The Kramer Law Firm LLC Blog

Starting a New Maryland Business? When Should You Hire?

Thu, 27 Jan 2011 08:00:00 GMT

Many new Maryland business owners start off with little more than a great idea and lots of effort. Infrequently do they have the financial resources to hire employees. But at some point, additional people - either partners or employees - are necessary in order for the new business to grow. When should the new business owner hire help?

You need to place a value on your time. A good rule of thumb is that it is appropriate to hire when you are spending so much time on growing and administering the company - through marketing, administrative duties, etc. - that you no longer are doing the actual business of the company.

As a recent Wall Street Journal article explains, the choice of when to hire does not need to be an all or nothing proposition. Indeed, bringing on help in a part-time or project-based role is often the most prudent course of action.

Purchasing Your Existing Business: Buying a Good Business

Mon, 24 Jan 2011 08:00:00 GMT

Maryland businesses that are active have:

an established customer base;
a source of revenue; and
business operations

An existing business also may own valuable patents or copyrights. For this reason, it is crucial to establish the division of rights and obligations BEFORE the business is purchased.

Although it is often more expensive to buy a MD business for sale than to start a new one, it is generally easier to obtain financing for an existing business. Investors tend to be more comfortable with a business that has a proven performance.

There are three primary actions to perform before buying a business for sale in Maryland:

1. Tax Returns: review the tax returns and financial statements over the last few years for a Maryland business for sale. Maryland businesses can measure their growth potential with actual experience rather than conjecture.

2. Profits: examine the current profits for the small businesses for sale. Maryland businesses will have expenditures such as employees’ salaries, utilities and insurance that you must deduct from the sales revenue.

3. Inspect: inspect the operations of prospective business opportunities. Maryland businesses may have obsolete inventory, dissatisfied employees or outdated distribution methods.

For more information, contact Seth Kramer, Esq: skramer@kramerlawfirmllc.com

How Does a Maryland LLC Protect My Business?

Fri, 21 Jan 2011 08:00:00 GMT

A Limited Liability Company (LLC) is its own legal person separate and apart from its owners. So, when you create an LLC for your business, the LLC itself is the business, not you; rather, you are the owner of the business. Consequently, when a customer, supplier, employee or any third party has a problem with your business, and, more importantly, if they decide to sue, they must sue the LLC. In this way, the owner of the LLC is not personally liable for any legal claim against the LLC. The owner's bank account, house, and other assets are protected by creating the LLC vehicle (and sticking to certain formalities which keep the assets separate).

To create an LLC or change your corporate structure to an LLC, contact the business lawyers at the Rockville, Maryland-based Kramer Law Firm. 301-296-4445.

Handshake Agreements

Fri, 14 Jan 2011 08:00:00 GMT

Here are a few (just a few) MAJOR problems with not having a contract:

1. Management decisions: when everyone agrees it's easy, but who breaks the tie when there are "artistic differences"?

2. Profit and loss allocation: if you have no written agreement, under the law, profits are always split 50/50 (even if you guys agreed otherwise).

3. Services are not valued if you have no written agreement: you provide the legwork, he provides the cash. Without a written agreement, you will NOT get paid if there is any dispute.

4. If someone tries to leave the company: If there's no existing agreement or mechanism to determine who gets what, it will be impossible to split things fairly or to everyone's satisfaction.

CHANGE TO AN LLC

Wed, 12 Jan 2011 08:00:00 GMT

LLC Defined

A limited liability corporation (LLC) is a business entity formed under state law. The owners are referred to as "members." There are many benefits of a LLC over a general partnership or corporation. A LLC can engage in any business except the insurance business. Title 4A of the Maryland Corporations and Associations Article provides the establishment of LLCs in the state.

Liability

As the name suggests, a LLC limits liability to the corporation. Members are not personally liable for the obligations of the corporation. When compared to an unincorporated business partnership, which would hold the partners liable for debts and obligations to the partnership, a LLC would be advantageous to insulating the personal wealth of a member.

Lending

Members of a LLC may lend money to the corporation and be treated as ordinary creditors. This permits the members to hold the corporation liable for money that the members have lent to the corporation. Members share in the profits and losses of the business in proportion to their contribution, unless the operating agreement provides otherwise. If the LLC is successful, the members are individually successful as well.

Members

A LLC needs at least one member. There is no limit to the number of members. Someone becomes a member by making a monetary or property contribution to the LLC. If an individual is intending to start his own business and grow the business, a LLC may be a good option because it insulates his personal property if he is sued or if the company goes into bankruptcy.

Management

Unlike an incorporated business that is run by a board of directors, a LLC is managed by the members. This could be good or bad. If there are a lot of members it may be difficult to balance all of the interests. If there are a few members, the members can exert more control over the direction of the LLC. Members may also hire a manager to manage the day to day activities of the LLC.

Eight Ways Maryland Small Business Owners Can Weather the Recession

Mon, 27 Dec 2010 08:00:00 GMT

Although economic indicators suggest that the economy is no longer in recession and that the Washington, DC metropolitan area has performed above the national average, few small business owners feel financially secure. Whether concerns focus on cash flow or operation costs, the following eight steps remain sound advice:

1.Stay on top of your cash situation

Take time to prepare cash flow projections for the next 12 months and revise weekly if needed.

2.Know your key drivers and manage them

Keep a careful eye on areas that affect cash flow: accounts receivable collections and inventory turnover. How are you doing compared to past performance and your peers? Watch key areas that affect profits, net and gross margins, labor and fixed asset utilization.

3.Monitor Accounts Receivables closely

Process invoices immediately, distribute an outstanding accounts receivable statement weekly and take action on late accounts immediately. Start with a polite but firm personal call and don't get off the phone without a commitment to a payment date. A few days improvement in collections will make a huge difference in cash flow.

4.Insist on good financial data

Accurate, timely financial statements are critical in tight economic times. Don’t accept excuses.

5.Get funding now!

The worst time to get financing is when you are about to run out of cash. Arrange for loans and lines of credit before you need it. Your cash flow projections from tip one will help you figure out how much you’ll need and when you can pay it back.

6.Review your long term financing

Are you financing long-term growth (or assets) with short-term funding such as a credit line? If so, see your banker about getting it changed.

7.Have good advisors and use them

Make sure you have a solid team of outside advisors, meet with them regularly and listen to what they say.

8.Stay close to your clients

This will generate good will for you, give you a chance to spot new opportunities and provide an early warning in the event their industry isn’t doing well.

How the Estate Tax Compromise Affects Maryland Small Businesses

Thu, 16 Dec 2010 08:00:00 GMT

Few things are more damaging to Maryland small businesses than risk and uncertainty. Businesses thrive when owners can devote time and resources toward running their companies, not hedging their bets. In recent years, the uncertain status of the federal estate tax has forced many small business owners to review and revise their estate plans and forgo many transfers of business interest out of fear of unforeseen negative tax consequences.

Fortunately, the House of Representatives this week passed a compromise bill which establishes a $5 million exemption for the estate tax with a tax rate of 35%. Prior to the compromise the exemption was set to fall at only $1 million with a taxable rate of 55%. Although the new standard is only in place for two years, it is unlikely that the new Republican controlled House will impose an additional tax burden when the time comes for renewal.

Is Your Maryland Will Valid?

Fri, 01 Oct 2010 08:00:00 GMT

You've drafted a will and made an estate plan. Great! But is that will valid? Every state has its own legal requirements for a will to be property and duly executed, and those requirements must be observed or the will will fail to be admitted to probate by any Court that has jurisdiction. The proper execution of a will in Maryland requires certain specific statutory formalities, including among other things that it be witnessed by two individuals, the testator specifically request that the witnesses sign it and that the witnesses sign in the presence of the testator. Many execution requirements are not commonly known and failure to observe them can invalidate a will.

Court finds LegalZoom Deceptive and Unqualified

Mon, 27 Sep 2010 08:00:00 GMT

   Do-it-yourself business formation and estate planning documents services like LegalZoom offer a tempting option to cost-sensitive individuals with legal needs. Indeed, in difficult financial times, who can resist a claim such as this: "You save $1,491.00 with LegalZoom! A lawyer would charge you approximately $1,740.00 for the standard LLC package."? According to a recent consent decree entered into by LegalZoom with the Attorney General of the State of Washington, perhaps we all should.

   The court noted that LegalZoom was misrepresenting the benefits, costs, complexity and time involved in customer legal matters. It also concluded that the company was engaged in unauthorized practice of law and failed to protect adequately customers' privacy interests.

   Proving the old adage 'you get what you pay for', LegalZoom agreed to modify its online representations regarding the services that it provides to disclose honestly what it's discount packages truly amount to: risky and non-individualized general information provided by unlicensed and untrained employees. Among the disclaimers now contained on the LegalZoom site are:

At no time do we [LegalZoom] review your answers for legal sufficiency, draww legal conslusions, provide legal advice or apply the law to the facts of your particular situation. LegalZoom is not a substitute for an attorney;
Communications between you and LegaZoom . . . are not protected by the attorney-client privilege; and
[T]his site is not legal advice and is not guaranteed to be correct, complete or up-to-date. The law is a personal matter, and no general information or legal tool like the kind LegalZoom provides can fit every circumstance.

Not exactly a confidence inspiring list. An appropriate question to LegalZoom is whether or not they consulted with an attorney prior to drafting their disclaimer. The bottom line is this: you need to know what you don't know. Only a licensed and experienced attorney can provide competent legal advice.

Small Business Tax Relief on the Way

Fri, 17 Sep 2010 08:00:00 GMT

Yesterday the US Senate passed the "Creating Small Business Jobs Act of 2010" Once reconciled with a House of Representatives version and signed into law by President Obama, the measure will provide the nation's small businesses with tax relief and greater access to credit markets.

Among the Act's significant provisions is modification of the Internal Revenue Code to encourage investment in small businesses by allowing investors to exclude 100 percent of the gains from the sale of certain small business stock from their income for tax purposes if the stock is held for more than five years. The legislation also would reduce the tax burden for small businesses by allowing them to carry back general business tax credits to offset their tax burdens from the previous five years.

Small businesses would also be able to count the general business credits against the alternative minimum tax.

In addition, the legislation would establish a Small Business Lending Fund of $30 billion to provide capital investments to small community banks to increase small business lending.

The National Small Business Association applauded passage of the bill. "America's small businesses have been struggling for more than two years now," said NSBA president Todd McCracken. "This legislation comes not a moment too soon and will provide myriad avenues of help for small businesses."

The Kramer Law Firm is interested in feedback from small business owners regarding the expected effect of the new legislation on both short and long term business prospects.

The Three Steps of Choice of Entity

Wed, 15 Sep 2010 08:00:00 GMT

The initial and most important decision facing a new business owner is a task often referred to as “choice of entity" -- whether to operate the endeavor as an LLC, a partnership or a corporation.

However, it is important to understand that choice of entity requires three types of analyses, each of which is entirely different from the others. When considering choice-of-entity, owners should do all three analyses and then, if there are any conflicts among them, reconcile these conflicts. The three issues to be considered are:

Non-Tax Considerations. The first type of choice-of-entity analysis is non-tax choice of entity. This is the process by which lawyers choose the best type of business organization for their clients on non-tax grounds—mainly on business organization law grounds. The key types of business organizations are sole proprietorships, general partnerships, limited partnerships, corporations and LLCs. The most common issues include (1) determining the optimal form for personal liability protection; (2) the level of management participation desired by each owner; and (3) the need for special statutory business asset protections referred to as charging order protections;

Federal Income Tax Considerations. The second is choice of federal income tax regimen for federal income tax purposes. The relevant regimens are disregarded entity taxation and Subchapters C, K and S. Key issues include: (1) Which regimen will provide the client with the lowest tax rate? (2) Which will provide the client with the greatest flexibility in deploying and redeploying business assets?; and

Social Security Tax Considerations. The third is choice of federal income tax regimen for Social Security Tax purposes. The relevant regimens are those listed above, but the relevant issues are entirely different from federal income tax issues. In addition, you won’t find the key authority in this field in the Internal Revenue Code or even in a final regulation—it’s a little-known but remarkably powerful IRS proposed regulation designated Prop. Reg. § 1.1402(a)-2.

Devoting appropriate time and consideration to these three areas can ensure an appropriate choice of entity and reduce risk and future loss for new business owners.

What's a Maryland B Corporation?

Tue, 10 Aug 2010 08:00:00 GMT

For centuries, the role and responsibilities of corporations and corporate boards of directors have been clear: to maximize shareholder (owner) profit. Indeed, directors are subject to derivative suits by shareholders for violations of either the duty of care or loyalty which impedes such pursuits. However, beginning October 1, 2010, that will not necessarily be the case in Maryland. The Free State recently became the first state in the nation to approve a new form of business entity known as a Benefit (B) Corporation.

B corporations continue to operate for-profit. However, it is distinguished from a traditional corporation by having as it's central purpose a "General Public Benefit". Recognizing that corporations necessarily create broad externalities, this standard requires that a B corporation shift its focus from maximizing shareholder utility to "stakeholder" utility, which includes owners, employees and the general public. Among the statutorily enumerated public benefit purposes that a B corporation must stipulate in its charter are:

Providing individuals or communities with beneficial products or services;
Promoting economic opportunities for individuals or communities beyond the creation of jobs in the normal course of business;
Preserving the environment;
Improving human health;
Promoting the arts, sciences, or advancement of knowledge;
Increasing the flow of capital to entities with a public benefit purpose; or
The accomplishment of any other particular benefit for society or the environment.

One of the most significant effects that this new entity will have is on the duties required of board members. Indeed, the legislation requires that directors shall consider the following five factors in making business decisions:

The stockholders of the benefit corporation;
The employees and workforce of the benefit corporation and the subsidiaries and supplies of the benefit corporation;
The interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation;
Community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or the subsidiaries or supplies of the benefit corporation are located; and
The local and global environment.

It will be some time before B corporations are formed and operated and the statute interpreted by Maryland courts. At this time, two questions clearly present themselves. First, to what degree will investors be inclined to fund a for-profit venture that is statutorily obligated to consider the interests of non-owner parties when making business decisions? Second, even with statutory protection, to what degree will B corporation directors be shielded from shareholder derivative suits if profits suffer?

The End of the Billable Hour?

Fri, 30 Jul 2010 08:00:00 GMT

It is my goal at the conclusion of every legal matter to have reduced risk for my client. Most of my counsel is aimed at enabling company owners to focus on running their firms, without the uncertainty that stems from poorly planned and vague business governance. However, the billable hour -- long the standard billing method of the legal industry -- stands as one of the more uncertain and anxiety-producing factors for such clients.

Neither lawyers nor clients like billable hours. Obviously clients dislike the method because they aren't able to determine fully how much a given legal service will cost. Lawyers too find the system frustrating. It is very difficult to balance the need to provide clients with superior and comprehensive service while simultaneously attempting to limit time spent on a matter to control costs.

For generations, the billable hour has remained unchallenged. However, as noted in the current edition of The Economist, the recent recession has given clients the leverage needed to object effectively in favor of new schemes. Small business law in particular lends itself to an alternative billing structure. In matters not involving extensive negotiations with opposing parties, the time required to accomplish many small business legal matters can be determined in advance, thus allowing for fixed fee billing. Fixed fee services provides a comfort level for both parties and allows clients vital increased communication with lawyers without fear of incurring additional costs.

The structure and mission of The Kramer Law Firm enables us to work with each client to develop a payment structure that accommodate most financial situations. Please contact us to discuss these flexible options.

The Small Business Advantage in a Bad Economy

Fri, 09 Jul 2010 08:00:00 GMT

One of the most common problems I face with new clients is getting them to understand that the issues and concepts they face as “small” business owners are almost exactly the same as those encountered by large multi-national firms: the difference between the two is simply the number of zeros on the end of the deal value. Indeed, all businesses, large and small, must deal with legal compliance, budget concerns, employee relations, market analysis and contract negotiations.

However, in one key area there is a significant – and positive – difference between small businesses and their larger brethren: a recent article in the Washington Post, cites small firms’ flexibility to be an asset in surviving the recent economic downturn. While not universal, many factors enabled progressive and nimble small businesses to side-step the cumbersome bureaucracy and fossilized credit markets that toppled industry giants. For example, small firms enjoy:

* Alternative Funding Sources: Venture capital and bank lines of credit nearly ceased to exist at the height of the recent recession. For medium and large businesses with sizeable overhead expenses and high cash flow needs, this resulted in layoffs and company failure. However, many small business owners self-funded ventures survived because of lower immediate cash needs and the ability to acquire smaller amounts of funding from informal loan sources;

* A Modern Approach to Employee Relations: Small business owners often closely monitor the bottom line (it is, after all, their money) and do not face institutional resistance to alternative working arrangements. They significantly reduce overhead costs through flexible telecommuting and working hour shifts; and

* Personal Responsibility: In many small businesses, owners are often the first and only point of customer contact. This enables them to develop personal relationships with clients to gain a strong understanding of what their target market values most. That information may lead to quick value added changes to services to best satisfy and retain repeat business.

For these reasons, many smaller businesses have been able to adjust quickly and efficiently to the changing economic and market circumstances that doomed many larger and well-established firms.

Contract Negotiating Tips for Maryland Small Businesses

Tue, 22 Jun 2010 08:00:00 GMT

Small businesses constantly negotiate and enter into contracts, including leases, purchase orders, employee agreements, customer engagement letters and asset purchase agreements. In the vast majority of cases, owners often focus primarily - if not exclusively - on price, quantity and time of performance clauses. Unfortunately, doing so neglects to address the crucial remaining terms of the contract which allocate risk and transfer liability between the parties.

Ensuring that a business contract satisfies the goals and purpose intended, it must both avoid crucial omissions and use precise language so as to leave little room for future disputes over terms. Business owners should enter into contract negotiations with clear objectives. It is important to be aware of relevant laws, facts, and figures. Finally, they should determine in advance what concessions are really needed from the other party, and also decide in what areas to compromise.

For further discussion of this topic, please read the article, "How can my small business minimize risk in contract negotiation?".