor for not only samples, but for any products shipped, thus the distributor ends up as a customer of manufacturer, simply getting a larger discount on products purchased so that the distributor may resell at a profit.
This not only requires funding for buying the product, but collection efforts by the distributor and credit checks of customers since the distributor will soon be out of business if the customer does not pay.
Equally troubling is the danger of damage to goods in transit, for if the distributor is buying for resale, then quite often the risk is transferred at the manufacturer’s plant and the distributor takes on the added headache of arranging effective shipment and insurance for same.
The new distributor, thus, should only seek to earn a commission from sales and have the manufacturer sell directly to the customer with distributor merely earning a commission. The alternative is to the benefit of the manufacturer who thus transfers the risk of resale entirely to distributor and simply has one good customer – the distributor – in that particular territory.
But assuming that the manufacturer is selling directly to the customer, the distributor must negotiate and achieve good contractual terms so that the customer cannot end up buying directly from the manufacturer and thus cut out the distributor. Often unscrupulous manufacturers will offer customers a special low discount (cutting out the distributor’s share of the markup) and the customer will be delighted to buy direct. That must be prohibited in the contract.
TERM OF THE CONTRACT AND TIME TO BUILD THE MARKET
It is not cheap to create a new territory. Often months or even years are necessary to educate the potential customers of the value of the product and during that period few sales occur and the distributor works for almost nothing hoping for eventual market share. A wise distributor will build into the contract a “startup” time to develop the market so that no cancellation of the distribution agreement can occur for a long enough period of time. The worst thing that can happen is that after all the sacrifice one is just beginning to develop a market – and the term of the contact is over.
This dovetails into the more general question of term of the distribution agreement. Recall that once the contract is over, your business is over. The key is exclusive territory and time to exploit it. As a distributor, you should seek as long a contract period as possible, ideally as long as your sales are maintained. As a manufacturer, the goal is to be able to terminate the contract and go in-house once the distributor has created the market. A good compromise is performance criteria so that the distributor gets to keep the market for so long as certain sales are achieved. (Be careful here, for a manufacturer, by price manipulation, can effectively end any such contract by simply upping the price. A smart distributor will get some guaranty of price alteration limits while the term is negotiated.)
At a minimum, the distributor should seek a “three and three.” That is, a guaranteed non-cancellable contract for three years which is renewed for three years if criteria are met. The best is a permanent distribution agreement by which, if certain criteria are met, the contract is automatically renewed for so long as sales are kept at that level.
COSTS OF SALES
Samples and sales materials can be very expensive and a good distributor will seek access to a plentiful supply since sales will depend largely on convincing customers and nothing is so convincing as good product samples. The distributor should carefully review the likely needs for materials, web support, etc., and seek to have same delivered without cost.
CUSTOMER SERVICE: RETURNED GOODS
It is not unusual for half of a good distributor’s time to be spent on servicing the customer, interacting with the customer to assure satisfaction, and assisting in return of defective goods or obtaining training and training materials, such as manuals. Manufacturers are often at odds with distributors in this regard and a common area of dispute is how to satisfy customers and who is primarily responsible for this area. This should be placed in the contract and expect the terms to be of vital importance to your profitability.
REPRESENTING COMPETING PRODUCTS
Most manufacturers want undivided loyalty from distributors and will insist that no competing product may be sold by the distributor. Indeed, the law often imposes a “duty of loyalty” by which a distributor must act in the best interest of the manufacturer in all its efforts and it is hard to see how such a duty can be reconciled with the dual loyalty inherent in representing a competing product.
If the distributor determines to represent a product that competes, that must be in the contract or the manufacturer can later claim this breach of duty and sue for breach of the contract. Equally vital, if the products offered by the manufacturer alter over time, either through improvements or new products developed, the contract must provide for how this can affect already existing lines of the distributor.
Many distributors represent a dozen or more manufacturers, often in the same field but not identical competing products. If one of your manufacturers begins to sell a competing product, how is this to be handled?
A further issue is representing competing products after the end of the contract. Many contracts provide a “cooling off” period in which the distributor may not represent a similar or competing product and quite often the severance package described below is made contingent on not representing a competing product.
The wise distributor will thus carefully determine how a product fits in with an entire line of products represented or to be eventually represented by the distributor to discover how the business will be effected by termination and the invocation of a non-compete clause. One successful distributor who rejected a profitable contract was quite happy he did, for if he had been terminated he would have had to give up even more profitable lines. Do not let desire for one product disrupt the entire line of products that may be in your future.
There are some statutory protections against non-competes in some states, including California, but those normally apply only to former employees and reasonable restrictions to protect trade secrets are allowed. This area is an important one to carefully negotiate at the beginning of the relationship and the key question is what products are “competing,” what happens if the product line alters and how long and in what physical area any restriction on competition will last.
Sooner or later the distributor will be terminated. Either the manufacturer will go in house or another, apparently better means of distribution will arise. The only protection a distributor has is contractual: what terms in your contract protect you from termination and for how long; and what payments may be due upon termination.
Clearly, the longer the contract, the better. Some contracts provide for an “endless” term so long as certain sales levels are maintained. Other contracts allow for renewal if and only if the parties agree – which is equivalent to having no protection since either side can simply refuse to agree.
A critical factor is what happens to sales already booked upon termination of the contract. This is probably the most hotly contested issue and the one leading to the most litigation. The typical clause provides for payment of commissions for already booked orders but too often the manufacturer “rebooks” existing orders, claiming some alteration in them, and states no commission is due. Ideally, the distributor would like to continue receiving commissions from orders to clients found by distributor but few manufacturers allow that in the contract. This is the provision that the intelligent distributor will spend much time negotiating since the right severance provisions increases the chance that the contract will not be terminated since the cost would be “too high” for the manufacturer.
DEFECTS AND RETURN CREDIT
Assuming defective or substandard good are delivered, the distributor should have a process by which they are handled so that the good will of the customer is not lost. Quite often the manufacturer will care little due to high volume of other customers but that particular customer is a vital one for the distributor. This can lead to friction as the distributor insists on protection of a customer that the manufacturer refuses to take seriously. Precise terms with time deadlines for when defective products are to be accepted for credit, etc., must be in the distribution agreement.
A key aspect is what power, if any, the distributor has to accept or approve return of products. Most distributors wish to have “control” of their accounts but few manufacturers will grant significant authority to distributors to approve returns.
STANDARD CONTRACT TERMS
And, of course, those terms in any contract recommended as seen in the articles on the web on Arbitration of Business Disputes as well as Binding Contracts and Legal Actions Predicated on Breach of Contract should be included. Be sure to include such standard clauses as part of your contract.
Each relationship between a manufacturer and distributor is unique in many ways and good legal advice is needed to hone the discussions and contract to the particular issues and product. The above criteria are, however, good starting points for the distributor first reviewing a proposed relationship.
THE PLIGHT OF DISTRIBUTORS
One can make a great deal of money as a successful distributor and the startup cost is often quite low. No research and development, no manufacturing facilities, no huge staff, no patent lawyers or trade mark issues. One does need to learn the product and, perhaps, learn how to service the customer, but the usual complex and expensive requirement of developing a product and manufacturing same is someone else’s problem.
But the downside is one “owns” next to nothing. One has one’s own expertise, perhaps, and whatever protection is in the contract – but once the contract is over, that portion of your business is gone forever. And the market and reputation you build up for the product is not “yours” but belongs to the manufacturer or product owner that provides the product and at the end of the contract, absent remarkable contract provisions, all that value is in their pocket, not yours.
The important aspect for your own business is to keep as many lines of products active as possible, be ready to switch once the contract is over, and do not become “wedded” to one product since it and your business may be terminated once the contract expires.
However, very good money can be made in such an arrangement so long as the distributor keeps in mind that no matter how long they represent a company, their connection is only as good as the distribution agreement they negotiate.
The Seller’s First Task: Preparing Your Business
A plan to sell your business should begin with an effort to strengthen the company’s financial condition. Review your numbers and begin to boost your financials. Starting two years out is not too soon. You should work at increasing your sales even it means longer hours, harder work, and more advertising. You should also look at any potential opportunities to reduce costs. Since prospective buyers will want to see your tax returns, you may consider improving your bottom line by foregoing some deductions, such as company cars, meals and entertainment, and owner salaries. When you are ready to sell, your financials will be strong. Your company will be more attractive to prospective buyers and may bring a higher selling price.
For Buyers, Due Diligence is Key
When buying a business, your considerations are different. First, you must decide what type of business is right for you. Do not buy a business that you do not have the skills to run. For example, many entrepreneurial spirits have learned the hard way that the restaurant industry is a highly complex and competitive market. Also, you should investigate trends in the industry. For example, twenty years ago, owning a video rental store may have been a good idea. With the advent of a completely new delivery system for electronic entertainment, this market is now virtually non-existent.
For the buyer, due diligence is key. It involves a multi-step process of researching the business’s history and finances. Have a CPA dig deep into the company’s financial records and tax returns, including profit and loss statements, the general ledger, and accounts payable and receivable. Determining who key employees are and if they will leave the business when it is sold is important as well.
Buyers also should review the business’s organizational documents, such as LLC agreements, partnership documents, articles of incorporation, and bylaws. Other key elements of the due diligence process include:
- Taking an inventory of all physical assets prior to buying the business.
- Reviewing all personnel records.
- Reviewing insurance policies and claims.
- Talking to key customers, suppliers, contractors, and employees, examining all contracts with suppliers and subcontractors.
- Scrutinizing legal documents involving any prior, pending, or threatened litigation.
In short, spending the time up front to investigate potential problems can mean the difference between a profitable purchase and a failed venture.
Transaction Type: Stock Sale or Asset Sale
Business owners have several options when it comes to transferring ownership rights. An owner can sell stock in a company or can sell some or all the company’s assets, depending on what kind of entity the business is. Most sales of small or medium-sized, closely-held businesses are structured as asset sales.
The type of sale has different implications for the buyer and the seller. For example, stock sales are usually more beneficial to the seller while asset sales may be better for the buyer. Selling stock results in capital gains while selling assets can generate ordinary income, taxed at higher rates. The IRS rules for stock versus asset sales are complex and it is best for the seller to consult with a tax professional before deciding on the type of sale.
Buyers generally are better off with an asset sale because buying the individual assets of the business can protect the buyer against any liability claims against the previous owners. A stock sale, on the other hand, involves stepping into the shoes of the previous owners and potentially being held responsible for taking on any claims against them, such as employment disputes or environmental liabilities.
Outright Sales v. Gradual Sales
Once a buy/sell decision is made, the parties have different options to choose from when transferring the business. By selling a business in full, you will transfer ownership immediately and receive payment for your assets right away unless it is an installment sale. Sellers wanting a quick exit and cash should choose an outright sale of the business and payment in full at closing.
A gradual sale is a flexible option which allows a seller to stop running the business but still receive monthly income from it. This option benefits buyers who cannot afford an outright sale and sellers who cannot find a buyer with adequate outside financing. Another option is a lease agreement, which allows you to transfer temporary rights to the business. This option gives a potential buyer the chance to run the business for a time, develop expertise, and decide whether to make the long-term purchase commitment. The seller will benefit from starting the process of transferring ownership and engaging a potential buyer for a hard-to-sell business.
Payment Terms: Lump-Sum or Installment Sale
The buyer can negotiate a lump-sum sale and receive the proceeds all at once or can sell the business on an installment basis. Particularly with small businesses, most of these sales are done on an installment basis where the buyer makes a down payment on the sale and pays the seller off over several years. This option is beneficial because of the difficulty of getting loans to purchase businesses.
If the seller can pay upfront, the buyer may offer a discount on the sale price. If the seller cannot draw on family money, cash reserves from another business, or penalty-free retirement savings distributions to raise funds, the seller can look to the U.S. Small Business Administration for information and leads on obtaining a business loan.
When the parties enter an installment sale, the buyer typically makes a down payment of 20% or 25% and then signs a promissory note for the balance to be paid in regular installments over a term of years. It is important that the buyer and seller set a reasonable payment schedule, specify the interest rate, and address what happens in the event of a default. From the seller’s perspective, the installment payments should not extend for more than 2-5 years. The buyer should try to negotiate a smaller down payment to keep some cash on hand for unexpected business expenses. It is important for both parties to align the terms of the installment sale with the profits the business is expected to produce.
Sales Agreements and Closing the Deal
To buy or sell a business, you will need to prepare a sales agreement. The agreement should define everything that you intend to buy or sell—stock, or assets, including customer lists, intellectual property and goodwill. This is the key, legally binding document in transferring ownership and it is vitally important to have this document prepared by an attorney. Get advice from trusted advisors about the key points in the sales agreement or you may have years to regret a misstep.
If you are looking for new business opportunities or you are ready to sell your existing business, the time is right. Today, there are more sources of information than ever before to match buyers with sellers and different types of professionals to guide you through the process, including attorneys, appraisers, and accountants.
WFB LEGAL CONSULTING, INC.–A BEST ASSET PROTECTION Services Group
LAWYER for BUSINESS
Before bringing just anyone on board, you need to understand that extra manpower entails a whole new string of legal obligations, liabilities, expenses and, of course, paperwork. One estimate tallies the average cost of recruiting, hiring and training a new employee at close to $4,000.
Beyond the red tape, hiring mismatches can result in high turnover, absenteeism, higher healthcare costs, workplace violence and theft–substantial costs to an organization’s bottom line and reputation.
To help you navigate the legal ramifications of the hiring process, I’ve laid out the steps and precautions you should follow to ensure you make informed decisions, while staying within legal and ethical boundaries.
- Don’t just trust your instincts.Whether your new recruit will be filing reports or configuring computer networks, realize that criminal, under-qualified, and emotionally unstable minds hide in all uniforms and job titles. In reality, nearly 40 percent of all job applications and resumes include bogus or inflated facts. Plus, the number of negligent hiring lawsuits in this country is mounting–if your staff member’s actions hurt someone, you can be held accountable and sued. And with terror acts, corporate scandals and identity theft on the rise, trusting your gut as a sole basis to hire is simply unsafe.
So just what do background checks check, and what kind of stuff is off limits? The search typically consists of confirmation of prior employment claims, determination of worker’s compensation claims and criminal and incarceration records, drug tests, credit history and driving record. In some cases, an identity (Social Security) check is undertaken.
While much of this information is documented publicly, certain personal records, including education, military and medical, are confidential and necessitate an applicant’s consent before digging them up. If you can, you should try to obtain original educational credentials. With advances in technology, a manufactured diploma or degree is as simple as typing in a few keystrokes.
When prying into an interviewee’s possible criminal past, take note: While a criminal conviction can be reported indefinitely, arrest records, paid tax liens, accounts placed for collection, civil suits and judgments can’t be included on an employment background check after seven years. In some states, more stringent reporting rules apply. In California, for example, bankruptcies are off limits after ten years.
If you plan to farm out a fact-finding hunt to a third-party, you’re required by federal law to alert the person who’s under investigation in writing. You must also notify the applicant if he or she is being denied a position due to disparaging information you’ve uncovered, and give him or her a chance to refute that information.
Be forewarned, however: The internet is loaded with scam artists and private companies that compile “virtual rap sheets.” What such online brokers dish up isn’t always accurate or current, and the low rates they advertise may be deceptive.
- Test for illegal substances.With more than 250,000 drug- and alcohol-related deaths a year nationwide, our society’s battle against substance abuse is far from over. Whether cocaine or sleeping pills are the drug of choice, addicts can be a terrible drain on an organization’s productivity and balance sheet. Moreover, drug-abusing employees are six times more likely to file worker’s compensation claims than other staff members.
To weed out such weak links from your work environment, pre-employment and random drug testing are an employer’s best lines of defense. Some occupations actually mandate such checks, including industrial tractor and truck operators, material movers, child-care workers, teachers, private and corporate investigators, state and federal personnel and police officers.
Before instituting a drug exam of your own, bear in mind, on pre-employment interviews, it’s illegal to inquire about a candidate’s prescription medication use. However, if an applicant refuses a drug test, an employment offer can be denied or retracted.
- Screen for unwanted behavior.Depending on the position you’re trying to fill, there are supplementary screening options available. Psychological testing, handwriting analysis, skill and aptitude tests and even lie detector tests are additional assessment tools that business owners exercise today to help them select the best job candidates. Such profiling allows you to select people who have the skills and the temperament needed to succeed in your business. To avoid any legal problems, before administering such tests, be prepared to demonstrate job-relatedness, non-discrimination and statistical validity and by all means, consult an attorney to assist you.
Time to Hire
Once you’ve completed your behind-the-scenes evaluation and have turned up some promising candidates, you’ll need to know the dos and don’ts of interviewing someone face to face.
- Some questions are off limits.Whether on a written employment application or in person, it’s unlawful to ask about an applicant’s age, sexual orientation, marital status, religious affiliation or race. And questions pertaining to the nature of a physical, emotional or mental handicap can only be asked if an applicant will need special accommodations for performing a specific job.
During your dialogue, you should also be mindful of other important federal laws including:
- Title VII of the Civil Rights Act of 1964, which covers the subject of discrimination or harassment on the basis of race, religion, sex or creed
- The Age Discrimination in Employment Act of 1967
- The Americans with Disabilities Act of 1990
- The Family Medical Leave Act of 1993
- Check references.Before making a formal job offer, be sure to ask the contender for at least three references. Two of the references should be professional, and one should be personal to help endorse the character of the applicant. Then pick up the phone and call those references. You’d be surprised what references are willing to tell you about an applicant if you’d only ask.
Be sure to keep your queries as objective as possible, and, if you’re speaking to the professional references, make sure they relate directly to the candidate’s job performance and duties and to information provided on the application or resume, or to information provided during the interview. Forms of discrimination that apply to interviewing and hiring are also applicable to reference checking, so be sure to avoid questions that involve race, age, disabilities, national origin, religion or marital status. For a personal reference, find out how long they’ve known the person and then ask about the person’s character and work ethic; you might also ask if the person would hire the applicant themselves if they had an appropriate job opening to fill.
- Set a salary and choose the employee’s classification.When it comes to paying and classifying a new employee, federal laws provide clear guidelines when it comes to both. If it’s a young person you’re putting on your books, the Fair Labor Standards Act sets the minimum age for employment in non-agricultural employment at 14 years old.
Depending on your hiring needs and finances, you’ll need to determine the status of your new employee as being part time or full time. According to the U.S. Department of Labor, part-time workers are those who work 20 hours or less per week, while full-timers log in 30 hours or more. Because states differ on the payment of benefits to part-time employees, you should check corresponding regulations with your local department of labor.
For tax reasons, you must categorize your worker as an independent contractor, common-law employee, statutory employee or statutory nonemployee. Misclassification can result in fines equal to one-and-a-half percent of the questionable wages, plus the withholding taxes. Criminal charges can apply as well.
As long as you retain the right to control their activities (such as when and where the person works, the tools and equipment they use, and where they purchase supplies), your workers are considered common law employees.
A statutory employee is one who’s an employee by statute and is allowed to report income and expenses as a business. The most common employees in this category are its officers, but it also includes such employees as:
- Full-time traveling salespeople who solicit orders from wholesalers, restaurants, or similar establishments on behalf of the company. The merchandise sold must be for resale (for example, food sold to a restaurant) or for supplies used in the buyer’s business.
- An agent-driver or commission-driver engaged in distributing meat, vegetables, bakery goods, beverages (other than milk), or laundry or dry cleaning services
- A home worker performing work on material or goods furnished by the employer
A statutory nonemployee, which includes direct sellers and licensed real estate agents, is treated as self-employed for all federal tax purposes, including income and employment taxes.
An independent contractor works for himself or herself, often for more than one company. This person typically works offsite, is paid on a per-job or commission basis, and sends invoices for his or her services. Employers aren’t required to deduct taxes on their behalf or extend them the same benefits that they do for standard employees. This also applies to freelancers and consultants. For tax purposes, it’s always a good idea to draft an agreement with an independent contractor, stating that he or she is not an employee.
- Get your records straight.Before your newest team member logs in a single hour of work, there’s a folder’s worth of records you’ll need to complete and process. According to the U.S. Department of Labor, there are 12 records an employer must maintain on each member of their staff for the length of their employment:
- Employee’s full name and social security number
- Mailing address, including ZIP code
- Birth date, if the employee is younger than 19
- Sex and occupation
- Time of day and day of the week when employee’s workweek begins, hours worked each day, and total hours worked each workweek
- Basis on which employee’s wages are paid (weekly, bi-monthly, and so on)
- Regular hourly pay rate
- Total daily or weekly “straight time” earnings for each workweek
- Total overtime earnings for each workweek
- All additions to or deductions taken from employee’s wages
- Total wages paid each pay period
- Date of payment and the pay period covered by the each payment
When it comes to filing taxes, you’ll also want to make sure your paperwork’s in order. Here’s a list of the taxes you’ll need to account for and the related documents you’ll need to file as an employer, according to the Internal Revenue Srvice:
- A W4 form to withhold the proper amount of federal income tax from a full- or part-time employee’s pay, once a year to your state and federal governments
- A W2 form to the Social Security Administration and a share of a full- or part-time employee’s Social Security payroll taxes (FICA) once a year to your state and federal governments
- An I-9 Employment Eligibility Verification form for every new hire
- Taxes on 1099 workers (independent contractors) either quarterly or once a year to the federal government
- The same forms must also be submitted to the your state’s department of labor or taxation
- Proof of worker’s comp insurance. Such a policy indemnifies a business against its legal liabilities towards accidental or fatal injuries sustained by employees during working hours. Although this is required by federal law, the administration of this benefit is at the state level.
- State and federal unemployment taxes, but only if (1) you pay wages to employees totaling $1,500 or more in any quarter of a calendar year, or (2) you employed at least one person during any day of the week during any 20 weeks in a calendar year, regardless of whether or not the weeks were consecutive. In some states, this is tied to a worker’s status as part time or full time, but you should contact your state workforce agency to learn the exact requirements.
- Handle your immigration issues carefully.With roughly 10 million undocumented immigrants living in America, obviously, this segment of the population has become a major factor in our workforce. If you’re sponsoring or petitioning a foreign national to work here, you must verify and send in documents proving his or her eligibility to work.
To avoid civil and criminal penalties and audits to your company payroll, you must also file an I-140 form (Immigrant Petition for Alien Worker) on his or her behalf with the U.S. Citizenship and Immigration Service (USCIS). The Employment Authorization Document, also known as an I-9 check, must accompany such credentials.
- Get the right insurance coverage.While only Puerto Rico, California, Hawaii, New Jersey, New York and Rhode Island require employers to provide income to disabled employees who get hurt off the job, many experts advise buying disability (or loss of income) insurance for yourself and key employees from the get-go.
There are two basic types of disability coverage: short term (which covers anywhere from 12 weeks to one year), and long term (which covers anything over a year). An important component of disability coverage is the waiting period before benefits are paid. For short-term disability, an employee will generally have to wait seven to 14 days. For long-term disability, an employee will wait anywhere from 30 days to one year. If having an employee laid up for a limited period of time wouldn’t seriously jeopardize your business, you can decrease your premiums by choosing a longer waiting period.
If you’re shutting the doors on a business, you may have some preconceived notions about what that process looks like. It’s important to get a clear understanding of what closing a business entails so that you can make a clean break and move forward with peace of mind.
- You Don’t Need to Formally Close Your Business.
Simply shutting down your website and stopping orders should signify that your business is done, right? Wrong. If you don’t take formal steps in closing your business, you can still be charged fees and be required to submit tax returns to the IRS, as well as an annual report to the state. Find out what your specific city or region requires to close a business.
- Your Business Structure Will Go Away if You’re Inactive.
Contrary to what many think, your LLC or corporation will continue to exist until you formally dissolve it by filing your Articles of Dissolution. The government will continue to consider your business entity alive and kicking, and charge you taxes and require you to fill out paperwork until you notify the proper authority that you’re no longer in business.
- Business Debt is Gone Once You Shut Down.
You absolutely are fiscally responsible for any outstanding invoices or debts you owe as a business. If you don’t have the money to pay your creditors, unless you’ve set up a business structure that separates you from your business (such as a corporation), you may be personally responsible to pay those debts. You may consider bankruptcy at this point, if your debt is too great.
- Cash Out the Remaining Money in the Bank.
If you have business partners or shareholders, that money is legally theirs, and you must divide it up amongst them. Even if there weren’t laws about this, it’s simply good business to do your best by those that supported you and your company.
- You Won’t Owe Taxes Once You Close Your Doors.
Before you take that money you’d set aside to pay your annual taxes and spend it on a blowout holiday, read on: you are responsible for paying any taxes you accrued while you were in business. Whether you shut down your business in January or December, you will owe payroll and sales tax for the months your company was still in operation, even if it’s not now.
It’s important to close your business the properly to avoid penalties and fees.
WHAT IS THE REALITY OF DELAWARE INCORPORATION?
There are many reasons why more companies are incorporated in Delaware than any other state. This article highlights a few of the reasons why half a million businesses, including more than half of all U.S. publicly-traded companies and 60% of Fortune 500 companies, have incorporated in Delaware. It then outlines the biggest drawbacks to incorporating in Delaware and explains why it is not a one-size-fits-all solution.
- The Corporate Law Expertise of The Delaware Court of Chancery
Delaware has a highly respected court that focuses on corporate issues – the Court of Chancery. Because of this specialization, the Court of Chancery has a great deal of expertise and familiarity in resolving complex corporate disputes.
No corporation wants to be involved in litigation, but if you are it is reassuring to know the dispute will be resolved by a very knowledgeable judge who is sophisticated in resolving corporate law matters.
- The Extensive Precedent of Delaware Corporate Case Law
Corporate case law in Delaware is much more extensive than in other states due to the high volume of corporate cases.
More case law means increased predictability of the likely judicial resolution of a business law dispute. If there have been several similar cases to the one facing your corporation there is less uncertainty about the judicial outcome, which can be key when strategically deciding whether to settle a dispute or invest the time and capital to litigate.
- The Flexibility Of Delaware Corporate Statutes
The Delaware corporate statutes provide a great deal of flexibility in the organization of a corporation and the rights and duties of board members and shareholders. For example, Delaware allows one person to be the only director, shareholder and officer of a Delaware corporation, whereas some other states require at least three people to fill the officer and director positions.
Although many of Delaware statutes have been mimicked in other states, the extensive case law mentioned above is an enormous asset when determining how a Delaware statute is likely to be interpreted.
- Corporate Attorneys Are Familiar with Delaware Law
Most corporate attorneys are familiar with Delaware business law. This can lead to your attorney more efficiently and cost effectively assisting you if your company is incorporated in Delaware than if it is incorporated in a less popular state.
- Angel and VC Investors Prefer to Invest in Delaware Corporations
Angel investors and venture capitalists tend to prefer to invest in companies incorporated as a C-Corp in Delaware. Therefore, if you are serious about receiving investments from these types of investors, you may want to incorporate in Delaware.
- Investment Bankers Prefer Delaware Corporations
Many investment bankers insist on a company being incorporated in Delaware before they take it public. Thus, if a goal is to eventually have an initial public offering (IPO), you may want to incorporate in Delaware rather than having to later convert the company to a Delaware corporation.
- You Send a Message That It Is A National Company And You Understand the Preferences of Investors
If you incorporate in Delaware, you send a message – “This is a national company.” From a marketing perspective, this could be important for your customers and investors. You also send a signal to investors that you understand their preferences and are serious about receiving investments.
- There Are Greater Privacy Protections in Delaware Than Some Other States.
Delaware does not require officer or director names to be disclosed on formation documents. This provides a layer of anonymity that is not available in some states.
- Quality Customer Service and Quick Turn Around Times.
The Delaware Secretary of State’s Office has made it a priority to provide expedited filings. In fact, you can have your filings guaranteed to be processed in less than an hour.
In contrast, California has a 24-hour processing option, but it is not guaranteed to be completed within 24 hours and the rush processing fee is significantly more expensive than in Delaware. This can be critical if you need to close a deal very quickly.
- Can Be Less Expensive to Relocate The Corporation.
The annual franchise tax in Delaware can vary, but it can be as low as $125 per year with reporting fees. In contrast, in California the annual franchise tax is $800.
If you incorporate in California and later move the corporation to a different state, you still must pay the $800 annual franchise tax each year, but if you incorporate in Delaware and later move the annual franchise of your “home state” where you initially incorporated could be as low as $125.
What Are the Drawbacks to Incorporating in Delaware?
- Annual Costs for A Registered Agent for Service of Process.
If you incorporate in Delaware, you will be required to have a registered agent for service of process. The annual fees for this service vary between $130-$150 per year.
- Extra Franchise Taxes.
If you incorporate in Delaware you will not only have to pay the annual franchise tax in the states in which you are “doing business,” but also in Delaware.
For example, if your company is headquartered in California, but you incorporated in Delaware, each year you will not only have to pay the $800 annual franchise tax in California, but also the annual franchise tax in Delaware.
- Extra Reporting Requirements.
If you incorporate in Delaware, you will have a second layer of reporting requirements. For example, if you incorporate your company in Delaware, but are headquartered in California, you would have to comply with the reporting requirements in both states.
If the benefits of incorporating in Delaware described above are not important to your company, you may want to avoid the extra expense and time of being incorporated in Delaware.
LAWYER FOR BUSINESS: WFB LEGAL CONSULTING, INC.—A BEST ASSET PROTECTION SERVICES GROUP
WHY ITS A GOOD IDEA TO REGISTER YOUR TRADEMARK
Contribution by: Renee Hykel Cuddy, Esq.
With the job market still on the rebound, many people chose to start their own businesses, but whether or not you need to register a logo, slogan or company name, depends on several factors, especially when trying to keep start-up costs at a minimum. Generally, if you are the first person to use a trademark, you acquire rights to the mark as soon as you start using it to sell goods or services. Registration is not strictly required, but there are several advantages to registering your trademark. In addition, the cost of registering your trademark pales in comparison to the losses you can incur for failing to do so. Here are a few reasons why it’s a good idea to register your trademark.
Registered Trademarks Increase the Value of Your Business
The Internet has made many industries fiercely competitive. Using a trademark helps you brand your business and provide a means for customers to recognize your product or service within seconds. Additionally, a registered trademark is an intangible asset that is valuable for your company. Should you envision ever selling the company, having a registered trademark may increase the sale price. If you are not looking to eventually sell your company, but want to build your business, having a registered trademark allows you to use the ® symbol, which adds legitimacy to your business.
Constructive, Nationwide Legal Notice
Registration with the U.S. Patent and Trademark Office (USPTO) puts others on “constructive notice” that you are the owner of the mark. Constructive notice is valuable because if someone else uses your mark or a mark that is confusingly similar to yours in commerce and you take them to court, you won’t have to prove that the infringer had actual notice the mark was yours before the infringement. A mere cease and desist letter which references registration of your mark can be a powerful incentive to stop the offender from using your mark. This is important to prevent others from diluting or outright stealing your brand. Furthermore, registration may also help you prevent others from using an Internet domain name that could be confused with yours.
Five years after registration, you can apply to have your mark declared uncontestable. This means your exclusive use of the mark is conclusively established in court. Secondly, and most importantly, trademark registration may allow you to collect triple damages and attorney fees if you prevail. It is also worth noting that if your mark is registered, it will automatically be subject to federal jurisdiction and you will be able to bring your claim in federal court, as opposed to state court, which offers many advantages, including ease of discovery across state lines and experienced, federal judges on the bench. Although under appropriate circumstances it is possible to bring an infringement claim in federal court even for a mark that is not federally registered, federal registration is the simplest and easiest way to obtain federal jurisdiction on a trademark claim.
What Can Be Registered
Generally, you can register a trademark for any combination of words, names and/or symbols that you use to identify or distinguish the products or services you sell. When used to identify a service (e.g. “Terminix”) they are called service marks but generally, service marks and trademarks are the same. Other features of your products or services may also be protected in addition to the mark, including product color or packaging. These attributes are called trade dress and can also be registered, but if the features are merely functional in nature, they will not be protected. For example, you would not be permitted to register a bottle shape that made it easier to grip the bottle.
It is a good idea to register your trademark to protect yourself against an infringement suit, to add value to your company, to put your competitors and the public on notice of your rights in your own brand and to strengthen the legal protection of your mark. The investment to register a mark is minimal compared to the potential cost of not registering, and compared to the potential benefits registration will bring to your business.
THE ‘ABCS’ OF BUY-SELL AGREEMENTS
Contribution by Lee Chen
Most of us know that in business it is crucial to choose your partners carefully as the success of your business (and perhaps your livelihood) depends on it. We also encourage our business owners to have frank discussions with their partners regarding the details of the partnership and all the “what ifs” that could happen, and to confirm these agreements in a written partnership agreement at the outset of the partnership.
In addition, to ensure stability and certainty in the partnership, we usually want the partners we select to abide by certain limitations on the partners’ ability to sell or dispose of the interest, such as requiring partners to first following agreed upon procedures, or a require “right of first refusal” in favor of the existing partners.
A frequently overlooked detail, especially for long term partnerships, is what would happen if a life changing event happened to the partner? For example, if your partner experiences a sudden death, does that mean you now have new partners that you never agreed upon (such as the spouse or children of your deceased partner)? In most cases, if an existing partner passes away without any written plan in place, the deceased partner’s interest would pass to his/her heirs (e.g. the departing partner’s spouse or children).
The departing partner’s surviving spouse or heirs will usually have no experience or interest in operating the partnership and so planning is necessary to ensure that a departing partner’s family is adequately compensated without unduly interfering with the operations of the partnership.
Without any concrete written succession plan, you may find that your new partner or the outcome resulting from a departing partner may be determined by a civil, probate or family law court which could be expensive, and even result in the dissolution of the partnership. Most partners in a business or investment want the ability to choose who their partners will be, and would not want such unpredictability, delay, and risk in the partnership.
A buy sell agreement is an agreement among partners (or shareholders) which specifies what happens to the partner’s interest in the event of a life changing event. In most cases, these agreements cover the “four D’s” being death, disability, divorce, or departure. However, it can cover any potential situation where a partner may depart including retirement, resignation, expulsion, or sale to a third party.
Occasionally people attempt to solve the succession uncertainty by setting forth provisions in their estate plan for handling or distributing their interests in a partnership. This is not recommended because (1) including these provisions in individual estate plans do not require the input of the other partners, and therefore, one of the primary goals of promoting harmony and a mutual agreement among partners is lacking, and (2) most estate plans can be amended at any time prior to death, thereby frustrating the need of the partners for absolute certainty regarding the transition of partnership interests.
A typical buy sell agreement will contain provisions whereby if one partner experiences a death, disability, divorce, or departure from the partnership, the other partners will have an automatic right to purchase their interest at agreed upon terms and price. Oftentimes, in order to avoid liquidity issues, partners can get life and/or disability insurance on each of the partners that would fund the buyout of the departing partner’s interest. Alternatively, a buy sell agreement could specify payment of the departing partner’s interest in installments over time at an agreed upon terms, but usually that is not preferred in the case of a death or disability where the family of the departing partner may be in need of an immediate lump sum.
Since the value of the business can change over time, it is recommended the buy sell agreement set forth procedures for determining the value of the business on an ongoing basis for purposes of an unexpected buyout. Agreed upon appraisers may be used for this purpose, but it can be costly and time consuming in actual application. Instead, we generally recommend that the partners meet periodically (e.g. annually) to review the agreement and update the company valuation. This helps the partners to achieve the primary goals of a buy sell agreement, to promote certainty and the orderly transition of a departing partner’s interest, while making sure that the departing partner’s family and/or next of kin are adequately compensated.
Similar to an estate plan or marital property agreement, a buy sell agreement can be as flexible and specific as the partners wish. Many partnership agreements or operating agreements include provision governing transfers of partner’s interests, but make sure that those provisions are suitable for your situation and are comprehensive enough to apply to each of the different scenarios in which the departure of a partner could cause instability, uncertainty, or interfere with the management or business of the partnership.
A well-conceived buy sell agreement should assure all the partners so that they know exactly who their partners would be in the event a triggering event, but also assure the partner’s next of kin that they will be adequately compensated for their interest in the event of a tragedy. If these provisions don’t exist in your current documents, a separate buy sell agreement that supersedes contrary provisions in your existing agreements may be recommended so that the partnership operations will not be adversely affected by a life changing event from one of the partners.