Do I Need to Register My Company to Do Business?

Posted on | August 1, 2009 | No Comments

 

 

Yes, no, sometimes and maybe.

 

The answer as to what registration is required for a business depends on two things: (1) the legal entity you create to operate your business and (2) the nature of your business.

 

Small business owners often make the mistake of creating a corporation or LLC without completing basic steps.  Use this short checklist to review whether you formed or registered your business properly.

 

1. Pick the right legal structure for your business. Your options include the limited liability company (LLC), general or limited partnership, limited liability partnership or corporation. Your business lawyer and your accountant should be consulted.  You should consider such factors as the number of owners, the business plan, the capitalization plan, taxes and other factors.

 

2. File a Certificate of Business Name. Most businesses use a shorten name, called a trade name, for marketing purposes.  ACME Medical Products, Incorporated will be marketed as “ACME” or “ACME Medical Products.”  One of the cheapest and most important things you can do keep your limited liability “shield” in place is to file a Certificate of Assumed Business Name in order safely to use trade names.

 

3. Register for your business’ Federal Tax ID. All partnerships, multi-member LLC’s and corporations must have an Employer Identification Number, which can be obtained from the Internal Revenue Service.

 

4. Register with the State Revenue Agency and Obtain Permits/Licenses.  Depending on the nature of your business, you may be required to register with your state, especially if you sell a product and are required to collect sales tax.  In some parts of the country, you might even be required to obtain local permits or licenses.

 

Of course, this is the short list, and your business may be required to obtain other permits or licenses, or you may be required to register with other governmental agencies.  See your legal advisor for help.

 

 

Matthew A. Griffith is an attorney, business performance coach,mentor and entrepreneur.  He coaches, advises and guides business owners, entrepreneurs, inventors, property managers, investors and real estate professionals.  Matt has nearly two decades of experience helping businesses grow.

Matt’s next class. . .

Posted on | July 16, 2009 | 2 Comments

August 28, 9:30 am:      Legal Landmines: Grow Your Business Without Stepping In It

Avoid Shareholder Disputes- ALWAYS!

Posted on | July 5, 2009 | No Comments

Every small business needs to address the possibility of future shareholder or owner disputes. These concepts apply to every business structure, including partnerships, limited liability companies ans corporations.

Shareholder disputes are time-consuming, expensive and counter-productive. Shareholders disputes are easy to avoid, if you agree on basic principles before shareholders come together as business partners. The basic principles include-

1. Who does what jobs.
2. Who gets paid what and when. (I include a provision to cover taxes.)
3. What happens if someone stops working or completing their job duties.
4. What happens if there is a buy-sell “triggering event” such as death, divorce, dissolution of the entity, disability, etc.
5. How elections are held to select company leaders.

The key to solving shareholder disputes is to AVOID them in the first place through buy-sell agreements, operating agreement and similar documents. Do NOT form your business partnership without addressing these issues IN WRITING AT THE START.

One final thought. . . pick your partners well. I have myself had to endure difficult and unreasonable business partners. So, trust me when I urge you to be cautious in selecting your partners. Assume each partner will be unreasonable at some point.

And get it in writing at the start!

Indiana Business Fraud Alert !

Posted on | June 4, 2009 | 2 Comments

 

Introduction by Matthew A. Griffith, Esq.

Here is an email-letter I just received from the Indiana Secretary of State.  Those of you who are clients of my law firm will remember that I alerted you to this fraud scheme almost two years ago in my law firm’s newsletter.  Amazingly, the fraud is still happening.

 

 

From Todd Rokita, Indiana Secretary of State

Dear Indiana Business:

I feel it is important to follow up with you on the actions taken by my office to address the deceptive letters many Hoosier businesses have received over the past several months. The letters come from “Indiana Corporate Compliance Business Division.” They attempt to secure a $125 or $150 payment in exchange for processing a company’s annual minutes. As we previously communicated to you, despite the fact these letters are made to appear as though they come from an official government source, they are a hoax and should be ignored.

In a multi-state investigation, my office tracked down the individuals behind these letters. Aaron V. Williams of Las Vegas and a Lisa Diane Brown of California are affiliated with several businesses including “Indiana Corporate Compliance.” The results of the investigation were shared with Indiana Attorney General Greg Zoeller, who recently filed a complaint against Williams, Brown and their businesses.

If the state prevails, these individuals could receive fines of over $1.5 million and be barred from doing business in Indiana. I will also continue to work with law enforcement agencies to pursue possible criminal action against these individuals.

If you have not done so already, please get in touch with our Business Services Division at (317) 232-6576 if you believe you are a victim of this scam.

Corporate images now available online for free

I am also pleased to let you know you can now access your corporate documents, business filings and any additional registrations on file with our Business Services Division instantly and free of charge through the INBiz portal found on our Web site: www.sos.in.gov/business . You will also be able to find more than 6.5 million images of business filings that date back to the 1800s for other active businesses.

Government should always use technology to drive down costs and increase access for taxpayers. I am proud of my staff’s work and the culture we have created here at the office of the Secretary of State to meet, and often exceed, the efficiency standards that are in place in the private sector.

Sincerely,

Todd Rokita

Indiana Secretary of State

Stay Out of Court At (Nearly) All Costs

Posted on | March 30, 2009 | No Comments

  

Stay out of court, because courts often make bad decisions that can have enormous impact on your business, your personal life and your finances.  If you stay out of court, you increase your chances of controlling your own fate.  If you let a judge decide, you have no control.

 

One of my law partners has a great expression about clients who get themselves entangled in lawsuits:

 

“When a client has to file a lawsuit or gets sued, he has already lost.”

 

What’s that mean?

 

It means lawsuits cost.  They cost you or your business:

• Time spent in the courtroom, in depositions, reading documents, talking to your lawyer, in mediation, reading court documents, searching for evidence, etc.
• Money for attorneys’ fees, expert witness fees, photocopies, travel, etc.
• Opportunities to make money elsewhere doing other things, to grow your business, or to take personal time to be with family and friends.
• Your health.  Lawsuits are stressful.  The only thing more stressful than getting sued is having to file a lawsuit.  Lawsuits are fun for lawyers.  I love them, from a professional vantage point.  I get to exhibit and sharpen my advocacy and strategy skills, but lawsuits are no fun for my clients.
• Goodwill or reputation.  Getting sued can hurt the image people have of your business or you.  The newspapers rarely report stories accurately.  Allegations and even rumors are often reported as facts.  People who really, truly know you and your ethos will be unaffected.  Everyone else,  including your customers, vendors and potential customers, will develop doubt in you to some degree.

 

A good lawyer-friend of mine just got a horrible ruling from a judge in a divorce case.  The judge was wrong and should be appealed, but at what cost to the client?  The judge robbed a father of all time with his children in a visitation ruling.  The father in the case is not a bad guy at all, but the judge, for whatever reason, decided that the man should no longer see his own children. 

 

Amazing isn’t it?  How can one human being exercise that much power over another human being.  This father is dying inside, because he no longer can see the children he loves so much.  It’s very sad, and that judge should be ashamed of himself.

 

In a divorce case, there is not much you can do in advance to avoid a divorce lawsuit.  Save your marriage, if you can.  Or, don’t marry THAT woman in the first place.  Ladies, don’t marry THAT man!  That is the only lawsuit prevention available in a divorce context.

 

But what about your business affairs?

 

Do you take these preventative measures:

• Meet with your lawyer when you are unsure of your rights?
• Meet with your CPA, lawyer and insurance agent at least once every year?
• Have your lawyer draft or review all your contracts?
• Have your lawyer develop an asset protection plan?
• Use limited liability entities properly to create a “corporate shield?”
• Train your staff on a regular basis?
• Have processes and procedures developed into an operations manual?
• Properly use insurance to transfer liability risks away from you or your business?
• Etc.

 

If you answered “no” to any of these questions, then it’s time to go see your lawyer.

Vacations Are Essential to Good Business Operations

Posted on | March 20, 2009 | No Comments

 

 

If you run a business, you need a vacation.  In fact, you need to take a vacation regularly.  And NOT just a vacation to “recharge your batteries.”  I’m talking about a great vacation that makes both your personal life and your business life better.

 

Here’s what I did on my recent vacation and how my experience can help you as a business person.

 

Rule #1-   Do NOT try to “get away from it all.” 

 

DO take your cell phone.  Do check your email.  Do call into the office.

 

It’s hard to relax on vacation when you’re stressed out about your office, missed calls, office emergencies, clients or customers looking for you, etc.  The notion that we have to separate our business life from our personal life with a “Chinese Wall” is completely ridiculous and completely unrealistic.  If you feel better while on vacation by checking in with your secretary, assistant or manager a few times, then do so.  Don’t WORK, but do check in a few times.  You’ll have a better, more relaxed and fun vacation, if you know that you’ll return home and not have to face a catastrophe.

 

Rule #2-   Eat well.  Exercise.

 

Vacations are  a time to replenish, refocus, re-establish and renew.   That applies to our minds, bodies and souls.  Our hectic lives at home wear us down and wear us out.  We fall into bad eating habits and exercise routines.  You can stop those bad habits and establish new ones during vacations.  In fact, establishing good habits is really the best thing you can do on vacation.

 

I just returned from sailing through the Caribbean, and time in Panama and Costa Rica.  I always wanted to sail through the Panama Canal.  Now I have!  It was fun, adventurous and relaxing.  And, I ate well.  There are no fast food or drive-thru restaurants in the mountains of Costa Rica or along the Panama Canal.  I ate locally cooked rice, beans, chicken, plantains, etc.  Normally, I try to cut out caffeine during vacations, but I wasn’t going to pass up fresh coffee served at the haciendas in Costa Rica.  I did refrain from processed foods almost entirely, and I exercised.  Now my job is to get past the difficult first week back and stay on track to eat well and keep exercising.

 

Rule #3-    Read.  Something fun.  Something educational.

 

I read often at home and every day at the office, but there is always a growing stack of books and magazines by my bedside table.  Vacations allow me to read important business books and books of leisure.  I also read those magazines that have stacked up.  I read the magazines first, usually in the airport and in the plane.  I cut out the articles I want keep or read again.  Then, to lighten my suitcase, I throw away the other parts of the magazines.  I save the books for the beach!

 

Rule #4-   Come Home With Ideas.

 

Take some paper and a pen.  This is a time to reenergize and become motivated to be a better person and businessman (businesswoman).  You should outline ideas, hopes, concepts, aspirations, etc. that you’d like to accomplish when you return home.  Do NOT rewrite your business plan.  DO think about larger, exciting and interesting ways to come back from vacation and become better than ever.  Consider a few new ideas that you could implement when you’re back at it next week.  If you took the right books and magazines, you’ll have new ideas that excite you about the future of your company, firm or career.

 

And this Rule #4 applies to your roles as a father, husband, wife, daughter, girlfriend, friend, partner, etc.  This is not just about business.  I came home with ideas about being a better friend, father, son, brother, etc.

 

My financee and I spent hours on vacation talking about her law immigration law practice, our pending nuptials, and our future together.  We took a very fun “marriage workbook” with us, and had a blast going through it.  We talked about a wide range of topics, both personal and professional, and we came back ready to take on the World together.

 

Rule #5-    Make It Memorable

 

Have a great time.  Try doing something you’ve always wanted to try.  Maybe try white water rafting.  Or deep sea fishing.  Or, sailing through the Panama Canal.  Whatever it is, give yourself reason to remember how good it felt to reward yourself with time away from your routine and sources of stress.  Take a few vacation photos and tape them to your PC or desktop.  If you can remember your positive vacation experiences, you’ll remember that the routine stuff is worth it.  And, you’ll be more likely to take another vacation sooner than later.

 

Rule #6-   Follow Up When You Get Home

 

Now that you’re back, make the most of your vacation.  Schedule time on your calendar, or in your PDA or planner to follow up with things planned on your vacation.  Do these things:

• Do eat better.
• Do get better sleep.
• Do exercise.
• Do implement those business concepts, plans and goals.
• Review your notes and the magazine sections you kept.
• Do make changes in your personal life to feel more successful as a father, daughter, wife, etc. . .  and businessperson.

 

Here’s a final idea. . .  print a copy of this blog today, and put that copy in your favorite suitcase.  Tomorrow, schedule your next vacation.  Then, when it’s time to pack the suitcase, pull out and read this blog again.  Pack your magazines and books.  Get on the plane and start at the top with Rule #1.

 

Do these things, and your business will benefit tremendously.

WARNING- Asset Protection Is NOT Done Off-Shore

Posted on | March 16, 2009 | No Comments

 

My blog just got spammed by some company trying to get people to invest in a corporation based on some Caribbean island.  The spam came across as an advertisement for “asset protection.”  I deleted the comment and will not be posting it on this site!  The spammer was trying to comment to my post Asset Protection-  “It’s As Easy As 1 – 2 – 3!”

 

So, I need a Caribbean trust or corporation to protect my assets?

 

Hogwash!

 

Asset protection is the lawful use of entities, contracts, business practices and other legal structures that are recognized and permitted under existing law.  Everything you need to protect your personal and business assets can be found right in your home state.  You do not need to go off-shore to protect your assets.  In fact, going off-shore raises another type of risk to your assets and can, therefore, be self-defeating.

 

Asset protection is NOT trying to hide assets in a Caribbean-based trust or corporation.  Nor do you need a Delaware corporation or a Nevada corporation, unless you live or operate your business in those states.  Nor do you lawfully protect assets by trying to hide them, by committing crimes or by engaging into fraudulent transfers.

 

The law provides ways to protect your assets!  You’ve just got to understand what your risks are and what lawful means are available to address those risks.  It’s really not that difficult.  And there is no trickery involved.  Trickery usually leads to other problems.

 

Do you know what a “legal witch doctor” is?  It’s a term I coined years ago to describe people who talk about the law and who practice law without a license but with a particular financial motive impacting their advice.  If a legal witch doctor tells you that off-shore trusts are the key to asset protection, you can bet that off-shore trusts are being sold to you.

 

Buyer beware!  Avoid legal witch doctors.  Go see your lawyer.

What is “Phantom Income” for a small business owner?

Posted on | March 6, 2009 | 8 Comments

Before I can define “phantom income,” I’ve first got to explain how “tax flow through entities” work.  Basically, if you own at least part of a partnership, limited liability company or S-corporation, you get a a tax bill each year based on your share of the business’ profits.  That bill comes in the form of a K-1 tax form, which shows your portion of the profits or losses.

 

So, if you own 40% of a company (for the entire tax year) that had $100,000 of profits in 2008, then you would get a K-1 for $40,000.  If you only owned that 40% for half the year, your K-1 should report $20,000 of imputed income to you.  You then have to report that income on your individual income tax return and pay taxes on that amount.

 

But wait!  What if the company never paid you a distribution (a/k/a dividend) equal to your K-1 number?  Or, what if the company only pays you $12,000, but your K-1 shows $40,000 of income?  If that happens, you have have “phantom income.”  So, even though you only received a distribution of $12,000, you have to pay income taxes on the full $40,000.

 

If you want to avoid paying taxes on “phantom income,” then you should consider an agreement among all the owners and the company requiring the company to distribute at least enough profits to cover the taxes on your “phantom income.  When I draft these agreements for my clients, I like to include a provision requiring no less than 40% of the company’s profits to be distributed, which should normally be enough in distributions to cover the highest marginal tax rate on any one owner.  I include an exception, in the event the company has anticipated cash flow issues, or is about to make a large expenditure and needs the cash.

 

If you fail to include such a provision in your agreements, then you run the risk that the majority owners might try to “freeze out” the minority owners by causing “phantom income” to be reported on the minority owner’s K-1, year after year after year.  In that case, it actually costs money for the minority owners to own a share of a profitable company.

 

 

 

 

.

Piercing the Corporate Veil/Shield

Posted on | February 17, 2009 | 1 Comment

 

The single greatest advantage to operating a business as a corporation is that the owners of the business protect their personal assets from the corporation’s creditors. Incorporation creates a fictional “shield” or “veil” between the corporation’s owners and its creditors. Generally, incorporation protects its owners from personal liability and limits an owner’s risks to the loss of his or her investment in the corporation.

Unfortunately, many business owners form a corporation but fail to take the necessary steps to maintain the integrity of the corporation. Even worse, owners will blur the distinction between their personal affairs and the corporation’s business. The consequences are that the corporate veil can be “pierced”, and an owner may be subjected to personal liability by the corporation’s creditors.
Maintaining the corporate veil is not difficult, but it does require some simple tasks completed and vigilance. Here is a partial list of tasks which should be completed in order to maintain the integrity of the corporate veil:

1. Never commingle personal and corporate finances. Never pay personal expenses with corporate funds.
2. Corporate officers should always execute documents in their corporate capacity. For example, sign documents as “John Doe, As President of ABC Corporation.”
3. Hold annual meetings of shareholders to elect directors.
4. Hold annual meetings of directors to select officers.
5. Create and maintain a corporate record book, which should include minutes of all corporate meetings.
6. Prepare and adopt good Articles of Incorporation and By-Laws.
7. File biennial reports with the Secretary of State.
8. Register all assumed business names with the Secretary of State and appropriate county recorders.

This list is certainly not exhaustive, but completing these tasks will greatly help preserve the protections afforded to business owners by incorporation.

Go see your lawyer for help help in reviewing your present corporate documents.  Make any necessary changes to those documents.  Prepare notices and minutes of meetings.  Do all this and more ASAP.

LLC’s, Charging Orders & Judgment Liens

Posted on | February 17, 2009 | No Comments

Question from one of Matt’s readers-
“A residential rental property is owned by a single member LLC. The tenant files a frivolous lawsuit and wins. The amount of damage awarded to the tenant exceeds the amount covered by the liability insurance on the property. What are all the possible ramifications to the property, the single member LLC that owns the property in question or the natural person who is the single member of the LLC? Charging order, lose ownership of the property, lose ownership of other assets owned by the LLC, etc.?
Thanks Matt”

Matt’s Answer-

What a great question. There are several issues here. I’ll take them in chunks.

FRIVOLOUS LAWSUIT

I’m going to assume that your case was in a small claims court, even though you didn’t say that. Crazy things happen in Small Claims Courts. The level of “lawyering” and judging is often not as high as it is in superior and circuit courts. There are exceptions, of course. But, your case shows why we have appellate courts to fix what lower courts screwed up.
Appeal!
In Marion County, Indiana, appeals from the Small Claims Courts go to the Superior or Circuit Courts. In Marion County, you get a fresh start. . . a new trial. The Small Claims Court judgment is vacated. You start over and get a chance to get the case determination right. So, my first response is: Appeal! That’s an easy solution to all your problems.

INSURANCE

Secondly, ask your insurance agent why you’re not fully insured! Should you be suing your insurance agent for malpractice? Maybe the insurance agent’s Errors & Omissions coverage is your solution.
On a side note, I’d encourage you to learn how to communicate properly with insurance agents. There are specific things you should do in order to develop the right Insurance Plan for your business, and I can share those techniques with you in another article or during a consultation.

JUDGMENT LIENS

When a judgment is entered by a court of record in an Indiana county, a lien is automatically created against any real property owned in the same county. If the judgment-defendant has real property in other counties, those properties are not impacted. However, a judgment in “County A” can be “recorded” in “County B.” At that point, the judgment is a lien on real property owned by the judgment-defendant in both counties.
Importantly, judgment liens apply not only to the subject property but to ANY real property owned by the judgment-defendant.

PERSONAL LIABILITY

If I understand your facts, there is no judgment against the LLC owner, just the LLC. In that case, there should be no collection efforts against the LLC owner. A plaintiff cannot collect a judgment issued against an LLC from the assets of the LLC’s owner. So, the owner (you) should not be concerned about a charging order. Actually, charging orders are a good thing, in a sense (read on).
Some of you might be asking: “What’s a charging order?”
A charging order only applies to LLC’s, not corporations. A charging order is an order that requires the LLC to pay to the plaintiff any monies that would be distributed from the LLC to the owner. There must be a judgment against the owner, before a charging order could be issued. Charging orders are the only remedy a plaintiff would have to collect from the ownership interests a judgment-defendant would have in an LLC. So, in other words, a plaintiff cannot acquire an owner’s ownership interests in an LLC. By contrast, a plaintiff can acquire a judgment-defendant’s stock in a corporation.
Why do the courts distinguish between corporations and LLC’s in this area of the law?
The rationale is that LLC’s are partnerships and that a plaintiff should not be permitted to become someone’s partner. So, if A and B are partners in an LLC, and C gets a judgment against B, C should not be able to enforce the judgment to become A’s partner. A has the right to chose his partners. He picked B, not C, to form a partnership. C could get a charging order against the LLC and collect any monies that would be distributed from the LLC to B. If A and B owned a corporation together, then C could acquire B’s stock and become a co-owner with B.
Back to your situation. . . the law concerning charging orders is irrelevant to your situation for the reasons I described above. What you have at risk is your equity in the LLC. You cannot do much about the equity you have in the LLC at this point, now that the judgment was entered. Any transfers of equity you were to make now could be considered “fraudulent transfers.” And that is an entirely separate topic for another article.

THE LESSON(S) HERE-

Call your attorney. You lost a lawsuit, and probably did not have a good attorney with you in court! You saved the cost of having an attorney in court, but at what greater cost? Was it worth it?
Appeal bad decisions.
Learn how to communicate with your insurance agent to develop the right Insurance Plan.
Plan. Planning is an activity that occurs in advance. I’m not sure from your short question what your Asset Protection Plan includes. Clearly, planning is important, as your situation reveals.

Meet Matt

Wouldn’t it be great, if your business coach was also an attorney? Owned other service and manufacturing companies? Was an entrepreneur himself? And truly understood business, marketing, finance, accounting, taxes and the law? Meet Matt.

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