How to divide interest in new business!

I was consulted by two friends who wished to start a business. They wished to get legal advice on what is the best form of business (benefits of corporation versus sole proprietorship, etc.), lease issues, personal liability of individuals to the lenders in case of default on business loan, hiring and firing of employees, etc. I was impressed with these people. One client had all the questions on his iPhone- putting technology to use. Lot of thought seems to go in the process which is a great sign of business planning.

One of the questions which was most interesting was-how to divide the interest. Both partners were putting in equal amount of money but one partner was going to work in the business and take care of the technical side as well as day-to-day management related issues. The working partner wanted a higher interest as well as a monthly compensation once the business reached a certain level of revenue. The investing partner wanted to know if such division of business equity was fair and reasonable. Specific question was what is the norm?

There is no particular norm in the industry for division of equity or share. I feel it is all negotiable. It just depends on what value is placed on money invested, work done, product created or service rendered and result obtained.

However, it is a great idea to talk about these things before hand to avoid future problems. Someone who is going to work in the business will naturally take most of the credit as person is using his technical and management skills based on previous experience. The investing partner is bringing in the money.

It is interesting to note that even though the money is important to run any business, the things change drastically when someone starts to value his own skills more than the money. If money is not there, the business won't start, however, if the business person is not there to manage functions skillfully then the business will not continue. It is classic "chicken or the egg first?" kind of situation.

What I felt was that the partners had the following choices:

1.      Acknowledge that money is important. And that personal credit is being used to qualify for business loan. Bank is requiring personal guarantee. Question becomes how is providing such guarantee!

2.      The working partner is contributing his business, technical and management skills.

3.      Either divide equally and pay the working partner a certain reasonable monthly amount as Manager. Or give the working partner a little bit higher interest (share) based on his skill if the business can not afford to pay the monthly amount.
4.    Loan money the friend/wanna-be-working partner at a market interest rate and be satisfied with the return.

5.      And lastly, walk away from the venture. My logic was that working partner might adjust the interest currently based on business or financial need. However, if working partner already views his experience and skill as more valuable and worth higher interest plus monthly salary, then at later stage, once the business starts to flourish, it might create more problems and might lead to a rift and breakage in relationship and smooth functioning of business.

Good thing is that at least these people are talking about it and discussing it before hand. I am sure based on their relationship, they will be able to reach a happy medium and do well in the business. I certainly wish them well.

Corporate Governance

Modern corporations are moving towards a progressive era of shareholder franchise which was a myth till yester years. The biggest questions that come to the fore when discussing corporations’ role is that of corporate governance: how companies are run internally and what rules they will play by in the external world. In a narrow sense, good corporate governance means shareholders realize value and boards of directors have an easier time fulfilling their fiduciary duties. More broadly, corporate governance is about the principles that underlie democracy: transparency, checks and balances, and accountability. Good corporate governance means that businesses recognize the duties that correspond to the privileges that society has granted them: favorable tax treatment, limited liability, and so forth.

I, as an attorney, contribute by being part of a corporation’s professional legal team by advising on what measures you need to take to comply with the modern day corporate governance practices; to legally protect the corporation, directors and officers from shareholder derivative litigation and take care of all legal compliances which the stock exchanges have made mandatory compliance for all public companies listed and trading. Smooth flow of capital, investor faith and reliance on the corporate machinery also directly depends upon good corporate governance structure where the present course of action would be governance restructuring to provide transparency, checks and balances in the functioning of any modern day corporation and create a competitive, fair and ethical corporate climate.

Here forth is set a list of best governance practices which should be incorporated in the articles of incorporation and to be used as a governance constitution which cannot be modified without shareholders consent and leverage given to the Board of Directors for business oversight:

• Checks and Balances - Transparencies in conduct of corporate affairs.

• Active, Informed and Independent Board.

• Role and duties of Board of Directors in compliance with governance standards.

• Nomination of Directorial candidates and Election Process –CEO selection and succession planning as well as electronic “town hall” system to facilitate proposed shareholder resolutions.

• Specific and Active Board Committees – Audit Comm., Governance Comm., Compensation Comm., Risk Management Comm. with independent directors heading them.

• Term limits and Auditor rotation.

• Compensation limits.

• Equity Compensation Programs.

• Legal Compliance - Enhanced Legal Department and Ethics Program.

• Performance Monitoring.

• Non Executive Chairman of the Board of Directors who will be coordinating Board’s work, chairing meetings, organizing CEO and Board Performance audits.

What is Estate Planning? and more!!

"I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, and when I want, and, if I can, I want to save every last tax dollar, attorney fees, and court cost possible."

(Courtesy, Generations by Esperti and Peterson). Definition adopted by NNEPA.

Point is make decisions and plans while you can-when you are alive and well.

My wife is leaving for India for two weeks. I will here with our two kids. She started to tell me what to do. I asked her to write everything down. So, now I have notes from kids' doctors to how to make a dish (so-called recipe) to the kids' menu for breakfast to dinner. It helps to have written instructions!

How would the world know what you want or should I say wanted if something happens to you!!

Starting a Business-Issues to Consider

So, you have decided to start your own Business. My first advice would be to read The E-Myth Revisited by Michael Gerber.

Secondly, how you run your business is your business. I, as an attorney, can contribute by being part of your professional team by advising on what measures you need to take to comply with the law and also to legally protect yourself.

So, if you are confused about which business licensing department to visit first or which corporate form to select or what paperwork you need to open your bank accounts, don't worry. Most new business owners are. You just need to make sure that you either have the time to do the research and no money or that you want to do it right and hire the right professional to help you with the process.

Typical issues are:

Licensing. City, County, State licenses and registrations. Make sure to comply with the City, County or State requirements. For example, if you are going to be conducting the business in your name alone and working from home, you still need to register the business with the city and obtain license. However, if you plan to form a company, you have to also register the company with the State and file incorporation documents in addition to registering with the City. See the difference and importance!! Of course, you knew that.

Sole proprietorship vs. Corporation. So, if you have looked into what form of business you are going to conduct and if it is going to be individual name or proprietorship, then you do not have much to worry about. However, if it is going to be a corporation, you still have to decide whether it is going to be LLC or P. C. or C Corporation or S Corporation.

And different options are available to people depending upon what is their background, who else is involved and what their objectives are. For example, a doctor can have Professional Corporation (P. C.) but an Engineer cannot. Whether the corporation is going to be a C-corporation or S-corporation also needs to be decided based on the objectives of the corporation. A good CPA can help in the decision making process.

Professional Advisory Team.  Who will help you on legal matters? Legal matters can vary from simple incorporation to complex employment or corporate Governence. Who will help you with tax planning and strategy? Who will help you with Marketing? Insurance and Financial planning is a big part of running a business. So, make sure to identify your lawyer, CPA, Insurance Agent, etc. before you need them.

Here is a short list of documents which are required as well.

Governing Documents

Operating Agreements

1. Shareholder Agreements
2. Bylaws
3. Buy-Sell Agreements
4. Partnership Agreements

Employee Related:  

1. Employee Manuals
2. Independent Contractor Agreements
3. Employee Agreements
4. Confidentiality Agreements
5. Non-Disclosure Agreements
6. Noncompete Agreements

It's much easier and far less expensive to do things right at the start than to try to fix a mistake down the road. With all the laws and regulations out there, it's easy to make a mistake.  I have seen too many people get excited about working together and not paying attention to legal aspects and then later paying for the mistakes.

                                         More later….stay tuned!!

HIV Infection No Longer Sole Grounds for Inadmissibility to U.S.

I just read this news update:

In the Federal Register, dated Monday, November 2, 2009, the Centers for Disease Control and Prevention (CDC) will officially remove HIV infection from the definition of "communicable disease of public health significance” and will additionally remove any reference to HIV from the scope of examinations for aliens wishing to enter the U.S.

Prior to this final rule, HIV infection was considered a communicable disease of public health significance by CDC; individuals that tested positive for the infection during the required medical examination for U.S. immigration were inadmissible to the United States. However, effective January 4, 2010, as stated in this final rule, such individuals will no longer be inadmissible to the United States solely on the ground that they are infected.

What I don't know is what factors were considered by the CDC or US CIS in finalizing the rule. What I do know is that before the final rule is published, there is plenty of time during which public comments are sought and anybody who has any feedback, comments or objections can send them to Department of State.  So, my assumption is that since comments are always sought, the comments were made by some interested organization, group and number of people.

I personally wonder what is financial and social impact of bringing in more people in this category to US general population pool. I would imagine that, at bare minimum, people with such medical issues would not be able to obtain health insurance. How are they going to pay for the healthcare? I would imagine that they would go to county hospital and taxpayers would pay for it. I don't know anything in between.

So, how do we balance the fine interest of family unity and taxpayer burden? Keep in mind, that there is an additional provision that visa can be denied if intended immigrant is likely to become a public charge.

Under the law, there is a 3-part test for determining deportability as a public charge:

1] the state or government agency that provides a public benefit must charge for services rendered. The alien cannot be regarded a public charge if there is no legal reimbursement requirement.

2] the welfare agency must make a demand for repayment.

3] the alien or other legally responsible persons must fail to repay the debt after the demand is made. All three prongs must be met.

So, if someone is primarily dependent on the government for subsistence, as demonstrated by either: (i) the receipt of public cash assistance for income maintenance or (ii) institutionalization for long-term care at government expense, then they can be considered public charge.

I feel that it is going to be very tricky!!! I personally feel that Consulates and Consular officers are going to need clear and detailed instructions from Department of State. This is a major policy shift.

Avoid Harassing calls from Creditors

Lot of people who are delinquent in their payments, receive calls from collection department of the lender/creditor. These people must be specifically trained in providing a "guilt trip" on the phone and talk as if the money is owed to them directly. I feel they should be thankful to the person who is delinquent because they have a job exactly for the same reason (borrower is behind).

In any event, in California, the state Rosenthal Fair Debt Collection Practices Act and the federal Fair Debt Collection Practices Act require that, except under unusual circumstances, collectors may not contact before 8 am or after 9 pm. They may not harass you by using threats of violence or arrest or by using obscene language. Collectors may not use false or misleading statements or call you at work if they know or have reason to know that you may not receive personal calls at work. For the most part, collectors may not tell another person, other than your attorney or spouse, about your debt. Collectors may contact another person to confirm your location or enforce a judgment. You can get more detailed information about debt collection activities by calling Federal Trade Commission at 1-877-FTC-HELP or by visiting www.ftc.gov.

Name Change-2 ways to do it

One of the callers during the radio show wanted to inquire about Name Change during citizenship interview. He explained that he is a green card holder and is applying for citizenship in two weeks. He wanted to change his name. A friend had told him that he has to change name by filing the petition with name change.

There are two ways to change name:

1. If you are a permanent resident (aka green card holder), you can change your name as part of your naturalization if a court in your area conducts naturalization oath ceremonies. Otherwise no name change can be recorded on your Certificate of Naturalization unless you already changed your name legally (such as by marriage) before completing the naturalization process.

If you decide to change your name, you will be required to complete a Petition for Name Change during your interview. Petitioning the court to change your name may delay the date of your oath ceremony, in some cases. If you petition to change your name, the new name will not be legally binding until after your oath ceremony. The new name will appear on your Certificate of Naturalization. You can start using the new name. No other legal formality is required.

During the last citizenship interview with a client, the interviewing officer at Immigration Service (USCIS) had client sign the form right there and my client will now use her new name and get citizenship certificate with such new name as well.

The U.S. of Citizenship and Immigration Services (formerly known as the INS) does not process petitions for a name change after naturalization. However, you still may change your name after naturalization by other legal means.

2. The other legal method is by filing the Petition for Name Change in Superior Court of California in your local county. The procedure also requires having to publish the Notice of Name Change in a local newspaper for 3 weeks first. And then going before a Judge after furnishing the proof of such publication with the court. A judge conducts a bare skeletal hearing and confirming certain representations in the Petition for Name Change. The judge then signs the Order of Name Change Petition. You can then start using your new name.