A common thing I see from franchisees is that they include only the name of the franchisor in contracts as opposed to including the corporate or limited liability company name of THEIR franchisee business. Most of the time the names are different. For example, if I own a  "Subway" franchise but my corporate name is "Rush Nigut Enterprises, Inc.", I need to make sure I include my corporate name in any contracts. 

I have seen this happen way too many times to count. On one occasion a franchisee litigation client failed to include the name of his corporation in a contract. The court ruled that he was personally liable for the debt because he had not disclosed to the other side that he was signing in a corporate capacity. Including just the name of his franchise in the contract was not enough.

Also, always be careful to always to sign with the title of your corporation or limited liability company, (i.e. President, Vice-President, member, etc.). This will assist in giving the proper notification to the other side that they are dealing with a corporation or LLC and not an individual responsible personally for the debt.

Be sure to contact a business lawyer if you have questions about whether you’re signing contracts properly.

Joel Libava a/k/a The Franchise King is running a great contest for prospective women franchise owners. It’s called the ONE WOMAN. ONE FRANCHISE Contest. Joel is looking for one woman who is ready to make the commitment to be a franchise owner. He’s going to help that woman choose, research and buy a franchise.

Joel is helping celebrate the launch of his new book, Become a Franchise Owner. I’ve read it and if you’re interested in franchising, I recommend you read it too.

I have agreed to help out the contest winner with a franchise disclosure document and franchise agreement review. Several other sponsors are assisting as well including a business formation from CorpNet, a press release from Ignite Venture Partners, a six month subscription from Live Plan to assist with business planning, a consultation with online marketing expert Matt Mansfield, and a free book on finance from Nicole Fende.

Should be a great opportunity for one lucky prospective woman franchise owner. Register today!

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?

I often review contracts for clients that are doing business with companies from out-of-state. Inevitably these contracts will have a choice of law provision that says the laws of [insert state] apply. Clients usually take it for granted that a court will apply the laws of the state referenced in the contract.

But a recent post from the Austin Technology Law Blog points out that isn’t always the case and we should consider those contract provisions we often never think about. The post discusses a contract involving truck drivers and whether the truck drivers were employees or independent contractors. The two state laws involved were Georgia and California. Georgia law had a rebuttable presumption that the drivers were independent contractors while California law would favor them being employees. The contract in question chose Georgia law and that’s where the defendant had its principal place of business.

A driver filed a class action claiming violations of the Fair Labor Standards Act and California wage laws. You’d think Georgia law would apply and the drivers would be treated as independent contractors, right? Wrong! The court held that California law ultimately applied. 

An interesting decision to say the least. The case points out it’s important to consider provisions such as choice of law that are often not considered by the parties. Consider whether those provisions are written clearly and properly. I wonder whether it would have made a difference if the contract provision would have said the laws of the State of Georgia applied "without giving effect to conflict of laws principles"? The contract provision in question said only that the laws of the State of Georgia applied.

It appears the court in this case was determined to apply California law since Georgia law directly conflicted with a fundamental California policy. Just goes to show you how important some of these contract provisions can be and why it’s so important to have agreements reviewed by experienced business counsel.

Click for the court’s opinion: Ruiz v. Affinity Logistics Corporation

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.

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

 

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.

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

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.

In this video I discuss the importance of social media policies and training for employees on social media issues. While researching a presentation on social media legal issues I was surprised to learn that only 40% of businesses have a social media policy. Even less conduct employee training on social media issues. To serve this need we are now offering Social Media Policies and Training Workshops.