San Diego Business Lawyer Blog

Sweat Equity for Ownership in California Limited Liability Companies and Partnerships

Tue, 29 Jun 2010 10:32:47 -0800

Trading "sweat equity" for a share in ownership of a California Limited Liability Company (LLC) or Partnership is common these days particularly because the recession is forcing people out of the main stream work force and into creative forms of income generation. Trading "sweat equity" is a practical way for financial investors and motivated human capital to combine forces to start and/or grow a new business. Unfortunately, most people are unaware of the potential pitfalls and move forward without any thought to potential conflicts between partners or the tax consequences.

There is little doubt that new and growing businesses benefit from sweat equity. The young business gets an infusion of much needed human capital and the sweat equity provider earns ownership. It's a win-win situation for the fledgling LLC or Partnership. However, business owners considering trading ownership for sweat equity need to be acutely aware of two important issues.

First, it's critical that the economic relationship between the members or partners be clearly defined in the LLC's operating agreement or in the partnership agreement. Otherwise, the business' future will be froth with peril. The company must anticipate potential conflicts that would arise should for instance the sweat equity partner fail to perform as expected or either partner expose the company to liability. A well drafted LLC operating agreement or partnership reduces the possibility of future conflict and/or litigation. A partnership attorney will ensure that all eventualities are addressed.

Second, the sweat equity partner (the person trading sweat for equity) is in effect earning dollars that she is trading for a percentage ownership in the business (her capital contribution). This is a complex issue that has important tax implications. In the simplest terms, the dollars earned are taxed when the ownership is vested and the tax will be based on the value of the percentage ownership in the LLC or Partnership at the time. For example, say the LLC was formed by a member who contributed $50,000 for 50% ownership and a sweat equity member who contributes one year's future services valued at $50,000 for 50% ownership. The $50,000 is compensation for services and is considered taxable income. This can have a sizeable impact on the sweat equity's tax burden. Moreover, if the company never proves profitable, it's much like paying tax on phantom income.

How Do I Pay Myself As A Small Business Owner?

Thu, 17 Jun 2010 10:15:00 -0800

The excitement that comes with starting your first business is most often tempered by the myriad of critical decisions you have to make. New businesses are sprouting up all over San Diego, and a common question for young entrepreneurs is "How do I pay myself?" The question is usually asked well after the new business is underway. It is common for new business owners to forge ahead with the expectation that as soon as they see a profit, they'll simply pay themselves. However, as they think more about "how much" and "how" to pay themselves, they begin to wonder just how to accomplish the task. Do they withdraw profits for themselves? If so, can they do this any time or must they wait until year's end? Do they pay themselves a salary including the withdrawal of state and federal deductions? What are the tax consequences? What about my partner?

The answer depends on your business' structure. If you have formed a corporation, you would typically pay yourself as the corporation would pay any employee including the withdrawal of state and federal deductions. You would also have the option of paying out dividends. Determining what to pay and how to pay yourself requires careful consideration of the corporation's anticipated profits. It makes little sense to pay yourself more than the corporation makes (whether via salary or dividends). The decision becomes more complicated if you have multiple shareholders but your Articles of Incorporation and By-Laws should be set up to clearly address management compensation and dividends.

As a sole proprietor, you pay yourself a draw from the company profits. When and the amount you draw from the business has no tax implications. You and the company are the same entity for tax purposes, and you pay yourself whatever you like. However, the ability to pay yourself and whether paying yourself makes good business sense are two different things. Withdrawing all of the company's revenues leaving the company unable to pay expenses is never a good idea. It's also important to know that what you pay yourself is not an expense for tax purposes. You don't get to write it off. For a single member Limited Liability Company (LLC), you would pay yourself exactly the same way as you would for a sole proprietorship. LLC's are considered pass through entities (as long as you did not elect to be taxed as a corporation) which means you are taxed the same as if you were a sole proprietor - you pay yourself a draw from the company profits.

You also pay yourself a draw from company profits in partnerships and multi-member LLCs (that do not elect to be taxed as corporations), although as with corporations, paying yourself becomes more complicated because there are multiple owners. In these circumstances, it is important to plan ahead and ensure that a well drafted partnership agreement or LLC operating agreement is executed. Otherwise, partners and LLC members will struggle with how to divide up profits and this can be devastating to young and growing businesses.

In the end, how much you pay yourself will be more important than how you pay yourself. You will want to balance your personal needs with the needs of your business. Whatever your financial goals, it remains important that you begin your new venture by carefully considering which business entity to choose, and this decision shouldn't be made without first consulting your accountant or tax attorney.

Are Your Workers Employees or Independent Contractors?

Tue, 08 Jun 2010 11:09:57 -0800

Organizing a workforce for your San Diego business presents formidable challenges. One of those challenges is deciding whether to hire staff as independent contractors or as regular employees. Obviously, there are fiscal advantages to hiring independent contractors. For those workers classified as "employees", withholdings, payroll taxes, worker's compensation, and compliance with labor laws generally add about 18% to your payroll costs, and this is exclusive of employee benefits. Hiring independent contractors is an appealing alternative, but it's not as simple as treating all workers as "independent contractors". Federal and State law dictates whether a worker is an "independent contractor" or an "employee".

When the time comes to hire staff, it is crucial that businesses ensure that workers are properly classified under Federal and State law. Even large corporations have fallen victim to the assumption that classification of its workers as independent contractors was appropriate. Microsoft Corporation, Hewlett-Packard, Time Warner, Allstate and FedEx have all borne the cost of litigation regarding the misclassification of workers. Since 2007, estimates of settlements in worker misclassification cases approach one billion dollars. Nonetheless, employers continue to opt for the "independent contractor" classification while treating staff as employees opening themselves to significant tax liabilities, interest and penalties.

Part of the problem lies in the ambiguity in existing regulation lending to subjective determinations. In California, the Employment Development Department offers the following guidelines for the definition of an "employee": the employer has the right to discharge the worker at will; the work is usually done under supervision; the worker does not provide the tools, equipment, or place of work; the worker is paid based on time worked or piece rate; the worker has little or no meaningful discretion on how to do the job; and the worker does the same kind of work as that which is the principal production of the company.

Under these guidelines, it is easy for unwary employers to convince themselves that they are properly classifying workers as independent contractors. This is often done through rose colored glasses without fully understanding the consequences of misclassification. If the I.R.S. or state tax agency determines that a business' workers are misclassified as independent contractors, the business will be subject to back taxes, interest and penalties which can be significant. In most cases, especially for smaller businesses, the issue of misclassification never arises. Workers classified as "independent contractors" fear challenging their employer's determination. Nonetheless, employers that currently classify workers as independent contractors should reevaluate the classification, particularly as tax agencies are increasingly viewing the use of independent contractors with suspicion. If there is any doubt, employers can seek the advice of a business attorney and/or file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Tax Withholding.

Managing Business Litigation Costs - Is Flat Fee Litigation Possible? Part Two

Mon, 30 Nov 2009 13:00:13 -0800

Part One of this article discussed the general concept of flat fee litigation, and the associated relative risk shared by attorneys and their clients. Part Two explores potential flat fee litigation schemes further. The greatest challenge in devising a flat fee litigation scheme is making reasonable estimates of the attorney time necessary to effectively litigate any given case. Experienced litigators can distill the facts and the law in advance and make reasonable estimates of the time necessary, and they routinely offer estimates to prospective clients in the billable hour context. Unfortunately, lawyers' estimates are often understated and clients end up paying significantly higher fees than originally expected. This is likely because attorneys are loath to give worse case scenarios and risk turning clients away.

So long as clients are willing to absorb a share of the risk (see Part One) in exchange for certainty in billing, attorneys can and should offer their clients a flat fee option for most litigation matters. In order to reduce the risk to clients of over paying for matters that may resolve in the early stages of litigation, attorneys can offer flat rates for the different stages of litigation. A flat fee litigation scheme may look something like the following: a flat fee for pre-filing negotiation; a flat fee for post-filing/pre-trial litigation; and a flat fee for trial preparation and trial. The pre-trial litigation phase could be broken up further into a flat fee for post-filing/pre-discovery work and a flat fee for all remaining pre-trial litigation including discovery.

The difficulty of course arises in deciding how to calculate the flat fee. Litigation is a complex process mired in factual, legal and procedural uncertainty, and it's the attorney's job to navigate the maze for the client. Nonetheless, experienced litigators have the skills required to make reasonable estimates. They can estimate the number of witnesses to be deposed, the volume of documents to review, the potential discovery burden, the extent of expert discovery and an average time for expected motion work. In some cases, they'll be able to include the skill and determination of opposing counsel in the equation. They will not get it right in every case. In fact, the estimates may be off more often than not. Whatever accuracy is achieved, they can at least assign risk value to the estimates. The goal is to present a marketable alternative to the inefficient and client unfriendly "billable hour" practice.

It's important to note that setting a flat rate for attorney fees doesn't eliminate all uncertainty for clients. Litigation costs can vary considerably and attorneys should provide their best estimates of those costs while explaining the inherent unpredictability.

Compared to the entrenched "billable hour" practice, the flat fee approach is an attractive prospect to the San Diego law firm looking at creative billing practices to lure new clients and keep existing clients who are increasingly more frustrated with the status quo.

Managing Business Litigation Costs - Is Flat Fee Litigation Possible?

Wed, 18 Nov 2009 12:37:35 -0800

Attorneys and law firms have visited the issue of flat fee litigation in the past, and there are San Diego litigation attorneys today that offer some of their business clients the option under limited circumstances. However, there can be little doubt that the overwhelming consensus amongst legal professionals is that flat fee litigation simply isn't practical. In part, this view stems from the difficulties in predicting actual attorney hours necessary to litigate any given case. Even if a law firm could adequately estimate the number of hours necessary to complete a case, it is virtually impossible to know whether the matter might resolve informally long before significant attorney hours are expended. In fact, a good attorney will strive for this beneficial result for his or her client. Avoiding long drawn out litigation is always a healthy result. Apart from the monetary costs, the emotional and time consuming roller coaster ride takes a toll on business owners.

Business owners would like some certainty as to the final cost of litigation. Attorneys are concerned with compensation for the actual work performed. Under standard billing practices, attorneys do their best to provide estimates, explain the process and most often stress the inherent uncertainty that comes with any litigation. Unfortunately no matter how well explained, clients rarely anticipate the actual costs ahead. Moreover, although attorneys are bound by ethical considerations, the reality is that there is little incentive for efficiency. Nor is there a desire to scare off clients with worse case scenarios. Yet, worse case scenarios are common in litigation, and the result is an ever increasing dissatisfaction with litigation and the legal profession in general.

The question then turns to one of sharing risk. From the litigation attorney perspective, agreeing to take on a litigation case for a flat fee comes with great risk. They know the potential for a long drawn out process consuming unanticipated attorney hours. At best, underestimating attorney time results in reduced average hourly rates. At worst, the attorney finds himself or herself overwhelmed by a single case at the expense of others. For clients, knowing what attorney fees will be in advance makes it possible to evaluate whether anticipated litigation is an economically feasible alternative to informal resolution. However, in exchange for certainty in billing, they risk overpaying for their attorneys' time, and the overpayment can be significant if the case resolves in the early stages. Paying an attorney for an anticipated 80 hours that resolves after 5 hours of work can be just as dissatisfying as expensive ongoing litigation. It's clear, nonetheless, that consumers are looking for alternatives.

Non-Competition Clauses in California Employment Contracts

Fri, 13 Nov 2009 09:32:07 -0800

In California, post employment non-competition clauses are generally unenforceable. The prohibition of such clauses stems from the state's strong public policy favoring freedom of employment and competition, and there can be little doubt that savvy California businesses are aware of this. Yet businesses in San Diego and throughout the state routinely include non-competition clauses in their employment contracts, especially those with upper management. Businesses likely feel justified in including non-compete language because they know it is legal in nearly every other state in the country. In addition, many businesses have legitimate concerns regarding the protection of trade secrets. Companies invest in the creation of customer lists, customer loyalty, and in methods and procedures for maintaining and building a customer base, and they want to protect their investment.

Most employees don't intend to steal their former employer's secrets. They are simply interested in taking advantage of employment opportunities. The problem arises because of the difficulties in distinguishing between a former employee's inappropriate use of trade secrets and that same employee's utilization of personal skill and experience for the new employer. Competitors often solicit business from the same customer pool and use similar mechanisms to seek out and maintain a customer base. Who can say for certain that the former employee isn't soliciting clients consistent with the new employer's standard operating procedures? Whatever the case, California has chosen to err on the side of competition.

Employers, on the other hand, have chosen to err on the side of inclusion. Despite their illegality, businesses still include non-compete clauses in their employment contracts. Most prospective employees are unaware of California's employment laws and are unlikely to consult an attorney, and employers know that in most cases their employees will honor non-compete agreements upon the termination of their employment. Moreover, employers merge non-compete language with trade secret language. If a former employee chooses to go to work for a competitor, employers will look past the non-compete language and allege theft of trade secrets. California courts have long recognized a "trade secrets" exception to the prohibition on non-compete clauses. By alleging theft of trade secrets, employers reduce the risk of having the case dismissed early for failure to state a cause of action, and increase the pressure on the former employee now faced with prolonged and costly litigation. Sometimes, the new employer will absorb the cost, but not often.

There is anecdotal evidence that California's competitive friendly approach has been successful. Some argue that the success of Silicon Valley compared to other technology corridors is in large part due to California's competitive environment. Whatever position one takes, recent developments make it clear that California businesses should exercise caution when including non-compete language in their employment contracts. California Labor Code § 432.5 makes it a misdemeanor to include illegal terms in an employment contract, and Labor Code § 2699 provides for a private right of action for any alleged violation of California's Labor Code and provides for a penalty for each violation of up to $200 per employee per pay period. With 25% of the penalty going to the prevailing plaintiff, employees concerned about non-compete clauses have an additional incentive to bring such actions. Moreover, a recent case casts doubt on the continuing validity of the trade secret exception. In Dowell v. Biosense Webster, Inc., the appellate court found a non-compete clause unenforceable and questioned, but did not rule on, the "continued viability of the common law trade secret exception to covenants not to compete."

Considering these developments, employers and their business attorneys should at the very least take care to ensure that non-compete language is narrowly tailored to address the protection of trade secrets. Including broader non-compete language risks liability under California law.

Existing Tenants Are Valuable Asset to Commercial Landlords in Ever Shrinking Lease Market

Tue, 03 Nov 2009 13:45:47 -0800

It's now estimated that the San Diego commercial lease market will hit bottom in 2010. Whatever the future has in store for commercial real estate, the present news is not good for commercial property owners. Office vacancies in San Diego are at almost 20% and retail vacancies, while not as high, are still significant at around 8%. It's likely that most commercial property owners in San Diego cannot remember the market every being this bad. With vacancies so high, commercial landlords are forced to negotiate better lease terms in order to retain existing tenants and to attract new ones. In this highly competitive market, it's the smaller commercial property owners that are being hit the hardest.

The competition for new tenants is tough. Larger companies can afford to offer cash incentives for improvements, free rent for six months and significant first year discounts to lure the most attractive tenants, leaving smaller properties desperate to fill their empty space. For many smaller property owners, the only way to compete with these incentives is rent reduction. It's an economic reality that commercial property owners of all sizes cannot get around - continued downward pressure on rent coming from all sides.

Offering incentives to prospective tenants is a good business decision for those that can afford it. For those that cannot, holding on to existing tenants is of paramount importance at least for the foreseeable future. As the market continues to tighten, landlords are beginning to recognize that existing tenants are their most valuable asset. There is little to be gained by eviction of a tenant who can pay partial rent if it proves difficult if not impossible to fill the space once the eviction process is complete. Moreover, existing tenants are known quantities. A tenant with a history of timely payment and who is not constantly at odds with the landlord is a good tenant. This is also the type of tenant that will remember a landlord's goodwill during tough times. While it may be impossible for smaller commercial property owners to offer cash incentives to prospective tenants, they may be able to afford accepting lower rents for a fixed period of time to keep existing tenants. This also provides the landlord with some control over the term of any renegotiation.

Of course, not every tenant is a good tenant. However, commercial property owners of all sizes should carefully weigh the benefits of keeping existing tenants against the cost of eviction and the all too real risk of empty space. Struggling businesses are increasingly aware of the tightening market and, with or without the assistance of a commercial lease lawyer, are approaching their landlords hoping to trade on their track records to stay alive.

Hiring Foreign Workers - Choosing the Right Visa

Fri, 23 Oct 2009 10:46:59 -0800

In a continuing series on hiring foreign workers, this article explores the different types of visas available. For most San Diego businesses, the idea of hiring foreign workers seems like an overwhelming task even with an immigration attorney on their side. See Hiring Foreign Workers - Initial Considerations for San Diego Businesses. However, businesses of all sizes are making the decision to hire foreign workers more and more these days despite daunting immigration policies. Once the commitment is made, the next step is deciding which visa to sponsor a foreign worker under. The decision depends on the employer's needs, the pool of prospective foreign workers, whether the work is seasonal or not and the length of time the work is expected to last.

In some cases, a particular foreign candidate offers a unique skill above and beyond that which is normal for the trade making it virtually impossible to fill the position with a qualified domestic applicant. In other cases, there is a shortage of a particular type of worker such as an electronic engineer or a nurse. In the former, the employer may desire to immediately sponsor the prospective employee for permanent employment under United States immigration law even if it proves a bit more difficult. In the later case, employers may want to sponsor the foreign worker under a temporary employment visa, and later re-evaluate the decision to sponsor the worker under a permanent immigration visa. The specific legal requirements for United States employment visas, both temporary and permanent, and the necessary recruiting efforts will be discussed in more detail in following articles under this series.

Hiring a foreign worker for a permanent employment position requires sponsorship under one of five employment based visas (EB visas). EB-1 priority workers are aliens with extraordinary ability in sciences, arts, education, business or athletics, outstanding professors or researchers and managers and executives subject to international transfer to the United States. EB-2 professionals are professionals with advanced degrees or persons with exceptional ability in the sciences, arts or business or qualified physicians who will practice in underserved U.S. areas. EB-3 workers are skilled workers (with a minimum of 2 years training and experience), professionals (with bachelor's degrees) and unskilled workers. EB-4 special immigrants are religious workers and U.S. government employees and former employees abroad. EB-5 immigrant investors are aliens seeking to engage in new commercial enterprises. Often, an alien's qualifications may fit more than one of the above immigration visa categories and choosing which visa to sponsor under will most often depend on the backlog of available visas in each category and per country limits. There is currently a six month backlog on labor certification for EB-3 visas. If a professional with a bachelor's degree is also a person with exceptional ability in the sciences, arts or business, sponsoring under an EB-2 visa may be the better option.

The following are non-immigration visas for temporary employment: H-1B for specialty occupations including architects, engineers, health professionals, educators, accountants, legal professionals and artists and fashion models; H-2A visas for temporary agricultural workers; H-3 visas for those training in education of handicapped children; L-1 visas for intra-company transferees; and TN visas (non-immigrant professionals from Canada and Mexico under NAFTA (the North American Free Trade Agreement). The H-1B visa is the most common and requires a bachelor's degree or its equivalent in a specialty occupation. When your business is ready to hire a foreign worker, consult an immigration attorney to discuss which visa best suits your circumstances.

Consider a Legal Check Up for Your San Diego Business

Wed, 14 Oct 2009 10:13:57 -0800

At one time or another, every San Diego business owner questions how well their business is protected from risk, liabilities and infringement. Should they incorporate, form an LLC or partnership? Does the current business entity offer the best tax advantages? Are their personal assets protected? What are their rights and obligations under leases and contracts? Are key contracts enforceable should there be a dispute? Can existing contracts be improved? Are trademarks, logos and business names protected from infringement? Could they be infringing on others' trademarks? Is there any legal exposure to the company from its website and blog? Is insurance adequate? Do insurance policies meet regulatory requirements for the business or meet the minimum standards agreed to in a lease agreement? Is the company in compliance with government regulations pertaining to employees? Do they need to consult an attorney? The list is as long as businesses are prolific. For most new and growing businesses, addressing every potential legal issue is cost prohibitive. However, an attorney evaluation summarizing and assessing areas of concern is within reach for most businesses. Once an assessment is provided, business owners can better prioritize and plan for the future.

Virtually every car owner at one time or another has taken their car in for service. Most often, the service includes a check up of every major component of your car. Brakes, fluid levels, suspension, tires and electronics are all examined and in the end you are provided a list of recommended repairs and maintenance. Some of the suggested repairs stem from visual inspection and others are derived from manufacturers' mileage triggered recommendations. It's not uncommon for folks to prioritize perhaps electing to have the front brakes replaced and a tune up performed while putting off the replacement of shocks, hoses, and the water pump. Ultimately, whatever decision the consumer makes regarding actual repairs, the cost of the examination is relatively small and the examination alerts the owner of potential trouble spots.

A business lawyer can perform the same kind of affordable analysis for your business - they can evaluate your business profile from top to bottom, provide an assessment of the current state of affairs, highlight areas of risk and other areas requiring attention and make recommendations regarding priorities. This type of evaluation can generally be performed for a flat fee which would be determined by the size of your business. Once completed, the business owner (like the automobile owner above) can prioritize. Whatever decision the business owner makes, at the very least, he or she has been alerted to potential trouble spots and can plan to address those concerns as time and economics permit.

What You Need To Know About Home-Based Businesses and Zoning Laws

Thu, 08 Oct 2009 08:44:52 -0800

Most people don't think about zoning laws when they first decide to start a business out of their home, and most home-based businesses never hear from local governments about zoning violations even where they are clearly in violation of local zoning laws. The reason why is that most home-based businesses are stealthy. Modern technology allows entrepreneurs to conduct virtually all aspects of a business' operations (short of manufacturing and direct sales) without leaving the computer. Employees can work from their own homes, products can be delivered via on-line companies and services can be provided off site. So long as signs aren't posted, traffic isn't increased beyond what is normal for residential neighborhoods and excess noise isn't a factor, no one notices that a home-based business even exists. In fact, a neighbor's complaints are generally the only thing that ever puts a home-based business on a local government's radar.

So what's all the fuss about zoning laws? Although most home-based businesses are stealthy, some business owners are looking to more visible home-based options. The recession has encouraged many would be entrepreneurs to consider starting a business, and one of their first major cost decisions is location. For a small business requiring employees, product assembly and manufacturing, customer visits, vendor deliveries or any combination of the preceding, understanding local zoning ordinances is critical. Otherwise, they risk being shut down.

Some localities forbid home based offices completely. Others allow home based offices for professionals such as lawyers, doctors and accountants. Even the most liberal of localities will allow home based businesses only under certain circumstances, and the zoning laws can vary greatly from municipality to municipality. Generally, they have the following in common: they require that the business be only incidental to the home as living quarters taking up less than a certain percentage of the home's overall space; they require that all employees of the business reside in the home; they require that increased vendor and customer traffic is not beyond what is normal for the residential neighborhood; they prohibit the use of equipment that creates a nuisance such as noise, vibration or fumes that are detectable outside of the home; they prohibit the use and storage of hazardous materials; they prohibit the warehousing of business inventory; and they prohibit any changes to the outside appearance of the home (including signage).

If you are considering a home based business that for any reason will be noticed by neighbors, it's important to know the zoning laws in your locality. The easiest way to check your local zoning laws is at the main branch of your public library. You can also contact your local Planning or Zoning office. However, it's probably better not to put yourself on their radar. It may be better to have a friend in the neighborhood call and check for you. You can also try contacting the city clerk's office or your local Chamber of Commerce, or check your city's home page online. If you live in or are considering moving to a planned community with a homeowner's association, the CC&Rs (covenants, conditions and restrictions) are likely even more restrictive than those set forth above.

Avoiding Litigation - Part Two

Fri, 02 Oct 2009 15:03:14 -0800

Avoiding Litigation - Part One sets forth three pre-conflict practices useful in reducing your business' risk of litigation. Of course, avoiding all conflict is virtually impossible. However, conflict does not inevitably lead to litigation. In fact, more than 90% of all conflict is resolved before reaching the courthouse steps. Below are three practices useful in avoiding litigation after conflict has arisen:

Act Fast. The worse thing anyone can do is ignore a potential conflict. If you receive a letter, phone call or personal visit from an unhappy customer, vendor or client, respond immediately. In most cases, the problem will not go away because you chose to ignore it. The problem will more likely get worse. Communication is a powerful tool that can diffuse even the most heated dispute. The faster you act, the more easily the problem will be to resolve. Being responsive often puts the other side off guard. They are poised for a battle and when you call to offer a solution, they're not quite sure how to respond. If you are behind on a debt, offer a payment solution that is workable for you. Offering a payment solution you can't ultimately adhere to is worse than ignoring the problem. If you cannot fully perform, offer creative alternatives. Whatever your response, it will be better received if it provides options. If there is disagreement about your rights and obligations under an agreement, offer to sit down and discuss the issue. Don't be rigid. Explain your beliefs politely but be sure to leave the door open for a compromise. Conflict and anger breed more conflict and more anger. In the end, you don't have to agree to anything. However, open and conciliatory communication opens the door to a wider range of potential resolutions. Acting fast is no less important where you are seeking redress. If you are owed a past due debt, don't rest on your laurels. The fact that there is no doubt about the debt doesn't guarantee payment, especially without litigation. It remains costly for you to sue. Instead, contact the debtor and ask whether there is a problem. Offer to work with them to resolve the debt as quickly and as efficiently as possible. They will appreciate your offer, and likely never forget it. If it appears your efforts at informal resolution are ignored, try asking an attorney to write the other side a letter. A litigation attorney can concisely set forth the legal realities for the other side and can usually do this at a relatively low cost. Be sure your attorney understands your commitment to resolving the matter without the need for litigation.

Be Willing To Compromise. No matter the strength of your bargaining position, litigation is expensive. For new and growing businesses, it is prohibitive. Large businesses and corporations can more readily afford a legal battle, but there is little benefit to litigating a matter that could have been informally resolved at a much lower cost to the company. Even where larger concerns are at issue such as fear of opening the floodgates to repetitive litigation, looking to a compromise may help avoid worst case scenarios. Think about the prospect of litigation. What will it cost you in terms of aggravation, time, money and goodwill? Take a hard look at the matter before you and consider alternatives that might be acceptable to you - weigh the costs of the compromise against the aggravation, time, money and goodwill you will exhaust during a court battle. These costs cannot be overstated. Compromise may be the single most important practice in avoiding litigation. It is also the hardest practice for most businesses to swallow.

Avoiding Litigation - Part One

Thu, 24 Sep 2009 13:08:50 -0800

Litigation! The word has many connotations, most of which are pejorative. The "litigation happy" label is ubiquitous. In the business world, "litigation" has a much more pragmatic import. It remains a useful tool for San Diego business seeking legitimate recourse but simultaneously is the source of unease. While a full proof method of avoiding litigation may be impossible, there are six simple practices businesses of all sizes can follow to reduce the risk of litigation. The first three pre-conflict practices are set forth below. The remaining three post-conflict practices are set forth in Avoiding Litigation - Part Two of this article.

Get It In Writing. Ideally a contract attorney will assist with the drafting and negotiation of all contracts. However, this may not be practical for many businesses, especially for new and growing businesses or those that routinely contract with vendors and customers. If an attorney is cost prohibitive, drafting basic instruments yourself to memorialize your agreements is a pragmatic alternative. The internet provides a wealth of helpful instruction, sample contracts and anecdotal information from other business owners. The paramount concern is mutual understanding. Although you may not recognize all the legal complexities of contracting, a writing that memorializes your agreement at the very least reminds each side of the representations made. Be sure that everything discussed orally is in writing. Don't take anything for granted. If the person you are contracting with is resistant to a detailed agreement, there is reason for concern (see "Use Common Sense" below). Faced with a written agreement, even the most difficult of parties will often concede critical points. Getting it in writing without the assistance of an attorney can be a pragmatic alternative which is better than no writing at all. However, consultation with a contract attorney remains the best way to ensure that an enforceable contract is in place to protect your business' interests.

Use Common Sense. Learn to recognize repeat problem areas either with customers or vendors. If a vendor is repeatedly late with deliveries or a customer owes you money or either is constantly complaining, it's generally a sign that those types of problems will continue. Don't ignore obvious perils. When your gut tells you something is fishy, it's probably not worth the frustration to go forward no matter how appealing a customer's business or how economical a vendor's products or services may be. These are the folks that are more likely to create conflict with you and others. If you offer a service or invite customers into your place of business, don't be oblivious to hazards. No matter how busy you are, immediately address anything that might cause even the slightest mishap. There is no substitute for common sense. There is no rule book for you to follow. Your job is to be aware.

Treat Everyone With Respect. This is difficult for some people. Entrepreneurs and successful business men and women are generally driven focused people with a clear vision. They are intelligent, savvy and direct with little patience for distraction, excuse or delay. Unfortunately, this personality trait is not always conducive to building strong enduring relationships. Your customers, vendors and clients are part of a diverse population comprising varying degrees of motivation, intellect, knowledge and patience. Some communicate better than others, and some are simply nicer than others. They all have one thing in common - they consider the deal between you and them to be very important. Whatever the personality trait, treating even the most difficult people with respect reduces the likelihood that they will go back to their office or home complaining about how they were treated. This in turn reduces the likelihood of conflict. It's the difficult people that will most likely lead to conflict, so for this very reason they are the ones you should be most careful with. In colloquial terms, "suck it up". Stay polite and considerate, and be apologetic (not apathetic) when you cannot accommodate them. It won't cure every potential conflict, but it will reduce their occurrence. If you think you are incapable of this type of patience, insulate yourself using management and staff who have these skills. The ultimate reward is the goodwill respect garners over time - a priceless commodity for your business.

These seemingly obvious rules are too often overlooked. A little common sense and respect go a long way even for the largest corporations. And don't forget - get it in writing. Avoiding Litigation - Part Two sets forth the three post-conflict practices that are conducive to reducing your business' risk of litigation.

Managing Business Litigation Costs

Tue, 15 Sep 2009 14:48:47 -0800

Most San Diego businesses, regardless of their size, try not to think about the potential for litigation. They cross their fingers and move forward concentrating on day to day operations and marketing. They are aware of possible contract disputes and potential liabilities but put their faith in the good nature of their customers, clients and business associates. The prospect of litigation scares them and for good reason. Past experience has taught them that anything involving an attorney is excessively expensive, and inevitably leaves them feeling frustrated and dissatisfied. Attorneys have proven unresponsive to their needs, difficult to communicate with and often apathetic leaving them with little confidence that they are being billed fairly or that their case is being handled economically. Instead, they walk away believing, without really understanding why, that attorney hours and costs are inflated and that their case has probably been drawn out longer than necessary with little or no effort towards early resolution.

Today, skyrocketing legal costs have even the largest corporate executives second guessing themselves. While the billable hour has been under attack as of late, it is still pervasive. This is because in a large number of scenarios it seems the only practical way to bill clients for attorney time. Yet the practice is fraught with inefficiencies and disincentives (see our article on the "billable hour" setting forth just some of the reasons why this is so). The solution for those faced with the inevitable hourly billing that comes with litigation is twofold. First, a frank and open discussion with your attorney about the firm's billing practices (including how costs are incurred) minimizes any misunderstandings and ensures that your expectations are realistic. If a law firm is resistant to this type of discussion, it's a clue that the firm is likely wedded to the "billable hour" freight train. This article distinguishes between the typical "billable hour" mentality and a litigation attorney's practical need to charge by the hour. The former is part of a firm culture that rates attorney performance by the number of hours billed while the later looks to client satisfaction. Second, once a clear understanding regarding billing is reached, monitor your attorney's bills with close scrutiny. While it is almost impossible to recognize every inefficiency, close scrutiny of billing provides a general impression that is valuable to you as the client. This includes looking at costs. Your law firm will recognize your attentiveness, and will be forced to pay better attention to attorney hours and costs incurred (i.e. consider reducing attorney hours charged for a new associate's work on a motion that could have been finished faster by a more experienced lawyer or consider three or four star accommodations the next time they travel for a deposition).

This may be second nature to smaller businesses concerned with escalating legal costs. It should be of greater concern to larger businesses and corporations who seem to accept skyrocketing legal costs as the cost of doing business. Businesses of all sizes should not be afraid to put their current law firm on notice that it expects efficient and cost effective representation. Nor should they be afraid to take their business elsewhere should closer scrutiny of billing evidence a pattern of inefficiencies and excessive costs. Your power rests in your ability to hire another litigation firm if you are unsatisfied.

New and Growing San Diego Businesses - Hiring Employees Part Three

Thu, 10 Sep 2009 14:39:57 -0800

Parts One and Two of this article focused on the factors new and growing San Diego businesses weigh when considering whether or not to hire their first employees. Part Three focuses on the important task of developing an employee policy. Regardless of the stage any San Diego business finds itself in, ensuring that new and existing employees understand what is expected of them in any given situation is critical for effective management. A clear and unambiguous employee policy minimizes costly miscommunication and conflict between employees, management, vendors and customers.

Some argue that companies could or even should wait until the second or third employee before developing a written policy because new and growing businesses have other priorities and little time to spend on a formal employee handbook. This is a pragmatic view which undoubtedly appeals to many entrepreneurs. However, forward looking businesses will draft some sort of written employee policy for its very first employee.

Whether a handout a few pages long or a detailed handbook prepared by attorneys and a fully staffed human resource department, a good employee policy will contain a number of important features: it will be written in clear and unambiguous language (preferably at a 5th grade reading level with each policy set forth on a separate page); it will address key employment issues such as health, safety and other government regulations (State and Federal), employee theft, and company expectations regarding performance and conduct; it will address anticipated problem areas such as internet use, outside email contact, phone procedures, customer contact and media contact; it will set forth a disciplinary policy; it will hold all employees to the same standards; and lastly but by no means any less important, it will highlight company benefits and quality of life. Businesses should avoid a tedious written policy that creates an impression that the company will be stuffy and unyielding. The employee policy should articulate standards prospective employees can understand while simultaneously stressing the company's appealing attributes.

The Internet Plays Important Customer Service Role for San Diego Business

Wed, 02 Sep 2009 15:22:36 -0800

In today's climate, San Diego businesses are loath to suffer any negative publicity. Instead, they are looking for an edge wherever they can find it. Whether businesses know it or not, the internet is filling an important customer service role. Websites like Yelp.com and Amazon.com provide actual consumer reviews on a wide range of products and local services. More and more, the average consumer turns to the internet first for information and first hand customer insight. Whether looking for a car wash or an San Diego attorney, review sites on the internet are a powerful tool allowing consumers to look inside a company's windows before trying out its goods or services. For instance, a modern consumer with car trouble today might do a search on Yelp.com for a trustworthy automotive repair shop in San Diego County. He or she would find out rather quickly that Advantec Auto Repair comes highly recommended (reviewed by 98 customers with a perfect rating of 5 Stars out of 5 Stars by all 98 customers). This is precisely the confidence builder that the savvy consumer is looking for before trusting their car to a mechanic.

If your business provides a service in San Diego, odds are there are already some reviews on Yelp. You may be surprised (pleasantly or to your consternation) at what people have to say. Either way, internet review sites are here to stay and managing this new facet of customer service must be part of any business' marketing arsenal. "Managing" does not mean you get to go in and change the reviews. It does mean that you will have to pay closer attention to customer service and customer satisfaction. No business can afford to ignore negative publicity, especially during a recession. If reviews are negative even in the slightest, a business owner needs to act immediately to cure whatever deficiencies might exist including making necessary changes to how he or she does business. It's true that some reviews may be vindictive and unwarranted. In such cases, business owners are allowed to post their own response. However, this is a good idea only in unique cases because it most often appears defensive and disingenuous. The better solution to an unwarranted negative review is to work toward an increase in the number of positive reviews which in turn increases the business' overall average rating on Yelp. One negative review against 75 positive reviews carries little weight. Encourage your customers to share pleasant experiences with others on Yelp.

While restaurants, products and retailers remain the most critiqued of all categories, it is only a matter of time before every business is under the internet microscope, including doctors, lawyers, banks, investment companies, real estate agents, dentists, cell phone companies and individual professionals. Go on line today and see what people are saying about your business. If you don't find your company on Yelp, add your business. This allows you to provide accurate information about your location, phone number, website, pricing and other facts such as whether you accept credit cards. By adding an inbound link to your website, it also has a positive impact on your site's optimization.