CLICK HERE FOR ARTICLE: Preparing for a home business, part two

July 14, 2014

BY MICHAEL GOLDMAN

People working from home have a number of issues to consider during the course of launching their business. Part one of this article examined entity formation, protecting confidential information, employees versus independent contractors and contracts with third parties.
Here are more key steps toward making a home business a success:

Insurance
You need to check with your homeowners insurance agent to see whether operating your business from your home affects your policy, or whether you are not covered for liabilities that arise from the business’ activities at the premises. Depending upon the activities at your home, you may need to buy additional coverage (generally very inexpensive) to make sure that your premises’ liability will extend to acts arising in the course of your business. Your auto insurance policy also may need to be updated if your amount of business-related driving is beyond what you had reported on your insurance application. In addition, many small business owners are surprised to find out that there is relatively inexpensive liability insurance (which can include defective product or errors and omissions coverage) for their type of business. Such policies usually cover your legal fees if you are sued by a client or customer for a product defect or negligent consulting advice.

Zoning
If you are using your home office merely for phone calls, file storage and a place for you, alone, to work, your home business is unlikely to raise any zoning concerns. However, if your home business involves visits from others (customers, colleagues, employees, contractors, etc.) or entails more than the occasional shipment of materials or products, you may actually have a zoning problem. Local zoning ordinances govern the use of property and are designed to protect the health, safety and general welfare of the greater community. For the same reason that zoning normally does not permit industrial buildings in single family zones, zoning also may limit what non-residential activities a person can do in his or her home. Therefore, you should not spend a lot of money fixing up your basement or home office to accommodate employees, a satellite tower, and an expanded parking area (installed on what used to be a part of your grassy lawn) without knowing whether you first need a zoning permit. Between nosy neighbors, the building department (for permits), the tax assessor and competitors, the local zoning officials generally know everything that is going on in town. If you are having frequent visitors or the FedEx truck knows its way to your house without a driver, you should not expect to be able to keep your business use secret from the zoning authorities for long. If you are in violation, the municipality can have the right to impose a cease and desist order. It can be expensive to challenge or comply with cease and desist orders. If you are unable to challenge or comply, the monetary fines, demolition costs, etc. can be expensive and time-consuming. And, such cease and desist orders can be embarrassing as they are frequently reported in the newspaper and the local online news. Therefore, if your business involves having regular visitations at your house or lots of deliveries and shipments, consult with your attorney before plunging forward.

Obtaining permits
You might not anticipate that permits are needed for projects such as sign installation, sheds or accessory structures, fences and walls over 4-6 feet in height and demolition work. Changing windows to doors, moving plumbing fixtures to different locations, moving an interior wall, altering a driveway, or replacing roof shingles (even shingling over an existing roof) all require permits. If you are just hanging wallpaper or painting the walls, of course, you don’t need a permit. Nor do you always need one for changing a toilet or sink and replacing it with the same item in the same space. One rule of thumb: anything requiring a dumpster requires a permit.
Your business is an investment. If your project does not comply with the codes and standards adopted by your community, the value of your investment could be reduced.

Building a team of professionals
Every self-employed person should assemble a team of professionals to assist in their respective areas of business. These professionals would normally be a lawyer, accountant, commercial insurance broker, and IT consultant. With liability protection, tax advice, insurance and technology covered, you can then focus your energies on what’s really important: sales, increasing your expertise, and networking.

Knowing when to pull the plug
Declaring bankruptcy is a wrenching resolution for most people, necessitating uncomfortable and typically unpopular decisions such as abandoning the dream of a home business.
Most cases filed by individuals fall under Chapter 7 of the bankruptcy code and involve people experiencing a crisis that prevents them from meeting their financial obligations.
Fear of their financial affairs becoming public is common, but bankruptcy proceedings are not published and rarely involve a court appearance. Many individuals fear, also, that they will lose everything they possess in a bankruptcy, but that is not the case; many assets (such as the debtor’s home, most household goods, engagement and wedding rings) are exempt and can be kept by the filer.
Those filing under Chapter 7 also may retain their retirement accounts, social security payments and other government-subsidized benefits. Properly funded college accounts for the debtor’s children are also beyond the reach of creditors in Chapter 7. Personal injury claims and payments also can be protected with proper planning.
While there are many protections for filers, some discrimination against those who have filed Chapter 7 does exist. Private employers can refuse to hire a person who filed for bankruptcy. Landlords can refuse to lease to a Chapter 7 debtor. Private colleges can deny transcripts. There are other issues that may arise and it would be a wise move to determine all the benefits and drawbacks before deciding to file.

Click here for part 1 of this article

Michael Goldman is an attorney with Goldman, Gruder & Woods L.L.C. He can be reached at 203-899-8900. The firm, with a focus on smaller or closely held businesses, has offices in Norwalk, Trumbull and Greenwich.

CLICK HERE FOR ARTICLE: Positioning yourself for a business bank loan

BY MICHAEL GOLDMAN

Rates are low. The economy is improving. Banks have money to lend. “So,” you wonder, “how come I can’t get a loan?”

The answer is threefold: One, many business owners approach the wrong banks; two, some approach the right bank but do so poorly; and three, others are not “bankable” and need to look at non bank options.

In this post-Lehman world, banks have unquestionably cut back on the types of borrowers and loans they will entertain. The criteria have become much more stringent and if you don’t meet the criteria, it’s a complete waste of time looking for bank financing.

This means that despite the higher costs, you are probably stuck with non-bank options.

Meeting the criteria

Most banks cannot even consider an application if the borrower’s lowest credit score (among Transunion, Experian and Equifax) is under 660. Furthermore, banks are not interested in borrowers who are facing lawsuits or whose Internet profile may present character questions. And unsecured lending to small businesses is now virtually nonexistent, so anyone seeking a loan from a traditional bank needs to have collateral.

Real estate is considered the best collateral, but a business with a track record can still receive bank financing based on accounts receivable, work in process and finished goods inventory.

Many banks will also finance equipment purchases, but these days, the financing arranged by equipment vendors is generally easier to obtain and has terms that are not much more onerous than bank financing.

If the business owner has sufficient credit, character and collateral, he needs to present his “financial due diligence” in a neat package. This would include copies of at least three years of business and personal tax returns, a financial statement and, for a new business, a business plan.

Financial statements should not reflect a comingling of business and personal transactions, and anything unusual should be explained in a narrative or footnote. An accountant may assist in presenting the financial statements more professionally, and banks prefer CPA-prepared or reviewed financial statements over something an applicant personally prepares.

Approaching the right financial institution

You need to know which bank to approach. Although bank advertising is ubiquitous and generic, banks have different appetites for the loans they will entertain.

For instance, some banks will not even consider loans for construction or buildings with vacant space or sub-market leases. Some banks only want real estate loans when the collateral is also the location of the business. Other banks prefer loans to certain types of businesses and/or disfavor loans to others.

The difference in lending between local community banks and large (generally multi state) institutions cannot be overemphasized. According to the Institute for Local Self-Reliance, while small banks comprise only 21 percent of all bank assets, they account for 54% of all lending to small businesses.

Large banks offer many conveniences, but unless your loan is the proverbial round peg, they are likely to seek your deposits, not your loan business.

Local business lawyers and local accountants generally know which bank is the best match for a particular client. They also know which bankers actually mean yes when they say “yes” and which banks actually get to the closing table.

Non-bank alternatives

In the good old days, having significant deposits to offer a bank was sufficient for getting a loan.

Now, deposit accounts are helpful, but if your type of loan is not on the bank’s “menu,” your banker won’t budge, regardless of the deposit size. Business owners should investigate what deposit accounts may bring at each potential bank.

SBA loans are a good way for a fledgling business to obtain its first bank loan, but since the SBA guaranties the bank repayment of 75 percent of the loan, the process and paperwork are more arduous than a traditional bank loan.

SBA loans also frequently require a blanket mortgage on the business owner’s house. Most banks offer an SBA loan program, but consider going to a banker who primarily handles SBA loans, has a track record of recent successful SBA loan closings and can provide references whose situations are similar to yours. Larger banks frequently have better SBA programs than community banks because their scale allows for specialization within the bank.

There are private lenders, often called “hard money,” who charge much higher rates but are more flexible.

There are also non bank lenders, most of which act like banks. Credit unions are straightforward and often grant small loans. If your credit score is high enough, you might try a zero percent interest virgin credit card for a few months.

People could also try loan brokers, who scour the universe of potential lenders on the customer’s behalf and are paid a commission when the loan closes.

The money is out there for the lending. You just have to be clever in finding it.

Michael Goldman is a founding member and managing principal of the Goldman, Gruder & Woods L.L.C. law firm with offices in Greenwich, Norwalk and Trumbull. He can be reached at 203 899-8900 or at [email protected].

CLICK HERE FOR ARTICLE: Legal preparations for a home business, part one

July 6, 2014
BY MICHAEL GOLDMAN

These days, many people are leaving the mother ship of corporate life to become self-employed. Our nation boasts a surplus of high-skilled workers that, combined with continued trends in downsizing and outsourcing, is creating a plethora of jobseekers that have no choice but to be self-employed. This is particularly prevalent in the baby boomer generation.

Many people become consultants who can work anywhere and, therefore, work out of their homes to save on expenses and enjoy convenience. Here are some of the key topics any self-employed person needs to consider at the outset:

Entity formation

Gloria runs a successful landscaping business from home, storing equipment in her garage and employing three younger workers. In the course of a tree removal, a massive branch fell on the customer’s house, damaging the roof and the master bedroom. Compensating the customer could cost tens of thousands of dollars.

Although it is legal to be engaged in your business as a sole proprietorship or “doing business as,” it is almost always better to operate your business as a corporation or limited liability company. In addition to the professionalism of having an entity, the entity affords some protection by shielding you from liabilities caused by others in the course of the business’ activities. Therefore, while the business itself will be liable for acts or omissions by employees, agents or contractors, the business owner would not have his or her own assets at risk (like a house or savings) unless the claim arises from something the business owner did.

Protecting confidential information

Mario was thrilled when a national charitable foundation hired him to help with a major campaign. He quickly signed a contract, not realizing the terms of the agreement required he divulge a list of former donors he had amassed over years as a professional fundraiser.

Your value as a self-employed consultant or salesperson derives from your years of experience, know-how and contacts. Therefore, you must protect your “special sauce” – your proprietary information and sales base. This is facilitated with confidentiality and nondisclosure agreements, which will also include provisions that prohibit solicitation of each other’s customers, clients and employees. Frequently, consultants are all too willing to sign such documents provided by the bigger companies for whom they wish to work. Without legal review, you might find yourself having given the other party access to your contacts and know-how without knowing it.

Employees vs. independent contractors

“Grandma’s Kitchen” was such a success that Grandma Esther had to hire an assistant, Delores, to meet the demand for her home-baked cookies and cakes. Should Delores receive benefits at her new job?

If your business merits hiring underlings or associates, you need to determine whether they should be employees or independent contractors. Many small-business owners try to consider everyone a contractor in order to not put them on payroll, to have more flexibility and to save money on a payroll service. However, the rules about whether someone is an employee or independent contractor are very complex and based upon the particular facts and circumstances of each unique relationship. The penalties for treating someone as an independent contractor for tax purposes when he or she is really an employee are significant, and you can avoid big headaches by discussing each situation with an experienced attorney.

Contracts with third parties

Making the move from a high-pressure international publishing house to freelance editing from home was easy for Arthur, but his contract as a consultant to his former employer was more complicated.

Most businesses need a basic contract that obligates the client to make payment and evidence the amount of your compensation, and protects you from delinquent customers by imposing late charges, interest and court costs. In addition, most consultants would benefit by a contract that, in simple terms, defines the scope of the project, pays the consultant for extras, further protects confidential information and limits your liability in case the other party alleges it is dissatisfied with the work or has had other problems. More complicated contracts will involve such issues as fixing defective work, warranties, indemnification and dispute resolution. Some self-employed people make the mistake of using nothing more than purchase orders, which usually are not binding, or of blindly signing contracts provided to them by their client or customer. These contracts are typically one-sided, often prepared by in-house attorneys who have added provisions buried in the “boiler plate,” which can go unnoticed by a layman and create trouble for you. For these reasons, having a lawyer review such contracts is very important, and typically, an experienced contract lawyer will not need to charge much to review contracts on small projects.

Of course, these are just some of the issues baby boomers must consider when launching a home business. Other equally important concerns will be covered in Part 2 of this article – Preparing for a home business, part 2.

 

 

Michael Goldman is an attorney with the Connecticut-based law firm Goldman, Gruder & Woods L.L.C. He can be reached at 203-899-8900 or [email protected]. The firm has offices in Norwalk, Trumbull and Greenwich

Posted date: May 17, 2014

Fairfield County Business Journal – Commercial real estate leases explained, Part two 

By Michael Goldman

Outside of the actual product or service sold, a business’s most important decision is its lease. This decision affects a business’s revenues, costs and employees and is frequently a make-or-break decision. Last week’s column assessed specifics of how to make the best choices or to maximize negotiating leverage. This is part two.

Most landlords require that a lease be guaranteed by the business owner, thereby putting personal assets (home and savings) of the guarantor at risk if the tenant does not generate enough cash flow to pay the rent. If the business fails, it is bad enough that the owner will lose the initial investment. It is even worse to have additional losses stem from the guaranty. Yet, almost all landlords require a guaranty. Therefore, the key for the business owner is to negotiate a reasonable limitation to the guaranty (a “cap”).

There are several ways to convince a landlord to limit the guaranty. One way is by posting a larger security deposit. Alternatively, some landlords will agree to a “good guy” guaranty, which caps the amount of the guaranty so long as the tenant (i) gives a certain amount of advance notice that he needs to end the lease early, (ii) pays rent until he vacates, and (iii) leaves the property in good condition. Depending on the size of the lease and the amount of the landlord’s build-out, landlords will frequently accept a “good guy” guaranty with a cap of three to twelve months’ rental exposure. Stronger tenants can sometimes negotiate that the guaranty gets reduced over the lease term — in other words, a successful track record reduces the total exposure over time.

Almost every lease states that the tenant accepts the property “as is” at the time the lease commences. This requires that the owner uses good building inspectors when negotiating the lease, ensuring that such issues as zoning, permits, liquor licenses, etc., are in order before the lease starts or are the subject of contingencies in the lease. Without this, an owner can be stuck paying rent on unusable property, suffer a delayed opening, or have to pay significant unbudgeted costs to get unexpected permits before being able to open.

These important leasing issues should be on every business owner’s checklist:

• Exclusivity: If appropriate, the landlord should agree not to lease the shopping center to competitive businesses. For a restaurant in a large shopping center that can accommodate multiple eateries, there should still be exclusivity about the type of food served, entertainment, price point, etc.

• Insurance: Among the most overlooked aspects of a commercial lease are the insurance provisions, since they are typically long, boring and “seem standard.” Nonetheless, an experienced commercial insurance broker should review them to determine whether the lease requires appropriate insurances and that the tenant is not paying for duplicative coverage. Also, the tenant will be in default if his or her insurance does not completely comport with what the lease provides
• Parking: Parking can greatly affect the location’s attractiveness for customers and employees. Is there enough parking for both customers and employees? Will other tenants overburden the existing parking? (Fitness and medical centers use more parking than other businesses.) Is there sufficient lighting? Is exclusive parking available? If the building has significant unleased space, consider restrictions on future tenants’ use of parking.

• Traffic patterns: Traffic patterns affect location choice. If a strong competitor’s location is more convenient, your new business may be doomed for no other reason. Customers consider things like long traffic lights, distance from main arteries and even which side of the street a business is on.

Some business owners mistakenly believe they can save money if they do not use a leasing broker — the landlord will pass along the commission savings. The opposite is generally true.

Because of commercial brokers’ knowledge of the marketplace, the landlords’ modus operandi and construction costs, they can save clients more money than what the landlord might save (and pass along) by not paying a commission. Experienced commercial brokers generally have personal knowledge of each major building and landlord in their market so they know the best deal they can win from each. Brokers know the additional rent structure, parking issues, IT-related capabilities and what limitations on guarantees and option terms the landlords have accepted in the past. Some brokers represent tenants exclusively. Some handle more class A office space. Others focus more on class B and lower-grade space.

The list of leasing concerns for business owners is lengthy. Anyone expecting to sign a lease should have an experienced leasing attorney, accountant, insurance broker, contractor and real estate broker on the team in order to make sure the leasing decision is a good one and the lease is fair.

Michael Goldman is an attorney with the Connecticut-based law firm Goldman, Gruder & Woods L.L.C. He can be reached at 203-899-8900.

Posted date: May 10, 2014

Fairfield County Business Journal – Commercial real estate leases explained 

By Michael Goldman

Outside of the product or service sold, a business’ most important decision is its lease, affecting revenues, costs and employees. It is frequently a make-or-break decision. Many business owners decide to lease new space or to renew their leases without sufficient information to make the best choices or to maximize negotiating leverage. This is part one of a two-part guide to commercial leasing.

A business’ location is its single best asset outside of its ability to deliver goods and services. Too many business owners are impatient, selecting a location with drawbacks bound to result in failure.

Retailers need strong traffic counts, visibility, signage and a location where customers want to go. Offices need buildings conducive to their operations, plus convenient to customers and employees. An experienced commercial broker can be helpful in selecting sites, as can members of trade associations or franchisors.

A tenant who rents on a “gross basis” pays a monthly all-inclusive cost. “Net” rent means the tenant pays a “base rent” that does not include such items as a share of the building’s taxes, insurance and common area maintenance, or “CAM” — hence the term “triple net.” Costs above the base rent are called “additional rent.” Some leases combine the gross and net concepts to provide for gross rent plus “escalations,” in which the lease assigns a baseline year for the building expenses and the tenant pays only the annual increases in taxes, insurance and CAM. Some gross leases also contain an additional charge per square foot for electricity if it is not metered separately for each tenant.

“It is essential for a business owner to receive good advice from an architect, contractor or other professional to make sure the build-out will meet all needs. Obvious examples include the needs of dentists, information technology outfits and vibration-prone dance studios.”

Whether a tenant pays gross, net or a combination, costs should be understood up front. For buildings with additional rent, the landlord should supply current and the past two years’ costs for analysis before lease terms are negotiated. An experienced attorney should review the way additional rent is computed — it is frequently appropriate to cap or exclude certain types of charges. Landlords frequently ask for the moon — hoping an attorney does not review the terms.

It is also common for a tenant to receive some free rent at the beginning of the term, as well as an allowance for the build-out.

Virtually all space needs to be customized for the tenant. This is true even if the space previously was used by a similar business. Landlords generally have an estimated budget for what they are willing to spend on renovations, based upon size, expected rent and related costs.

It is essential for a business owner to receive good advice from an architect, contractor or other professional to make sure the build-out will meet all needs. Obvious examples include the needs of dentists, information technology outfits and vibration-prone dance studios.

Generally, the landlord looks at the whole picture and may trade rent for build-out. For example, a tenant who will pay for upfront work will generally pay a lower rent. Larger landlords may insist that their own contractors do the build-out. This may avoid friction between the landlord’s and tenant’s contractors or a delay by the tenant’s contractor requiring full payment before the business opens. Therefore, unless the tenant has extensive construction experience, needs highly specialized construction or is part of a franchise that punches out standardized build-outs efficiently, it is often best for the landlord to do the work, allocating costs accordingly in the lease.

A typical lease term is for five or 10 years, although no term fits all situations. The longer the term, the longer the business is liable to pay under the lease. This, of course, can spell ruination for an owner if the business fails long before the lease runs out.

A shorter lease puts the space “back into play” earlier, and can backfire on a tenant who desperately wants to stay but is subject to a landlord who can overcharge or force eviction in favor of another potential tenant willing to pay more.

There are compromise options.

The typical option gives the tenant the right to extend the lease for an additional time period, generally with predetermined rent increases. The tenant likely has to give the landlord written notice to extend — usually six to 12 months in advance of expiration. Some landlords offer an option to renew with the rent on the extension to be negotiated. However, if the landlord and tenant do not reach agreement, the tenant may be stuck with an unaffordable rent or lose the option. Another compromise is for the rent to be decided through an independent appraisal in the months immediately prior to the extension.

These provisions should be reviewed and negotiated by an attorney to make sure they are fair to the business owner.

Restaurants are particularly in need of a sufficiently long lease term with options to renew. The ability to sell a restaurant for a good price generally depends on the remaining lease term. Unlike other businesses, which can move down the road when alternative space becomes available, most restaurants lack such flexibility. Zoning laws limit locations due to parking requirements and liquor permit rules. As well, the cost and time to renovate space for a restaurant can make moving prohibitive.

Michael Goldman is an attorney with Norwalk-based law firm Goldman, Gruder & Woods L.L.C. He can be reached at 203-899-8900 or [email protected]. Part 2 will appear next week.