You think we’ve got it bad here in the United States?  You think the recession feels like the end of life as we know it?  Do you think this is as bad as it can get?

Hogwash!

We’ve got it made in the USA!

Hard work and intelligence go a long, long way in this country.  This is truly, absolutely and without doubt THE land of opportunity.  Unfortunately, it’s also the land of complainers and whiners.  We’re spoiled.  We have an extremely high standard of living, ready credit (even now!), free primary education, tons of governmental services, social safety nets, and opportunities every where.  Yet, most of what you hear these days is doom and gloom.

I just got back from the Caribbean, Panama and Costa Rice.  I can tell you from personal observation that we are very, very lucky to be in the USA.  The fine folks living in Central America do not have the infrastructure, markets, education, credit or opportunities we enjoy here in the USA.   It’s not even a comparison!

Yet, all I hear these days is how bad things are, and how people are suffering.  We’re suffering?  Really?  Tell that to 90% of the World’s people.  THEY are suffering.  WE are just feeling sorry for ourselves.  I know people have lost jobs and income in this country, but we have it GREAT here compared to what the rest of the World has to endure.

If you want to end the recession, then GET MOVING.  Stop waiting for Congress (which helped to screw this up in the first place!) to solve our problems.  If you own your own business, grow it faster.  Hire more workers.  Order more materials and parts.  If you manage business operations, get better at it.  Do something to make your operations better and better and better.  Get better every day, and your business will grow.  You’ll have to hire more workers.  You’ll create more jobs.  And, you’ll make more profits.

If we all stop listening to the bad news, the media will stop reporting it.  So, turn off the TV and stop reading Yahoo’s news on line.  Instead, get busy!

92% of us are employed.   Interest rates are still incredibly low.  Credit is hard to find, but you can still find credit or credit substitutes.  Try building strategic partnerships and alliances in lieu of financing.  Consider trades and exchanges with other businesses.  Talk to your customers, clients, vendors, suppliers, employees and even your competitors.  You never know where you’ll find opportunities. . .  especially if you’re not looking.

So, stop worrying.  Stop complaining.  And start making it happen.  The sooner we all get busy, the sooner the recession will end.

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.

Two weeks ago, I was sitting on a beach, looking out across crystal clear blue Caribbean waters with the sun about three hours from setting.  That’s when I noticed this pelican fishing.  Pelicans are large birds, so it takes some effort to lift off, clear the ocean’s surface and fly nearly straight up 50 feet or so.

The pelican slowly drifted in flight a few yards, searching for fish just below the surface, 50 feet in the air, and then the pelican folded in its wings to its sides, and would dive straight down to the ocean.  It torpedoed into the water, using its beak to stab at and capture a meal of fresh fish.

Amazing.  I watched that bird for nearly an hour.  It must have made 15 dives while I was watching.

What in the World does this story have to do with business?

You need to be “pelican like” in your business operations.  I know, I know. . .  we’re in a recession.  You have to watch cash flow.  You can’t afford to make mistakes.   Blah, blah, blah.

What was your excuse when we weren’t in a recession?  Frankly, you can’t afford NOT to take risks.

Too many businesses are too passive in exploring growth opportunities or bettering existing operations.  In a recession or in good times, you’ve got to be calculating, smart and aggressive.  Sometimes, you’ve got to go for it, just like a pelican diving for a meal!

You can be smart and aggressive.  You can take calculated risks.  Sometimes, a pelican dives but misses the fish.   Sometimes, businesses take chances that don’t work out well.  However, doing the same thing over and over without innovation, calculated risk taking and determination leads to slow deaths, for pelicans and businesses both.

Virtually every successful entrepreneur had several failures before their first success.  Then again, successful entrepreneurs understand the art of being “pelican like.”

What are you doing this week to catch more fish?

Question from one of Matt’s readers-

“How should I screen tenants?”

Matt’s Answer-

That is a great question and more important today than ever. As the foreclosure wave pushes more and more people out of their production homes and into the rental market, landlording is seeing a rebirth. Once again, it is not so bad to hold rental properties. Generally, the number of vacancies is dropping. And, more and more investors are moving away from the more creative real estate investing techniques and back to buying and holding rental properties.

Landlording is back!  (I never thought it went away, actually.)

For both the seasoned landlord and the newest of real estate investors, it is important to screen tenants and have a command of the tenant screening process. There are a number of factors to consider, such as:

· What forms do I use?

· Do I require an application fee?

· How do I screen?

· What is my screening criteria? What makes a good tenant?

· How do I avoid discrimination claims? What are my duties and rights?

· How do my rental application and lease agreement work together?

· Was does it really mean to “pre-screen” tenants?

· Should I use a tenant screening service?

These are great questions, and the answers are relatively simple. It does, however, take some time to learn about your rights, responsibilities and opportunities, as they relate to tenant screening. I cannot address all these topics here, but let me take the last question- “Should I use a tenant screening service?”

The answer is: Yes, you better. Using tenant screening services is the most cost- and time-effective way to improve your chances of a successful landlord-tenant relationship. Good tenant screening services are a bargain. I have written for more than a decade on the subject, and believe in them more today than ever.

Do “bad” tenants slip through, even with a tenant screening company helping you? Yes, it happens. But, for the most part, professional tenant screening greatly improves your odds of finding the best tenant in your pool of tenant applicants. I believe in tenant screening services so much that I agreed to teach a class on landlording, called “Landlording 101,” for the local office of the National Tenant Network, last year. WE WILL PROBABLY OFFER THE CLASS AGAIN THIS SPRING!  IF YOU ARE INTERESTED IN ATTENDING, EMAIL ME.

Also, once each month, I host the “Landlording Subgroup” of the CENTRAL INDIANA REAL ESTATE INVESTORS ASSOCIATION.  The next meeting will be held in my law office building- 151 N. Delaware Street, downtown Indianapolis at 6:00 p.m. on March 23.  If you’re a CIREIA member, register to attend the meeting at www.cireia.org.

At these classes, I answer the questions listed above. If you are a landlord and have not attended one of my classes, please do so soon.  If you haven’t established a relationship with National Tenant Network or another such service, do so this week. That is one of the first and certainly most important steps in the tenant screening process.

The current recession started with a crisis in the real estate market, and the solution, in large measure, remains tied to the real estate market.  However, there are three problems with the massive stimulus plan Congress passed, as it relates to housing.

First, the current stimulus plan limits the $8,000 tax credit to first time home buyers.  Those buyers are in the lower end of the housing market.  So, there is no direct stimulus for middle to upper-end home buyers, who tend to buy larger and more expensive homes.  It made no sense for Congress to stimulate demand for the lower end of the housing market and essentially ignore the other portions of the housing market.

By offering a tax credit to all home buyers, not just first time buyers, Congress would provide needed stimulus for the entire residential real estate industry.

Secondly, Congress failed to account for the fact that all real estate markets are not alike.  Some areas of the country are suffering more than others.  Southern California, Florida, Arizona and Nevada have horrible real estate troubles.  California has seen a drop of nearly 75% in home values in particular areas of that state.  Supply in those markets is out-pacing demand.  There are too many homes, and too few buyers.

In Indiana, we have not suffered huge drops in values, because values here were never over-inflated.  The fall in Indiana property values has not been so deep, because the rise in values was not as high over the past few years.

We need a program that accounts for the differences in local real estate markets across the country.  Congress should establish a formula for determining what constitutes “excess” housing supply for a particular market.  For example, Congress could determine that a normal amount of housing inventory is five months of home sales, on national average.  Then, Congress could provide greater buyer incentives for those markets with excess inventory (greater than five months of inventory), until housing supplies have dropped to a “normal” level.  This would enable Congress to direct more aid to those markets in greatest need.

Thirdly, there is a difference between stimulating the sale of existing homes and stimulating demand for new home construction.  In Marion County, Indiana, we have too much housing inventory.  We need incentives for home buyers to purchase existing homes.  We do not need incentives for new home construction.  By contrast, housing inventories in the surrounding counties are much lower.  Arguably, Hamilton County, Indiana is seeing a housing shortage.  So, new home construction should and could be stimulated in those counties that do not have excess inventory.

What’s the first rule of selling real estate?   Location, location, location.  Congress has ignored that basic principle.   All real estate is not the same, nor are all real estate markets the same.

Are there any solutions in development?

Sort of.

Indiana Congressman Dan Burton is going to co-sponsor the Homebuyer Tax Credit Act, H.R. 1245.  The goal of the bill is to stimulate the entire housing market by offering a $15,000 tax credit to individuals who purchase a home in the next year.  The amount of the tax credit would be $15,000 or 10 percent of the purchase price, whichever is less. Purchases must be made within one year of the legislation’s enactment, and the tax credit would not have to be repaid.  The bill, if passed into law, would replace the current $8,000 housing tax credit.

H.R. 1245 would address some, but not all of the concerns I have expressed in this blog.

What are your thoughts on the subject?  Post your 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.

(photos of Judge David Dreyer with Indiana Supreme Court Chief Justice

& a Notre Dame priest-   from Judge Dreyer’s website- http://www.judgedreyer.com.)

More than 10 years ago, Indiana passed a “tort reform” law that limited the amount of punitive damages that could be awarded in a single case.  There was a wave of “tort reform” years ago, as there was public outrage against several large damages awards.  Remember the old lady burnt by hot coffee at McDonalds?

Tort reform-  the idea was that juries were running out of control and were awarding excessive damages intended to punish bad defendants.  Punitive damages are intended to punish and deter, while compensatory damages are intended to make the plaintiff whole again.  Many states passed laws limiting how much juries could award in punitive damages.  We have had similar caps of medical malpractice claims for years and years now.  Most states do.

So, for the past 10 years, all jury awards have been capped in Indiana, and the same holds true for most states.  But wait a minute. . .  ENTER JUDGE DAVID DREYER.

David Dreyer, a Marion County, Indiana judge, recently refused to reduce damages in a priest sex-abuse case, holding that Indiana’s punitive damage caps are unconstitutional.  Judge Dreyer issued a 20-page ruling last Friday in John Doe v. Father Jonathan Lovill Stewart, No. 49D10-0402-CT-0443. The case involves allegations from a man (John Doe)claiming that he was molested by a Catholic priest when he was 10 years old, back in 1993. A jury awarded $5,000 in compensatory damages and $150,000 in punitive damages.  Under the Indiana “tort reform” law, the punitive damages would have been reduced to $50,000.  That law provides that punitive damages cannot exceed three times the compensatory award or $50,000, whichever is greater.  However, the “tort reform” law capping punitive damages was not passed until 1995, two years after the boy was molested.

Judge Dreyer held that the “tort reform” statute is not retroactive and cannot be applied to a 1993, event. 

Judge Dreyer had another rationale for ignoring the $50,000 cap.  He held that the 1995, law violates the Indiana Constitution with respect to separation of powers and right to trial by jury.  The Judge concluded that the law, passed by the Indiana legislature, violates a person’s constitutional right to trial by jury:

“The Indiana Constitution protects each branch of government from interference with each other, and further guarantees Indiana citizens will have their civil cases decided by a jury,” he wrote. “The Statute’s two provisions … interpose the will of the General Assembly to supersede otherwise valid verdicts. Accordingly, it contradicts the Indiana Constitution and should not interfere with Doe’s punitive damage award.”

Judge Dreyer acknowledged that other states might not have similar constitutional limits, but that Indiana’s constitution clearly does.

It would have been easier for Judge Dreyer simply to uphold the punitive damages cap, and allowed the plaintiff to appeal the issue to the Court of Appeals.  Judge Dreyer could have “passed the buck” and not suffered any criticism or review.  But, he didn’t “pass the buck.”  He did what he thought was right, and struck down a law that he felt was unconstitutional.  Remember that Judge Dreyer is a trial court judge!  Normally, appellate courts strike down laws.  It is rare for a trial court judge to strike down a law on constitutional grounds.

Whether you agree or disagree with Judge Dreyer’s legal opinion and regardless of how you feel about large punitive damages awards, you have to applaud Judge Dreyer’s commitment to the law.  It took much courage to strike down a 10-year old law in this fashion.  If you assume that he truly believes what he wrote, you have to feel good about a judge trying to do the right thing, follow the law despite the personal consequences, and  honoring his Oath of Attorneys.  It’s refreshing to see a judge give so much thought to doing what is right, rather than what is easy.

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.

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If you’re serious about saving, growing or starting a business, branding is vital.  Protecting that brand is equally important.  That’s why you should attend this class.

Let me introduce you to Kyle Lacy.  Kyle is a social media mastermind, truly.  Check him out at www.getbrandswag.com or www.kylelacy.com

My law firm does a lot of trademark work for our clients.  We trademark company names, product names, service marks, tag lines, etc.  We also develop strategies to protect names and logo’s

Kyle Lacy develops marketing strategies that utilize great branding.  

Together, we are going to teach how to develop a brand strategy and then legally protect it.

March 10, 2009 ,  12:00 – 2:00 P.M.         8604 Allisonville Rd. Suite 300, Indianapolis, 46250

$25.00  TUITION FEE

EMAIL KYLE OR ME IF YOU’RE INTERESTED.

I don’t like to “copy and paste” content from other business thinkers into my blog.  I do borrow, meld, mix and reshape ideas I learn from other people, but try to add some original thought in everything I write and say.

Here’s a rare exception.

If you care about small business or our economy, you have to read this blog post by Dennis Romero on Entrepreneur.com-

Entrepreneurs Not Feeling Stimulated