Lawyers are, in part, counselors and advisors.  As with accountants, tax professionals, financial planners, bankers, etc., lawyers should play a role in helping to grow and maintain a successful business by giving practical, helpful advice.  But all too often professional advisors (lawyers being the prime suspects) stand in the way of business success. 

This is due, in part, to the multiple roles advisors play.  Lawyers, for example, are called on by businesses to minimize risk, help achieve certainty, decrease exposure to claims, increase profitability, and protect ongoing interests.  These can be conflicting goals because the advice given to minimize a particular risk can also act to slow down business growth.

To use a current example: the use of social media in marketing businesses.  Have you noticed that a substantial amount of businesses advertise that they are on Twitter and Facebook (and linkedin, yelp, google+, etc.)?  In recent months I have seen a sharp increase in the amount of advice offered by lawyers on the risks of allowing employees to use social media.  Many lawyers fear that employees may make claims, promises, or misstatements without the business’ knowledge, which could then tarnish the business’ reputation or expose it to potential risk and lawsuits. 

But these so-called risks must be counter-balanced with the huge advantages businesses have to gain by engaging in real, meaningful social media marketing.  Times are changing, and the way in which consumers and customers view a given business is not based solely (or even at all) on the ads seen on television, magazines, or billboards.  So much of traditional media is either ignored or simply discounted.  Instead, customers are looking for real, live interaction with real, live people.  And when they interact with a business or company, they often perceive that business as a real, live person.  Just look at many consumers relationship to companies like Apple.  People who love Apple, really love Apple as if it is a person in many cases.

So what is a business to do when the professional advisors say “no” to a critical business idea or initiative?  The answer lies in obtaining practical advice.  We lawyers are great at pointing out all the things you should not do and all the terrible things that will happen if you do them.  And I have written often about the critical need to consult with a lawyer (and other professionals too) before a problem arises, which is still important.  However, in seeking out that advice it must be tempered with real-life practicality—also known as common sense. 

Common sense if a bit like the U.S. Supreme Court’s definition of pornographic speech—we can’t tell you what it is, but we know it when we see it.  So it changes with each situation and each business owner.  As a business, you need to know the pros and cons of a given business activity you want to enter into.  And you want to avoid the risks that are easy to avoid.  But when it comes to a potential risk that cannot be avoided altogether, then you need to make a hard business decision.  That decision can only be made by the business itself because each business is different and has a different risk tolerance.

By arming yourself with the facts (both potential risks and benefits) and seeking out practical, common sense advice, you’ll be able to make an informed decision and help your business grow the right way.  It’s okay to minimize risks, but let’s keep business growing for the good of our community.

There are times when a business owner wants to get out of business.  With the recent down economy many people have either left, or want to leave, their current businesses.  But getting out is not so easy, especially when there is a mountain of debt the business has accumulated over time.

A more positive aspect of business succession is when an owner simply wants to pass on the business to her children and grandchildren.  Deciding on the best way to exit a business can have important and long-lasting ramifications for the soon-to-be ex-business owner.

Here are a few options to consider when you reach quitting time:

Scenario Number 1:  Business owner has too much debt and wants to dissolve his business (and his debt)

Dissolving a business in California is relatively easy, but dissolving debt is not.  For example, if your business is formed as a corporation, limited liability company, limited partnership, or any other type of entity, you can dissolve that entity with the Secretary of State’s office with a few simple forms.  But there’s a catch, and it’s a BIG catch: once a corporation is dissolved the debts and liabilities of the corporation must pass to someone else.  The dissolution forms require you to name a person who will personally take on the debt and liabilities of the corporation after it is dissolved.  This is a huge problem because you likely formed the corporation in the first place to limited yourself from the debts and liabilities of the corporation.  So why take those debts and liabilities on personally now? 

All too often I have clients come into my office and tell me that they dissolved their business and so the debt is no longer a concern.  Not so.  In fact, if a business is dissolved without resolving the debt issues, then you just made matters worse because debts that may have been limited just to the entity before are now on your own personal balance sheet after dissolution.

The correct approach is to resolve debt issues before dissolving the business entity.  Resolution could take many forms from negotiating the debt to a smaller amount so it can be paid, to filing for bankruptcy protection for the entity so the debt is discharged either in whole or in part prior to dissolution.  Either way, the debt must be dealt with first.  Never dissolve a business entity that has debts and liabilities.

What about debts that the business owner guaranteed personally?  That may require a personal bankruptcy to resolve.  The point is to look at your options before dissolving anything.

Scenario Number 2:  Business owner wants to transfer business to family member to avoid creditors.

Let’s be clear right up front, this never works.  Transferring the ownership and management of a business entity to a family member in order to avoid a creditor is fraud, plain and simple (called Fraudulent Transfers under the law).  And courts generally disfavor this type of tactic because it just causes a huge mess.

Plus, transferring a business means giving up control, so the business owner is no longer calling the shots from a legal view.  This means that once the business ownership and management is transferred to someone else, you are powerless from stopping them from taking actions you may not like. 

It is far better to simply deal with creditors head on.  It may seem painful, but it’s the only way to resolve the problem.  And the worst that can happen is a bankruptcy filing.  Bankruptcy is there for a reason, to help people who need help with creditors. 

Scenario Number 3:  Business owner wants to sell a business.

There are many ways in which to sell a business to a new owner.  A sale is a great way to pass a business on to the next generation without having to worry about gift tax implications (because it’s not a gift, it’s a sale).  My advice to every business buyer: pay as little up front and push as much of the purchase price into monthly payments as possible.  My advice to every business seller: receive as much of the purchase price as possible up front and don’t allow any payments on the purchase price, if possible (unless you want to spread payments over time for tax purposes). 

Simply put, sellers want their money (all their money) up front when selling, and buyers want to pay as little as possible up front.  And there are safeguards that can be built into sales contracts to ensure the business either continues as it has in the past or the purchase price must be adjusted to account for the change.

The one thing to remember in selling a business is to have all the terms agreed to clearly articulated in a written sales contract.  If there is a down payment with the remaining purchase price being paid over time, then determine how those payments will be made, when they will be made, and what will happen if they are not made.  You will want to have some mechanism built in so that if payments are not made, the business can be re-possessed without going to Court.  The best way to secure payment is with “security”.  Security is a legal term that generally refers to being able to take something of value from the buyer without having to go to court first. 

Scenario Number 4:  Business owner wants to gift business to a family member.

Gifting a business to a child or grandchild can be a bit tricky, but not impossible.  Many people gift an interest in their business to children when they add them to the ownership percentage.  If I add my son to my corporation as a 10% shareholder, I have just made a gift to him of 10% of my company value.  Unless my son actually pays me for that interest, the transfer of 10% to him is a gift.

When making a gift of a business interest, you are required to have that interest appraised for gift tax purposes.  Also, if the interest gifted is greater than $13,000, then you also have an obligation to report that gift to the IRS (using Form 709).  Fortunately, for 2011 and 2012, each person is allowed to gift up to $5,000,000 during their lifetime without having to pay gift tax.  So unless your business is highly valued, a gift of a business interest comes with a reporting requirement, but no real gift tax consequences.  For that reason, now is good time to consider making a gift of part or all of your business to the next generation.

Of course, when you make a gift, you must give up control of whatever is gifted.  That means you will give up control of the entire business if you choose to gift it to a child or grandchild.  But you can still be involved in the business, and even be an employee of the business.  You just won’t be an owner and you won’t call the shots any more.

Adding a child or grandchild could also change the income tax consequences of your business, depending on the type of entity you have.  Be sure to check with a tax professional before making any gift of a business interest.  And remember that the addition of anyone as a shareholder, member, partner, or owner of any type is a gift unless that person pays you full value for the interest.

These are just a few examples of the way in which you can exit your business when quitting time arrives.  Make sure you know your available options and never obligate yourself for your business’ debts and liabilities if you can avoid doing so.  If done correctly, exiting a business can be a pleasant experience.

When you practice in the area of Trusts and Wills, you are often called upon to resolve other legal problems that pertain to clients’ assets such as business law, real property law, family law, etc.  So here is a post discussing a few business issues I have dealt with recently.  This same post was published in our local Corona Business Monthly

Do you have insurance?  Nearly every business buys some type of insurance because it’s better to pay an insurance premium than it is to pay for a huge loss if something unexpected occurs.  Taking unnecessary risks is not a smart business move.

 Yet businesses regularly take unwarranted legal risks when entering into agreements without properly documenting them in writing.  The “in writing” part every business owner seems to know—an agreement should be in writing.  The problem arises, however, with what is put down in writing.  All too often the terms of the agreement are not reflected in the written word on the agreement.  I meet with business owners all too often who first show me a so-called written agreement and then quickly explain how several meaningful provisions were either left out of the document or were written down incorrectly. 

Why the confusion between what we mean and what we say?  Part of the problem is that language is subject to interpretation.  I have litigated many business disputes that turn on the meaning of language in a document—even lawyers and judges struggle with drafting, understanding, and interpreting “clear” language.

But the bigger problem affecting business owners is lack of attention.  Businesses just don’t have time (or at least they think they don’t) to sit down and craft a carefully worded agreement.  In the rush to seal a deal, parties often forget to record the finer points, and sometimes even the most important points and provisions, of their agreement.  And agreement terms are fluid during negotiation, so a contract drafted yesterday may not reflect the agreement today.  Yet, sometimes, it is yesterday’s draft agreement that is signed without adding in the new or changed provisions. 

The best advice for anyone entering into a new business arrangement is to take the time (all the time) needed to draft a proper agreement.  The agreement should reflect all the major terms of the transaction and as many of the minor terms as you can address.  And the language should be clear and to the point.

For example, if the parties envision one side paying the other every other week then the agreement should say “payment shall be made every other week,” not “payment to be made regularly.”  And the term of the agreement should be clearly spelled out: “this agreement shall take effect on January 1, 2011 and shall expire on June 1, 2011.”  In fact, the best agreements are easy, simple, and straight forward. 

Unfortunately, it takes time to make language simple and it takes time to make a written agreement reflect the intent of the parties entering into it.  But the penalty for not taking the proper amount of time to draft an agreement can be a huge loss of business and litigation costs, including lawyers’ fees.  Poorly drafted agreements, and especially oral agreements, result in full employment for lawyers.  It’s somewhat ironic that some businesses are reluctant to pay a relatively small amount to have a lawyer prepare an agreement, yet subject themselves to  much higher fees, and for a much longer period of time, if a business is caught in a lawsuit due to a poorly drafted (or never drafted) agreement.  That is the risk every business runs in entering into a business transaction without the proper written agreement in place.

Taking the proper time and seeking the proper advice in preparing a written agreement is a businesses’ “insurance policy” to avoid the huge costs of litigation. 

What happens when a business owner tragically dies or suffers a sudden incapacity and there is no one named to succeed him in control of the business?  The utility bills, employee payroll, vendors, and a myriad of other expenses, will not be paid, and cannot be paid until an authorized person is appointed by the Court.  A Court could appoint a temporary executor (or conservator in the event of incapacity) to oversee the business, but only if there is a family member willing and able to seek out legal advice and start the legal process in motion.  Absent an emergency petition to the Court (which can take a number of weeks to file and be heard), the business will languish, and most likely fail—effectively dying with its owner.

It doesn’t have to be this way.  With a few bits of planning ahead of time, a business can carry on—business as usual—even when an owner (or other key employee) suffers an incapacity or death. 

It’s A Matter of Trust

For example, by using a revocable living trust, a successor can be named to take over business operations when required without the need for Court intervention.  The term “revocable living trust” has been somewhat misused (and abused) in recent years.  When lawyers talk about a “living trust” we mean a trust that is created during a person’s lifetime—as opposed to a “testamentary” trust (excuse the latin reference) that is created at death.  In California, a “living” trust is the primary estate planning tool lawyers use to help clients plan for the management of their assets at incapacity and upon death.  The trust is usually “revocable”, which simply means it can be amended, changed or eliminated altogether at any time when the person who creates the trust changes his mind.

A trust is simply an arrangement whereby a person who owns assets (such as a business) transfers that asset to himself as trustee.  The trustee manages the asset.  The trustee is said to have legal ownership, and can make all management decisions.  The asset is then held “in trust” for the benefit of the trust beneficiary—who is said to have beneficial ownership of the asset. 

For example, let’s say I own a business.  If I set up a trust for myself, I would transfer my business into my name as trustee.  I then manage that asset.  I also would enjoy the benefits of that asset as the Trust beneficiary.  This is exactly what I do now as an owner—I manage the asset and enjoy its benefits.  The only difference with the trust is that I am dividing up the different roles I play and wearing different hats—one hat as trustee and one hat as beneficiary. 

But there is one very important difference between me owning my business in my sole name versus holding it in a trust: the trust provides for an automatic successor to take charge if I can no longer act.  If I become incapacitated, a new trustee—previously chosen by me—steps into my shoes and manages my assets without any Court intervention whatsoever.  Problem solved.  If I am incapacitated or die, my business can be managed by my chosen successor who takes over almost immediately.  There is no delay and no need to file anything in Court.  Bills are paid, payroll is made, and the business lives on. 

Warning: a trust only controls assets titled in the name of the trustee!  If you already have a trust, but your business has not been transferred to it, you effectively have no plan.  Once a trust is created, some upkeep and maintenance is required to ensure the assets remain in the trust name so they can be managed by the trustee when necessary.

An Invitation to The Boardroom 

Another overlooked avenue of business continuity is having additional people named as officers or board members of the business.  Of course, the term “board member” is used primarily for corporations.  So if your business is not a corporation, the terms will be different (such as partner for partnerships, or members for limited liability companies), but the concept is the same—having a backup in place.

By naming a back-up person either as an officer or manager of the business, that person can take action to preserve the businesses affairs when you’re not able to do so.  This option does take some trust, however, because a person named as an officer, manager or board member would have the authority to act in most situations even during times when the business owner has capacity (this is unlike the trust where a successor can act only when the primary Trustee loses capacity).  Even though this may not be the perfect solution for everyone, it could prove useful in many different situations and should always be considered as a possible solution to provide business continuity.

The Best Laid Plans…

While we may not be able to plan for every eventually, at least some plan is better than no plan at all.  The important point to remember is do your planning now!  A good plan is one that is put in place before it is needed.  A great plan is one that is well-thought out (i.e., taking into consideration your own individual business needs) and put in place before it is needed.  The more time spent planning, the more useful the plan.

But a plan, even a great plan, doesn’t need substantial time to prepare.  A few hours of time, and some well-founded advice from those who have planned before, is sufficient for a plan to come together.  As long as the plan is implemented, you and your business are protected.