business tips


HE SAYS:

Unmanageable debt can bring a small business to its knees.   All efforts should be made to operate your business from cash flow without the need to incur any debts; however, when it is absolutely necessary to borrow money it should be done wisely.

If you dream of starting your own business, it is better to wait until you have put enough start-up money aside to open your doors without the use of borrowed money.   Once started, you should do everything you can to avoid having to borrow money for your business.   Invest your time and hard work, do not buy anything that the business cannot pay for, and do not make the classic mistake of expanding faster than the business can handle.

Borrowing money to run your business should be the exception and not the rule.   Your chances of success will increase if you do not borrow at all; however, if you must borrow, you should follow some basic guidelines.   You should confine any borrowing to short term loans that you know can be repaid from the business.   You should avoid trying to sustain your business by depleting your savings, taking cash advances on your credit cards, or encumbering your home with mortgages or home equity loans.   If your business cannot sustain itself; or, when necessary, carry needed short term debt, then you should cut back on your spending or think about getting into another line of work.

Debt spells nothing but trouble for any small business owner.   There is nothing more frustrating to the owner of a business then to find that the money being generated from all of the hard work and effort is only serving to line the pockets of the creditors of the business instead of being available to the owner of the business.   Debt reduces your options and makes operating your business much more difficult because you now have to answer to the demands of your creditors rather than being able to run your business as you see fit.

If you are fortunate enough to be able to operate your business without borrowing any money, you will have the ability to pursue your own vision and not that of your creditors.

WHAT DO YOU SAY?

This is the second part of a two-part series. Click here to read the first part.

HE SAYS:

As was stated in our last post, a Family Limited Partnership (FLP) can, under the right circumstances, be a very effective estate planning strategy for the transfer of a family business to the next generation; however, it is not something anyone should pursue without careful consideration.

One of the most important steps in forming a FLP is determining the value of the business.  The fact that most small businesses are not very liquid allows the valuation, for purposes of the FLP, to be discounted by as much as 35% to 45%.  The premise is that the value of only a part of the business can be reduced based on the fact that very few people would buy a partial interest in a privately owned family business which does not have a ready market for resale.  This creates the advantage of allowing the business owner to transfer, through the use of the annual gift tax exclusion, interests in the business to his/her children at a faster rate due to the discounted value.

Perhaps, the biggest advantage of a FLP is the applicable tax rate.   Because the income of the FLP is not taxed at the partnership level but is passed through to the individual partners’ personal tax returns, the applicable Federal tax rates for the FLP are based on the individuals’ Federal income tax rates rather than the higher rates generally applicable to trusts.

It must be pointed out that the IRS, in an effort to prevent abuses, has issued regulations that affect FLPs.   In order to qualify for the pass through taxation rules, the FLP must meet the following requirements:

  • the partnership must be bona fide and each transaction must be entered into for a substantial business purpose;
  • the form of each transaction must be respected under substance over form principles; and
  • the tax consequences of each partner must accurately reflect the partner’s economic agreement and clearly reflect the partner’s income.

Since this is a very complicated area of the law, it is highly recommended that you consult with a knowledgeable Accountant, Certified Financial Planner and/or Attorney who specializes in estate planning before you take any action.

WHAT DO YOU SAY?

HE SAYS:

Regardless of where you stand on the debate over whether or not the Federal Estate Tax should be repealed, this tax raises issues that should be of concern to everyone who has worked hard to build a successful small business in the hopes that the business will provide security for their children for many years into the future.  The inevitability of death and taxes can shatter your hopes and dreams.

Upon your death, the “fair market value” of your business will be included in your estate and in 2011 can result in a Federal Estate Tax of up to 35% (plus a NYS Estate Tax of up to 16%) of that value, after the exemptions and assuming no unlimited marital deduction to a spouse is available.  Since most small businesses usually represent the largest asset in an estate and generally do not have large reserves of cash, many families find that they have to sell the business in order to pay the estate tax on the business.

Even if you believe that the real value of your business is not high enough to worry about the impact of estate taxes, it has been my experience that the IRS usually determines the “fair market value” of your business to be higher then the price you might actually be able to sell it for since the “fair market value” is a theoretical accounting value and does not necessarily reflect the real value of the business after taking into effect all of the variables in the marketplace.

Unless and until the estate tax is repealed, this dilemma will continue to plague the hard working owners of small businesses and their families.   The only practical solutions presently available are sound estate planning strategies.

One such estate planning strategy is the Family Limited Partnership (FLP).   A FLP is set up in the same manner as any other partnership.  The business owner transfers the business to the FLP, names himself/herself as the general partner with a very small ownership interest and gradually transfers the remaining interest in the business to the children as limited partners.   The general partner makes all the decisions, including under what conditions power and money will pass to the children, while the limited partners hold most of the equity.

In the next installment, we discuss the benefits and possible pitfalls of a Family Limited Partnership.

WHAT DO YOU SAY?

HE SAYS:

One of the first and, perhaps, most important business decisions you will make is the form in which you are going to operate your business.   This decision will affect all aspects of your business, including liability and tax related issues.

Sole Proprietorship is the most basic of business structures.   You conduct business in your own name or under an “Assumed Business Name” also known as a D.B.A.   Your D.B.A. is simply a trade or business name that you file with the County Clerk’s Office in the county in which you reside or conduct business.   As a sole proprietor, you assume full personal responsibility for all debts of the business and for all claims arising from its operation, including all taxes that become due.

A partnership is appropriate if your business is operated by two or more people or other entities under a formal agreement.   Each partner contributes money, property, labor or skills and each partner shares in the profits and losses of the business.   The Partnership must file an income tax return; however, the taxes are paid by the individual partners and not by the partnership.    Generally, all partners are liable for any actions taken by any of the partners in furtherance of the partnership.

A corporation is treated as a legal entity that is separate from its owners and which has its own legal rights and duties.   The owners of a corporation are the shareholders who exchange money or property, or both, for capital stock in the corporation.   Each year the shareholders elect a Board of Directors and Officers who run the day to day operation of the corporation.    The shareholders have limited personal liability for the debts and obligations of the corporation.   Unless you file as an “S Corporation”, the corporation is subject to a corporate tax on its profits before it is distributed to the shareholders who are also taxed on this distribution.

The law also recognizes, as a separate legal entity, Limited Liability Companies. The owners of the LLC are called members and the extent of their ownership interest is measured by the amount of their capital contribution to the LLC.   Unless otherwise stated in the Articles of Organization, profits and losses of the LLC are allocated, among the members, proportionately, on the basis of the value of each member’s monetary contribution to the LLC.

The above summary is based on the laws of New York State.   Anyone seeking to start a business is recommended to first obtain the advice of a knowledgeable attorney and accountant.

WHAT DO YOU SAY?

HE SAYS:

It was once said that a rose by any other name would still smell like a rose.   A name may not be that important for most things; however, what you choose to name your business could help determine whether or not you are going to be successful.  The name of your business is often the first thing a potential customer knows about you and will shape that all important first impression, for good or bad.

Names that you believe are catchy or cute often are perceived by the public to be misleading, irritating or downright unappealing.   Here are some simple rules that may help you if you are thinking about what to name your small business.

Do not make up names that have no meaning within the English language or any other language.  Large companies with huge advertising budgets can develop name recognition even if they have meaningless names such as Verizon or Google.  This has become less of a problem with the extensive commercial use of the Internet and the proliferation of web based businesses that are able to attract a customer base without having a recognizable name.  Good examples of this are Skype, Groupon, and most recently, Grickets.

Do not use names that are cute to the point of being irritating.   If you are starting a contracting company do not become Bill the Builder or call your business Hammer Me Home.   How many times have we seen names such as Dew Drop Inn, Elbow Room or the Cut And Dye and cringed a little at the obvious play on words.

Do not engage in strained attempts to be the first listing in the yellow pages by calling your business AAAA Number One Car Rental.    Remember the old adage of he that is first shall be last.  You may think you have gotten the jump on your competition; however, most potential customers may not take you seriously and will keep looking.   Even though being found is now more about effectively using Internet search engines than the old fashion yellow pages, there is still some merit to this advice as some people still use the traditional yellow pages or similar online sites.

Do not use your own name as part of the name of your business if your name is extremely difficult to spell or pronounce.   Yes, we all like to see our name up in lights and usually you can’t go wrong using your own name; however, there are times when it just is not good business to make it more difficult for your customers to find you in the phone book or on the Internet.

Do not make your business name too long or complicated.   Usually it is best to keep the name of your business short and simple unless, perhaps, if you are a large law firm and want to string twenty names across your letterhead and business cards.   A business name that is short and simple is easier to remember and to find.

Do not let the name of your business confine you to a limited number of activities or be appropriate for only a limited amount of time.   For example, you would be better off with Joe’s Office Equipment Repair than Joe’s Copier Repair or John’s Winter Clothing Store should just be John’s Clothing Store.

Do not attempt to use a name similar to an already established business in an effort to create confusion and, certainly, do not steal someone else’s name.   Unless you are absolutely sure about the uniqueness of the name you are going to use, you need to check the name out, at least, at the county or state level.

What’s in a name?  Sometimes, everything.

WHAT DO YOU SAY?

HE SAYS:

Contract law has developed some very specific rules that you should be aware of and understand as a business owner who, no doubt, will need to enter into contracts from time to time.

At the very least, a contract must clearly express the intent of the parties, particularly, as to the fundamental terms such as price or compensation and quantity of goods to be delivered or type of services to be performed.  Unless a contract defines the basic intent of the parties, it may be held invalid and unenforceable by a Court.

A contract need not be in writing, except for certain agreements which are required by law to be in writing, as long as there is a meeting of the minds as to its terms.   However, if you think a written contract can be full of holes, just imagine what a mess an oral contract can make.   Oral contracts are never recommended and should not be used except for the most rudimentary purposes.

Now that you know why a well-written contract is so important, here are some basic rules regarding the legal construction or interpretation of contracts.

Only where the language of a contract is ambiguous, uncertain, or susceptible to more than one interpretation may a Court interfere to reach a proper construction by construing uncertainties and considering extrinsic evidence.   In the event of doubt or ambiguity as to the meaning of the terms of a contract, the language must be construed most strongly against the party who prepared it or supplied a form for the contract.

The cardinal rule in the interpretation of contracts is that the intention of the parties is to be ascertained and effect is to be given to that intention if it can be done consistent with legal principles.   In ascertaining the intent of the parties to a contract, the purpose to be accomplished and the object to be advanced may be considered by the Court.

In the process of the construction of a contract, words will be given their ordinary meaning when nothing appears to show that they are used in a different sense.   A Party to a contract will ordinarily be held bound to the usual meaning which the law places upon the words the party has used, even though it is proved that one party intended something other than the usual meaning.

The Court will look to the entire contract to determine the intent of the parties and will attempt to give meaning to every provision as long as it can consistently and reasonably be done.  For example, if two clauses of a contract are completely inconsistent with each other, the Court will enforce the first clause and reject the second clause.

If the parties to a contract do not make their intent clear within the contract, the Court will use the basic rules of construction to attempt to impose terms it believes the parties intended.   A well-written contract better serves the needs of the parties and is far less costly than a contract that requires interpretation by a Court.

Again, always consult with an attorney before entering into any contract.

WHAT DO YOU SAY?

HE SAYS:

An ounce of prevention is worth a pound of cure.   This old adage has never been more appropriate then when discussing the importance of a well-written and well-thought-out contract.

In any contractual relationship, whether it is for personal or business purposes, the more details and contingencies that are covered in the contract the less that is left to chance or subject to interpretation by the other party’s attorney or the Courts.   The world of contracts can best be summed up by this one phrase: “If you create a loophole, they will find it!”

There can never be a contract, no matter how well written and thorough, that could resolve or anticipate every conceivable, potential dispute; therefore, every contract must rely on the good faith performance of the parties.

The goal, however, when drafting a contract, is to eliminate as many potential disputes as possible so that you minimize the likelihood or need for costly and time consuming litigation.

Most contractual litigation is the result of poorly worded or inartfully drawn contracts that create confusion and misinterpretations rather than from a willful disregard of a party’s contractual obligations.   These lawsuits drain the resources of all concerned and never accomplish for the parties what a well drawn and faithfully executed contract can accomplish.

Whenever a poorly drafted contract sends the parties to the courthouse, the Court determines what is best for the parties and the outcome is rarely as good as what the parties could have determined for themselves if they had taken more care to create a better contract.

Since entering into and enforcing a contract can be full of pitfalls and hidden traps for the unwary, it is highly recommended that you invest the time and money needed to obtain sound and experienced legal advice before signing any contract.   If you don’t do this, just remember, the cure is always more expensive then the prevention.

In the next installment, we will look at some of the specific principles of contract law.

WHAT DO YOU SAY?

HE SAYS:

A kindly old woman came upon a very dangerous, poisonous snake lying on the road near death.  Feeling compassion for the snake, the old woman brought the snake to her home and over the next several months nursed the snake back to good health.  When it came time for the snake to leave, it viciously bit the old woman filling her with poisonous venom.  As the old woman lay dying, she said to the snake, why did you bite me after I was so kind to you?   The snake simply replied, you knew that I was a dangerous snake when you took me in, what did you expect?  The moral of this story is that you will not be able to change a person’s basic nature no matter how much you try to help him.

For example, a dangerous, anti-social person will continue to be dangerous no matter how well he is treated.  This is a fundamental truth that many well meaning but misguided social reformers fail to understand.

Another application of this rule can be found in the workplace.  A person who is not ambitious and industrious by nature cannot be motivated to be otherwise no matter how much you praise or reward that person.  No amount of opportunities that could be bestowed upon that person will make a difference in his lack of desire to succeed.

I experienced this first hand because I failed to understand this simple principle when I came to USFSB.   In my world of practicing law, ambition was a way of life and everyone I encountered seemed motivated by the opportunity to succeed and prosper.  I did not know the USFSB employees very well, but believed that everyone could be motivated to work hard and be ambitious if properly rewarded.

With that in mind, as USFSB became more profitable, I gave the employees very significant year-end bonuses not based, necessarily, on their efforts but on my belief that the reward would motivate them to be better employees.   Of course, this did not work with everyone since, as I eventually learned, you can’t change someone’s fundamental nature with rewards.

People who are ambitious and take pride in their work are that way by nature and not simply because they were encouraged by rewards.   After a few years at USFSB, I finally realized that you can reward ambitious people but that you can’t instill ambition with rewards.

WHAT DO YOU SAY?

HE SAYS:

We have all heard of the hard driving, tough as nails, no nonsense business owner whose only concern is the bottom line and it does not matter to him who is sacrificed along the way.

In some ways, we admire people who have this single minded, intense, and uncompromising drive to be successful at all costs.   However, on further reflection you realize that you can’t take the human element out of the equation.   No one achieves success without the help of others and it will catch up to you if you leave a trail of beaten and battered people in your wake.   I love the observation that you should be good to the people you encounter on your way up because you will meet them again on your way down.

When I practiced law, as I have mentioned, attorneys generally made accommodations to each other even as they zealously represented their clients.  This is not a sign of weakness but, rather, a concession to the fact that a cooperative attitude makes the system work for everyone’s benefit.

More importantly, you can’t look upon your clients as merely a means to earn a living.  Particularly, in litigation your clients are in a difficult point in their lives and they need to feel that you care about them.  It is a very personal relationship that requires you to have compassion for your clients as well as being passionate about their case.   Again, you can’t overlook the importance of the very human need your clients have to make a connection with you.

When I came to USFSB I did not have much experience interacting with a large group of employees and it was difficult, at first, to know how to work with them as their employer.   Even though I may have had some difficulties, over the years, with some of USFSB’s employees, being an employer is, in its most basic terms, still about connecting with people.

As a small business owner, you and your employees depend on each other and you need to develop a connection with them that you hope will foster a level of trust and cooperation that will be of benefit to your business.  Even when this failed at USFSB, I always felt that I had done the right thing and had tried to make it work.  At times, there was disappointment but rarely regret.

Whether in life or in business, your drive, intensity, and ambition will only get you so far if you don’t also have a heart.

WHAT DO YOU SAY?

HE SAYS:

One thing I have learned as the owner and operator of a small business, whether it was my law practice or USFSB, is that you need to develop a realistic business plan before you start your own small business or, even, before you make any important changes in the way you operate your existing small business.

Yes, being self-employed requires a certain level of risk taking and demands that you be decisive; however, that does not mean you should be foolhardy and throw caution to the wind.   The risks that you take should be calculated risks based on doing your homework and researching your marketplace.

There are too many factors involved in successfully starting or operating a small business to leave it all up to chance.

You need to know the nature of your potential customers.  You need to determine what type of people in your marketplace, whether that is local, regional, national, or global, will most likely want or need your product or service.  You need to determine how you will best reach out to those people and let them know about your business.  You need to determine how you will create a demand for your product or service and how you will deliver or distribute your product or service to satisfy that demand.

You need to know your potential competitors.   You need to determine how many there are and, more importantly, how will you present and deliver your product or service better than your competitors do, particularly, regarding the quality of your product or service as well as such things as price, promotions, and advertising.

You need to understand the nature and amount of your start up costs such as inventory, renovations, equipment, and supplies; your fixed overhead costs such as rent, utilities, payroll, and taxes; and your discretionary costs such as marketing, advertising, and promotions.   That means developing a realistic budget before you venture forward.   Many new business owners either drastically underestimate their start up and overhead costs or overestimate the amount of income that the business will generate.

Of course, your plan will not be complete until you determine how you will acquire the capital needed to start up your business and to sustain it while you grow your business to be profitable, which can take a year or more.

In the enthusiasm and exuberance of starting your own small business, it is easy to rush to judgment and fail to adequately plan ahead which, invariably, will cause your business to fail.

WHAT DO YOU SAY?

Next Page »