May 2009 Archives

May 25, 2009

San Diego Small Businesses Struggle During Credit Crunch

Whether San Diego small business can survive the current credit crunch may depend more on each business's determination and grit than on the Obama administration's attempts to ease credit. Some established businesses with excellent credit may not feel the impact of the current credit crises, but new businesses, start-ups and other businesses struggling in this current recession have to find ways to stay in business. Typically, new and struggling businesses fund themselves through difficult times with loans and credit cards. When credit dries up, businesses are left to fend off failure by cutting costs in whatever creative ways they can dream up, including sometimes laying off employees.

Unfortunately, there doesn't appear to be any immediate relief in sight. President Obama's administration is struggling to ease the credit crunch as part of his recovery plan but so far with little practical effect. Recent announcements regarding TALF (the Term Asset-Backed Securities Loan Facility act) reflect a promise to cure some of the TARP deficiencies. TARP (the Troubled Asset Relief Program) was the centerpiece of President Bush's Emergency Economic Stabilization Act. However, it appears that most lending institutions cannot or are not participating in TALF, at least not so far.  This is not to say that President Obama's overall plan has failed or will fail. At this stage, it is simply too early to tell.  There are some promising signs for small business.  For instance, the Small Business Administration has temporarily raised its size requirements making more businesses eligible for small business loans (Reuters "U.S. makes more businesses eligible for loans").  The only thing certain for now is that credit to business remains tight.    

Credit crunch 2.jpgThe solution for small business today - ride out the recession and credit crunch.  This is easier said than done of course particularly as struggling businesses typically turn to credit during recessions. Nonetheless, American entrepreneurs are resilient and often exhibit their greatest potential during tough times.  First, businesses shouldn't assume that the credit crunch means there are absolutely no loans.  Businesses should exhaust all potential sources before giving up.  The San Diego Daily Transcript, a good resource generally for small businesses in San Diego, offers some financing tips.  Small business owners can also use their personal credit card lines, and if necessary look to family and friends for short term loans.  More importantly, smart business owners will look for creative ways to cut costs and strive to maximize an efficient use of business resources. 

One powerful tool available to businesses during a recession is to lessen profit margins by discounting goods and services and then aggressively marketing these "good deals" to the ever increasingly cost conscious consumer.  Letting customers know that your business is sensitive to the hard times of others often sets businesses apart during recessions.  With grit and determination, creative business owners can ride out the current credit crunch while simultaneously building brand loyalty.  Whatever the methods of survival, keeping San Diego small businesses alive during these tough times is good for all San Diegans.   

May 20, 2009

Choosing the Right Business Entity - Sole Proprietorship May Still Be the Right Choice

So you're ready to start up your new business in San Diego but are still wrestling with the idea of incorporating or forming an LLC (Limited Liability Company) instead of operating as a sole proprietor? Young entrepreneurs should be cautious. There is a misconception that a Corporation or LLC is always the right choice for new business. Law firms and attorneys and even do-it-yourself legal services sing the praises of incorporation and routinely dismiss the sole proprietorship. After all, small businesses do not need lawyers to obtain a business license. In reality, operating as a sole proprietorship may still be the right decision for many start-ups. When starting a new business, all forms of business should be considered including the sole proprietorship.

Sole Proprietor 5.jpgThere are two key factors that influence the business formation decision - minimizing taxes and limiting personal liability.  In most cases, particularly in the small business context, tax savings from incorporation are negligible or non-existent.   While corporate tax rates might be lower than personal tax rates, small business owners still have to pay income tax on dividends and the salary earned as an employee of the corporation.  If taxes were the only benefit to incorporation, the hassle, expense and time necessary for incorporation would hardly seem worth it.  Individuals starting up a new business often find themselves bogged down with corporate formalities instead of focusing on the business at hand.

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May 11, 2009

San Diego Commercial Leases at a Discount

It is a great time for small businesses in San Diego to lease commercial space. The recent economic downturn has resulted in an increase in the supply of commercial space putting downward pressure on rents. More importantly, small businesses now have the ability to negotiate better lease terms as commercial property owners scramble to fill empty space.

Over the last 10 years, small businesses have had little bargaining power when it comes to negotiating lease terms. Faced with a highly competitive market, commercial property space was available at a premium. Eager to scoop up a nice location, small businesses were ready to agree to whatever lease terms were proposed or risk losing the space to the next highest bidder. While a good attorney could negotiate some favorable terms, prospective tenants remained largely at the mercy of a very competitive market.

834466_city_skyline_2.jpg The terms of a commercial property lease have value in and of themselves, and negotiating a lease that best suits your needs can have a profound impact on the future of your business.  Today, small businesses concerned with expansion may be able to negotiate shorter leases.  Some businesses may wish to negotiate the ability to make alterations to a space.  Others might be concerned with the ability to sub-lease.  Retail businesses may expect to rely on the traffic brought into an area by an anchor store and seek to negotiate a bailout clause which would terminate the lease if the anchor store went out of business or moved.  Whatever the terms, commercial property owners are more likely to consider the tenants proposals.

In today's market for commercial property in San Diego, businesses have a remarkable opportunity to negotiate beneficial lease terms.  It is a great time for new businesses, businesses looking for new locations and entrepreneurs interested in new start-ups to explore the San Diego market for suitable commercial space.  Contacting a commercial real estate agent is a good way to get started.  Once a suitable location is found, businesses should work with their attorneys to negotiate the best lease terms possible.  CityFeet and LoopNet are two resources that allow businesses to search on-line for properties in their area. Commercial real estate agents can be found in the Yellow Pages.
May 4, 2009

Basic Contract Principles Should Guide San Diego Businesses and Their Lawyers In Any Negotiation

On December 22, 2008, the California Supreme Court ruled in Patel V. Liebermensch that the parties had entered into an enforceable option contract for the sale of real property despite the absence of terms specifying the time and manner of payment. The controversial decision was widely reported by the media and in attorney blogs and the moral of the story appeared to be that parties could forego the inclusion of contract terms setting forth the time and manner of payment (at least for the purchase of real property in California). Although the decision is important, businesses entering into contracts should not be lulled into thinking exclusion of such terms is acceptable simply because their exclusion does not render a California contract unenforceable. Time and manner of payment is an important detail in any contractual relationship, and prudent business owners do not enter into contracts (for the sale of real property or otherwise) without knowing when and how they will be compensated.

The purpose of entering into a contract is set forth clearly and concisely the material terms agreed to by the parties and to affect a means of enforcing those terms should there be a dispute. A good attorney or other negotiator will ensure that all material terms are agreed to and that important factors such as the time and manner of payment are included in the contract regardless of any law or court decision that may appear to minimize their importance. Having a clear understanding of the contractual relationship is the best way to minimize potential misunderstandings and avoid future disputes. Whether a court will ultimately enforce the contract has little benefit to parties embroiled in a battle over when and how each side is to be compensated. The object of a good contract is to avoid these kinds of disputes in the first place. Such disputes are costly to businesses even with the long term prospect of prevailing in court. A business' goodwill, reputation and bottom line all may suffer by the dispute's mere existence. Too often, businesses and their lawyers lose sight of these practical aspects.

Of course, the Patel decision will impact the enforceability of many existing California contracts, particularly those executed by unsophisticated parties without the benefit of a contract attorney. In fact, the contract at issue in Patel was a short contract in the form of a proposal sent by fax. The point of this article is that while Patel may be the law of the land for California, San Diego businesses shouldn't rely on it and similar decisions in place of common sense and sound contractual negotiation.