I’ve Formed My Company, So Now What?

The Basics of “Corporate Formalities” & a Few General Rules for the Small Business Owner

Almost all small business owners understand that before they open shop they need to first form a company. Most small business owners even understand that operating their business through a corporate entity helps to insulate their personal assets from liability. But, in my experience, too few small business owners fully understand how to use their corporation or limited liability company to best ensure the company is treated as a separate entity from you, the owner.

In a nutshell, if you and your company fail to follow certain “corporate formalities”, your company could lose its corporate status, create adverse tax consequences, and even open the door for individual liability. Let’s say your company gets sued, a smart plaintiff will attempt to “pierce the corporate veil” and go directly after you, and your hard earned assets. Think of your company as a protective bubble with you in the middle – when used properly, the protective bubble (veil) is designed to keep creditors away from you personally. Unfortunately, far too many small business owners, for some reason or another, fail to follow the legally required corporate formalities, and consequently leave an opening for plaintiffs/creditors to pierce that protective bubble, thereby allowing them to go after you in your individual capacity.

Below are 10 Rules that all small business owners should followafter forming your company. These rules have been developed over more than 100 years of corporate jurisprudence, but are, in most instances, equally applicable to limited liability companies (“LLCs”).

1. Abide by the Company’s Operating Agreement, By-Laws, etc.If you didn’t go to a lawyer to create you LLC and decided to save a few dollars by forming your company on-line, beware. Missouri law requires all LLCs to have an operating agreement. If you do have an operating agreement (LLC) or By-Laws (corporation), review them annually and make certain your company complies with their terms.
2. Sign All Documents on Behalf of Your Company. You can quickly personally obligate yourself on a contract, purchase order, etc. if you sign said document in your individual capacity rather than as a member of your LLC or officer of your corporation. Your signature block should look like this:
             –[Name of company]–
             By:__________________________
             –[Title of individual]–
3. Hold Scheduled Meetings. If you are a corporation, you need to hold your annual meeting as dictated in the bylaws.
4. Hold Special Meetings. Again, if you are a corporation and an important decision is coming up, you should hold a special meeting consistent with your by-laws (think… signing a lease, selling the company, buying a company, borrowing money, entering into a big contract, compensation, etc.).
5. Use Your Company Minute Book & Resolutions. Use your minute book to record actions of shareholders and directors of a corporation. This would include annual minutes showing the election of directors by the shareholders, as well as resolutions showing any significant corporate activities where a special meeting was held.
6. Bank Accounts and Commingled Funds. You should never commingle personal funds with the funds of the company; rather, you need to open a separate bank account for the company. This is not your money, this is the company’s money.
7. Stock Ledger Book. If you are a corporation, rather than an LLC, you are required to keep a stock ledger book evidencing who has stock certificates and what was paid for them. This is also an effective way to keep track of who owns how much of the corporation.
8. Document Loans to and From the Company. Any loan you make to or from the company must be properly documented – usually through use of a promissory note. The company is not your ATM.
9. Maintain Accurate and Up-to-Date Accounting Records. Pretty obvious, but if your company is audited you’ll regret having skipped this step.
10. The Last Place to Borrower is from the IRS.Be certain to set aside sufficient funds for taxes – this includes employment, income, and sales taxes. Unlike most debts, these taxes are as a general rule non-dischargeable in bankruptcy.

In sum, remember, you are not your company, and your company is not you. Even if you are the only owner of your company, and you are the only person running the company, it is crucial you always keep in mind that your corporation or LLC is a distinct and separate entity from you personally, and must be treated as such.

The Security Breach Notification Rule

A security breach notification only applies to “unsecured PHI”. PHI that is not encrypted or completely destroyed is considered “unsecured” by HHS. The only way, generally, that HHS has said that PHI would be considered “secured” is if it encrypted or completely destroyed. If that is the case, then the covered entity does not need to develop internal procedures for notification of security breaches. In any event, those practices should review their existing Notice of Privacy Practices to update it with respect to the new notification rule.

WHAT IS A “BREACH” REQUIRING NOTIFICATION UNDER THE RULE?

HHS has defined “breach” to mean a use or disclosure of unsecured PHI in violation of the HIPAA Privacy Rule. As we learned when the Privacy Rule was implemented, PHI generally cannot be used or disclosed without the individual’s prior, written authorization. However, the Privacy Rule also contains a laundry list of exceptions to the general rule. Consequently, covered entities may often have to scrutinize the Privacy Rule to determine whether a breach, indeed, even occurred. Hence, a breach will only occur if the following requirements are met: Continue reading »

Missouri Shared Work Program

A Unique Opportunity to Reduce Employee Hours While Still Qualifying Them for Unemployment

In a struggling economy, employers have to make difficult decisions pertaining to their businesses and employees. Faced with “hopefully” temporary losses in business, many employers are forced to terminate employees losing their experience and knowledge. On the other hand, if the employer elects to reduce hours, the employees receive lesser pay and are ineligible to collect unemployment benefits.

Fortunately, employers do have a unique alternative under the Missouri Employment Security Law whereby they can retain their hourly workforce and reduce hours while at the same time allowing their employees to receive a proportional supplement of unemployment benefits. This article applies only to such programs that involve hourly-paid employees.

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What are you really paying for – net, gross, or modified gross leases?

When choosing your leased space, you need to be certain you’re comparing apples to apples. Your decision to enter into a lease without understanding the significance of the type of lease may have a drastic financial impact on your company. The three most common types of commercial leases are: net, gross, and modified gross.

Net Leases: Net leases allocate building costs and responsibilities between the landlord and the tenant. The most common type of net lease is the triple net lease (“NNN”). With a triple net lease, the tenant pays taxes, insurance, and maintenance in addition to the monthly rent. If the building is newer, in good repair and you, the tenant, are going to be the only tenant in the building, this may not be a bad option. In exchange for the higher level of building responsibility, the tenant’s monthly lease payment is usually lower. Also available are single net leases (“N” – tenant pays monthly lump sum plus property taxes) and double net leases (“NN” – tenant pays monthly lump sum plus property taxes and insurance). With a N or NN lease, the landlord is generally responsible for all other operating expenses.

Gross Lease: A gross lease is the opposite of a triple net. With a gross lease (sometimes referred to as a “pass-through” lease), the landlord will pay for all repairs, taxes, and insurance in exchange for tenant paying a fixed lump rental amount each month to the landlord. True gross leases are relatively rare outside of the residential or multi-unit retail context; but, when available, relieve the tenant of some of the risks usually associated with property ownership. The flip side of a gross lease is that your monthly rent will be higher than a comparable NNN lease – the landlord will, when it determines the monthly rent, factor in future repairs, taxes, and insurance.

Modified Gross Lease: On the scale of allocating responsibility for the property, a modified gross lease falls somewhere in between a NNN lease and a gross lease. In real life, many leases are within this category. The landlord may agree to pay for real property taxes and major repairs (roof, foundation), but the tenant is responsible for insurance and minor repairs (windows, paint). The key is to negotiate and understand each party’s respective level of responsibility prior to signing the lease, and then decide whether the “great deal” on this property aligns with the small business owners’ risk tolerance.

When looking at your lease for the first time, it is important to remember that often these terms are negotiable. In any event, before you sign on that dotted line, be certain you know who’s paying for what.

10 Essential Lease Traps & Tips for Small Business Owners

You’ve made up your mind, you’re going to take the plunge. You’ve crunched the numbers, lined up staff, and found the perfect location to open your own small business. You meet with the landlord, negotiate rent, and move in… life is good.

Minutes after making your first sale, you notice the ceiling is leaking in aisle 2 over the new cashmere sweaters, the A/C stops working on the first 95 degree day of the year and your selection of artisan cheeses is about to spoil, and you just received notice from a bank that they are foreclosing on your landlord and you need to be moved out in 10 days! As a small business owner, you know these things happen everyday. The key is to recognize these concerns before you sign the lease and to plan accordingly – not only will this approach give you protection, it will force you to understand what exactly you’re getting your burgeoning company into.

This 10 part series will start at the beginning and walk you through some of the most important, and often overlooked, aspects of a lease agreement for the small business owner. Whether you’re opening a restaurant, selling high fashion, or just working from cubicles, all of these lease issues must be addressed for your small business to thrive:

1. What are you really paying for? – Triple Net, Gross, and Modified Gross Leases.
2. How long should you stay? – Lease Term, Renewal Options, Lease Purchase Options.
3. What is the landlord going to fix? Landlord’s Duty to Repair.
4. Who’s on the hook for the lease? Personal Guaranty.
5. Making the space right for your business. Tenant Improvement  Allowance.
6. The best neighbors are those you aren’t competing against. Exclusive Use Clauses.
7. Will the city let you do what you want to do and where you want to do it?
   Intended Use & Zoning.
8. The building burned, flooded, and the city wants to take my leased space to put in a coffee house. Casualty Loss, Insurance, and Eminent Domain.
9. Does my landlord really get to hold onto my security deposit forever? Security Deposits and Sunset Clauses.
10. Bank foreclosure on your landlord. SNDAs.

10 Ways for Companies to Stay Union-Free

Your company has the opportunity to create a culture now that encourages informed, engaged, and productive workers that have little incentive to organize.

Create your own competitive advantage in your industry by taking the actions below so the union walks away from your workforce and shows up at a competitor’s door instead. Wage your election campaign now by thinking and acting proactively!

1. Competitive Wages & Benefits—Outside & Inside

Companies should evaluate wages of similarly situated employees of other companies to determine if their workers are being paid a competitive wage. Similarly, companies should analyze their internal compensation system (salary/wage ranges and rates) to determine if compensation is set for “position” rather than individual and whether a uniform approach is used for length of service and experience. If there are disparities that cannot be justified, they should be evaluated.

2. Communication with Employees—What are the Wants?

Companies should allow employees to communicate with management regarding complaints and concerns. Methods of communication include having open door policies when appropriate, surveys, suggestion boxes, bulletin boards, job orientation, forms which communicate to the employee various hidden employee benefits, and company events such as picnics and holiday parties. Continue reading »

Department of Labor Exempt Regulations—What 2004 Favorable Changes Are You Still Not Using?

The Fair Labor Standards Act was passed in response to the Great Depression. An important piece of New Deal legislation, the Act was concerned primarily with providing a minimum subsistence wage and protection against oppressive working hours. Congress passed overtime legislation to advance three goals: a shorter work week, compensation for overworked employees, and work spreading (sharing). The white collar exemptions essentially served as a line drawing tool between those workers in need of statutory protection and those whose skills, pay and position offered them sufficient bargaining power to protect themselves.

In the agrarian and manufacturing-oriented economy of the 1930’s and 1940’s, white collar workers had clearly defined decision-making responsibilities, were closer to management and were paid better than today. In such an economy, white collar workers were middle class in income, outlook, attitude and life.

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You Should Exchange Your Briefs

Your pre-mediation briefs, that is.

It is generally agreed among lawyers that some amount of information must be possessed by both disputing parties to a mediation, if the mediation is to result in settlement. (Of course, theories on how much information is necessary, i.e. how much discovery, if any, differ with types of case and frequently from attorney to attorney.) I’ll write more about that in future memos.

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Amendments to FMLA Extend New Leave Rights to Family Members of Military Personnel

Within the last several days, President Bush signed the National Defense Authorization Act, which included amendments which expanded the coverage of the Family and Medical Leave Act (“FMLA”). These changes provide job-protected unpaid leave to covered workers to care for family members who are injured or become ill while serving in the armed forces, and when reservists are called to active duty in a “qualifying exigency” (a term which is likely to be defined under future regulations to be issued by the Department of Labor, but which clearly includes service in Iraq and Afghanistan). Because the law did not have a specific effective date, it is effective immediately.

Wounded Service Members

Under the FMLA amendments, an eligible employee who is the spouse, child, parent or next of kin of a service man or woman is entitled to a total of up to 26 weeks of unpaid leave to care for the servicemember if he or she is receiving medical care for, or recuperating from, a serious injury or illness suffered while serving in the military. The term “next of kin” has not previously been used in FMLA and is undefined by the statute. Exactly who qualifies as a “next of kin” is likely to be defined under new regulations to be issued by the Department of Labor (“DOL”). A serious injury or illness is one that renders a servicemember medically unfit to perform his or her military duties. The 26 weeks of leave can only be taken during a single 12-month period (i.e., can not be taken in successive years due to the same injury or illness). Leave may be taken intermittently. The employer must allow the employee to take leave in increments as small as the shortest period of time that the employer regularly tracks in its payroll system (e.g., if a time clock is utilized by an employer, the increment can be measured in minutes). If a husband and wife are employed by the same employer, they may be limited to taking a total of 26 weeks of unpaid leave between them.

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Kicking the Habit and Getting Fit Helps Employers’ Bottom Lines

Employee costs are the bottom line

The fact is that employee costs, and curbing those costs, are the “bottom line” for most employers. For years, employers have been struggling to control and minimize the rising costs of health care for their employees. Employers are increasingly forced to transfer health care costs to their employees through higher premiums, copayments and deductibles. Only in the past few years have employers realized that they can assist their employees in improving their overall wellness, while at the same time potentially reducing the employers’ health care costs. The methods that employers have begun experimenting with include implementing wellness programs, offering health risk assessments, and education.

Hard, Cruel Facts

Since 2000 U.S. healthcare cost increases have exceeded the overall inflation rate by a factor of two to five times. (National Coalition on Healthcare, Economic Cost Fact Sheets.)

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