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

I am pleased to announce that I now have a Rush on Business You Tube Channel where I'll post short videos on various aspects of business and franchise law. I have a few videos posted so far and I'll add content weekly.

New videos include:

Should You Include Your Spouse When Forming a Small Business LLC?

Where Should Iowa Residents Incorporate or Form an LLC for their Small Business?

If there is a topic you think would be interesting, please let me know!

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Jon Hyman wrote on his Ohio Employer's Law Blog that the NLRB has issued a 2nd report on social media as protected concerted activity.  If you are an employer considering discipline or termination of an employee resulting from social media activity you need to be very careful. Jon points out:

This report underscores that employees’ use of social media to discuss the workplace and work-related issues, and the impact of business’s social media policies on those discussions, remains at or near the top of the NLRB’s priorities. Because the NLRB is taking such an interest in this area, employers act at their peril if they discipline or discharge an employee for social media activities, or roll out a social media policy, without the advice and input of counsel well-versed on these issues.

Bottom line:  Discipline of employees making disparaging comments about your company through blogs, Facebook, Twitter and other sites could land you in trouble. You should read the report of the acting NLRB general counsel. It's one thing to have rules that prohibit plainly egregious conduct through the use of social media but be VERY cautious if have rules trying to curb what employees can say about your company. 

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Over the last 5 years that I have been writing this blog, there haven't been many Iowa business lawyers who write a blog on a regular basis. But when I was looking at Mike Colwell's Startup Models site, I noticed a new blog from business lawyer Chris Sackett of Brown Winick called BizB4Law.

Chris wrote a post I wish I had written called I Like Clients Who Don't Like Lawyers.  Chris says,

This post, of course, runs the risk of offending lawyers, but I suppose the whole premise is that lawyers need to get over themselves and think like the business people who are their clients.

Well said. It's a super post. Check it out.

If you're working on a business plan or financial model for your startup business, be sure to check out Startup Models too. It could save you a lot of time, expense and effort.

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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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One of the things I love the most is providing proactive educational workshops to companies and other organizations.  Due to the ever-growing interest in the topic, I am pleased to announce that I am now offering a new legal training workshop for businesses, large and small, regarding social media. A custom workshop will be designed for your business to cover the following topics:

• Overview of Social Media, New Developments and the Future
• The Use of Social Media in the recruiting and hiring process
• Balancing Employee privacy v. Employer's Business Interests
• The risks and benefits of Employees using Social Media in the workplace
• What every supervisor needs to know about the use of social media
• How (or whether) to discipline employees for Social Media use
• Social Media and its impact on Litigation
• Social Media Train Wrecks
• Summary of Social Media Case Law Developments 
• Drafting the Social Media policy 

To tailor the presentation specifically for your organization, we will send you a questionnaire in advance regarding your organization's and employees' use of social media and your existing policies and procedures.  Every company is different and the presentation will be designed to address your organization's specific issues, size, level of understanding and industry. Like other forms of employment based training, not only can social media legal training help you in the event you get pulled into litigation, but even more importantly, it can help prevent costly litigation and the loss of employee productivity.

Social media presents unprecedented opportunities and challenges for your business. It is essential that your executives, supervisors and employees stay informed about this ever-changing and important topic. For more information on social media legal training workshops and fees, please feel free to contact me at rush.nigut@brickgentrylaw.com.

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Franchisees generally want an exclusive territory that is protected from encroachment by other franchisees or the franchisor's company owned stores. Unfortunately franchisees are often under the mistaken belief they have an "exclusive territory" when they really don't.

You must consider whether the franchisor has reserved rights that could cause encroachment or competition from the franchisor, other franchisees or even other companies the franchisor may acquire in the future.

Further, franchisors may have a Web site where it conducts online retailing but franchisees are not permitted to conduct online retailing themselves.  Do you really have an exclusive territory if the franchisor conducts sales online? If the franchisor's online sales are significant, it could potentially divert customers away from the franchisee.

So don't gloss over the territory provisions in the FDD or franchise agreement. If you are told that you have an exclusive territory when meeting with the franchisor's representatives you better make sure that is actually the case.

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I advise business owners to seek the advice of an accountant when they are forming a corporation - particuarly if they have multiple businesses. A recent post from accountant Joe Kristan on IowaBiz shows why as a Michigan couple ended up with a $16 million problem in Tax Court.

As the saying goes, "An ounce of prevention is worth a pound of cure."

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Our new startup company, Notifyworks, Inc. has officially launched its Web site today. You can check it out at www.notifyworks.com. The site also contains a blog which will cover client relations and legal technology issues.

Notifyworks is a software system that allow you to set up proactive notifications to clients that are timed to automatically go out in advance of important dates and deadlines.

Be sure to check out the video on our home page and whatever you do, "Don't be Dick!"

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Once a mainstay of this blog, I have not written about employment law for quite some time. Since my franchise law practice has grown over the past few years, I've left it to Matt Brick from Brick Gentry to handle employment law issues in the office.  On the blogging side there are many great employment law blogs to follow including Daniel Schwartz of the Connecticut Law Blog and Jon Hyman of the Ohio Employer's Law Blog. Their blogs are terrific resources for anyone interested in employment law.

Another employment law blog that has come on the scene is the Iowa Employment Law Blog written by Patrick Smith of Des Moines. I've known Patrick for years and his blog is also one you can trust for up-to-date content on employment issues.

But the reason I am writing on employment law in this post is because all employers should definitely be aware of a new National Relations Labor Board (NLRB) rule that requires nearly EVERY private sector employer to post notices about their rights to unionize.  While there is some debate over whether the NLRB has the right to require the postings, the rule will go into effect on November 14, 2011. The failure to do so could result in an unfair labor practice. I am sure this would be quite the surprise for most small (or even large) businesses.

For more information, see the postings by Jon and Patrick on the topic.

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This blog post from the Minnesota Business and Real Estate Blog discussing the Fallacy that LLCs require less paperwork is spot on.

Many people come to my office wanting to set up an LLC because it is easier to "manage" than a corporation. But even with an LLC, it is important to follow corporate formalities as described in the post including documenting important decisions such as loans, issuance of membership interests, major capital purchases, leases, and the election and removal of managers/officers and board members.

Plus, in the state of Iowa you must file biennial reports with the Secretary of State whether you have a corporation or LLC.  For the typical small business owner, it does not require significantly more work to have a corporation than an LLC.

The decision to form a corporation or LLC involves several factors. But in my view the amount of paperwork is not one of them.

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Earlier this week I applied for a charge card for my new business. As a part of the application, I was informed that I would need to personally guarantee charges, not only for my card, but also the cards of any other people under the account. Fortunately, this did not come as a surprise because I had already seen this bite unsuspecting business owners and/or executives in the past through my law practice.

In one instance I represented the vice-president of a company who was a part of a four-person management team. The vice-president was the named account holder but he thought the other members of the company's management team were equally liable for the debts on the account. Not so. So when the company folded, the charge card company had his personally guarantee but not the personal guarantee of the other members of the management team. Naturally, the charge card company pursued only the vice-president for the debt.

In another instance, an office manager (yes, an office manager) was pursued by a charge card company for BUSINESS expenses charged when the owner of the business died without adequate funds in his estate to pay for the debts. We argued no personal guaranty existed and that the office manager had never agreed to the terms on the account but the fact that charge card company pursued her cost her legal expenses and much aggravation. 

So beware of personal guarantees on charge cards. You may be accepting more personal liability than you suspect. Always inquire when applying for a new card and make sure you understand the extent of your personal liability.

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For the past 17 years, I have been advising businesses of all shapes and sizes, whether small or large. I have always loved working with startups. It is exciting to hear the stories of these entrepreneurs and how they could solve a problem or discovered a new way of doing business.

Now I am leaping into that startup world with my own company called Notifyworks. Notifyworks is an automated client notification system. We are currently continuing with our beta testing but anticipate launching formally September 1, 2011. My partners, Mike Colwell and Brian Hemesath, bring a wealth of experience and I couldn't be more excited to get our company off the ground.

The idea from Notifyworks developed out of my law practice. In almost every contract or legal matter, there is some sort of follow up needed. It might be a termination date, a renewal or some other deadline. Too often these dates are ignored by clients until the last minute, or worse, forgotten entirely. What Notifyworks does, in a nutshell, is make sure lawyers and their clients never miss one of those dates. It's a great solution for any professional or business that routinely deals with contracts and deadlines.

Unlike your calendar or docket system that still requires you to take action, Notifyworks removes surprises or last minute scrambling by allowing you to set up proactive notifications that are timed to automatically go out in advance of important dates and deadlines. The system is easy to use and we have a notification library with message templates or your own customized messages that will save you valuable time in the process.  I think most lawyers will even generate more work from clients that see their lawyer cares and is on top of things.   The whole idea is to deliver great service and build strong relationships with clients.

I am excited to discuss Notifyworks and other stories on the Silicon Prairie News Prairiecast this afternoon at 2:00 p.m. If you miss it live, please be sure to check out the archived podcast.

If you are interested in joining our beta test group, please send me an email at rush@notifyworks.com. Be sure to let me know if I can answer any questions. 

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Sometimes knowing what not to buy may be just as important as what to buy.

From BlueMauMau you should see this list of the 25 worst franchises to buy in 2011. The list is based upon failure rates of SBA loans only (with 50 or more disbursements). Eight franchises have over a 50 percent failure rate on getting the SBA loan repaid. It would appear you definitely need to think twice if you are looking at franchises on this dubious list.

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I hear two words from prospective franchisees all the time. In fact, almost every time someone visits with me regarding a franchise opportunity. But a blog post on the Franchise King's Blog says these two words don't exist in franchising. 

If you are a prospective franchisee read the post from the Franchise King and take it to heart. There is no such thing as "Turn-Key". Franchise operations do not magically appear and then you walk through the door to a pile of cash thrown at your feet. It's hard work and it depends all on you.

I can tell you from experience that if a dispute or litigation occurs, the franchisor will probably deny they know what "turn-key" means and the franchise agreement will contain disclaimers that make the franchisor's marketing materials immaterial. And although the franchise industry has done a good job of marketing its method of business, the facts are that franchise operations fail at essentially the same rate as independent business operations.   

I am not anti-franchising. Franchising definitely has its place. But I'd make sure I was with a franchisor that possesses superior name recognition in its marketplace, quality products and/or services and a proven system. A proven system that won't be "turn-key".

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It is not unusual for a franchisor and franchisee to have a dispute that is resolved and then the franchisee continues in business. In those circumstances, a franchisor will often resolve the dispute with the franchisee in exchange for a full release of claims. These releases state that the franchisee is releasing the franchisor for any and all claims through the date of the release. The franchisee, often more than happy to have the dispute behind them, will agree to the release with few questions asked.

Franchisees need to think twice about agreeing to a full release in this circumstances. While it may resolve the current dispute, it will also potentially gut a significant portion of a franchisee's case against a franchisor should a dispute arise again. The franchisee must obtain sufficient compensation or other settlement terms that make it worth giving up all claims.  Chances are there will not be a second bite at the apple after a release is signed for past claims including issues not central to the initial dispute that may be raised by the franchisee later.

I am not saying a full release in these situations is never warranted. The franchisee continuing in business just needs to make sure it gets full compensation and understands that a full release will significantly limit the claims against the franchisor in the future.

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Matt Brick has a super webinar on our Brick Gentry Web site on the Changes to Iowa Employment Law and Legislation. Employment law is a constantly shifting area of the law that has serious consequences for employers, even when making a good faith mistake. Matt's presentation covers important developments in employment law for both public and private employers in Iowa.

Want to hear a Webinar on a particular legal topic? Let us know what you would like to know more about.

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I often received questions about whether a worker should be classified as an independent contractor or employee. In fact a blog post on Employees v. Independent Contractors is still one of the most popular posts ever on my blog even though I wrote it over three years ago.

In a couple of recent blog posts, Brick Gentry immigration lawyer, Austin Kennedy, explores the use of independent contractors by companies hoping not to verify the employment authorization of a worker and whether this practice could lead to liability. His posts are worth a read. 

See links below:

Does an Employer Have to Verify the Employment Authorization of Independent Contractors?

When can an Employer's Use of Subcontractors Still Lead to Liability?

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Pat Burk, a shareholder with Brick Gentry, P.C. practicing in real estate and business law has an important update with respect to how LLCs convey real property in Iowa.

Pat indicates that a recent change to the Title Standards of the Iowa State Bar Association removes the presumption of authority on LLC conveyance documents, such as a deed. Now, information must show of record indicating whether the LLC is member-managed or manager managed, that the deed was given in the ordinary course of business and setting forth the proper authority of the signatory(ies). This is a major change to the manner in which LLC's convey property and may be missed by many LLC owners until this becomes common knowledge.

Just another reason why it would be a good idea to use a lawyer for your LLC documents in Iowa. Sorry, LegalZoom.

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The Wall Street Journal Reports that many law firms have begun offering flat monthly fees to their business clients. Done correctly, these type of arranagements can be advantageous to the client and the firm. I have worked with several companies in this way for several years and prefer to charge flat fees for many different services including Iowa incorporations and LLC formation and franchise review services.

My philosophy is that most business clients would prefer to know how much something is going to cost them rather than be surprised by an hourly bill where the lawyer took much more time than the client expected.

What do you think?

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