Rush on Business : Iowa Corporate Lawyer & Attorney : Rush Nigut of Brick Gentry Law Firm : Serving Des Moines, Cedar Rapids, Davenport, & Sioux City

Many advertisements from document filing companies on the Internet tout the benefits of forming a corporation.  The first benefit typically mentioned is that a corporation provides"limited liability" or "asset protection".  Many of these companies would have you believe that if you form your own company for $99.00 you can magically protect your assets from creditors.  But asset protection is more than that.  It is true that limited liability is a major reason for incorporting your business.  The issue not addressed in these advertisement is that filing your articles of incorporation is only the very beginning in protecting your assets.

The basic concept of incorporating is that a creditor will not get to the shareholder's assets unless there is a reason to "pierce the corporate veil".  One reason for piercing the corporate veil is the failure to follow corporate formalities.  This may include the failure to hold shareholder and director meetings, documenting those meetings with corporate minutes, segregating corporate funds from personal funds and the failure to sign documents as a corporate officer.  Managing your small business corporate governance is a key factor in maintaining your corporate limited liability.

For more information see my legal checklist for starting a business in Iowa or the small business formation page.

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I love stories like the one I saw in the Des Moines Register this morning.

Check out this story about two young Iowa entrepreneurs who turned $40 into business success.

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I had the opportunity to attend the Forum on Franchising in Baltimore this past month. The Forum Chair, Joseph Fittante, was recently interviewed by BlueMauMau on the state of franchise law which I thought was important to share.

Fittante commented that he is seeing more high stakes litigation. In his experience the number of litigation cases are decreasing but more of those cases are going longer than before. (That's my experience as well by the way, so if you are a franchisee looking to end an agreement or recover damages, you can expect a strong fight from the franchisor).

Fittante also mentioned the significance of the KFC case decided by the Iowa Supreme Court. The Iowa Supreme Court ruled that a foreign corporation could be taxed on revenues received from the state of Iowa even though the company had no physical presence within the state of Iowa but rather received royalty revenues resulting from intangible property (i.e. the use of trademarks and licenses to franchisees) within the state. Fittante expects that more states will look to raise additional revenues through similar taxation methods or through the misclassification of franchisees as independent contractors v. employees.

Finally, Fittante also said he doesn't believe we will see a federal franchise relationship law that governs the franchisor-franchisee relationship but that will continue to be controlled by state law. He has a point that it's nice to know what the rules are rather than have ambiguity which happens when state laws vary so widely. 

Overall, I was impressed by the presentations at this year's Forum. Hats off to Fittante and many others for their hard work!

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A business owner needs to raise money. He comes up with an idea to "sell" a portion of his equtiy in the business. A prospective investor listens to the business owner's pitch and likes the idea. He decides to invest nearly $20,000 in the business in exchange for ownership. The problem? Nothing is in writing, yet the investor has given the money, and there is nothing that documents whether the "investor" is entitled to ownership, whether it was a loan or perhaps even a gift.

I can't tell you how many times I've seen something like that happen. It must happen to others as well because business advisor Mike Colwell recently wrote on a similar topic. It seems incredulous to me that someone could part with that kind of money without assurances in writing but I have seen it happen between friends and complete strangers alike. Why does this occur?

I think it boils down to trust. Most people are just too trusting. They believe things will work out and many don't want to confront or offend the other person. Or, they're just plain stupid (but I prefer the trust angle). So by all means trust your partner but make sure to get it in writing BEFORE you invest the money.

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The last post touched on Franchising Your Business. To continue learning more about factors to consider in franchising your business, I highly recommend this post on the New York Franchise Law Blog called Franchising Your Business: What You Can Learn from Existing Franchisors.

One of the most important points from the post is the fact you need to have adequate capital to franchise. Bootstrapping your business may be vogue now but franchising isn't something where that works. It takes significant capital to run an effective franchise operation - even if it's low cost franchise offering.

Bottom line, you can't do franchising half way. It will come back to bite you big time.

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