Invest In My Idea

By setting up your business properly from the outset, you are putting in place a foundation that will help ensure your success. Finding a good lawyer and accountant whose opinions you can trust, learning how to hire and fire employees, and getting properly insured are all part of that solid foundation.

 

Finding Attorneys and Accountants

 

Lawyers and accountants are critical business advisers for your new business. They can help steer you away from trouble, and get you out of trouble if need be. Lawyers can help with contracts, leases, hiring and firing employees, and a host of other issues. Accountants will help prepare your taxes and can give other helpful financial advice. Combined, these two professionals can become vital advisors.

But this begs the question: Where do you find a good accountant who knows his or her stuff, or a lawyer you can trust? The best way is through a satisfied customer. A referral will tell you far more about a professional than a dozen television ads. So, if you know someone (or know someone who knows someone) who has a business similar to yours, find out how they like their lawyer or CPA. You need to ask the following questions:

• Did the professional get good results? Did the case settle successfully, was the contract beneficial, were taxes reduced? Results are what count.
• Was the lawyer or accountant accessible? Far too many attorneys are hard to reach and don’t return phone calls quickly. A call should be returned within 24 hours. That is what you should insist upon.
• Were the fees reasonable? While you need to be conscious of fees when hiring a professional, they are not the most important thing to be concerned about. As in life, you often get what you pay for; the cheapest attorneys and accountants are probably not the best.
• Who does the work? Many lawyers and accountants (especially at big firms) pawn your work off to underpaid, overworked associates. While this helps keep their fees down, you want to make sure that the person you hire is the one doing the work when it counts.

If you can get a referral for a professional who meets these criteria, call him or her and schedule a meeting. As you are looking to start an important long-term relationship, expect to spend a few hours with the lawyer and accountant. Get a feel for his or her personality. Make sure he or she under-stands your needs. Find out about his or her background. Get some referrals. Certainly, you should not expect to be billed for this meeting, and if you are, it’s a bad omen.

How to Find Exceptional Professional Advice

Barring a referral from a friend or business associate, here are some ways to find good advisors:

• Call your local bar association. Almost all cities have an association of local lawyers called a bar association. The lawyers are listed by their areas of specialty and the bar can usually give you the names of some of its members who have a good reputation. As bar associations are nonpartisan, you can rest assured that the recommendation will be trustworthy.
• Contact the AICPA. The American Institute of Certified Public Accountants is the premier national association for CPAs in the United States. Visit their site online at <www.aicpa.org>.

an employee’s status changes from at will to just cause. An employee whose status is “just cause” is an employee who can only be let go when there is a valid cause to let him or her go; for instance, because the employee has stolen something.

What is the difference? An atwill employee is an employee who does not have a written employment contract or who has not been guaranteed employment for a specific period of time. The important thing for the business owner is to be sure you do not make any promises, either expressly (in an employment contract or employee handbook, for example) or implied (telling the employee, “Don’t worry, your job here is safe.”).

Review all your application forms, offer letters, employment contracts, handbooks, and manuals to ensure they do not contain any promises of job security or employment for a specific or definite period of time. All such documents should contain an atwill employment statement.

■ When Employees Cannot Be Fired

 

Even when an employee is clearly at will, there are still times when he or she cannot be fired.

• An employee may not be terminated on the basis of his or her status in a protected legal class. That is, you cannot fire employees because you don’t like their color, their sex, their ethnic background, or because they are disabled.
• You cannot fire someone in retaliation against an exercise of statutory rights, such as filing a workers’ compensation claim.
• You can’t terminate someone in retaliation for an exercise of his or her legal duty, such as jury service.

In this litigious society, even when you have valid reasons for firing an atwill employee, plenty of workers are willing to file frivolous suits, claiming discrimination even where none has occurred. To avoid such claims of wrongful termination, you need to develop clear performance standards and communicate them to your employees. Enforce the standards consistently and uniformly.

Many businesses have a performance evaluation policy or a disciplinary policy. These help document problems and prove you have been fair and forthright. Meet with employees regularly and let them know how they are doing. Most important, document everything, both good and bad, in writing. A paper trail can help avoid litigation. The importance of documentation cannot be overstated.

Keep careful records of all events and actions leading to a discharge, including the dates and circumstances behind each action. Include what policies have been violated and what disciplinary action has been taken. Preserve these records, especially regarding termination. By setting clear standards, enforcing them, and documenting problems, terminations can be much less painful.

Your Business and the Law

You don’t have to be a lawyer to write a contract. If you can afford to have a lawyer write yours, you should. But if you can’t, then you are going to write your own contracts anyway. If you are going to play lawyer, do so correctly.

How do you write your own contract? There are several ways.

• Draft it yourself. Although not the best idea, it can be done. The key is to avoid fancy language and just be as clear and concise as you can. For example: ABC Corp. will sell 5,000 widgets to Bob’s Home Business. Bob’s will pay $1 per widget and the widgets will be delivered no later than May 1.
• Buy a software program. There are several software programs that you can buy that will draft contracts for you.
• Buy preprinted forms. These are not as easily customized to your needs as software packages. But remember that printed forms can be changed. If there is a clause that you don’t like, cross it out and initial it. Have the other party do the same and you now have a custom contract.

 

This is called the standard of care. If a plumber did a repair poorly, that is, below the standard of care, and if that mistake caused someone harm, then that plumber would be legally negligent.

This is true for any business—you must do your job competently. If you don’t, and it causes harm, you can be held liable for all resulting injuries. Another example: An accounting firm is hired to do an audit, but mistakenly fails to see that a VP has been embezzling funds, which the VP continues to do. The accounting firm probably would be liable for all embezzlements after the audit because their mistake (not catching the embezzlement) caused further harm (more money embezzled). And if an electrician improperly puts in a new electrical box that causes a fire that burns down the house, it’s his or her fault.

The rule is that you must do your job in the same manner as a reason able and prudent person in the same position. If you don’t and it causes harm, you are liable.

Businesses make legal mistakes all the time, and while most are fairly benign, others can be disastrous. Knowing which pitfalls to watch out for can make all the difference between business success and business failure. Following are the five most common legal mistakes small businesses make.

1. Not documenting rights and responsibilities.

With the excitement and all of the tasks to perform when starting a business, it is easy to not clearly delineate who will do what. Yet that can be a big mistake. Imagine what can happen when you think that you are in charge of daytoday operations and your partner thinks the same thing. Therefore, founding shareholders or partners should have a written agreement that addresses the following questions:

• How much time and effort is each person expected to contribute?
• Who will do what?
• How much capital will each person contribute?
• What happens if the business needs more capital?
• What happens if one person leaves the business?
• What happens if one person dies?

2. Ignorance of the law. An old legal maxim is “Ignorance of the law is no excuse,” and it’s true. Not knowing your legal rights and responsibilities can get you deep into hot water. Here is what you need to learn: 

• Basic contract rules
• How to avoid being considered negligent
• How to protect your ideas and inventions via copyright, patent, and trademark law
• Basic employer employee regulations
• The governmental regulation of your industry

3. Not having written agreements. All of your important business agreements should be in writing for several reasons. First, oral agreements are difficult to enforce and sometimes are not enforceable at all. More important, memories fade over time, people change their stories, and people “remember” the agreement differently. Putting it in writing avoids these problems.

 4. Starting the business as a sole proprietorship or partnership instead of a limited liability entity. Partners are jointly liable for all debts

and obligations in general partnerships, as are sole proprietors. If you start the business as one of those two kinds of entities and the business encounters a legal problem, your personal assets will be at risk. If instead of a sole proprietorship or partnership, you start the business as a corporation, LLC, or limited partnership, you avoid that possibility and thereby greatly reduce your risk.

5. Getting involved in litigation. Litigation fees can actually bankrupt you. Beware the lawsuit!

Taxes

The following are four tax rules all small businesses should know.

1. Deductions. You can deduct all “ordinary and necessary” business expenses from your revenues to reduce your taxable income. Some deductions such as business travel, equipment, salaries, and rent are obvious. Others are not. Don’t overlook these potential deductions:

• Trips that combine business and pleasure. If more than half your tripis devoted to business, you can deduct the cost of travel, as well as other businessrelated expenses.
• Business losses. Business losses can be deducted against your personal income to reduce your taxes.
• Purchases financed by business loans or credit cards. You can deduct such costs this year even if you won’t pay off the loans until next year. You can also deduct the interest on the loans themselves.

“The IRS spends God knows how much of your tax money on these tollfree information hot lines staffed by IRS employees, whose idea of a dynamite tax tip is that you should print neatly. If you ask them a real tax question, such as how you can cheat, they’re useless.”

—Dave Barry

2. Employee taxes. If you hire employees, you need to pay, or withhold from their salaries, a variety of taxes, including:

•   Unemployment tax. Federal and state unemployment taxes must be paid.
• Withholding. Social Security (FICA), Medicare, and federal and state income taxes must be withheld from employees pay.
• Employer matching. You must match the FICA and Medicare taxes and pay them along with your employees.

3. Quarterly estimated taxes. This area trips up many an entrepreneur. Failure to keep up with your estimated tax bill can create a slew of IRS penalties. You should pay quarterly estimated taxes if you expect your total tax bill in a given year to exceed $500. How much should you pay? By the end of the year, you must pay either 90 percent of the tax you will owe or 100 percent of last year’s tax.

4. Sales taxes. Most services are exempt from sales tax, but most products are not. If you do sell a product or service that is subject to sales tax, you must register with your state’s tax department. Then you must track your taxable and nontaxable sales and include that information on your sales tax return.

■ Important Tax Consideration

As you begin to create some procedures for dealing with money and taxes, keep these tips in mind:

• You need a separate business checking account, and you need to deposit all money from the business into that account. Money can then be transferred to your personal account. This helps maintain an accurate record of business income for tax purposes.
• Designate one credit card as a business card and use it only for this purpose. The card does not need to be in the business’s name. Business credit card interest is 100 percent deductible. Keep all receipts.
• Keep your appointment book or calendar. Notations can provide backup information for things like business mileage, telephone expenses, and business trips.
• Keep every receipt related to your business.
• Keep all canceled checks. In the event of an audit, you will be asked to provide them.
• If you have inventory, you need to physically count what is left at least once a year. Inventory removed for personal use cannot be deducted as a business expense.
• Each year by December 31 you need to issue a Form 1099 to anyone to whom you paid $600 or more for business services during the year. But don’t wait until then to get their address and Social Security number, both of which must be included on the 1099 form. It is best to get that information when you hire the person.

Audits

 

Small businesses are audited more often than individuals, and the results are not usually good. In most cases after an audit, the audited business has to pay additional taxes. Although the IRS audits the same number of people as ten years ago, they are recovering more than four times as much money now thanks to superior software.

How then do you avoid an audit? First of all, don’t overdeduct. Be careful of listing every single receipt you have, no matter how tangential, as a deduction. Studies have shown that taxpayers who deduct expenses of more than 65 percent of their gross income are often audited. Taxpayers who deduct 50 percent and less of their income as expenses are audited far less often.

Also, be sure to prepare a proper return. Have it typed and filled out in full. A messy return, or one full of cross outs or WiteOut is suspicious. Moreover, you should try to avoid showing a loss. Losses do happen and they must be reported, but a business that shows a loss several years in a row is a business that should be out of business. If it’s not, something’s fishy. Finally, be prepared to back up anything you put in your tax return just in case you are audited. Keep every receipt. They can go a long way to getting you out of a jam should an audit arise.

■ The Home Office Deduction

Before you can deduct expenses for using part of your home in a business, you must meet three stringent requirements:

• 1. You must regularly use part of your home exclusively for a trade or business. As long as you are using part of your home for business on a continuing, rather than haphazard, basis, you qualify.
• 2. The use must be exclusive. Exclusive means just that—exclusive. If you use the room for any other purpose, as a spare bedroom, for example, you would not qualify for the home office deduction. Any personal, nonbusiness use would disqualify you.
• 3. Your home must be the principal place for your business, or you must meet patients, clients, or customers there, or you must use a separate structure on your property exclusively for business purposes.

 

Insurance

 

Instead of assuming that you know what sort of insurance you need, you should meet with an insurance broker to evaluate your newfound business needs. Brokers represent more than one insurance company, so they can check various policies and companies to find what is right for you.

Here are the major types of coverage that you should consider and discuss with your broker:

• Health. One of the big eyeopeners when you start your own business is just how expensive personal health insurance is. There are several ways around this. One is by utilizing a federal law called the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). This law allows you to personally continue your employersponsored group medical insurance, dental, and prescription drug coverage on an individual basis after you leave. Another way to lower your health care costs is simply by shopping around. Try <www.ehealthinsurance.com>.
• Business property. You should seriously consider obtaining business insurance that covers damage or loss to business equipment. You can also obtain more extensive coverage for damage or loss to business inventory and equipment, including loss of earnings, and errors and omissions.
• Comprehensive general liability (CGL). CGL insurance can be critical to your financial health. It does two things. First, it covers you for personal injury damage suffered by visitors to your property for business purposes; for example, a customer trips and breaks her leg going up the stairs to your business. CGL insurance can also provide special liability coverage to protect against claims and damages that result from the rendering of services or sale of products. And, should you get sued, CGL is supposed to cover the cost of your legal defense. If you have ever been sued, you do not need to be told that this could save you tens of thousands of dollars.
• Business interruption. This covers losses from an inability to conduct business due to fire, flood, or disaster. It also covers reductions in business revenue while you recover from the disaster by providing funding to meet cash flow obligations such as payroll and loan payments.

• Malpractice. This is used by such professionals as doctors and lawyers to cover damages resulting from substandard work. This can also include errors and omissions and product liability insurance.
• Workers’ compensation. If you are going to have employees, you will be required by your state to carry workers’ compensation insurance for workrelated injuries to employees.
• Disability. Disability insurance covers you when you can’t work because you are disabled due to injury.
• Life. Why are you going into business for yourself? One reason is because you want to provide a better life for your spouse and children. Well, what happens to that dream if you die? The dream will likely die too. Life insurance keeps the dream alive.

You need not get all of this insurance all at once. In the startup phase, it is probably impracticable. Instead, you can phase your insurance needs in as your business grows. Here is how you might want to proceed:

• Business startup. As capital is needed to get things going and cash flow is minimal, this is a good time to maximize the use of existing policies. Riders to existing policies may cover equipment. Floaters and endorsements to homeowner and auto policies can provide limited protection for business activities in the home or vehicle. You should also consider declaring one of your vehicles as a business car and adjust its policy to cover business activities. You will have to get health insurance right now, and the sooner you buy life insurance the better. You can always increase the amount of coverage as your business grows.
• Growth phase. This is when your business begins to expand and cash flow starts to increase. This might occur in six months, a year, or later. When it does happen, you may want to consider obtaining separate policies for business property and general liability.
• Longterm stability. This is when your business is established and successful and you have a pretty good idea what comes in every month and what goes out. Future growth will be more predictable. This is the time to make a long term assessment of your insurance needs.