Rush on Business

Corporation, S Corporation or LLC? What to Choose for Your Business?

rush.nigut@brickgentrylaw.com (Rush Nigut) — Fri, 11 May 2012 08:07:20 -0600

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.

Contract Negotiations: Find the Person that Wants the Deal

rush.nigut@brickgentrylaw.com (Rush Nigut) — Wed, 18 Apr 2012 09:15:48 -0600

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.

Employee Wage Misclassification Should Be Taken Seriously

rush.nigut@brickgentrylaw.com (Rush Nigut) — Wed, 11 Apr 2012 10:37:18 -0600

Last December I wrote about how an employee wage misclassification case cost Oracle $35 million. The question about whether an employee is exempt v. non-exempt is often misunderstood by employers. Often, employers want to avoid paying overtime to employees. So employers will play a game of Russian roulette by paying those workers a salary instead of hourly.

Have you reviewed your employee wage classifications recently? If not, we recommend that you do so. We have found in our reviews that employers large and small often make mistakes in classifying the wages of their workers. Sometimes even companies with sophisticated HR departments make errors - just ask Oracle. And companies right here in Iowa make mistakes too.

A tremendous resource regarding employee wage classification found on the Department of Labor website at www.dol.gov. There's great information on the site about the tests used to determine whether employees are exempt or non-exempt . Don't wait for a lawsuit to review your wage practices. By then, the horse will be out of the barn and you'll likely find yourself paying a substantial settlement or judgment.

Business Succession Planning Seminar

rush.nigut@brickgentrylaw.com (Rush Nigut) — Tue, 03 Apr 2012 07:20:45 -0600

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!

Copyright Infringement: What do I do if Someone Copies My Website

rush.nigut@brickgentrylaw.com (Rush Nigut) — Wed, 28 Mar 2012 09:29:48 -0600

* This is a guest post from Aaron Hall. Aaron is a Minnesota business lawyer that handles intellectual property matters. See his information below.

Someone is copying my website. What are my options?

Illegally copying websites is a big problem as the internet grows. Illegal copies of your website may be made by competitors, spammy websites looking for free content, or other businesses who liked what you wrote. If you are the victim of copyright infringement, you have a number of legal rights and options.

Options for Victims of Copyright Infringement

By creating content for your website, you automatically own a copyright in that content. If someone is infringing your copyright by copying your website content without permission, you have the following options.

1. Try to Work it Out Yourself

First, you can try to work it out with them by contacting them and asking them to take down the infringing material. If you feel comfortable with negotiation, this is certainly the cheapest option.

2. Attorney's Cease and Desist Letter

Second, you can hire a law firm to send a cease and desist letter which serves as a take down notice. That letter can demand that the person take down the infringing material and also pay some sort of fee to settle the matter. For example, you might demand payment of $500 for use up until this point, in addition to the infringing material be immediately removed from the website.

3. Register Your Copyright and Sue

Third, you can register a copyright with the U.S. Copyright office and then sue for copyright infringement. Federal copyright registration is a requirement before initiating a copyright infringement lawsuit in the United States. In general, copyright litigation must be done in federal court. Fortunately, copyright registration is very cheap and you can do it on your own or with the help of an attorney. Then you can contact a law firm to initiate a lawsuit for copyright infringement and seek damages.

The Cost of Protecting Your Rights

One public policy behind copyright law is that you are required to enforce your own rights against those who infringe upon your intellectual property rights. For that reason, your material must at least have certain degree of value in order to justify spending the money on copyright registration and enforcing your legal rights. The courts don't want to get bogged down with small and nominal copyright claims. However, when the value of your material is significant, the options here provide you with the various routes you can take to protect your copyrighted material. Many business owners view enforcing their intellectual property rights as merely protecting an intangible asset of their company. Intellectual property is an investment, like other assets of your business, which requires protection from thieves who would attempt to steal what your business has built.

Aaron Hall is a business attorney at the Twin Cities Law Firm, LLC in Minneapolis, Minnesota. He represents companies in intellectual property matters including copyright, trademark, and litigation.

Business Innovation Zone: Raising Capital Seminar

rush.nigut@brickgentrylaw.com (Rush Nigut) — Mon, 19 Mar 2012 06:00:00 -0600

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.

Franchisees: Be Careful to Include Corporate Entity on Contracts

rush.nigut@brickgentrylaw.com (Rush Nigut) — Mon, 12 Mar 2012 07:15:42 -0600

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.

Wanted: One Woman. One Franchise

rush.nigut@brickgentrylaw.com (Rush Nigut) — Wed, 07 Mar 2012 07:59:15 -0600

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!

Getting Your Business Funded in these Economic Times

rush.nigut@brickgentrylaw.com (Rush Nigut) — Thu, 01 Mar 2012 08:10:18 -0600

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.

Contract Law: What about Choice of Law Provisions?

rush.nigut@brickgentrylaw.com (Rush Nigut) — Mon, 27 Feb 2012 08:00:14 -0600

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

Franchisor Financial Problems Dragging You Down?

rush.nigut@brickgentrylaw.com (Rush Nigut) — Fri, 24 Feb 2012 08:01:19 -0600

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.

S Corporations and Setting a Reasonable Salary

rush.nigut@brickgentrylaw.com (Rush Nigut) — Thu, 23 Feb 2012 08:04:12 -0600

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

To LLC or Not LLC? That is the Question

rush.nigut@brickgentrylaw.com (Rush Nigut) — Wed, 22 Feb 2012 08:08:45 -0600

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.

Iowa Creativity Summit March 1st at Drake University

rush.nigut@brickgentrylaw.com (Rush Nigut) — Tue, 21 Feb 2012 08:51:21 -0600

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

Employers: Are you Protecting Your Intellectual Property Rights?

rush.nigut@brickgentrylaw.com (Rush Nigut) — Mon, 20 Feb 2012 08:30:14 -0600

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.

Importance of Social Media Policies and Training

rush.nigut@brickgentrylaw.com (Rush Nigut) — Wed, 15 Feb 2012 13:17:41 -0600

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.

Social Media: From Hiring to Firing Seminar

rush.nigut@brickgentrylaw.com (Rush Nigut) — Tue, 14 Feb 2012 06:00:00 -0600

Join me for a webinar this coming Wednesday, February 15, 2012 through MyEntreNet entitled Social Media: From Hiring to Firing. We will discuss strategies to manage social media in the workplace including discussion of recent cases, the NLRB report on social media and discussion of social media policies.

Here's some interesting stats on social media and why it's so important to your business. Did you know that more iPhones sold in a given day than the number of people born in the world?

Franchise Agreement Negotiation Red Flag: We Won't Hold You to It

rush.nigut@brickgentrylaw.com (Rush Nigut) — Fri, 10 Feb 2012 13:20:45 -0600

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!

The Franchise Contract is Over. What Next?

rush.nigut@brickgentrylaw.com (Rush Nigut) — Thu, 09 Feb 2012 06:00:00 -0600

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.

False Advertising Lawsuit Filed Against Hall of Famer George Brett's Company

rush.nigut@brickgentrylaw.com (Rush Nigut) — Wed, 08 Feb 2012 09:30:25 -0600

A false advertising lawsuit has been filed against Brett Bros. Sports International, Inc. by an Iowa man. The President of the company is none other than Hall of Famer and legendary baseball player, George Brett. The lawsuit, filed in the United States District Court for the Southern District of Iowa seeks class action status and more than $5 million in damages according to the Complaint filed on February 6, 2012.

The allegations center on the alleged health and/or performance benefits of the necklaces that many young athletes seem to wear these days. The lawsuit alleges that Brett Bros. falsely claims its necklaces "help relieve stiffness in the shoulders and neck, eventually stabilizing your whole body, as well as help recovery from sports fatigue, restore important ion balance, and improve concentration and focus."

The Plaintiff, who purchased his necklace at the 2011 College World Series, says he didn't receive any of these benefits after relying upon the endorsement of George Brett.

This isn't the first time the sports performance necklace and bracelet industry has come under attack. Last year, it was reported that Power Balance entered into a $57 million settlement and declared bankruptcy.

The lawsuit against Brett's company specifically alleges that the company violated the Iowa "Private Right of Action for Consumer Frauds Act" (Iowa Code section 714H). Filing a class action pursuant to the statute requires approval from the Iowa attorney general's office. The Complaint indicates that such approval has been obtained. A successful lawsuit under the statute would entitle the named Plantiff and the class members to damages, costs and reasonable attorney's fees.