Sonoma County Bankruptcy Lawyer Blog

I'm in Nashville for the National Folk Festival, where we saw some great music including, Samba Mapangala & Orchestra Virgunga (East African rumba and soukous), Aubrey Gent (gospel with great steel guitar) and the Marshall Ford Swing Band (Bob Wills-inspired Texas swing).

After a blistering hot day Saturday, Sunday's rains provided welcome relief and we started off Sunday with a vigorous vinyasa (flow) yoga class at the lovely Sanctuary for Yoga.

Enjoying the lack of law in all this . . . but speaking of that, The Yoga Journal Conference in San Francisco features a 'business of yoga' track featuring attorney Andy Dudnick on legal issues affecting studios -- although it seems generalized to most small businesses.

It's clear that it's a good idea to create a business entity for most small businesses. But which is better: LLC or an S corporation?

1. Why not a sole proprietorship? It's dirt cheap to run your business as a sole proprietorship. There's no filing fees, no minimum taxes, no paperwork, other than the city business taxes and the like that every business must pay. And you get the deductions for business use of home, business expenses, etc. But despite these savings, running a sole prop comes with one huge risk: You are personally guaranteeing every obligation your business enters into. If your business signs a lease for a store front and you wind up breaching the lease, the landlord is entitled to the remaining rent on the lease at the time of breach. If that's $100,000 and you have that much in equity in your home, guess where that's going to come from?

2. Limited liability entities

Yup, you just lost all the equity in your house, if not the house itself, or you've been forced into bankruptcy. Viewed from that perspective the $800 minimum tax bill for an LLC or S corporation is pretty freaking cheap. When your LLC or S corp enters into that store front lease, the landlord is left trying to get the money out of the business entity -- not you personally. If your breached the lease because your business is bust and the company has no assets, the landlord will get a judgment against the company but won't be able to collect from you. OK, that sounds better!

3. The LLC

The LLC is quite flexible and friendly entity. In California there can be single-member LLCs as well as several member LLCs. There are member-managed LLCs (most common in smaller companies) and manager-managed. The key benefits of an LLC: fewer rules in terms of formalities like boards, meetings; and greater flexibility. In an LLC the members can allocate profits however they like, however seems fair. For instance, if one person is going to put in all the work and someone else the money, they might want to structure the profits in a particular way. You can do that with an LLC.

4. The S Corp and the employment tax

If you're self-employed, you have a special relationship with the alluring Form SE. Yup, the self-employment tax: 15.3 percent of net income goes straight to Uncle Sam and despite the thousands you have in deductions for home mortgage interest, SEP-IRA contributions, HSA contributions, you can't get away from that tax. An LLC doesn't solve that problem. But an S corporation does. As a corporate employee, you pay yourself a salary and you pay self employment taxes on just that amount. You can take more money as a distribution, and you don't have to pay taxes on the distribution amount. Thus you can save thousands a year in taxes by paying yourself a reasonable salary - but it must be reasonable - and taking the remainder as a distribution. If taxes are a concern, the S corp may be an attractive way to go. But there are many more restrictions on S corps, so seek a business lawyer's counsel to make sure the trade off is worth it.

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SANTA ROSA, Calif - Every product and to some degree every service runs through a lifecycle - Introduction, Growth, Maturity, Decline. Depending on where you are in your company's lifecycle, you'll need different services from your attorney.

• Introductory (start-up) phase. Lawyers can help define and set up compensation schemes for founders and early employees; identify, define and protect intellectual property rights; manage and define joint ventures. (The rumored iSlate from Apple
• Growth phase. Lawyers can negotiate favorable leases, supplier contracts and sales contracts, and maintain control over distributors and franchisees.
• Maturity phase. Attorneys' work in this phase tends more to employment issues (since there may be a lot of employees), product liability (since there are lots of products out in the market), licensing and, as always, defending intellectual property.
• Decline phase. Here, lawyers will help with exit strategies - selling off the business, avoiding long-term commitments and encouraging development of new products and variations that will let the cycle start all over again.

As you can see, it makes sense to fully integrate your attorney into your business management so he or she can see where your business is in the life cycle and help you act accordingly.

For more on this widely accepted model, see this article from NetMBA. Or just try Google.

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SANTA ROSA, CA - At the highest level, there are three basic Marketing Strategies. Most companies will only be able to pull off one of these. Certainly most small business should only attempt to pick of them. It takes a lot of expertise to be able to operate two of these at the same time. No one can do all three. If you don't understand what strategy your business is following, you have a problem. Do customers come to you because you:

Offer efficiency? (Variety at low prices)

Offer high quality? (Charge a premium for premium products or services)

Offer customer intimacy? (Customized to individual consumers)

These things tend to make more sense in thinking about the famous brands and what they would have been like as start-ups.

Walmart - Highly Efficient. Walmart offers lots of choices at the low end. It is famous for its operational efficiency, squeezing every penny out of its vendors and frankly its employees. So what you will, the marketing strategy is clearly on efficiency. It offers variety at low prices. It's a volume business. It knows how to buy, distribute and sell at huge volumes. It doesn't offer high quality products and it certainly doesn't offer intimacy. Starbucks seems like another company that makes profits though huge volumes and operational efficiency. It's not the best coffee in town (although it's better than some) and it's not an intimate experience.

Apple - High Quality. In the technology world, I think of Apple as a high-quality provider. Their products are simply better than almost any other computer seller. They're beautifully designed, well built, they offer pretty great customer service. You pay a premium to buy a Mac or an iPhone, no doubt about it. They're too big to truly offer intimacy but through the Apple Stores and AppleCare, most customers feel like they can get personal attention, so they straddle quality and intimacy, in my opinion.

At the other end of the spectrum, Dell is definitely an efficiency-oriented company but they also originated the 'Build Your Own Computer' model, which is basically customization. At the end of the day, that feature doesn't really go to intimacy though but to efficiency. An intimate computer company?

Your Lawyer/Tailor/Doctor/Organic Farm/Etc. - Intimacy. No brand-name company can truly offer customer intimacy. For that you have to be a local provider, who can meet and understand your client's needs and problems. If you want a tailored suit, you have to go in person to your local tailor, who has to take the time to measure you, then cut and hem your suit exactly to your proportions. In the law, you could go to one of the bankruptcy mills, where you get a lower price but zero personal attention (efficiency-centered company), or you could see a local bankruptcy attorney and get personal attention. Depending on your needs you might pay a premium to go to a expensive lawfirm (quality) but if your needs aren't that complicated it might be better to a less-expensive but perfectly competent attorney (intimacy).

For small businesses, we don't have the scale to operate a high-volume, low-margin business. We're either going to charge a premium for a superior, niche service, or going to provide excellent customer service and a customized experience. I recently had a conversation with someone who was interested in copying a business "that used to be in Healdsburg" -- selling relatively low-cost imported fair trade items from the developing world. The operative words were "used to be." Why is that?

Because they were selling low-cost items, they simply had to do serious volume for the business to make sense. Selling low-margin items at low volumes just won't cover the rent. Without volume, this business has to either be selling quality items at a substantial premium (think Gado-Gado in Santa Rosa's Railroad Square) and the inexpensive things are loss-leaders to get you in the store -- or they're providing great customer intimacy (as part of an interior design business, they sell items as accents - essentially give-aways. That sort of thing.

So, Sonoma County small businesses ... are you a quality seller or an intimate seller?

Learn more about a different kind of law firm at Le+Pelletier

I'm listening to a California Education of the Bar program on how lawyers can "think like an MBA." Is this a good idea? The typical split is that businesspeople see opportunities to be exploited and lawyers see risks to be avoided. This can mean that too often lawyers put the kabosh on business ideas because they are so highly attuned to the legal risks. On the other hand, business people need their counselors to keep their enthusiasm in check - at least until all the risks are understood.

My interest is in helping small businesses succeed. That means providing legal counsel that supports the creation of opportunity and growth, not just drafting an LLC or a contract. One of the lawyers on the panel told of a company that discovered one of their warehouse workers was an illegal immigrant. The company was in the middle of a tight-deadline warehouse move. The law firm insisted on a full audit before the move. When the audit revealed that 85% of warehouse employees were undocumented workers, the lawyers insisted they all be fired, despite the fact they were in the middle of a critical move.

The better approach: Fire the one known undocumented, complete the move, THEN do a full audit of the employees. Deal with legal risks but not at the cost of critical business functions. More to the point: Where were the lawyers when the managers were hiring illegals willy-nilly? Where were the practices and procedures that could have averted this situation in the first place?

A small business is not going to be able to handle all of the legal protections they would in an ideal world. The emphasis will be on innovation and product development, not paying lawyers to copyright and patent everything in sight. It's natural that problems only get dealt with when they become problems. But it's a good idea to meet with your lawyer and review all of the issues (many of which the small businessperson may not be aware of) that will have to be addressed over time.

These include exit strategy, planning for growth, marketing issues (false advertising, etc.), employment issues and intellectual property protection.