Tag Archives | business law

Building Business Credit (Even When Your Personal Credit Stinks)

By Coco on October 17, 2012 in Business Law

Note to Commecion: Thank you so much for calling in to my radio show today. Since we didn’t get to your question about how do get credit for your business even if your personal credit is bad, here are some tips. Understand that even if you have great personal credit, you still may not get business credit if you don’t have a solid business plan. But, if you have a good business plan, then you can start building your business’s credit immediately.

Your business begins to establish a credit history from the beginning. Your business’s creditworthiness will be partly evaluated using your business’s credit score. Business credit scores run from 0 (bad) to 100 (excellent) – a score of 75 is a very good score. Your score is influenced by when you pay your bills, your available business credit, the length of time you’ve had a credit footprint and the number of inquiries about your credit score.

Steps to build business credit.

You can build your business credit by taking these steps:

Credit transactions are compiled by business credit bureaus and used to form a business credit report. Register your business with the business credit bureaus. Business credit bureaus include Dun & Bradstreet, Experian, Equifax and Business Credit USA.
Get a dedicated phone line.
Get a business license.
Keep your financial statements and business plan up to date to provide upon request.
Use your business information – and not your personal information – when applying for business credit.
Pay your bills on time.
Get credit lines, even if small, to build credit history.
Report your own payment history to the business credit bureaus.

PS: Commecion, if this does not answer your question, then leave me a comment and I’ll see if I can answer it.

PPS: Let me know if I spelled your name wrong.:)

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Independent Contractor v. Employee

By Coco on October 17, 2012 in Business Law

Note to Janice: Janice, thanks for calling in to my radio show today. I’m republishing this post so it is easy for you to find. Keep me posted on your progress.

***

A person you hire to work for you is either an “employee” or an “independent contractor.” Trying to tell employees from independent contractors can be surprisingly difficult. The IRS used to have a 20-Factor Test that you would use to figure out the difference. But, recently they killed the 20 Factor Test and came up with the 3 Part Test, each with 6 subparts. So, it’s much clearer now. Read on for the new test and why this all matters.

Over-Simplified: Employee vs. independent contractor

A worker is an employee if you have the right to control the end result of the person’s efforts plus how, where and when they work to get that end result. A worker is an independent contractor if you have the right to control or direct the end result of the person’s efforts, but not the efforts or the how, where and when they work to get that end result.

Why it matters

There are two big reasons why it matters: (1) you have different rights and responsibilities for employees and independent contractors; and (2) you are liable for cash money if you call someone an independent contractor that you should have called an employee.

1. Your rights and responsibilities change drastically:

For You, the Boss:
If she is an employee	*If she is an independent contractor*
You have to deduct payroll taxes and withholding. You have to get worker’s compensation insurance. You can’t discriminate against them on the basis of sex, race, national origin, religion, sexual orientation, disability or veteran’s status. You are liable for the acts of your employees. You have to withhold income tax from the employee on payday. You may have to provide health insurance under health care reform. Communications with her about inventions do not start the clock running on the maximum to file a patent application. Every copyrightable work she makes connected to her job belongs to you.	She pays her own payroll tax and Social Security and Medicare withholding. You may not have to get her workers’ compensation insurance. But, without worker’s compensation, she could sue you for damages she suffers without the liability limitations built into worker’s compensation insurance. Discrimination laws may not apply to her. She may be excluded from your obligation to provide health insurance in 2014 under Health Care Reform. She also won’t count under the 50-employee threshold for employers who have to provide health insurance. Disclosures about inventions probably need a special confidentiality agreement to not start the patent application filing. Nothing she makes connected to her job belongs to you, unless you get it in writing.
For the Worker
If she is an employee	If she is an independent contractor
Withholding taken care of; she also only pays half of payroll tax that she would pay as an independent contractor. Gets unemployment benefits. Gets worker’s compensation. Ability to deduct business expenses very limited. Protected by lots of laws, like wage and hour, antidiscrimination and laws about indemnification by employer. She is probably not liable for accidentally stupid things she does while at work. But, she could be liable for intentionally stupid things she does while at work.	She can deduct business expenses directly. No unemployment benefits. Maybe no Worker’s Compensation (but if so, fewer limits on the boss’s potential liability). Pays self employment tax (which includes full amount of Social Security and Medicare. Must sue to collect any unpaid wages/compensation. Can be sued by third parties for harm caused while working for the boss. Can set up self-employed retirement plans

2. You owe money to the IRS If you should have treated your worker as an employee

If you treat an employee as an independent contractor, you are liable for FICA if the employee doesn’t pay it herself. Plus you are liable for the amount you should have withheld for income taxes if she doesn’t pay. The person who had control over the decision about whether to treat the worker as an employee or independent contractor is on the hook personally for this money. (BTW, there are ways to reduce or erase your tax liability if you made good faith decisions and filed your taxes on time. Talk to your employment lawyer or accountant.)

Is she an employee or an independent contractor?

The IRS’ new 3 part test

An employee is someone exclusive to you who does the work the way you say it should be done. An independent contractor is someone who works for you and other people and does your work the way she wants to do it. The IRS says you can tell the difference between an employee and independent contractor by looking at (1) behavioral control; (2) financial control; and (3) the factual clues that reveal the real relationship.

1. Behavioral control

If you have behavioral control over the worker, then the IRS thinks you are the employer. Behavioral control means the right to control the moment to moment and day to day work performed to get the job done. So, these questions are designed to tease out who gets to pick the process, time and location of work. There are two parts: (a) Instructions; and (b) Training.

Instructions. If you provide instructions on the actual how-to over the job, then you look like an employer. Ask yourself if you kept control over: When to work, Where to work, What tools or equipment to use, What sub-workers to hire to assist, Where to get supplies or services, Work that must be done by certain peopleWhat order or sequence of action steps to follow.
Training. If you train a worker on how to do something, the IRS thinks you look like an employer. After all, independent contractors ought to have their own methods. Ask yourself if you provide training on how to get the job done – if you do, you are tipping towards employment.

2. Financial control

If you have control over financial decisions, then the IRS thinks you look like an employer. Financial control is about who bears the financial burdens and possible benefits.

Significant investment. Significant investment in a venture is evidence that the independent contractor is a stand-alone business.
Unreimbursed business expenses. Stand-alone businesses bear their own expenses. Fixed ongoing costs incurred, whether work is done or not, are a sign that the worker is an independent contractor. But, if you reimburse the worker for all incurred expenses, you look like an employer.
On the market. Independent contractors work for many clients; employees work for just one company. If the worker markets her services to others, she is free to seek out other opportunities, she advertises and has a visible business, she looks like an independent contractor.
Compensation Structure. The IRS thinks that independent contractors get paid on a project or flat fee basis and employees get guaranteed amounts in a period of time. Therefore, paying the worker a total amount for a period of time looks like an employment relationship.
Profit. Independent contractors have the opportunity to make a profit on work; employees get paid wages. If the worker has a potential to realize a profit or a loss, he is probably an independent contractor.

3. Type of Relationship.

If there are parts of your relationship with your worker that look like employment, then you look like an employer. This is a way of examining the facts in your arrangements to infer a truth.

Written Contract. A written contract describing the relationship as an independent contractor relationship is helpful, but doesn’t rule the ending.
Employee Benefits. Independent contractors provide their own benefits; employees get them from their employer. If you pay your worker employee-type benefits, like insurance, pension, vacation or sick days, you look like an employer.
Permanency. The IRS thinks that companies hire independent contractors to do projects and hire employers to work on a permanent basis. If the engagement goes on indefinitely, rather than for a project or period, you look like an employer. Similarly, the right to fire a worker without penalty makes you look like an employer.
Services critical to business. The IRS thinks that the regular business activities of the company are done by employees. If services performed by the worker are a key aspect of the regular business of the company, you look like an employer.

You can also ask the IRS to make the decision for you by filing Form SS-8.

PS: There are these things called “statutory employees” that are employees no matter what. Some work at home workers, drivers, insurance sales people, traveling sales people and realtors are statutory employees (those occupations that filled Tennessee Williams plays). But, talk to an employment lawyer for more.

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Interns: No Such Thing as Free Labor

By Coco on May 1, 2012 in Business Law

It’s May. Soon, the kids – drinking age and younger – will come seeking internships. So, this is the season when accounting and legal bloggers do a post on the legal treachery of using unpaid interns. And, we are no exception.

Let’s say you are tempted to take the offer of free labor. After all, you did unpaid intern work. Working for free is part of the journey. Turns out we got suckered. Many unpaid internships violate laws around employee wages.

Here is basically how it works. Federal[i] and state laws require all employees to be paid minimum wage (and overtime if they do the time). Non-employees aren’t entitled to be paid. But the definition of employee[ii] is a deliberately broad net, so only a few workers fall through the holes.

The federal Department of Labor tried to clarify this by picking 6 things that make an interning worker in a for-profit business a non-employee.

1. The work is similar to training the intern would get in an educational environment

The internship is built around a classroom or academic experience
The internship is not built around the employer’s existing operations
A school oversees the program
The intern gets school credit
The program is designed to give intern skills that can be used in other environments, not just in the employer’s business
The intern does not perform routine work

2. The internship experience is for the benefit of the intern

The Intern performs no or minimal work
The business is not dependent on the intern

3. The intern does not take the work or position of a regular employee and works under close supervision of existing staff

Interns do not substitute for a regular worker
The internship is not an alternative to hiring someone or making staff work more
The intern is shadowing someone else
Intern receives more supervision than what he would experience as a regular employee

4. Employer gets no immediate advantage from the intern’s work (and sometimes the internship disrupts company work flow)

5. The intern is not entitled to a job when the internship ends

From the beginning, the internship is for a fixed period of time
The internship is not just a trial period for a new or potential employee

6. The intern understands he isn’t getting paid

If these six factors don’t accurately describe your internship program, then the intern is probably an employee. Refusing to treat your intern as an employee is a violation of the law.

And, companies are getting sued by their interns for violations of the wage and hour laws. Interns who worked on the Charlie Rose Show, the movie Black Swan, and accessories for Harper’s Bazaar have sued the companies who ran the programs. Here is the website set up by the employment law firm to attract more plaintiffs.

The point of the wage and hour laws is to make sure that employees cannot agree to work for free, because that skews the job market and makes productive people financially unproductive. So, if you want cheap labor this summer and you want to be both compliant and safe, then treat your intern as an employee. And, if you don’t want to treat your intern as an employee, call your employment lawyer and ask her what she thinks.

PS: Can I express some ambivalent opinions? I believe in wage and hour laws. I believe that companies will take slave labor as long as they can, which depresses wages all over. I also believe that people take the unpaid jobs because they hope it will lead to other things. On a small scale, this is fine. But, on a broader scale, it depresses wages and creates a compensation race to the bottom. I also wonder how many people in creative fields got their feet in the door through unpaid internships. But, I also wonder whether the availability of free labor means that creative fields become the province of kids with a head start who have other sources of cash to enable them to give their time for free. I wonder how much diversity we lose in the creative fields as a result of the system.

Also, it looks like the law firm representing the plaintiffs, Outten & Golden LLP, is trolling for clients and causing the suits to happen. Typically, I think this is a shoddy practice, particularly in class actions against public companies and IP trolls like Righthaven. Here, it’s not as clear. Wage and hour laws exist and should be followed. If we don’t like them, we should change them. As long as they are on the books, we should comply with them. But, the government doesn’t always do such a terrific job of policing employer trangressions, particularly now that busines lobbies have swamped the public sector. So, maybe when government fails, private industry becomes the cop on the beat, driven not by concern for the common good, but by hunger for profit. Maybe relying on private plaintiffs firms to investigate and (civilly) prosecute bad employment practices is just one of the fruits from the outsourcing tree. What’s good for the goose…?

[i] Fair Labor Standards Act and similar state laws.

[ii] Under the Fair Labor Standards Act (FLSA), “employ” means “suffer or permit to work.” People who are “suffered or permitted” to work must be compensated under the law for the services they perform for an employer.

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5 Steps to Make Your (Business) Marriage Last

By Coco on April 23, 2012 in Business Law

As a business lawyer, I sometimes get hired to perform a sort of marriage counseling for business partners. The goal is to preserve the business by coaxing the partners back together or gently breaking them apart. I always know I can save the partnership when each partner asks the other questions and talks about both business and feelings. I usually cannot save the partnership when one partner lacks accountability; the cause is lost when one sneers with contempt.

All of the business partners I have helped stay together or break apart have similar disagreements. There is usually a partner more financially prudent who tries to rein in the other partner; a deadline oriented person who imposes limits on the perfectionist; unavailable partners; wounded feelings following criticisms, even if gentle.

People conflate their self worth with their work, so criticisms injure their ego. But, most businesses lack the emotional space to share and soothe. In a business partnership – like every other relationship – unexpressed hurts accumulate and turn into resentment. When resentment becomes contempt, the deal is done.

Having worked with business partners in good times and bad, I can recommend five action steps you and your partners can do to stay connected.

#1 HAVE THIS TOUGH CONVERSATION EARLY

Have an honest conversation about how you and your partners will work together. This is important at the beginning of a venture, when you are all at your most optimistic. All of you need to feel that the divisions of control, labor, cash and credit are fair. Here is what you ought to decide:

What are your goals for the business?
Which owner will be the boss?
How much money, property or time will each partner contribute?
How will you divide salary money, profits and losses?
How will voting get divided?
Will one or more owners have veto power and, if so, over what?
Who gets the right(s) to sign checks and spend money?
What will failure look like (so you know when to pull the plug)?
How will you resolve ties and disagreements?
How can you get away from each other if it’s not working?

If you can, write down the answers to the 10 questions. If you don’t have a lawyer to do it, write it down as clearly as possible without short hands or acronyms. The point is not just to create a contract, it is also to create a roadmap and a record of your conversations.

#2 DON’T BE A DOUCHE

Yes, your partner, employee, consultant, etc should take criticisms and suggestions professionally. Yes, you are certainly entitled to criticize and demand changes. But, if you want to preserve the relationship, your reputation, and the willingness of the other person to root for you and your business, then be sensitive about his feelings.

#3 DON’T BE A DRAMA QUEEN

Yes, it hurts when someone rejects your idea. Cut your hurt feelings a little slack – but just a little. There is not even a fine line between being human and a baby. You are here to do a job and to do it well. Take instructions; don’t sulk or throw a tantrum. Adults feel their feelings but aren’t controlled by them. Past the pain of rejection is satisfaction from overcoming an obstacle – try to get there.

#4 SCHEDULE REGULAR DATE NIGHTS

Look, it’s mildly ridiculous that humans can’t just separate personal feelings from professional relationships, but most of us can’t, so own it. Once a quarter, go out to dinner, preferably with booze, and talk about your relationship. Try and use feeling words, listen, and don’t go tit for tat. Address the following questions:

Have you been communicating well?
How can you improve your communications?
Are you each still happy with the division of labor, control and money?
What changes should you make?
Is there anything anyone is happy about or mad about?

#5 PICK THE RIGHT PARTNER(S)

The most important thing you can do is choose wisely, or at least don’t choose badly. Don’t pick someone mean or lazy. Pick an adult, who believes in you and understands your weaknesses and lets you be the best parts of you but speaks honestly to the worst parts of you. Pick someone with talents equal to, but different than, your own.

I find that most times when business partners follow this advice, they live happily ever after.

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Birth to Buyout – The Workshop

By Coco on March 14, 2012 in Business Law

I’ve spent the last few years trying to figure out how to make business law accessible for entrepreneurs – not just to encourage more small business, but also to make what I do available to people who can’t pay my rate. So, we here at Profit and Laws published Birth to Buyout: Law for the Life Cycle of Your Business. And, we’ve spent the last year developing a workshop based on the book. The good folks at the Chicago Area Gay & Lesbian Chamber of Commerce have been kind enough to let us beta our seminar on Thursday, March 29th. For a mere $30, you can participate in the workshop, have lunch, and take home a copy of the book. All proceeds go to the Chamber (with a small fraction covering the printing costs of the book).

For more info and to register: Birth to Buyout: The Workshop.

Up next: Birth to Buyout: The Musical!

More info about the Chamber: Click Here.
More info about the book: Click Here.

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Ch Ch Ch Changes – A Redlined and a Plain

By Coco on February 16, 2012 in Business Law

I used to represent a now defunct hedge fund that had a whip smart general counsel. Her standards were high and she prized speed and competence. At one point, I was helping her get licenses to a bunch of algorithms. I drafted the first version of the license agreement, sent it to opposing counsel and a week later, they sent a revised version back. My client called me instantly, and said, with contempt, “No redline.” I understood what she was saying and how she felt. One thing that drives me up a wall is when we get back a revised contract from opposing counsel without a redlined version showing their changes. Not long ago, one of my beloved clients deleted the redline before forwarding my email with the revised draft to the other side. And I felt sad. So I thought I would answer this question:

What’s a redline and why should I use it?

A redline is a copy of a document that shows the changes made to it since some previous version. They can also be called blacklines or comparisons. You can run a redline in a few different ways. You can use special software like we use in law firms like Deltaview. Second you can use track changes in the Review tab in Word which racks up the changes as you make them IF you remember to turn it on. And Microsoft Word also has a comparison feature that will compare two documents. My favorite by a mile is Deltaview. I like to send both a redlined version and a clean or plain version for two reasons. First, I want people to be able to see what I’ve done very clearly. Second, I want to encourage the other side to make the next round of changes in the plain version.

Here are five reasons why you should always send a redlined version when sending revised drafts.
1. Clarity. To show the changes you made, make a comparison and clearly show all parties what you did to the document.
2. Fairness. Every contract is an agreement between two or more parties. Being clear and open about your changes is fair.
3. Efficiency. Most of the time, things worth trying are worth getting done. Showing people what you did clearly is efficient. Making them try to figure out the changes by comparing two documents side by side is slow and maddening. Slowing the process can impede or even block finishing the deal. If the time and cash costs of getting the deal done are too high, maybe the other side will walk away.
4. Agreement. Sometimes people want to sneak language into the contract to create a term the other side didn’t really see. This works sometimes but not always. Once you have a contract, the people who signed it have to do what the contract says. If one side is unaware of an obligation hidden in the contract, they probably won’t do it. So then you’re going to have to fight with them to get them to do what you snuck in. But that takes time, money and emotion. You may then have to sue them, which takes much more time, money and emotion. The court may actually ask the appropriate question, which is, “what was the intention of the parties.” If so, maybe the court will figure out the other side never actually agreed to the language you snuck in.
5. Good faith. Business deals are usually exchanges between people. Starting off a deal by making it harder on the other guy is bad sportsmanship. Trying to purposely confuse him puts the deal on an unsteady footing at the beginning. Things can only get more wobbly from there. If you start from a place of bad faith and sneaky dealing, the road to $20,000 legal briefs and vacations you cancel for your deposition may not be far behind.

So be clear, be fair, be fast. And if the other guy doesn’t operate the same way, have your lawyer run a redline and review it carefully.

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6 Ways to Deal with Loan Covenants

By Coco on January 9, 2012 in Business Law

If you borrow money, you may expect that the terms of the loan, including the loan amount, payment terms, interest rate and all other terms, are listed in the cover letter. The rest of the documents may look like inaccessible lawyer filler that have no bearing on your conduct. But, in fact, that is wrong.

Most people simply don’t read the loan documents they are about to sign.

Intro to Loan Covenants. Business bank contracts usually have these paragraphs called “loan covenants.” These are minimum standards and prohibitions for you and your business to meet. Loan covenants are the bank’s weapon against bad management or economic downtimes. The bank uses the loan covenants to pressure the borrower into keeping enough cash flowing to pay its debts, to keep growing and to protect the bank’s investment and collateral.

The Stakes. What happens if you violate one of these covenants? The bank can call your loan and make you repay it today. The bank may also be able to increase your interest rate. If you can’t repay the loan, the bank could move to grab the collateral you have pledged to the bank to sell it. In other words, all bad things.

TIPS FOR LOAN COVENANTS

Read and understand every page and every clause before you sign.
Don’t be afraid to negotiate any clause you don’t thing is fair. That includes financial ratios.
Once you sign, make sure you get at least one folder of all documents.
Give copies of your financial covenants to your accounting professional to make sure you stay vigilant on compliance. (Particularly beware of the positive cash flow covenant.)
And, if you have to produce audited financials, reserve plenty of cash and time for the audit fees.
Calendar the due dates for delivery of financial statements or other reports.
If you have to sign a personal guaranty, negotiate limits and terminations so if you leave or get deposit, the guaranty ends.

Loan Covenants can be “affirmative” covenants to do something and “negative” covenants to refrain from doing something.

Affirmative Covenants
These are typical do’s:

Get and keep liability and property insurance with minimum coverage amounts
Get and keep “key man’ life insurance on top management
Pay all taxes and state fees on time
Deliver certificates of insurance to the bank
All loans must be subordinate to the bank’s loan
Financial statements must be prepared and “reviewed” or “audited” each year, and then delivered to the bank. Push back on audit requirements if you can.
Maintain liquidity and performance ratios
Deliver annual corporate tax returns

Negative Covenants
These are typical don’ts:

Change management
Merge with another business
Take other loans
Issue dividends
Increase management salaries
Sale of assets

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