Don't expose your personal assets to business liabilities -- be careful how you sign documents

If you've formed a corporation for your business, one of the reasons you've done so is to avoid personal liability for business debts. If you sign your name wrong, however, you've defeated the purpose and exposed yourself to lawsuit and your assets to judgment collection.

When a corporate enters into a contract, an officer or other agent of the corporation signs the contract. The only way the other party to the contract knows you are signing as an officer/agent, is a designation of your title or agency. If you sign the document and don't indicate that you are signing as an officer/agent of the corporation, you could be sued personally if the contract is breached, and your personal assets could be subject to the business debt. This is critical for things like leases or unsecured debt obligations. 

So, two things to remember:

1. Make sure the corporate name on the contract is proper and contains the "Inc." (or equivalent) designation
2. Make sure your name is printed under your signature, with your title, so that it is clear you are signing for the corporation, and not entering into the contract individually

Can I be sued for defamation if I forward a defamatory email?

Let's suppose your receive an email about someone, and forward that email along to someone else. Can the person slandered sue you for merely forwarding the email? What if you add comments?

What is defamation? Defined by California statue, defamation is the publication of false information about someone that exposes that person to hatred, contempt, or ridicule, or which causes him to be shunned or avoided, or which has a tendency to injure him in his occupation. That's a broad definition -- think back to emails you've received, and likely more than one will fit that bill.

If you create an email, or blog, that defames someone, you can be required to pay civil damages in a lawsuit. But how about it you simply forward it? Fortunately, if you merely forward an email, without writing anything further, you are protected under California law. But, when you forward the email, if you write an introduction, and materially contribute to the statement, or enhance the statement, you can be held liable. So, if ever in doubt, keep your fingers off the keyboard!

Can I be sued if my employee gets into an auto accident on the way home from work?

The answer to this question is YES -- so, make sure you have an auto-insurance rider on your business general liability policy.


Generally, an employer is held responsible for an employee's "torts", such as car accidents, committed during the "course and scope" of employment. So, if you ask your employee to run to Staples to get office supplies, and the employee gets an accident, your company is unquestionably responsible to the injured party. If your company doesn't have auto insurance, it could be forced into bankruptcy.


However, what if your employee is on his or her way home from work? Are accidents during the "commute" to and from work also the employer's responsibility? They didn't used to be, but ever expanding California law continues to create exceptions. One such exception is where the use of the employee's vehicle gives some incidental benefit to the employer. This exception is called the "required-vehicle" exception. If you require your employee to have a car and use it for work purposes, then an accident during the employee's commute is the employer's liability. The required use doesn't have to be pervasive, or written, or a technical requirement of the employment. Thus, if make an employee available for something like on-site customer support, the exception can apply.


The only sure way out of the exception appears at this point to be providing a company car to employees who need a vehicle during working hours. Thus, the on-site customer support can be accomplished without the employee's vehicle. And, the "required-vehicle" exception won't apply.


The moral to the story?? Make sure you are properly insured!!!

If he's paid a salary, and not hourly, do I have to pay overtime?

Business owners naturally want to reduce costs, and overtime costs can add up quickly. Many employers are tempted to pay an employee a salary, rather than hourly, and avoid the overtime charges. However, this strategy can be illegal and very costly.


California's labor laws start with the presumption that all workers are entitled to receive overtime wages if they work more than 8 hours per day. An employer cannot unilaterally ignore this rule and classify an employee as "exempt" from overtime. California allows five types of employees to be "exempt" from the overtime requirements, and a job title alone is not the determining factor:

1. executives
2. administrators
3. professionals (e.g., legal, accounting)
4. outside sales representatives
5. computer-related professionals

So, can your small business classify your employees as an "administrator" or "executive", and avoid the overtime requirements? Although the legal analysis is complex, and you should consult a lawyer for a specific situation, California uses what is known as the "stopwatch" test, meaning what percentage of the employee's time is spent on the exempt activity. For an executive, how much time does he or she spending "managing" the business, or supervising at least two employees? If it's less than 50% of his or her time, then she won't be classified as "exempt", and you are responsible for keeping track of, and paying, overtime.

And, what happens if you get it wrong? This question often arises after the employee is terminated. No longer loyal to the former employer, the former employee files a claim for back wages, interest, penalties, missed meal and rest breaks, etc., as well as attorney fees and costs. Suddenly, the employer is faced with significant risk and expense. Consult your lawyer and make sure you're complying with these rules.

Potential pitfalls in the hiring process

If you own a business, you know what qualities you want in a prospective employee. Clients often ask me what they can do to protect their company during the hiring process.


First, you should generate a list of legally justifiable employment criteria for each job position, and then hire the prospective candidate that you believe best fits those criteria. Do not ask questions during the interview that express any potential discrimination against members of a protected class (e.g., Are you pregnant? How old are you?).


Second, since California courts have held employers liable for defamation and interference with prospective economic advantage when provide employment references, many employers refuse to disclose information about a prior employee except for the fact and dates of employment. There are several strategies to solve that problem. For example, have the prospective employee sign a written permission for you to contact his or her prior employee, with a waiver of tort claims. Provide the permission and waiver to the former employer. 


When offering the job, the offer should be in writing, and should clearly spell out the terms of employment, hours, compensation, bonus structure, and any benefits. The agreement should clearly indicate that the employment is "at will", rather than a specified term, and should contain an "integration" clause that states the agreement is the final and only expression of the parties' agreement. 

If the employee has access to your company's trade secrets, make sure the employee signs a confidentiality provision in which he or she agrees to maintain the confidentiality of the trade secrets. Failure to do so may jeopardize the classification of the trade secret. But, do not reach too far. Agreements in California limiting one's right to earn a living are void and can carry penalties against the over-reaching party.

When is a Judgment Lien not enough?? Be careful of the foreclosure sale...

Have a judgment against someone? Be careful of a new California case law that left a judgment creditor empty handed after the debtor's home was foreclosed on and there was extra money after the mortgage was paid off. If you're smart, there's something you can do.

So, you've got a judgment against someone who owns a home, recorded your judgment with the county recorder, and think that's good enough -- eventually, the "judgment debtor" will try to refinance or sell the home, and you'll get paid. Right? WRONG!!!! If that's all you've done, you may never recover. A recent California appellate decision held that you may get nothing if the judgment debtor's home is sold in a non-judicial foreclosure sale, even if it is sold for more than the mortgage being foreclosed upon! With foreclosures on the rise, be careful!

So, imagine this -- you have a $100,000 judgment against a home owner. The home has a $500,000 mortgage. You timely file your judgment lien (called an "Abstract of Judgment) with the county recorder's office. The home owner / judgment debtor fails to pay the mortgage, and the mortgage holder initiates a foreclosure sale. This does not have to go through the Court system. Rather, the mortgage holder hires a "trustee" to sell the property. The trustee simply records a "notice of default", sends the notice to the homeowner (your judgment debtor), waits three months, records a "notice of sale", and 20 days later sells the property. Most significantly, the trustee has no obligation to inform you, the lienholder, of the sale! 

Back to the example -- the home is sold to the highest bidder at public auction. Let's say it is sold for $600,000. In the crazy California real estate market, you never know what will happen at the sale. So, the trustee pays the mortgage holder $500,000, and that leaves an extra $100,000. Remember, this new California appellate decision states that the trustee has no legal obligation to notify the other lienholders of the foreclosure sale, and has no legal obligation to pay off the "junior" liens (your judgment). So, what does the trustee do with the money? He pays it to your judgment debtor! (Who immediately proceeds to take a nice vacation, maybe to Las Vegas). 

So, what can you do? Well, if you get lucky, you can try to get money from the judgment debtor -- after all, he now has a $100,000 in his bank (well, maybe less after the Vegas trip). But, is there a better way? Well, fortunately there is -- in addition to recording an "Abstract of Judgment" with the county recorder, you can record a request that the mortgage holder send you notice of the judgment debtor's property is going to be foreclosed upon. When you find out about the sale, you formally request the trustee to pay you out of the excess proceeds, and the trustee is obligated to do so. But be wary -- this case came out in January 2010, and it is not typical that a judgment creditor would record, in addition to the Abstract of Judgment, a request for notice from the trustee. If you have a judgment lien, talk to lawyer soon to make sure you are protected.

Is it okay to use an online will or trust?

If you own a business, you have assets that would pass to your spouse and/or children upon your death. At minimum, your ownership interest in your business would be included in your estate. Clients often inquire as to whether an online will or trust preparation form is "good enough" to address their estate planning needs. Unfortunately, with today's complicated tax structure, using an online service may save money in the short term, but cost big dollars later on. Let me explain.

You may know that the estate tax, otherwise known as the "death tax", was repealed effective calendar year 2010. So, if you die in 2010, as the law stands today (and until congress likely imposes a new estate tax retroactively), you could pass any amount or money, or value of property, to your heirs without paying estate tax. As a business owner, your ownership interest in your business would be an asset of your estate, and the value of that ownership interest would be included in the value of your estate. Your heirs would receive a step up in basis if estate taxes were paid, but would not if congress does not reenact the estate tax. When your heirs sell the business, they would pay income tax on the difference. But what to do if the estate tax is reenacted and applied retroactively? There are many nuances and traps given the unsure nature of what will happen next with the estate tax (which will come back in 2011) this year. Without careful drafting of a will and trust to address your particular situation, you could fall trap to congress and over pay, now or later.

Closing or leaving a business or partnership?? Traps to avoid.

I had a potential client come to me who had owned, with a partner, a franchised retail store. As the "franchisee", they were required to purchase products they sold from the "franchisor". They were each required to guarantee these purchases. These types of "personal guarantees" are very common in franchise relationships, and in many ongoing relationships between a business and its vendors.

A fews years after the business was started, the potential client had decided she no longer wanted to be part of the business, and her partner bought her out. The business was making money and its bills were paid. She trusted her business partner, knew that he would pay her, and didn't see a need to pay a lawyer to document the transaction.

Unfortunately, with the downturn in the economy, the business could no longer pay its bills, and had amassed a significant sum of money owed for product purchases to the franchisor. Her ex partner closed the business, and filed for bankruptcy.

And why was this potential client here seeking legal advice? She had just been served a lawsuit filed by the franchisor seeking over $100,000 from her personally. Yes, her personally. Why, she asked? She hadn't been involved in the business in years. She wasn't an owner when the products that hadn't been paid for were purchased. She could prove when she left the business, and that she wasn't involved.

Her problem was the personal guarantee she signed long ago. The guarantee stated that she was personally legally liable for the payment of any products by the business. The guarantee didn't state that she had to be an owner to be legally liable. In fact, it provided that she could notify the franchisor of any termination in her relationship with the franchised business, and that would end her personal liability. But, she didn't imagine that she would continue to be personally liable after she sold her interest in the business. Because she didn't hire a lawyer to document the sale of her business interest, no one took a "fresh look" at the existing documentation to determine what steps were needed to fully protect her. That process -- a sort of legal due diligence -- is critical, and can lead to very unfortunate circumstances.

So, be careful any time you buy or sell a business, or close down a company, or separate from a business partner. There can be unintended consequences that are easily dealt with at the time, and substantial if ignored. In these trying economic times, one can't be too careful.

Do I need to incorporate?

"Do I need to incorporate" is a question often asked by small business owners, and often for differing reasons. Will I be able to write off more expenses? Will I be shielded from liability? Should I incorporate in Nevada? Should I form an LLC, a regular corporation, or "closely held" corporation. Should I make a subchapter "S" election? 

These are all important questions. And the answers vary considerably depending on the business owners' operations and goals.

Business expenses are normally deductible regardless of the form of the business. A sole proprietor writes off business expenses on Schedule C on his or her personal tax return. A corporation writes off those same expenses on a separate tax return. Some accountants will tell you, however, that writing off business expenses on your personal tax return (Schedule C) will lead to more audits than writing them off through a separate business entity. But, regardless, forming a corporation will not allow you to deduct purely "personal" expenses.

From the standpoint of legal liability, incorporation can provide significant protection. If you don't incorporate, your personal assets are exposed to liability any time someone acts on behalf of your business. So, if you ask someone to go to Staples to buy something for your business, and they get in a car accident, you are personally liable to the injured party. Incorporation protects you from those types of liability. But, it will not protect you from your own actions. You can also shift to the corporation potential liabilities from leases or vendor contracts. Thus, if you sign a 3 year office lease under the corporation, you are not personally liable to the landlord if the business can't pay the bill, or needs to move. Just don't sign a personal guaranty!

Finally, once you decide to form a corporate entity, many more questions arise, including the corporate form, whether to file as a "closely held" business, where to incorporate, and whether to make an IRS Subchapter "S" election. Those questions will be answered in a future post.

How do I increase value when I sell my business??

As the economic recovery blossoms, the stage is set for a feeding frenzy on privately held companies. You've been working hard, and would love to sell. But, will you get the right price?

If you properly plan for the sale of your business, you can maximize value. Operating as "business and usual" can significantly affect in the negative the value someone is willing to pay. So, what you can you do? Here's some simple steps, that should be taken only in consultation with your lawyer and tax advisors.

First, cut expenses. A sophisticated buyer will look at your company's EBITDA -- earnings before interest, taxes, depreciation and amortization. Often times businesses are valued on a multiple of the EBITDA. Thus, your primary strategy is to maximize earnings. If the multiple is 7x, any reduction in expense is worth 7 times that reduction in a sale. That philosophy, however, is counterintuitive to a strategy to maximize after tax profits. For example, businesses typically lease vehicles or equipment to maximize the expense deductions. Thus, for example, consider a business that  needs a $100,000 piece of equipment. It can rent it for $25,000 per year, or borrow the money, pay annual interest (of say 7%), and depreciate $20,000 per year. By borrowing the money to purchase the equipment, EBITDA increases by $18,000. At a 7x multiple, you're increased the value of the business by $126,000.