This blog post is first in a series of blog posts highlighting changes in the 2009 Iowa Limited Liability Company Act. The new law applies to all LLCs filed in Iowa after January 1, 2009. The new LLC law will apply to older LLCs beginning on January 1, 2011 unless otherwise agreed by the members.

Beginning January 1, 2009, you will no longer file Articles of Organization with the Secretary of State to start your Iowa limited liability company. Instead, you will now file a Certificate of Organization to begin the process. Unless there are changes with the Secretary of State, I do not anticipate the filing fee would change from the current fee of $50.00. (Amazingly, the Iowa Secretary of State’s Web site has no mention of the upcoming changes that I could see). 

The Certificate of Organization under the new Iowa LLC law will actually have less detail than Articles of Organization typically had in the past. The only information required for the Certificate of Organization are as follows:

  1. The name of the limited liability company;
  2. The street and mailing address of the registered office and the name of the registered agent.

That’s it. The organizer also won’t need to state the the LLC has a perpetual duration in the articles as the new law automatically provides that LLCs have a perpetual duration (just like corporations).

Now, that may seem simple enough to start but there are a number of issues with the new Iowa LLC law that could trap unsuspecting business owners. I will highlight some of those areas in upcoming posts. 

An excellent resource on the this topic is Ward on Iowa Limited Liability Company Law, written by Marc Ward of the Dickinson Law Firm. Marc has devoted an entire blog to the changes in the new Iowa LLC law. 

There are significant changes to the Iowa limited liability company (LLC) statute effective January 1, 2009.  The changes include everything from how an LLC is initially formed and filed with the Secretary of State to changes that apply when a member leaves (i.e. disassociates) from the LLC.

Check back over the next couple of weeks for a series of posts regarding the new changes in Iowa’s LLC law.

A great discussion took place last Friday on Twitter among several young entrepreneurs in the Des Moines area. As a result, Daniel Shipton of Impromptu Studio took the bull by the horns and organized an "impromptu" entrepreneurial roundtable discussion for this Tuesday, December 9th from 12:00 p.m. – 1:00 p.m.

The anticipated roundtable will consist of Matt Kinley of Equity Dyanmics, representatives of the Technology Association of Iowa and several local entrepreneurs.  So if you care about the entrepreneurial climate here in Iowa be sure to participate.  I’ll see you there.

There are many entrepreneurs who want to run all their business AND personal expenses through the business.  For example, earlier this spring I witnessed a father buying his son’s baseball equipment at a local sporting goods store.  I chuckled when he pulled out a company check to pay for the equipment.  Sure, one expense might get buried and never noticed in an audit but experience tells me that "pigs get fat while hogs get slaughtered."  Many business people don’t understand where to draw the line.  Business expenses are fine to deduct.  But  running obvious personal expenses through the business just isn’t acceptable.  It could even be a reason to "pierce the corporate veil" in litigation causing you to lose your limited liability protection. 

But where it may really hurt is when you go to sell your business. That is when it is critical to show the best possible operating profitability and cash flow to gain a fair price for your business. This means those avoidable (or perhaps illegal) expenses take away from the bottom line of the business and leave you with less value.  Moreover, it draws questions about your integrity and could make it harder to sell our business.

So keep the end in mind. Accurate and organized financial statements are a must. A penny saved today might be a dollar lost tomorrow.

Rush Nigut of the Brick Gentry law firm represents businesses that are interested in expanding their business through franchising. His services for franchisor clients includes drafting and implementation of the franchise disclosure document (FDD) and franchise agreement plus assistance with the franchise operations manual.  He is also available to serve as general counsel to the franchise operation including the drafting and review of contracts, assistance with employment matters, litigation and other legal matters.

The decision to franchise your business is a complex decision that should not be taken lightly. Many people desire to enter franchising because it allows you to work "on" your business rather than "in" your business as Michael Gerber discussed in the E-Myth Revisted. While the E-Myth doesn’t necessarily endorse franchising, the franchising model of business can certainly help the business person leverage themselves and expand their business opportunities if done correctly.

Some questions to ask yourself before you franchise your business include:

  1. Are you making a good living in your business?
  2. Have you operated multiple locations?
  3. Do you have a proven system of operation?
  4. Are the profit margins large enough for the franchisee to make a good living, support employees and pay you a royalty?
  5. Do you have the time to devote to a franchise operation?
  6. Do you have the skill set to promote a franchise operation?
  7. Do you have start-up and operating capital?
  8. Will franchisees be able to get financing from afforable sources?
  9. Does your business have a unique selling proposition?
  10. Does success of the business depend on skills people have or can quickly acquire?
  11. Is the market stable enough to provide for growth over several years?
  12. Are you able to support franchisees once you get them in business and do you have something to offer them beyond getting them in business?

If the answers to these questions are "Yes" then perhaps you are a candidate to franchise your business.

A franchise business must comply with federal franchise laws governed by the Federal Trade Commission (FTC) and often state regulations as well. The FTC and certain states require that franchisors provide a written disclosure document to all potential franchisees now known as the Franchise Disclosure Document (formerly known as the UFOC).  You will also need a detailed written franchise agreement that serves as the contract between you and your franchisees. You should also develop an operations manual and implement a training program to teach your franchisees how to conduct your business. It is also important to have sufficient capital to support your franchise system from the beginning. 

Feel free to call if you have questions about the legal requirements of franchising your business.  In addition to the legal aspects, we have strong relationships with advisors and consultants that can help you with the business needs of your franchise. We look forward to the opportunity to work with you.

I recently received an email from a business brokerage advertising their services.  In the email the brokerage said they have "low-risk" businesses and franchises for sale. While that may make for good marketing – I must unfortunately say that "low-risk" businesses do not exist in my opinion. If our struggling economy has shown us anything, it has demonstrated that risk is inherent in business. To advise otherwise minimizes the enormity of the decision to purchase a business.

Now don’t get me wrong. I am not knocking the business brokerage. It’s their job to sell businesses and that’s just what they are attempting to do. But the prospective buyer should be more cautious and take the time to understand the inherent risks of ownership in the business you intend to buy.  It is absolutely critical to conduct due diligence. Appropriate due diligence includes examination of the following areas in the business:

  • Organizational documents and good standing with state and/or federal authorities
  • Financial information
  • Physical assets
  • Real Estate
  • Intellectual property
  • Employees and employee benefits
  • Licenses and permits
  • Environmental issues
  • Taxes
  • Material contracts
  • Product and service lines
  • Customer information
  • Litigation
  • Insurance Coverage
  • Professionals
  • Articles and publicity

See this due diligence checklist for more details.  It is a very comprehensive checklist.  The level of due diligence will likely vary with the size of the business transaction but this list should give you a good outline of the issues to consider. 

 

In this current economic downturn many people will lose their jobs.  Many of those individuals will turn to franchising as a form of business ownership instead of opting for another position in the corporate world.  While franchising may be a legitimate option for some, it is important for prospective franchisees to remember that it is not often very easy to get out of a franchise agreement.  Investing in a franchise is not a decision to take lightly.

A typical franchise agreement may last anywhere from 5-10 years and have options for renewal.  Often franchisees mistakenly believe they can get out of the franchise agreement if things go bad.  The reality is that the written franchise agreement usually remains in force and often the franchisor has rights to sue the franchisee for lost royalties if the franchisee does not pay.  Not to mention potential problems you will have with your lease and/or other contracts.

So before you buy a franchise follow these steps as outlined on the FTC Website:

  • Study the disclosure document and proposed contract carefully.
  • Interview current owners in person. (They should be listed in the disclosure document.) Visiting them in person may help you identify any that are "shills" — people paid to give favorable reports. Don’t rely on a list of references selected by the company because it may contain shills. Ask owners and operators how the information in the disclosure document matches their experiences with the company.
  • Investigate claims about your potential earnings. Some companies may claim that you’ll earn a certain income or that existing franchisees or business opportunity purchasers earn a certain amount. Companies making earnings representations must provide you with the written basis for their claims. Be suspicious of any company that does not show you in writing how it computed its earnings claims.
  • Sellers also must tell you in writing the number and percentage of owners who have done as well as they claim you will. Keep in mind that broad sales claims about successful areas of business — "Be a part of our $4 billion industry," for example — may have no bearing on your likelihood of success. Also, recognize that once you buy the business, you may be competing with franchise owners or independent business people with more experience than you.
  • Shop around. Compare franchises with other business opportunities. Some companies may offer benefits not available from the first company you considered.
  • Listen carefully to the sales presentation. Some sales tactics should signal caution. For example, if you are pressured to sign immediately "because prices will go up tomorrow," or "another buyer wants this deal," slow down. A seller with a good offer doesn’t use high-pressure tactics. Get the seller’s promises in writing. Any oral promises you get from a salesperson should be written into the contract you sign. If the salesperson says one thing but the contract says nothing about it or says something different, it’s the contract that counts. If a seller balks at putting oral promises in writing, be alert to potential problems and consider doing business with another firm.
  • Consider getting professional advice. Ask a lawyer, accountant, or business advisor to read the disclosure document and proposed contract. The money and time you spend on professional assistance, and research — such as phone calls to current owners — could save you from a bad investment decision.

In representation of a new franchisor I have recently been on the other end of this investigation process. But it is clear to me that a good franchisor will not discourage you from conducting due diligence.  You should be very wary of high pressure sales tactics.  Don’t be in a hurry.

 

I am excited to announce that Rush on Business has been honored as the Best Business Blog and Best Resource Blog in the Iowa Web Awards for 2008.  Since I started this blog in March of 2006,  I wanted to do my part to improve the public image of lawyers.  My strong sense of purpose is to educate and provide information to business people in a way that helps them identify legal issues and make more informed choices about what legal services they need.  The collaborative process of a law blog (or any blog) can allow this to happen.

I am grateful to receive the awards.  I want to thank 48Web Consulting for its work in forming the Iowa Web awards and also Daniel Shipton of ImpromptuStudio for hosting the awards ceremony.  It was a great evening at IgniteDesMoines last night.

Thanks to all that support this blog.  

Good article on IowaBiz regarding insurance for employee lawsuits.  Most businesses would be smart to explore this type of insurance coverage, especially in today’s slumping economy.

I think many small businesses are under the mistaken believe that they are covered for employment lawsuits through their ordinary business liability coverage. This is usually not the case.  You will need to purchase a specific policy relating to employer practices in order to be covered. In addition, employer practices liability insurance policies vary greatly so be sure to carefully review the covered items with your insurance agent and lawyer.  Find a policy that provides comprehensive coverage.