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!

Systems Are a Way to Limit Liability Risks

Posted on | May 28, 2009 | No Comments

 

In the past, I’ve written about business systems as a way to maximize profits.  Systems provide another advantage that is near and dear to my heart-  limiting liability risks.  In fact, systems are an essential way to limit liability risks and protect the assets of a business’ owners.

 

Here’s an example taken right from the pages of my law firm’s operations manual-

 

My law firm is a “debt collector” under federal law, because we collect debts for our clients.  That means I have to comply with a set of rules found in the Fair Debt Collection Practices Act.  One of those rules requires my office to deliver the “Mini-Miranda” Warning each time we communicate with a consumer debtor.  The “Mini-Miranda” Warning reads:

 

We are debt collectors.  This is an attempt to collect a debt.  Any information we obtain during this communication may be used to collect that debt.

 

But how do we ensure that a staff and office of 18 people reads that warning each and every time we communicate with a debtor?

 

Systems!  That’s how.

 

Here’s what is in my office’s Operations Manual and systems to comply with the Fair Debt Collection Practices Act-

 

• We have a written policy that all employees must read and agree to follow.
• Our initial staff orientation includes training on the Fair Debt Collection Practices Act.
• We hold regular staff training on the Fair Debt Collection Practices Act and any changes in the law.
• We solicit from our staff ideas and new ways to improve our systems.
• A brightly colored copy of the “Mini-Miranda” Warning is posted on, literally taped to, every staff member’s telephone.
• A stack of brightly colored copies of the “Mini-Miranda” Warning are at the receptionist’s desk and handed to any debtor who comes to my office.
• The “Mini-Miranda” Warning is printed on every collections documents we send from our office.
• We police our staff and follow up with any questions or issues.
• And more.

 

There are more components to our system, but that’s not the point.  The point is that we have systematized the way in which we handle this compliance issue.  Our system creates predictable results, which is the greatest advantage of systems.  We know that we are complying with the Fair Debt Collection Practices Act, because of our system.  We’ve taken all the “guess work” and risk out of the equation.  And, when the law changes, we can easily change the system to match the new law.

 

Every business needs similar systems to conduct its affairs.  There are no exceptions.  Every business needs systems.  Systems make it easier to become and stay profitable, while reducing risks.  But, you need to make sure the system is being implemented.  You have to “police” your staff to ensure the system is working.

 

 

What systems do you have in place? 

 

What systems need improvement?

Do you have systems that are not fully integrated into your business operations?

What are you doing to improve your business with systems as a key tool?

Protecting Your Business From the Lowest Common Human Denominator

Posted on | May 6, 2009 | No Comments

 

Recently, I was helping a client write a User’s Manual for a new product it is going to manufacture.  I was writing warnings about injuries that could result from the misuse of the product.  Later, as I was explaining to the client why I included some fairly obvious warnings, it struck me how ridiculous the law has become and how businesses are constantly under threat from frivolous lawsuits.

 

Mind you that this post is not about dangerous products or unsafe stores.  Rather, this is about customers and clients blaming you and your business for obvious errors made by the client or things clearly beyond your control.  Let me give you some examples to illustrate my point.

 

In products liability cases, manufacturers have to tell a consumer how to use and how NOT to use a product.  Manufacturers must also warn consumers about the consequences of misusing a product.  It is not enough to assume that a consumer will use a product for its obvious and intended purpose.  Nor is it enough to assume, for example, that a consumer understands that lighting a charcoal grill in the living room might cause a house fire or dangerous fumes that might harm people’s lungs.  You have to assume, as another example, that a consumer might try to scrap paint off an old house using a weed wacker.  Sounds ridiculous, but that’s a fair view of how the law now works.

 

The law requires you to protect your business against the dumbest customers imaginable.  Assume that your customers will make the silliest mistakes.  Now guard against those risks.  Unfortunately, that’s how you must now operate.  You cannot assume that your customers are of average intelligence.

 

Please understand that there is a gap between what the law says and how it is actually applied.  The law does not actually require you to protect yourself from injuries or losses sustained as a result of a customer’s unreasonable errors in judgment, but judges and juries apply the law that way.  Bad facts, as we say, make bad law.  Sure, you can appeal.  But at what costs?

 

Most people have heard of the “reasonable man” or “reasonable person” standard.  That remains the law.  There is, however, the reality of what judges and juries do in actual cases.

 

The solution to these business risks is to prevent claims and lawsuits by assuming the worst.  Create systems, policies and procedures that guard against claims by your dumbest customers and clients.  Get insurance.  Work with a good attorney, and take my warnings seriously.  In short. . .

Hope for the Best, but Plan for the Worst. 

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.

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.

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 | 2 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.

Good Customer Service = Good Legal Strategy

Posted on | February 10, 2009 | 2 Comments

 

Chris Brogan posted a story on how well his friend was treated by SanDisk when her mp3 player broke- http://www.chrisbrogan.com/guest-post-the-sandisk-story/.  After you read Chris’ blog, come back here and finish reading this blog entry.

 

Very few lawyers talk about customer service or quality assurance programs for their business clients.  That’s a shame, because happy customers aren’t going to sue you or your company.  So, shouldn’t lawyers teach their clients ways to make customers happy without (1) incurring other liability risks or (2) bankrupting the company?

 

Developing systematic ways to field and address customer complaints reduces the risk of getting sued for breach of contract, breach of warranty, products liability and even negligence.  Make your customers and clients happy, and you’ll make more money and get sued less often.  It’s that simple.

 

The client is NOT always right.  However, you should endeavor to make every customer FEEL like the customer was not wrong.  Angry customers are not simply liability risks.  Unhappy customers influence other potential or actual or angry customers.  In a small town, people talk, and negativity about your business can spread fast.  Ask any restaurant owner/manager if that’s true or not.  For large companies, blogs and chat rooms are where bad will for your company, product or service spreads and spreads fast.  You might lose future business, if an angry customer publicly trashes your services, products or company.  Additionally, unhappy customers encourage other unhappy customers to take action against you.  There is a negative snow ball effect in play here, and that can translate to claims and lawsuits. 

 

Study how Dell Computers got trashed on blogs and chat rooms for years, until it discovered how to turn all those customer questions and concerns into (1) ways to improve its products and operations, (2) cross-market other products and services  and (3) neutralize disappointed customers.  Dell’s story is another good example of how to identify unhappy customers and turn negatives into positives.  Obviously, you can’t make an unhappy customer happy, if your angry customers can’t be identified and have no way to interact with your company.  So, what are you doing to survey customer satisfaction?  No, seriously- WHAT ARE YOU DOING ABOUT THIS?

 

If a customer slips and falls in your store or office, go out of your way to make that customer  happy, without admitting fault.  An angry customer with a twisted ankle is far more likely to sue you than a pampered customer with a twisted ankle.  So, call a doctor.  Get some ice.  Send an employee for a bottle of pain reliever.  Move a cushioned chair from the back room to make the customer comfortable.  Comp a meal.  Waive a fee.  Offer a free service.  Ask what the customer wants.  Show concern and compassion.  Assign a key manager to stay by the customer’s side until the situation is resolved.  Etc., etc., etc.

 

It wouldn’t hurt to call your business advisor, coach or lawyer while the customer is still in the store for additional ideas.

 

It’s that easy.

 

In a future blog, I’ll describe how to develop a plan to make customers happy and angry customers less likely to file claims.  They key is to systematize dispute resolution processes at all levels of your business operations.  Avoiding lawsuits starts with your lowest ranking employee.  Business systems make it possible to ensure even the lowest ranking employee is a great tool in making potential lawsuits disappear and happy customers return.

Asset Protection – “It’s as easy as 1 – 2 – 3!”

Posted on | January 25, 2009 | 1 Comment

If you own a business or are going to start one, you MUST develop a plan to keep your personal assets protected against business risks.  Such planning is as important as your marketing plan, your capitalization plan, or your sales strategies. 

So, how do you develop and implement an asset protection plan?

There are time-tested, court-approved and easy things to do to keep a lawsuit from ruining your finances.  Here are the three key elements:

• #1    Use a corporation or LLC.
• #2    Get some insurance.
• #3    Develop and implement Standard Operating Procedures.

That’s it.  Those are the keys.  There’s more to learn about each of these three key elements, of course, but EVERY business should have an asset protection plan and EVERY plan should include all three elements.  WITHOUT EXCEPTION.

You can’t wait to get sued and then implement your protection plan.  At the moment you have a dispute with a customer or another business, it is too late to plan.  So, you have to develop and implement your plan TODAY to prevent TOMORROW’S risks from ruining your financial FUTURE.

Asset protection planning is not fun.  It’s not exciting.  It doesn’t generate profits.  And, it costs some money to do it properly.  So, most owners ignore it or avoid it, until it’s too late.

DON’T WAIT UNTIL YOU GET SUED!  An ounce of prevention or the pound of cure?  It’s your choice.  Which will you chose?

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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