Archive for the 'Legal' Category

Are partnerships really only good for two things?

When a partnership works, it’s a beautiful thing. When it doesn’t, it defines ugly.

Once, during a conversation with a mentor about partnerships, he made this declaration: “Partners are only good for two things: sex and dancing.”

My mentor’s personal experience led him to make that indictment. My experience has led me to be more thoughtful, but I still advise anyone planning a business partnership to consider his rude but worldly comment as a handy caution to purge their plans of naivete.

A business partnership should be entered into with a healthy dose of reality about the human element involved. My friend, David Gage brings sunlight to this reality in his book, The Partnership Charter, wherein he writes, “Business people are experts in what they do, but they’re not in how to be partners.” Boy, howdy, is that true!

If you’re considering a partnership structure for your business, Gage recommends asking yourself, and your potential partner, the three questions below, which are followed by my thoughts.

1. Why do I want a partner?
Having a partner means you can share the work and the risk. But it also means you have to share the decisions and the rewards.

For a partnership to work, all parties must place a higher value on the advantages of shared work and risk than on the efficiency of making unilateral decisions and keeping all the loot.

2. Are there better alternatives to taking on a partner?

Just like in a marriage or any other relationship, both parties have to bring something of value to the table. Examples could range from experience, to skills, to contacts, to capital.

The advantages of each partner to the endeavor should be identified, quantified and valued. Then each partner must determine if other alternatives to acquiring these benefits - and there are always alternatives - are more or less valuable than those of a partnership.

3. Is my prospective partner the best candidate?
If, after thoughtful and analytical evaluation, you determine that you prefer the partnership option, remember, that decision isn’t the same as who should be your partner.

When President Lincoln said at Gettysburg that “…all men are created equal,” he wasn’t talking about business partners. The person you’re considering may not be suitable for your, or any other partnership.

Now here are three of my quick partnership questions.

4. Work ethic: Are we compatible?
All small businesses have more work to be done than people to do it. Don’t take a partner unless you know he or she understands and accepts this commitment.

5. Vision: Is ours compatible?
Your views on the development, growth and ultimate dissolution of the business don’t have to be identical, but they must be compatible.

6. Values: Do ours align?
If you had to rank all the considerations for forming a partnership, most of the factors could be moved around, depending on the circumstances. But the issue of shared values is always going to be the numero uno, default, go/no-go factor. No exceptions. Immutable. Non-negotiable.

If your values are misaligned, all the money and success in the world won’t result in a successful partnership. Believe me - I’ve seen more than one misaligned-values train wreck. It’s as ugly as ugly gets.

Value factors to consider include, but are not limited to: devotion to ethical behavior; how to treat employees; is regard for customers transactional or relational; intellectual honesty and sense of fair play.

Last two points: Don’t begin your partnership without a plan - in writing - of how it will be dissolved. If you read my recent column about neurotics and character disorder, never go into a partnership with someone who has the latter. Every problem will always be your fault.

Write this on a rock … Do the same due diligence on acquiring a partner as you would a business.

Four IP questions to tell if you get it

One of the most interesting aspects of the marketplace is the evolution of how businesses leverage assets. For most of history, business leverage came from these three categories in this order:

1. Muscle power (human or animal);

2. Tangible stuff (raw material, inventory, tools, etc.);

3. Information (intellectual property, or IP).

Historically, the strongest cavemen, the biggest horses, the fastest ships, the largest factories, all had an advantage over lesser competitors. We’ve all seen this: “Largest inventory in the region.”

But here’s the interesting part: As the marketplace has evolved, the order of importance and the value of assets has inverted. Studies show increasing emphasis is being placed on IP and the ability to leverage it with less emphasis on leveraging tangible assets.

And what about muscles? Increasingly in the global marketplace, human brawn is number four on a list of three.

The good news is small businesses are joining this global trend of leveraging IP more and tangible assets less. They’re increasingly using technology in exciting new ways, doing more virtual business and are as likely to develop a strategy for doing business across an ocean today as they did across town 20 years ago.

Regarding how essential IP is to a small business’s 21st century competitiveness, more and more small businesses get it.  The bad news is there still are far too many who don’t. As an example, incredibly, almost half of small businesses still don’t even have a website.

To see if you “get it,” consider these four questions:

1. If I gave you for free (a) a truckload of inventory or (b) a special technology that would help you serve customers better, which would you choose?

2. Do you spend more time (a) thinking about products and services or (b) finding technology to more effectively serve new customer expectations?

3. Do your employees (a) use the same technology in the direct performance of their jobs today that they did 5 years ago or (b) different technology (not just new machines)?

4. If you purchased another business, which would be more valuable to you: (a) the inventory and equipment, or (b) the digital records of their customers: names; contact info, including email; what they buy; when they want it; why they buy it; and how they use it?

If you chose (a) for any of these questions, it’s likely your business’s performance is on a declining trajectory. But if you chose the (b) options, congratulations, you get it about IP.

Write this on a rock … In the 21st century, leverage intellectual property more and tangible assets less.

How to know when to change your business’ DNA

In nature, all life comes in two forms: plant and animal.

In the marketplace, all business entities are found in two forms: human and non-human.  But unlike plants and animals, a human business can morph into a non-human entity.

The human businesses are sole proprietorships and partnerships. Of the non-human entities, there are three: C Corporation, S Corporation and the Limited Liability Company (LLC).

So why should your human business morph to non-human?

There are three excellent reasons:

1.  To acquire certain tax advantages. Talk with your accountant about this.

2.  The “corporate veil” provided by a corporation or LLC can shield personal assets from legal obligations or claims on the business. Talk with your attorney about this.

3.  Many larger customer prospects won’t take your business seriously as a vendor unless you are a corporation or LLC.

When should you morph? If your business is very small, you might be able to spend the incorporating expense—$500 to $1,000—on something more immediately critical, like a computer or marketing. But one concern is that you might wait until it’s too late.

Here are three organizational and operating triggers that should help you decide when to morph from a human to a non-human entity.

- When you hire the first employee.

- When you enter into contracts on behalf of the business.

- When you establish any credit, including with vendors.

Non-human entities do require maintenance to be able to sustain the benefits against outside interests. Here are a few critical maintenance tips:

- Tell EVERYONE that your business is formed as a non-human entity.

- Identify the legal ownership designation (like Inc., or LLC) on all documents, signage, etc.

- Operate the legal entity’s finances completely separate from personal activity, especially checking accounts.

- Maintain proper corporate documentation, like shareholder and annual meeting minutes.

Remember that corporate veil? Think of it as you do your roof: Maintaining both will protect you from dangerous things that fall from the sky, like hail and attorneys.

And finally:

-  Don’t forget the triggers.

-  Be proactive, not reactive, about your entity.

-  Keep up the maintenance on your non-human entity.

-  Business entity laws vary by state.

Write this on a rock … Your business is not a plant; you can change its DNA.

Small business ownership has stealth benefits

The classic financial benefits derived from business ownership typically fall under two categories:

  1. Earned income – salary and bonuses as reported on your W2 form each year.
  2. Unearned (investment) income – distribution of profits from the operation and/or sale of the business.

But there are other ownership advantages that I call “stealth benefits,” because they’re not as evident as operating opportunities. The stealth benefit that is not only the most generally accepted, but which has the most wealth creation potential is to personally own the real estate in which you operate your business.

Here’s an invariable: Every business is a tenant of a landlord under a commercial lease. There are many financial and strategic reasons to lease property from someone else. But this arrangement offers only tax advantages – deducting expenses associated with the lease – no direct investment benefits.

Now let’s consider a lease relationship that includes stealth benefits. As long as your business is legally structured as a tax reporting entity, like an S Corp or LLC, you can accrue those stealth benefits by personally owning the real estate your business operates in, and becoming the landlord of that legal entity. For example: Smith Enterprises, Inc., tenant of Tom Smith, property owner and sole shareholder of tenant.

The first stealth benefits are your business doesn’t have to worry about prohibitive rent increases, or getting kicked out because the landlord won’t renew the lease. Other stealth benefits are tax and investment related:

  • As with any lease, the business deducts lease expenses before net profit passes through as income to shareholders.
  • As owner and landlord, you personally deduct expenses necessary to deliver on the lease agreement, including mortgage interest and depreciation.
  • Profits arising from this venture are taxed as unearned (investment) income, subject to income tax, but not payroll tax. And unlike your business sometimes, most profits – and even some losses – usually come with distributable cash.
  • Upon the ultimate sale of the property, basis-adjusted profit is taxed at the current capital gains rate, typically lower than income tax.
  • Over time, as rents rise against constant mortgage payments, monthly cash distribution is possible.
  • When the mortgage is paid off, you property becomes a cash-producing annuity.

Take advantage of the business owner’s stealth benefit of owning the real estate your business operates in.

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Last week on The Small Business Advocate Show I talked more about the benefits of owning your business’ real estate with Chris Hurn, CEO and co-founder of Mercantile Capital Corp. based in Orlando, FL and author of The Entrepreneur’s Secret to Creating Wealth: How the Smartest Business Owners Build Their Fortunes. Click on one of the links below to hear what he had to say.

Real estate as part of a small business retirement strategy

Get financing for your commercial real estate acquisition

Check out more great SBA content HERE!

Commercial real estate leasing: Part I

This is the first of a two-part series on leasing commercial real estate for your small business.

In most markets, one of the sectors that a small business can get a good deal on these days is commercial office and retail space. Whether you need more room or a better location, now is probably a good time to think about finding and negotiating for those new business digs.

But just in case you’re a little rusty on where to start the process, let’s focus on the initial steps of commercial real estate leasing fundamentals that will help you find and compare leased space that works for you.

1.  Don’t stop looking until you find at least two or three places that work. The extra shoe leather will pay negotiating dividends later.

2.  Don’t sign any lease until you know the entire expense picture, including maintenance, which we’ll cover next time

3.  Avoid emotional attachment until after you’ve negotiated lease terms you can live with. At this point, the only emotion that should enter into your decision is whether customers will get excited about the location. Love is for lovers - this is business.

4.  Ask for a pro forma copy of the lease as soon as possible and read it. Commercial leases are like belly buttons - each one is different.

5.  Create a comparables analysis in an electronic spreadsheet that allows you to compare the details of prospective properties. The basics include: leased square footage, unit lease price, incremental expenses (including maintenance), lease term required (how many years), plus pros-and-cons notes about each property.  The notes will come in handy later if you need a tie-breaker when you’re making the final decision.

Since every leased space is different in size and price, here is a handy rule of thumb to help you start the elimination process. Ask the agent or landlord for the unit lease price - $8, $14, etc. - which is the price per square foot of the space per year. Multiply those two numbers and then divide the product by 12 to get the monthly base rent. Use this only as a quick tool to compare properties of different size and unit price.

Taking these numbers and your preferences into account, by now you should be able to get your list of prospective properties down to a manageable list.

Now is a good time to look for a good deal on commercial space, if you know how.

In the next column we’ll wrap-up this project with the rest of the financial analysis and lease details, including types of commercial leases.

Should your business change its DNA?

In nature, all life comes in two forms - plant and animal.

In the marketplace, all business entities are found in two forms - human and non-human. But unlike plants and animals, a human business can morph into a non-human entity.

The human businesses are sole proprietorships and partnerships. Of the non-human entities, there are three: C Corporation, S Corporation and the Limited Liability Company (LLC).

So why should your human business morph from human to non-human? There are three excellent reasons:

  1. To acquire certain tax advantages. Talk with your accountant about this.
  2. The “corporate veil” provided by a corporation or LLC can shield personal assets from legal obligations or claims on the business. Talk with your attorney about this.
  3. Many larger customer prospects won’t take your business seriously as a vendor unless you are a corporation or LLC.

If your business is very small, you might be able to spend the incorporating expense - $500 to $1,000 - on something more immediately critical, like a computer or marketing. But one concern is that you might wait until it’s too late. Here are three organizational and operating triggers that should help you decide when to morph from a human to a non-human entity.

  • When you hire the first employee.
  • When you enter into contracts on behalf of the business.
  • When you establish any credit, including with vendors.

Non-human entities do require maintenance to be able to sustain the benefits against outside interests. Here are a few critical maintenance tips:

  • Tell EVERYONE that your business is formed as a non-human entity.
  • Identify the legal ownership designation (like Inc., or LLC) on all documents, signage, etc.
  • Operate the legal entity’s finances completely separate from personal activity, especially checking accounts.
  • Maintain proper corporate documentation, like shareholder and annual meeting minutes.

And finally:

  • Don’t forget the triggers.
  • Be proactive, not reactive, about your entity.
  • Keep up the maintenance on your non-human entity.
  • Business entity laws vary by state.

Your business is not a plant; you can change its DNA.

Recently on The Small Business Advocate Show, I talked more about the legal structure of small businesses. Take a few minutes to click here and listen. As always, tell us your experiences in changing the legal structure of your small business.




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