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?

If you are considering a business you should join me for an information-packed webinar through MyEntre.Net on Thursday, November 29, 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 some common misconceptions that abound in choosing a legal structure for your business.

Please join us! 

 In my last post I shared my ABI Quick Bits Interview on Wage & Hour Lawsuits. In that interview I discussed how I often hear employers reference "1099 employees". I cautioned that you should make sure not to confuse independent contractors and employees. They are separate worker classifications and it’s important the your workers are classified correctly.

A recent post from Epstein Becker & Green builds on that thought by stating that Independent Contractor Misclassification Should Remain a Key Area of Concern for Employers. The post discusses on the Department of Labor will continue to work with state and federal agencies, including the IRS, to share information and jointly investigate worker misclassification. 

With the re-election of President Obama, employers can expect more awareness around worker misclassification issues by federal agencies in particular because of the Affordable Care Act ("ACA") 50-employee threshold. Federal and state agencies will likely have a watchful eye on employers teetering on that mark.

The penalties and expenses for misclassification of your workers are significant. It is recommended that you conduct a wage and hour audit periodically to make sure your business is in compliance.

 

I recently sat down for an interview with Leisa Fox of the Iowa Association of Business & Industry to discuss wage and hour lawsuits. For a blog post I wrote on the topic see here.

Be sure to check out the other Quick Bits videos on a variety of business topics from ABI.

Rush Nigut of Brick Gentry, P.C. will be one of the featured speakers at the Iowa Association of Business and Industry’s Social Media Roundtable on November 14, 2012 at the Honey Creek Lodge Resort. Rush will deliver the keynote general session presentation on New Developments and the Future of Social Media. He will also lead one of the HR breakout sessions on Social Media and the Litigation Process. For the marketing track he will be a panelist on Learning Best Practices from Companies in Iowa Who Actively Use Social Media.

For more information on the seminar please see the event agenda.

This is not a political blog but I again feel compelled to write about the political effort by certain special interest groups to oust the Supreme Court justices who ruled in an unanimous opinion in the Varnum case that non-religious, civil marriage should be a right available to everyone. In the last election, three Iowa Supreme Court justices were ousted. This time the special interest groups have have targeted yet another Justice involved in the decision.  We cannot let this happen again. 

We have long had an excellent system of justice in Iowa. Like any lawyer or the public, I do not agree with every decision issued by our judges. However, it is my belief that our judges do their best to make our court system fair and impartial. On survey after survey, Iowa courts have ranked high in judicial fairness nationally. Moreover, the positive feedback from Iowa lawyers on the Iowa State Bar Association surveys demonstrates the high quality of work performed by our justices.

Unfortunately the special interest groups trying to oust our judges would have you believe otherwise. They want you to believe that a group of "activist" Supreme Court judges set out to ignore or rewrite our constitution. They want you to believe the judges ignored the will of the people. 

But know that judges are not activists when they decide constitutional issues, rather, they are required to rule on the issues presented by the parties. That’s called doing your job as a judge, not activism. In our judicial system, when one party alleges a law is unconstitutional, it is the court’s DUTY to compare the law passed in the political process to the equal protection guaranteed to all in our Constitution.

You may or may not agree with the decision in Varnum. But for me, that’s not the issue. The issue is the notion that an entire Supreme Court and lower court judges should be removed solely because special interest groups disagree with their decision. Do you want a judiciary that is for sale? Do you want a judiciary that must cower in fear because well-funded special interest groups may be unhappy with their next decision? Do you want a judiciary whose impartiality is weakened?

In conclusion, I hope you will turn the ballot over and vote ‘Yes’ on the retention of our judges in next week’s election. The survey of Iowa lawyers demonstrates these judges are well qualified in their current positions and are deserving of our support. An independent judiciary may be riding on it.

*The views expressed on this blog are my own and are not intended to speak for or represent the views of Brick Gentry, P.C. or the other lawyers in our law firm.

 Are you interested in becoming a franchisee? Franchise Note blog has a good post on Why or When is Franchising a Bad Idea for a Start Up Business. The post mentions considerations such as:

  • The start up expense:  Franchises can be expensive and perhaps cost initially more than your own start up business.
  • Are you are someone that needs to be in control? If so, franchising might not be for you because as a franchisee you definitely will not be in control.
  • Ongoing costs:  You will generally pay fees totaling 5-10% of your monthly gross revenues in a franchise business. With that kind of monthly expense can you  be profitable? Remember those fees generally are due whether you are profitable or not.
  • The feasibility of whether the franchise offers you something you can’t do on your own.

To drill down further I’d offer some additional categories and questions when talking with franchisors: 

1.  Competitive Advantage of Product or Service

How is your system better than others?  Who are your competitors?  How does your business match up?  Who are your suppliers?  What are the prices of your products?  Are your products priced fairly?  Are there any restrictions with regard to products and services?

2.  Time Tested, Standardized Franchise System

How long have you been franchising?  How many franchise units do you operate?  How many units have you closed in the last three years?  How many units have been transferred or sold in the last three years?  How many units do you plan to open over the next three years?  What is the initial investment and what do we get for that?  What are your fees?  What earnings claims do you make?  What improvements have you made to your system recently?

3.  Strong Franchisor Support

How do you support franchisees?  What is the initial training process?  What support do you provide after the franchise is up and running?  What will I hear from franchisees on this subject?

4.  Financial Strength and Management Experience

Describe in layman’s terms the financial strength of the franchise system.  How much revenue comes from initial fees and how much from royalties?  Is the franchise publicly traded and how has it performed?

5.  Mutual Interest of Franchisor and Franchisee

How will franchisees describe their relationship with the franchisor?  Supportive?  Combative?  Have there been any lawsuits or abritration proceedings?  What was the issue and how did it end?

Once you have these and other questions answered, you can begin to analyze whether  you’re better off with the franchise or going it on your own. I also recommend reading Joel Libava’s book Become a Franchise Owner. The book contains excellent suggestions and tips on whether franchising is right for you.

 I recently came across the Midwest Agricultural Law Guide, a legal blog written by Omaha lawyer Sean Minahan. Sean has an interesting blog post on how the recent drought may bring a flood of arbitration claims against crop insurers. Apparently the drought is expected to bring a whopping $25 Billion in claims!

Sean outlines the arbitration process in his blog post and stresses the importance of agreeing on an arbitrator for such claims, otherwise the arbitration will be conducted through the American Arbitration Association which often is more costly and allows less control for the farmer.

Sean’s blog is well done and I recommend you check it out. I am also impressed with the firm’s other blogs which includes the Midwest Business Law Journal. These legal blogs are definitely ones to keep in your RSS feeds.

 

Over the last several years I’ve had an opportunity to review many "License Agreements" that were actually thinly veiled attempts by companies to avoid franchising and the disclosures and regulations that come with it. It’s understandable why these businesses might want to avoid franchising. The costs of preparing franchise disclosure documents (FDDs) can be very expensive and the hassle of registering a franchise in many states is not only expensive but very time consuming. The regulations you have to deal with in franchising can be a burden. 

Charles Internicola discusses all of this in a recent blog post entitled Blatant Franchise Violations:Franchise Agreements Disguised as Franchise Agreements. It’s a great post and definitely worth a read. Charles comes at the issue more from a franchisor point of view. There are significant risks for businesses that draft license agreements that are actually franchise agreements. As Charles says, the potential litigation risk and liability exposure is not worth the cost savings that these business "save" by not setting up a proper franchise entity.

But it’s also important for prospective "licensees"  to consider whether a company that is willing to take these short cuts, it truly a business worth investing in. At the end of the day, I’d caution anyone to invest in a business that is not set up properly and within the applicable regulations. The problem is most prospective "licensees" don’t know better. That’s why it is so important to seek legal counsel and have such an agreement reviewed before entering into a business license or franchise agreement.

As Charles said in his post,

When it comes to franchising, there are no shortcuts.  "Dressing up" your franchise as a license, in the long-term, will not work and is not worth the future cost or risk.

And on the licensee or franchisee side, the same holds true. Investing in a company that takes short cuts will not work and it is also not worth the future risk or costs of your investment.

If you’re interested in buying a franchise and in the process of reviewing the franchise disclosure document (FDD), I recommend a post from business attorney and franchise consultant Mike Sheehan on Item 19 financial disclosures. Mike starts his post by giving some good general information about FDDs including the fact, despite the voluminous nature of the document, it is not everything you need to know about the franchise and its operations. Rather, the FDD is really just the starting point and the most useful information contained in the FDD is the list of franchisees and former franchisees that should you should interview about the franchise.

Item 19 of the FDD is the section that covers financial performance representations. There are several things to keep in mind when reviewing Item 19 of the FDD. First, understand that franchisors are not required to provide financial performance representations. In fact, most franchisors do not provide this information in their FDD. Why? As Sheehan points out, this could be for a variety of reasons including the fact the franchisor does not have reliable information or perhaps the financial representations do not paint a pretty picture. If the franchisor chooses not to provide financial performance representations, it’s an important part of your due diligence to understand why.

If past financial performance representations are made by the franchisor, it’s imperative to understand the limitations of these disclosures. Sheehan cites as an example that it may not do you much good to have financial performance representations from just Florida franchisees if you are seeking to purchase a franchise in North Dakota. The results could be dramatically different in those regions. Additionally, there is no obligation that the financial representations are based upon generally accepted accounting principles (GAAP). This makes comparisons potentially difficult. Moreover, any future forecasts or projections are really just guesses. 

Overall though, I’d like to see Item 19 financial performance representations in the FDD. But understanding what the numbers show is a must for anyone conducting due diligence of a franchise.

A lot of business owners are understandably price conscious when it comes to their business insurance policies. Often, business owners will shop their business insurance and hop from insurance company to insurance company in the hopes of finding the most affordable policy.

The problem with this strategy is that if a claim occurs it may be difficult to determine which insurance company coverage applies. For example, a plaintiff may allege that a claim occurred during the fall of 2010 but no date is specified in the petition. What if your business changed to a different insurance company on October 15, 2010? Which policy applies? Could this give the insurance company reason to deny coverage and defense of your claim?  

Compare this to the strategy of remaining loyal to a single insurance company. In that circumstance you’d only go to one company to determine coverage. It could even pay off to have that coverage despite a slightly higher premium price.

Neither strategy is necessarily wrong. I understand the need to keep costs low. I just bring it to your attention that if you hop from insurance company to insurance company you’ll need to make sure that policy start and end dates should be carefully recorded and kept even for years (if not permanently) to give yourself the best opportunity to determine which policy applies to a particular claim. Insurance companies may find reasons to deny coverage if specific dates of claims are not alleged by a plaintiff.

My advice is to carefully consider switching from insurance company to insurance company for business insurance. Find an agent and insurance you trust and stick with them provided the costs are reasonable and within your budget.