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

Mike Colwell of the BIZ recently wrote an excellent post on IowaBiz titled Partnerships a Guaranteed Divorce. Mike explains in his post that wise business people will always plan for the divorce. The end is inevitable, whether it's due to death, retirement, disagreement or other reasons.

Mike also linked to my recent seminar on Partnering that I delivered at the BIZ Raising Capital Seminar. It's long but provides many tips for business people interested in partnering with others. Like a good marriage, communication and planning are the key ingredients for a good partnership.

You can see many helpful business videos from the Raising Capital Seminar in the Post Event video section of the BIZ Website. 

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The Boulder Business Advisor has a general overview of the three main types of business structures and the factors that go into making a decision about which entity to choose for your startup business.

It's important to get tax advice when deciding what entity is best for you. Another critical question, as mentioned in the post by Mike Laszlo, is whether you plan to take venture capital. Generally, you will want a C corporation if you plan to take venture capital. But I've worked with a number of organizations that started as a limited liability company (LLC) and then later converted to a C corporation down the road after taking venture capital. I've also had organizations that started as an S corporation but later became an LLC for various reasons. Choosing one entity type in the beginning does not necessarily mean you are stuck with that entity type for eternity.

The darling of the business entity formation world right now is the LLC. But see my recent post on the factors of whether the LLC is right for your business.  The LLC is not the right entity choice in all situations. Talk with a business attorney and accountant before making your business entity decision.

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 I was busy reading an article on Why Lawyers Don't Run Startups (And Why Entrepreneurs Hate Lawyers) when I ran across a terrific lesson learned from the article's author, Steve Blank. 

In every company that gives you a contract there's someone who wants a deal. When you run into contract issues, call them first for advice.

In my experience, this is SO true. I'll often review and negotiate contracts for clients. Often, there are terms that are unacceptable and put the client at considerable risk if they were to give in on the terms. I'll always ask them to go back to the person who has the most stake at getting the deal done to find out if a compromise can be reached. Hint: It's rarely the lawyer on the other side of the table who could care less about the deal and cares much more about a brilliantly written contract that forever protects the other side from every possible liability. It doesn't always work, but more often than not, we are able to move past the stalemate.

As a part of the process, it's important for business people to communicate their overall strategy to their lawyer. As the article suggests, what are the short term consequences of signing a deal? What can screw you in the long term if you agree to the contract? What contract terms really matter to you? Many lawyers concentrate too hard on protecting their clients from EVERYTHING. When in reality getting a deal done on terms that you can live with should be your priority.

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Over the years I've noticed that very few businesses actually plan for selling or passing on their business to employees or family. It's one of the most important things any business owner can do.

I've teamed up with business coach Monte Wyatt to provide a free seminar to business owners on business succession planning. The seminar is Friday, April 13, from 11:30 a.m. to 1:00 p.m. at the Brick Gentry offices located at 6701 Westown Parkway, Suite 100, West Des Moines, IA 50266. We will provide lunch.

If you'd like to come please RSVP by sending an email to rush.nigut@brickgentrylaw.com. Seating is limited to 20 people. We would love to see you there!

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 The Business Innovation Zone (BIZ) is holding its annual Raising Capital seminar at StartupCity Des Moines on March 27 starting at 9:00 a.m. Raising capital for your business is complex and often time consuming. This is a great seminar to get you started.

There are several lawyers, accountants and business people presenting including Ben Milne who is the CEO of Dwolla. Ben will be speaking on the "pitch" to investors. That should be very interesting as his company just completed a $5 million raise for venture capital.

I'll be speaking on partnerships. We'll talk about the why partnership disputes commonly occur and how to avoid them. It's not uncommon for partnership disputes to cost in excess of $100,000 for litigation and can often derail a company's plans for growth and profits.

And while you're at it, check out this post on the BIZ Blog on Creative Fundraising. It's a good read.

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In the past many new business owners funded their ventures through home equity lines of credit. But with the decrease in home values over the past few years, it's been tougher for the start-up business owner to rely on home equity for funding. So what's a new business owner to do?

An article from the Wall St. Journal discusses How to Finance Your Start-Up without Tapping Home Equity. Some of the options include:

• Peer Lending - sites like www.prosper.com and www.LendingClub.com or Crowdfunding through www.kickstarter.com. 
• Asset-Based Credit - loans backed by marketable securities, equipment, inventory, accounts receivable and other business assets. Also factoring. 
• SBA Loans - Bank financing can often be tough for true start-up. Usually more viable as business becomes established.
• Angel Investors - The Des Moines Business Record recently had a story on Angel Investors in the tech sector. The number of angel investors are increasing in Des Moines and throughout Iowa but still low compared to some other parts of the country.
• Personal Credit and Savings - most businesses are funded this way. Bootstrapping a business can be very difficult. And not having enough capital can be fatal to the business.

All of these funding mechanisms are also in play for many franchises according to the Fox Rothchild Franchise Law Update. John Gotaskie says in his post that recent conversations with angel investors leads him to believe that angel investors are getting antsy from sitting on the sidelines and are interested in returning to the fray. If true, that's good news for franchises and small businesses alike. The momentum occurring throughout Iowa in the start-up community is also a good sign. You may need to get creative and beat the streets but funding is out there.

See also:Does Your Business Need an Angel?

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I was quoted in this article from The Street entitled, "When The Parent Company Drags You Down". The article discusses the financial woes of some franchises including Quiznos and the impact on franchisees.

If your a franchisee caught in a system experiencing financial problems, my first piece of advice is to carefully review the terms of your franchise agreement to make sure the franchisor is meeting its obligations to you. Another expert quoted in the article encourages franchisees to organize and band together. Banding together can enable franchisees to gather information and gives leverage and bargaining power with the franchisor, vendors and suppliers and even help with trademark rights, said Brian Miller, CEO of The Entrepreneur's Source. 

If your franchisor is experiencing serious financial issues, it's also prudent to speak with a franchise attorney to get an understanding of your rights.

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Joe Kristan of the Tax Update Blog has a very interesting post on So What is the Right S Corporation Salary? The blog post discusses a recent 8th Circuit case where a West Des Moines accountant had to pay FICA taxes on about $91,000 of his earnings from his professional S corporation --rather than $24,000-- the figure he had used as his W-2 income.

I've talked on this blog in the past about how S corporation salaries must be reasonable. There is definitely an opportunity for S corporation owners to save on FICA and Medicare taxes but determining what the IRS will consider as a reasonable salary is difficult at best.

The Watson case is instructive though. Watson had set his salary as $24,000 and claimed that was all his accounting firm intended to pay him. The IRS determined that $91,000 was a more reasonable salary in his case and the 8th Circuit agreed. But keep in mind that Watson earned about $200,000 out of S Corporation distributions. So all was not lost as he avoided the 12.4% combined FICA taxes and 2.9% Medicare taxes on the difference. The case demonstrates there is some happy medium for the S corporation owner and proper planning can certainly help in saving on taxes. I've known others who have been challenged by the IRS and faired very well when setting reasonable salaries.

Joe Kristan states, in responding to a comment from me, that every case is different and that the relationship between a reasonable salary and overall compensation is certainly not linear. He says, 

No matter how fabulously successful the company is, the salary should match the job. Heck, if the founding shareholder cuts back his hours and hires professional management, his salary might go down as profits go up. 

It's best in these situations to get good advice from your tax advisor before setting a salary for your S corporation. And as we've said before, "pigs get fat, but hogs get slaughtered." 

For more information see:  8th Circuit Decision and District Court Decision

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I recently had a meeting with a startup company that has tremendous potential for growth. If the idea for the business is to take off, it's likely they will need some capital injection along the way, especially if the owners want the growth they hope for in a short amount of time.

One question we discussed then was what type of entity should they form? The owners initial preference was an LLC but the question is whether an LLC is really the best entity?

The Startup Law Blog has a great article on 12 Reasons for a Startup Not to Be an LLC. The top two reasons cited in the post potentially apply to my new client:

1 – Many Investors Don’t Like LLCs - Investors frequently don’t want to complicate their personal tax situation by becoming a member in an entity taxed as a partnership and then receiving Forms K-1 and being taxed on the entity’s income even if no cash is distributed to them to pay the taxes.

2 – Many Investors Can’t Invest in LLCs - Some investors (such as venture funds), can’t invest in pass-through companies because they have tax-exempt partners which do not want to receive active trade or business income because of their tax-exempt status.

There are 10 other reasons listed in the post but the reasons listed above are the big ones that come up for many emerging companies.  Most of what you read out there on the Internet would tell you to go with an LLC, so it's refreshing to see a post that looks at the different angles. The threat of double taxation scares many away from C corporations but it can be a great entity choice for those looking to raise and reinvest capital.

A key is to consider the end goals for your business. It's best to get advice from an accountant and business attorney before forming your entity to determine which entity is best for you.

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Lawyers are not immediately recognized as the most creative souls on the planet but some of the best lawyers I know definitely have the the creative spark. I have seen many who were classic doodlers, photographers and painters. Some of them were also the most creative in the courtroom and ultimately very successful in winning cases. That's why I am intrigued by the Iowa Creativity Summit that is scheduled for March 1st at Drake University (Olmstead Center). Your registration includes dinner and two workshops led by best selling author Matthew E. May. The evening program begins at 5:15 p.m. and ends at 9:45 p.m.

This is a great opportunity for business leaders and employees to familiarize themselves with the creative process. As the program says, creativity isn't just for marketers or designers, it's for everybody. Even lawyers and entrepreneurs!

For more information on the program click:  Iowa Creativity Summit

For more information on Matthew E. May click: The Laws of Subtraction

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Jason Shinn of the Michigan Employment Law Advisor had a great post entitled "Is your company making this mistake when it comes to employees and intellectual property?" The post centers on a lawsuit filed by an employee of Marvel Entertainment who claimed he created the Ghost Rider character back in the 1970s. With the recent success of the movies, video games and promotional products, the value of the character has increased substantially and the employee wanted his share.

Shinn's post discusses how Marvel eventually won the lawsuit filed by the employee, but it wasn't easy, and the case took four years to litigate.

The importance of written agreements with employees and contractors that create intellectual property cannot be understated. A case I will never forget involved the sale of a business. At the 11th hour a contractor claimed to own all the intellectual property a business owner was trying to sell. No agreements existed between the business owner and the contractor. Fortunately, we were able to negotiate a reasonable figure that the contractor would accept to allow the sale to go through but the lack of an agreement did cost the business owner money and almost cost them the sale.

So I wholeheartedly agree with Shinn's advice:

In this regard, for companies that want to make certain they are the owner of a work - whether the work is created by an employee or independent contractor - the best advice is to require employees and independent contractors to execute an assignment and work-made-for-hire agreement at the outset of the relationship so that copyright ownership vest in the company.

Don't wait until it's too late. That's a mistake you don't want to make.

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In this video I discuss a red flag I've seen come up in franchise agreement negotiation. Sometimes a franchisor will tell a prospective franchisee that they can't (or won't) change the franchise agreement. That's just fine but my problem comes when they say, "Don't worry though, we won't hold you to that provision." That is definitely a red flag!

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Maryland franchise lawyer Jeff Fabian has an excellent blog post on the issues to consider when the franchise agreement terminates on the Franchise Help blog.

In my experience many franchisees are under the misconception that they can simply change the name of their business and then begin serving the same customers the next day under the new business name. Wrong!

Most franchise agreements will contain a non-compete clause. And franchisees are surprised to learn that the customers may not belong to them at all.

Jeff's post covers these issues and more. Keep these factors in mind when you are initially reviewing the franchise agreement and considering whether to purchase the franchise. If a franchise term is 5 years, that can go very fast and you might find your bucket is empty at the end of the term.  

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One of the nice benefits of filing an LLC in Iowa is that the owners are not required to disclose the members in filings with the Iowa Secretary of State. In many instances when filing a Certificate of Organization, I won't list the member(s) to provide anonymity to the member(s) on the public search site. Instead, I'll sign as the organizer and use our law office address as the registered office for the company. In biennial report filings, I'll sign as the registered agent or authorized representative.

This strategy is helpful when business owners don't want others to know what their doing through public searches on the Secretary of State's site. Today's Des Moines Register BIZ BUZZ column had a report about a buyer that purchased a home in our area for $2.5 million. The owner obviously did not want others to know who purchased the home so they set up an LLC with only the lawyer disclosed as the organizer. This kept the information confidential - for now. Someone will likely found out when they move in since it's a residential property. But I've represented several people who use this strategy to keep their identities protected from public searches. The member is disclosed in the operating agreement, meeting minutes and other documents but those documents are not filed or shared on the Iowa Secretary of State site.

Just another reason why forming an LLC in Iowa is beneficial for Iowa residents.

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I recently received an inquiry on the blog asking whether or not a spouse should sign a franchise agreement. Circumstances may vary, but in general, I usually recommend that spouses don't sign the franchise agreement if they aren't going to be involved in the franchise business. It's my view there is no reason your family should throw all your eggs in one basket by having both spouses sign a personal guarantee.

If a franchisor tells you it's required for the spouse to sign, push back. There is no such legal requirement. Plus, most franchise agreements have transfer provisions that allow the franchise to be transferred to the spouse in the event of death or other circumstances.

Other reading:  11 Things Every Franchisee Should Know.

Be sure to consult a franchise and/or business attorney for your specific circumstances.

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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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The Iowa Startup Fair takes place on January 31, 2012 from 3 to 6 PM in various locations around downtown Des Moines, Cedar Rapids, Cedar Falls and Pella. More than 80 companies will be exhibiting throughout the state.

There are more than 50 businesses exhibiting at the Des Moines locations. Those locations are the StartupCity Des Moines offices, 317 Sixth Avenue, Fifth Floor; Amici Expresso, 206 Sixth Avenue; Foundry Coworking, 418 6th Avenue, skywalk level; and the BitMethod Headquarters, 418 6th Ave., 12th Floor.

The event is designed to give the community, investors and business people a look at the exciting things Iowa business startups are accomplishing.

I'll be exhibiting with my startup, NotifyWorks, a cloud based software system that allows lawyers, financial advisors and other professionals to send automated email notifications to their clients even when they are away from their desks or working on something else. Come check us out!

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Do you know the difference between sole proprietorships, partnerships, corporations and limited liability companies? Do you know whether to set up an S corporation or is a C corporation better for you? Are limited liability companies really all that and a bag of chips?

Be sure to join me for an information-packed webinar through MyEntre.Net on Thursday, February 2, 2012 at 12:00 p.m. CT as we discuss the common business structures and how these various legal structures vary in complexities. Plus, we'll talk about the common misconceptions that abound in choosing a legal structure for your business.

If you're thinking about forming a business entity soon, you won't want to miss this seminar!

Register for the seminar today.

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Last night I attended the Greater Des Moines Partnership's Annual Dinner. It was an interesting evening and I enjoyed listening to the guest speaker Christiane Amanpour discuss her experiences as a global journalist. She is obviously incredibly passionate about her work and encouraged everyone in the audience to "DO GOOD" with their work and to help the community around them. 

The Partnership also announced last night that it is continuing its support of the "Hiring our Heroes" program designed to get our unemployed Iowa military veterans back to work.  A video presented before dinner stressed the sacrifice made by so few for so many of us and the tremendous qualities that military veterans demonstrate in workplaces throughout Iowa.

Yesterday, I wrote about Above the Line America a new group formed for business people who have a "GIVE FIRST" attitude. So all of the events and conversations got me thinking, "How can I "DO GOOD" and "GIVE FIRST"?

That's why I have decided throughout the rest of 2012, I will donate my time for any Iowa military veteran who wishes to set up a basic corporation or LLC for a new small business. It's only a small gesture but it's one way that I can say thanks to our veterans who have sacrificed so much for us. So if you are a military veteran in Iowa  who is starting a small business, feel free to contact me regarding this offer.

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A new organization called Above the Line America is hosting a Business Growth Summit in Ankeny, Iowa on January 31, 2012 from 8:30 a.m. to 5:00 p.m. The Summit is located at the FFA Enrichment Center, 1055 SW Prairie Trail Parkway in Ankeny.

The day should be a great one. Business owners and professionals will get an opportunity to come away with an ActionPlan for their business plus listen to some great speakers including Tony Brigmon (the Original Ambassador of Fun for Southwest Airlines, Geoff Wood of Silicon Prairie News, Major Sean Quinlan (a Bronze Star recipient), Jordan Lampe of Dwolla and Angela Maiers of Angela Maiers Education Services. But best of all there is the opportunity to network with many other business-minded people like you.

One of the advisory board members for Above the Line America is my friend Andrew Clark of createWOWmarketing. Andrew and three others started the group to create a network of business-minded individuals with a "give first" attitude. If you have any questions regarding the organization or the event be sure to contact Andrew.

You can register for the event here.

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