Determine Your Company’s Strategic Purpose & Growth

At the 1997 Apple World Wide Developer Conference, Steve Jobs answered a question about one of the numerous engineering projects that the company had become infamous for spawning by saying, “focusing is about saying no.” Jobs went on to apologize for what he described as “lousy engineering management” that had fostered a way of doing business at Apple that caused the “total [to be] less than the sum of the parts.”   During that time, Apple leadership had succumbed to the siren of continual ideation that undermined the progress and profitability of the entire company. In short, Apple had lost its focus. Paradoxically, it is often the entrepreneur’s advanced juggling and multi-tasking abilities that were the greatest asset in surviving the start-up phase that become the greatest liability in successfully navigating the growth phase. 

Take Rick for example. Rick was the newly minted CEO of a specialty manufacturing company that had just been acquired by a private equity firm. Rick had been given a daunting task by the company’s new owners: turn what had been somewhat of a post-acquisition money pit into a Cinderella story. But Rick suffered from what I call “bright shiny object syndrome.” Over the next year, this company of fewer than 50 employees (most of whom were well-meaning rank and file workers who had spent the last 18 years on auto-pilot) dabbled in four different markets, considered a fundamental change in its business model, and tried to roll out three new products. At the same time, the new owners continued to pump in more money to keep the company afloat.

Am I saying that there is no place for innovation or breaking into new markets? Absolutely not! In fact, without innovation or breaking into new markets, your company won’t grow. But if you want to generate the kind of innovation and new market entrances that lead to profitable growth, a better lifestyle for you, and eventually a large financial payoff when you decide to sell your company, then you are going to have to focus all your time, talent and treasure on one path at a time. You are going to have to become relentless about taking one idea and developing it to its full revenue generating, cash flow contributing, bottom line boosting potential while saying no to all others. You’re going to have to pick a path. 

One of the most simplistic and yet thorough frameworks that I’ve seen for guiding business owners in picking a path was put forth by Anthony Tjan, CEO and founder of the venture capital firm Cue Ball, in a blog posting that he wrote for the Harvard Business Review. In the post, Tjan describes the process that he uses when “outlining a path for strategic purpose and growth” of a portfolio company. The process boils down to answering four very basic questions. I’ve included the questions in bold below along with some color commentary to help you get started. So grab a pencil and a paper (you only need one sheet) and let’s get started:

1.   Why does your company exist (this is your company's mission)? This is where you write down the purpose that your company is trying to achieve. You don’t need a paragraph, just one sentence.  This statement should be simple and designed to stand the test of time. In other words, your mission should be something that anyone can remember and should still be the same 10 years from now.

2.   What is your value proposition? This question is all about your customers. This is not about what you or your executive management team decides to sell in the marketplace. It's about developing a true understanding of important (from the customer's perspective) unmet or underserved needs and delivering a solution that gives you a competitive advantage. Answering this question may require some research, but it’s well worth the time and energy to get this one right.

3.   Who are you trying to serve? This is really an outgrowth of question 2. Once you've identified the marketplace gaps, you then move on to deciding what customer group(s) you should be pursuing. This is what is commonly known as "outside-in" thinking. Your company has a set of core competencies--things that you are really good at doing (or that you could become really good at doing without significant costs and effort). What is the intersection between the marketplace gaps from question 2 and your core competencies? This intersection is your ideal playing field.

4.   How do you know when you are winning? I like to think of this as your vision for successfully delighting (not just serving) the market that you identified in questions 2 & 3. Perhaps it's as simple as being the #1 choice in the marketplace. If your company has been losing customers for a number of years, perhaps winning equals a net growth in your customer base. The key is to keep your vision short and simple and state it in terms of winning with your customer.     

Once you’ve answered all four questions you’ll have the foundation for a growth plan for your company. 

If your company is anything but a startup, you may find that because of the way you’ve done things for the last 10 or 15 years, you have a gap between your ideal growth path and where you are today. Does this mean that you are doomed to stagnation until you get everything perfectly aligned or that your newly created path is totally irrelevant? No. It just means that you’ll need to chip, hammer and blast away at business-as-usual while using your growth path as your guide for what should stay the same and what needs to change.  

Selling Your Business To A Key Employee

Owners wishing to sell their businesses often look to key employees as a way to transition the business to someone who knows and understands the business and often has a similar vision for the business.

But selling a business to a key employee is not as simple as handing over the business and cashing a check. Here are some steps you must still take:

Read more . . .

Spotting and Preventing Fraud in Small Businesses: Tips for Small Business Owners

Many of us know stories of small businesses succumbing to fraud committed by employees and third parties whether that is employees embezzling funds or third parties scamming business owners out of the company’s cash flow. In either event, individuals can be quite clever in disguising fraud or passing off a scam as legitimate. Business owners should be prepared to spot signs of fraud and have tools in place to prevent fraud in the business. Below are signs of fraud common in small businesses and tips to prevent such fraud from occurring.

Issue: A long-term employee who handles all aspects of writing checks and collecting funds has been embezzling funds for years. Many business owners have experienced some form of this where an employee or bookkeeper who handles all aspects of accounts receivable and accounts payable has improperly kept money for him or herself. Surprisingly, it is often a trusted loyal employee who is found to have been perpetuating the fraud over some period of time and that employee has little to no oversight from the business owner. To prevent such a situation, you should

  • incorporate an oversight process,

  • establish segregation of duties, and

  • require dual controls for any person to move funds in and out of a bank account.

For example, you may consider having one employee writing checks, but to withdraw or make payments over a certain amount, two employee signatures are needed. Similarly, the person collecting the accounts receivable may report to another individual who actually deposits the accounts receivable. Finally, employees should not share passwords related to a company’s funds or bank accounts and each employee should have a separate user name and log in. This makes it easier to track who is doing what with regards to your company’s funds and allows you to minimize the number of employees accessing this sensitive information.

Issue: Employees writing unauthorized checks out of the company bank account. One of the most common examples of small business fraud is employees writing checks to themselves from the company bank account. Specifically, a trusted bookkeeper or individual who handles the checks will write unauthorized checks out of the company’s bank account. Many business owners are effective in delegating duties; however, if an employee with the authority to write checks has little to no oversight, the possibility for fraud exists. To prevent such a situation, most banks offer a service called Positive Pay. Positive Pay is an automated fraud detection tool offered by most banks. Specifically, business owners send the bank a list of checks written and the bank matches the account number, check number and dollar amount of each check to the list provided by the business owner. If the checks do not match up, the bank notifies the business owner who then has the authority to approve or deny the check.

Issue: Employees intentionally or inadvertently wire funds for fraudulent purposes. For example, an employee may set up an ongoing wire to his or her personal account or an employee may inadvertently wire funds to a vendor without prior authorization to do so. Additionally, if such wire transfer was fraudulent or inadvertent, business owners only have 24 hours to notify the bank of such issues otherwise the bank may not be liable for executing such transfer. To prevent such situations, business owners can establish ACH filters or ACH blocks with their banks. ACH filters allow you to protect your company’s cash flow by setting up parameters of when your approval is needed before ACH debits are transferred out of your account. Additionally, you can receive email and text alerts of wire transfers over a certain dollar amount, so you are aware of funds going in and coming out of your company account to better understand your company’s cash flow. Similarly, another tool is to use an ACH block which protects your bank account from unauthorized electronic charges. Similar to an ACH filter, the ACH block will only process ACH payments authorized by you and block all other requests.

Bringing it all together: Business owners should consider implementing some of the prevention tips listed above. Putting dual controls in place and using tools offered by your bank will help prevent fraud in your company. In addition, by letting your employees know that these systems are in place, you are communicating to them that their actions are being monitored, which may prevent them from attempting fraudulent acts.

How to Terminate a Vendor Contract?

For business owners, time is often a precious commodity. Carefully reading vendor contracts do not often rank high on a business owner’s priority list.  Vendor contracts can be long and cumbersome and not something to glance at quickly. Alternatively, when vendor contracts are signed online, important terms may be overlooked if the business owner selects “I Agree to Terms and Conditions” rather than reading through important provisions. 

We have seen more business owners facing similar situations of being locked into long-term vendor contracts without the flexibility to terminate on reasonable terms. For example, business owners will often enter into a vendor contract with hopes and expectations that the relationship with the vendor will be productive and prosperous. When the vendor does not live up to the business owner’s expectation or a business owner finds a vendor that is a better fit, the business owner cannot end the relationship with the vendor without facing steep penalties or the vendor forces the business owner to uphold the contract.

For business owners facing this situation, we have identified a few tips to assist in reasonably terminating a contract.  Additionally, in looking forward to working with future vendors, we have identified provisions to review to prevent this situation.

1. Review the Vendor Contract’s Termination Provisions. Review the termination provisions in the vendor contract. If a business owner is locked into a long term contract without the ability to easily terminate upon 30 or 60 days notice, or the business owner is not satisfied with the vendor, the business owner may need to take the steps outlined below prior to terminating the contract.  Often, the exact course of termination may be specific to the termination provision in the contract, so it is important to understand your contract.

2. Document the Vendor’s Shortcomings. If a relationship with a vendor is not going well, the business owner should document the vendor’s shortcomings and notify the vendor, in writing, of these issues. Be clear in what the expectations are, what the vendor did and how the situation should be remedied. The vendor has the ability to remedy the situation and improve the relationship with the business owner. 

3. Give the Vendor Time to Remedy the Situation (if required). If the contract requires the vendor an opportunity to cure the situation before termination, the business owner should allow the vendor a reasonable time period for the vendor to remedy the issue based on the situation unless the vendor’s mistakes are materially harming the business.  If the issues materially harm the business, a business owner may resort to showing the vendor breached the contract and terminating immediately (See Step 4).  If the vendor has not remedied any issues after given a reasonable time period to fix the situation, the business owner should provide the vendor with written notice to terminate the contract immediately or within the time frame needed to transition to a new vendor.

4. Prove a Breach by Vendor. In some situations, a vendor’s actions or inactions materially harm a business and such actions or omissions cannot be remedied or cured by the vendor. If this is applicable, a business owner should notify the vendor in writing and possibly by phone or in person, depending on the relationship.  The business owner should clearly describe in writing to the vendor: (i) the vendor’s actions, (ii) the harm to the business and (iii) why the vendor cannot remedy the situation. Most reputable business (whether a vendor or not) will not want to continue such a relationship if both parties can tell this is not a good working relationship.

5. Negotiate. If a vendor insists on locking a business owner into a contract despite issues in the relationship, the business owner should negotiate with the vendor on how to exit or terminate the contract in a manner reasonable to both parties.  The business owner should have clear business reasons for terminating the contract that are clearly articulated. Alternatively, if termination is not an option, the business owner should consider other ways to ending or shortening the relationship such as (i) the vendor should significantly reduce the vendor’s fees for the remainder of the contract or (ii) the length of the contract is shortened or (iii) the vendor must provide addition products or services to the business at no cost. 

6. Send a Demand Letter. If no resolution is reached after documenting any issues with the vendor and trying to work out any issues through negotiation, a business owner may consider hiring an attorney draft a demand letter to demand that the contract be terminated.  While demand letters tend to escalate a situation, this may be the next viable option, short of litigation, for a business owner.

Planning Point of View.

In order to avoid a contentious termination with a vendor, business owners should review the termination provisions of a contract prior to signing such contract.  Often, a contract may seem great at the outset, but this feeling may not continue in a year.  In reviewing the contract, focus on when a business owner can terminate the contract and what it takes to do terminate. Next, negotiate with the vendor as much flexibility as possible.  For example, do not require a vendor an opportunity to cure or a reasonable time to remedy the situation. Instead, allow either party to terminate the contract upon a certain time period, 30, 60 or 90 days. 

Is Your Worker an Employee or an Independent Contractor: Why it Matters

Determining whether your current staff and next hires are employees or independent contractors is not an exact science. We can help clarify this determination by explaining the tests that will help you decide whether a worker is an employee or an independent contractor and the implications of both.

Why Does Classification Matter?

Knowing if you have an employee or an independent contractor is important for a variety of business and compliance issues. Many business issues such as Federal and state taxes, employee benefits, ERISA compliance, and civil liability, hinge on whether or not a person is an employee or an independent contractor. For example, generally, your company is responsible for any liabilities caused by an employee, but not by an independent contractor. Likewise, for employees, your company is responsible for paying the employer portion of Social Security, Medicare and sometimes state unemployment taxes.

Misclassifying a worker can lead to a host of unwanted issues including penalties, taxes and fees. Therefore, knowing whether a worker is an employee or independent contract is important. Additionally, knowing these tests can help you properly classify a worker in the beginning of your relationship avoiding any repercussions of misclassification.

How Do You Know?

Three major categories are used to help determine the difference between an employee and an independent contractor: (1) behavioral factors, (2) financial factors, and (3) the nature of the relationship. No one factor is dispositive; instead, it is a weighing of several points in each category.

Behavioral Factors

Behavioral factors include the type and degree of instructions given, the measure used to determine a completed job, and the amount and duration of training. The more instructions and the more details given, the more likely the worker is to be classified as an employee. If you tell the worker when and where to do the work, which equipment or tools to use, where to purchase any supplies, what steps to take to complete the work, and which people should perform which tasks, then most likely this is an employee. The key factor is determining if the business has the right to control the details of the worker’s performance, even if little or no instruction is necessary.

How you evaluate the job after completion is also a factor. If you measure how the work was done, instead of the end result, this evaluation system suggests you have an employee. Training the worker on how to do the job also suggests that a worker is an employee, particularly if you have continual training or more than one training session.

Financial Factors

Financial factors tend to be a little trickier to evaluate because these factors cannot be applied across all types of services. For example, one factor that tends to show that a worker is an independent contractor is significant investment in the tools or equipment that the worker uses. However, this factor is not quantifiable; meaning, no dollar minimum qualifies as a “significant investment”. Additionally, some jobs, particularly in construction, where a worker buys his own tools, are still classified as employee positions.

Other financial factors that suggest a worker is an independent contractor are (1) unreimbursed expenses, (2) opportunity for profit or loss, (3) ability to seek out other business opportunities in the market, and (4) payment based on a flat fee per job, rather than payment on an hourly or salary basis. For example, independent contractors will typically have their own overhead costs, such as tools, equipment, insurance and other unreimbursed expenses. Thus, an independent contractor has the potential to lose money on a job; while an employee does not have this same risk.

Nature of the Relationship

The nature of the relationship refers to the interactions between the worker and the employer. Several factors can be weighed to determine the nature of the relationship, such as written employment contracts, employee benefits, the permanency of the relationship and whether or not the services provided are a key activity of the business. A written contract outlining the worker’s expectations and duties is helpful for making a determination on the type of worker; however, if your company has a worker that meets all of the factors for an employee, you cannot call them an independent contractor in their contract to avoid the employee classification. Likewise, if your company provides the worker with vacation pay, health insurance and a retirement plan, you are suggesting that the relationship will be ongoing, rather than specific to a project or predetermined period. Not providing workers with benefits does not mean they are independent contractors rather than employees.

You should also evaluate the services that the worker provides to your business. If the services are a key aspect of your business, this suggests the worker is an employee. For example, if you own a painting company and hired a worker to work at your office, answer phones calls, book appointments, handle client complaints and reorder office supplies, then this individual is an employee. On the other hand, if the computer system failed and you hired somebody to repair the system, you likely hired an independent contractor. The first worker is necessary on a long term basis to make sure that the company’s primary business runs smoothly, while the second worker is needed to complete a one-time project.

Summary

No one factor will determine a worker’s status and no specific number of factors will automatically classify a worker as an employee or independent contractor. Instead, evaluate each factor as a piece of the whole and look at the entire employment relationship. If after careful evaluation you are still unsure of a worker’s status, for tax purposes, you can seek a determination from the IRS using Form SS-8, available at the IRS. A determination from the IRS can be a lengthy process.

In addition to independent contractor and employee classifications, for tax purposes, workers have additional classifications for statutory employees and statutory nonemployees.

When to Use a Texas Shoot-Out: Resolving Partner Deadlock

Business partnerships are hard. What if you and your business partners couldn’t get along? Or, what if you and your business partners couldn’t agree on a major business decision resulting in deadlock? How do you move past such a roadblock? A company’s well written operating agreement or buy-sell agreement should address these concerns. One possible solution to these potential issues is the “shotgun clause”, also referred to as a deadlock provision or a “Texas shoot-out”.

Although varying methods can break up a deadlock, a common method is a Texas shoot-out provision which states that an owner has the option to either (1) buy out the other owner or (2) be bought out and exit the business. A shotgun clause essentially operates as an “I cut, you choose” method. In this scenario, two individuals can agree to share a piece of cake by having one cut the cake and the other choose his piece. Likewise, in a deadlock situation, one owner sets the price for the company and “cuts the cake”, while the other owner “picks the piece of cake” and decides whether to buy or sell his ownership in the company. Specifically, the owner being presented with the offer has the option of either accepting the offer and selling his interest or purchasing the other owner’s interest at the same price.

In theory, the Texas shoot-out is an easy way to settle disputes and offer clarity during an impossible situation. In reality, it could lead to abuse by the owner with the most money. For example, if one owner was cash poor or otherwise did not have easy access to capital, the owner with more capital could simply set an offer price that the cash poor owner could not meet. The outcome could force an owner, who wants to remain with the company, to sell his interest in the company at a value that may or may not be the fair market value. On the flip side, the owner who wants to stay may receive a large payout to move onto his next venture.

One way to combat this possible abuse is to designate a valuation method for the company. You could either (1) choose a valuation equation to be used, or (2) elect to use a third party appraisal (or an average of several appraisals). Another way to limit abuse is to only use the Texas shoot-out to be invoked for certain key matters. The advantage being that a buyout could not be forced unless a true deadlock situation had occurred.

In addition to a pre-determined method to establishing purchase price, the owners should consider pre-determined terms of payment. This includes how long an owner has to make a decision once presented with a deadlock clause and how the payment will be made. For example, will the purchase price be payable immediately or will the purchase price be paid over time through a promissory note? If a promissory note can be used, then you should also determine the basic terms of the promissory note, such as the term, interest rate, and consequences of default.  

The shotgun concept can be applied to a company with more than two owners, although this process is a bit more complicated. Each owner is offered the opportunity to purchase his pro rata share from a selling owner. If any owner chooses not to purchase his pro rata share, then the remaining owners have the opportunity to increase their percentage ownership interests by purchasing the remaining unpurchased interests. Several combinations of this method could be used as long as an owner is entirely bought out.

Aside from the Texas shoot-out, the owners could consider appointing a third or independent party to handle disputes, such as a trusted advisor, or the owners could divide the business in a split-off arrangement where each owner takes a piece of the business. The moral of the story is that you have options in the event of a deadlock. While you can’t have your cake and eat it too, you may be able to pick the piece.

Incentivizing and Rewarding Employees

Employees may be rewarded or incentivized through equity compensation as a way to (i) attract and retain employees and (ii) align the financial interests of employees with the shareholders of the company.  If a business owner decides to offer employees equity compensation, the owner has a variety of options of how to award equity. Some common options are: a stock option, an Employee Stock Purchase Plan (“ESPP”), an Employee Stock Option Plan (“ESOP”), and a phantom stock plan. Each plan has its own pros and cons and each company should weigh the options, keeping in mind the company’s unique circumstances and employees.

Stock Options

Stock options offer a wide range of flexibility to the business. Stock options can be offered to key employees, executives, consultants or directors, but do not have to be granted to all employees. Stock options give the recipient an option to purchase the stock of a company at an agreed upon price within a certain time period.   The two major types of stock options are (1) Incentive Stock Options (“ISOs”) and (2) Non-Qualified Stock Options (“NQSO”). 

Incentive Stock Option

An ISO can only be granted to an employee and has specific requirements set out by the IRS. An ISO has an added benefit of favorable tax treatment for the employee because the employee can defer tax on the stock option until the stock is sold. Nonetheless, the company cannot deduct this option as a business expense.

Non-Qualified Stock Option

A NQSO may be granted to employees, contractors or directors.  NQSOs do not have specific requirements with the IRS to be established. However, if NQSOs are granted with an option price that is less than the fair market value of the stock at the time of the grant, the company must withhold applicable income and employment taxes of the recipient at the time of option vesting.  Additionally, the employee may be subject to IRC §409 which could result in further adverse tax consequences to the option recipient.  The company, on the other hand, receives a tax deduction when the recipient exercises the option. 

Employee Stock Purchase Plan

ESPPs involve an employee contributing to an ESPP through payroll deductions.  These deductions accumulate throughout an offering period which ranges from 3 to 27 months.  Generally, at the end of the offering period, the employee may purchase the company’s stock or securities at a discount of up to fifteen percent (15%) of the fair market value. ESPPs are relatively inexpensive and simple for the company to administer. The IRS imposed specific requirements to establish an ESPP, including a non-discrimination requirement meaning all option recipients have the same rights and privileges. The employee may receive some favorable tax treatment if certain requirements are met including holding the stock for at least 2 years from the offering date and at least 1 year from the purchase date.

Employee Stock Option Plan

An ESOP is a form of a retirement plan that is designed to invest primarily in the company’s securities. The plan operates by holding the company’s stock in a trust for employees meeting minimum service requirements and allocated to employees based on relative pay or a formula determined by the company. If the employee is vested in the ESOP, the employee may receive a distribution from the plan after the employee leaves the company or is terminated.  Because ESOPs are subject to the Employment Retirement Income Security Act (“ERISA”), the plans must be established on a non-discretionary basis. Essentially, this means the company cannot discriminate between employees participating in the plan or the allocations made to the employees.  Additionally, ESOPs provide a tax benefit to the company through tax-deductible expenses for contributions to the plan.  Generally, ESOPs are more expensive to establish and maintain because ESOPs require paying fees to a third party administrator to oversee the plan and act as trustee.

Phantom Stock Plan

A phantom stock plan is a way to reward employees without actually giving the employee any actual equity in the company. Rather, the employee receives "phantom" stock. Although the company issues no physical stock certificate, phantom stock pays out with the same price movement of the company’s real stock. In other words, phantom stock is an employee bonus plan that pays out upon certain triggering events. Plans typically either pay out (i) the stock appreciation value over a specific period of time or (ii) the full value of the stock issued, instead of just the increased value. Any bonus money paid out through the phantom stock plan is taxed to the employee as ordinary income and the company qualifies for a tax deduction.

What’s right for your business?

The plan that is right for your business will be determined based on several factors including how many employees you have, which employees you wish to reward, tax considerations, and other circumstances surrounding your company. Businesses are not cookie cutter and your plan shouldn’t be either. For more information or to discuss which plan may be right for you, contact Sheila Seck at 913-815-8485 or sseck@seckassociates.com.

The Series LLC: Is a Series LLC right for your business?

The series limited liability company ("LLC") is a relatively new way to organize business ownership. The series LLC has all of the benefits of a traditional LLC, such as flexibility and limited liability, with some added benefits that may appeal to your business such as the potential for a reduction in administrative costs and the further isolation of liabilities.

The series LLC is a group of mini LLCs all under one master LLC. This is a very similar concept to a parent corporation with many subsidiaries. Each mini LLC is independent from the other mini LLCs because each mini LLC has its own members, is only liable for its own debts and obligations, and can hold its own assets. The master LLC acts like an umbrella LLC or a holding company that controls all of the mini LLCs in the series. The series LLC started in Delaware and eventually became recognized as an entity type in Kansas and Missouri.

 A series LLC is ideal for someone who wants to form multiple LLCs within one large conglomerate without changing the function or business operations of each individual LLC. This is common for real estate investors or property management companies with multiple properties. A series LLC could also be used for a business with several different divisions or product lines. Each division could be its own mini LLC, thereby separating or limiting the liability to each division. Because each mini LLC is its own legal entity, each mini LLC must maintain separate corporate formalities such as a separate corporate book and its own financial accounts.

Not all states recognize the series LLC and formation procedures vary among the states that do. To form a series LLC in Kansas, the members must file Articles of Organization for the master LLC and then obtain a Series Limited Liability Company Certificate of Designation for each of the mini LLCs. The master LLC’s operating agreement must be carefully drafted to ensure that (i) a series LLC is specifically permitted and (ii) each mini LLC has limited liability (i.e. only liable for liaiblities within the mini LLC).

 To form a series LLC in Missouri, the members must file Articles of Organization for the master LLC and then file Form LLC 1A for each mini LLC. Similar to Kansas, the master LLC’s operating agreement must be carefully drafted to ensure that (i) a series LLC is specifically permitted; (ii) each mini LLC has limited liability (i.e. only liable for liaiblities within the mini LLC); (iii) each mini LLC must keep separate records, and (iv) the assets of each mini LLC must be accounted for separately.

Aside from isolating liabilities, a series LLC has other benefits such as potential reduced startup and administration costs. In Kansas, the filing fee for forming a stand-alone LLC is $160, whereas the filing fee for a master LLC is $250 and each mini LLC $100. Thus, filing for one master LLC and two mini LLCs in a series would be $450 compared to  filing three separate stand-alone LLCs which would cost $480. Additionally, Kansas requires ongoing administrative filing requirements for each LLC. However, a series LLC only needs to file one annual report for the master LLC and mini LLC, rather than separate reports for each LLC.

 Because Kansas only authorized the series LLC in July 2012 and Missouri only authorized the series LLC in August 2013, Missouri and Kansas have not clarified whether series LLC owners can file one consolidated tax return or whether each LLC must file a separate tax return.  Anyone contemplating forming a series LLC should consult their tax advisor about the tax implications applicable to their business. For more information on the series LLC or to see if it is right for your business contact Sheila Seck at 913-815-8485 or sseck@seckassociates.com.

What Rights Do You Have in Your Business Name?

There are many different types of protections available for a business owner’s name. The most basic protections come from having a legal name, whereas a trademark can carry with it national (and sometimes international) protections.  Below is a simple breakdown of some different types of business names and the protections they provide.

·   Legal Names. A business’s legal name is the name filed with the applicable state when the company is formed. This name is also on file with any other state where the company registers to do business. Once you register a name with a state, no other business may register to use that name in the same state, although variations of the same name are allowed; however, another business could register with the same name in a different state. The legal name does not provide much protection except that no other company may have the same name in the states where a company registers to do business.

·   Trade Names. A trade name is the name that a company uses in conducting business with customers. A trade name may be the same or different than the legal name. A trade name may be a fictitious name often referred to as a “Doing Business As” (DBA). For example, you may register your legal name as Jewelry Makers LLC, but you may operate that business as Jazzy Jewels or something completely different, like Julie’s Sparkles. Here, your trade name would be Jazzy Jewels or Julie’s Sparkles. Many businesses choose to never acquire a fictitious name, in which case the company would operate under the legal name and not register for a trade name. If you want to use a trade name in Missouri different than your legal name, you must register it. Kansas has no such requirement. It is important to know that a registered trade name will not necessarily allow you exclusive rights to a name. In Missouri, if your trade name, but not your legal name, is Jazzy Jewels, another company could register their legal name as Jazzy Jewels LLC.

·   Trademarks.  A trademark is protection for a word, name, symbol, sound or color that distinguishes your goods or services as unique from other goods or services. Think of a trademark as your logo or slogan. Trademarks must meet specifications that distinguish your logo or slogan as special or different from others in the same market.  State common law and state statutes provide trademark protection; however, federal law provides the most extensive source of trademark protection. Trademarks must be registered with the state or the U.S. Patent and Trademark Office. There are also some international trademark associations such as the Madrid System.

Each business owner’s needs are different and require an in depth analysis of the business operations, the current and future business plan and the desires of the owner(s) in order to determine the appropriate path for a business. 

Gaining a Competitive Advantage: Resources available for women and minority owners

Most business owners know the SBA can provide many different benefits for small business owners. What you may not know is that the SBA also provides certifications for particular types of business owners, including minorities, veterans and women. Obtaining these certifications could give a business a competitive edge in seeking new business opportunities and establishing credibility in the market. Government agencies, contractors and many other businesses have both governmental regulations and internal policies that mandate a certain percentage of contracts be awarded to minority-owned, veteran-owned and women-owned businesses. An SBA certified business is in a good position to receive contracts from businesses or government entities.

What are the basic requirements for certification?

Women business owners may get certified as a Women Business Enterprise (WBE), a Women-Owned Small Business (WOSB), and an Economically Disadvantaged Women-Owned Small Business (EDWOSB). Each designation has its own requirements and provides its own benefits. The core requirements of all designations are that a woman must:

  1. Own and control at least 51% of the business,
  2. Be active in daily management, and
  3. Serve as the highest ranking member of the company.

Qualifications for the WOSB and EDWOSB also require that the company be a small business. What qualifies as a small business is determined by the SBA based on where the business falls under the North American Industry Classification System (NAICS). Additionally, the EDWOSB certification requires that the woman owner is economically disadvantaged. A woman is presumed economically disadvantaged if:

  1. Her personal net worth is less than $750,000,
  2. Her adjusted gross yearly income averaged over the three years preceding the certification does not exceed $350,000, and
  3. The fair market value of her assets (including her home and business) does not exceed $6 million.


Additionally, there is a certification available for any Service Disabled Veteran-Owned Small Business Concern (SDVOSBC). Eligibility requires the service disabled veteran to:

  1. Have a service-connected disability,
  2. Be the owner and operator of a small business, and
  3. Hold the highest officer position in the company.

The SBA also runs the 8(a) Business Development Program which helps small disadvantaged businesses. The 8(a) program is a nine year program split into two phases. The first phase helps businesses through a four year developmental stage and the second phase is a five year transition stage. Participants in the 8(a) program receive specialized business training, counseling, executive development, the ability to receive sole-source contracts, and the opportunity to participate in an exclusive mentor-protégé program.


How does a business owner obtain certification? 

A business may be certified as a WBE, WOSB or EDWOSB in two ways. A business owner can either self-certify through the System for Award Management (SAM), a government-maintained database, or use a third party certifier. If using a third party certifier, a business owner can choose between four SBA-approved third party certifiers for WBE and WOSB and three third party certifiers for the EDWOSB designation. The certification process includes an application and detailed documentation proving ownership and control. Required documentation may include financial statements, tax returns, bank account and loan information, operational documents, resumes for all owners and key employees, licenses and permits, lease agreements, and other requested information.

Essentially, the application and documentation are the same whether a business owner self-certifies or uses a third party certifier. The main difference in the two methods is what documentation can be seen by others. If an owner self-certifies, the owner must upload all of the required documents to an online repository. Anyone considering awarding business to the potential WBE, WOSB or EDWOSB has the ability to review the documentation to ensure that the self-certification is accurate. Conversely, if an owner uses a third party certifier, the owner provides all necessary documents to the certification agency. The owner will receive a certification document upon approval. Anyone considering awarding business to the potential WBE, WOSB or EDWOSB, will only access the approved certification document from the repository.

The SBA maintains control over ensuring the accuracy of certifications and continued compliance with the requirements. The SBA may investigate the accuracy of any certification or representation of self-certification. Additionally, any interested party (another business bidding for the same contract) or a contracting party may submit a protest against any business that they believe does not meet the certification requirements. The SBA is in charge of reviewing each protest and issuing a final determination. 

How long does the certification last?  

Some states provide their own state certifications which vary in length depending on the state. The federal certification for a WBE, WOSB, and EDWOSB lasts for one year. The re-certification process after the initial application is approved is much simpler if a third party certifier was used.

Interested? 

Certification as a WBE, WOSB or EDWOSB can provide access to local, state and federal government agencies looking for certified companies to meet their contracting needs. For more information visit www.SBA.gov or contact Sheila Seck, at 913-815-8485 or by email at sseck@seckassociates.com, for help in navigating and completing the application process. 

Incubator Program Offers Resources for Entrepreneurs

The Ennovation Center, an Independence incubator program for entrepreneurs, opened in 2010 and has been serving small business owners ever since. The Ennovation Center is located in what was previously the Independence Regional Medical Center, allowing it the unique capability of housing a wet-lab and five fully equipped kitchens in addition to group work spaces, conference rooms and private offices. The Ennovation Center focuses on three business areas: bio-tech, culinary, and business & technology.

Since 2013, Lee Langerock, Executive Director, has headed the Ennovation Center. Langerock said what really drove her to the Ennovation Center was, “the opportunity to work on a micro level to support emerging companies and to help introduce entrepreneurship to the community.”

The bio-tech and business & technology companies benefit most from the wet-lab. The wet-lab has a multitude of diverse resources for the equipment needs of biotech entrepreneurs, including: incubator ovens, an Autoclave and a centralized deionized water system. “We have biological incubators inside our incubator,” said Xander Winkel, Program & Design Coordinator, speaking about the unique equipment that the Ennovation Center has to offer biotech startups. There is also a Subzero freezer available, which can replicate extreme temperatures. “Biotech companies use it for product stability,” said Winkel. The freezer is also used by manufacturers to test products, such as electronics, in extreme temperatures.

Perhaps the most distinctive aspect of the Ennovation Center is its ability to accommodate food innovators. The program currently has 50 entrepreneurial clients, including 39 food based entrepreneurs. In the majority of states, health departments require that all food products for sale be prepared in an approved commercial kitchen. 

Some of the more valuable resources available in the kitchen, according to Langerock, are the people themselves. “[The entrepreneurs] really know their stuff and are willing to share their knowledge,” said Langerock. “The knowledge and experience that you can gain by being able to work and communicate with each other is very valuable,” continued Langerock. “Here, we work to develop networks, friendships and supportive services to give them the very best chance of success.”

The best advice Winkel offers for entrepreneurs that want to get into the food business is to, “get market feedback, not just feedback from friends and family. Ask yourself, ‘is this food product meeting a desire in the market place?’” The best way to test your food product is to start small, Winkel continued. “Get out there with your minimal viable product or a limited product line. Get as much data and constructive feedback as you can get.”

The ability to work closely with other entrepreneurs can help program participants overcome the employee mentality. “The transition from employee to being a CEO is a very different mentality,” said Winkel, “so having the resources and different brains to help you figure out how to scale up and take the next steps in your business are helpful.”

For more information on the incubator program visit the Ennovation Center.

Choosing the Best Buyer for Your Business

Entrepreneurship is a wonderful thing; however, at some point, entrepreneurs may decide to sell their businesses for a number of reasons ranging from an impending retirement to partner dispute to new entrepreneurial pursuits. Establishing the seller’s desire for a sale makes for a better sale strategy and allows the seller to find the right buyer.  Furthermore, finding the right buyer for your business will allow for a smooth transition in ownership and continued success for your company. 

Typically, buyers come in three types: internal, financial and strategic. Depending on the seller’s motivation for a sale, a particular type of buyer may be best suited for the company. 

Internal Buyer

An internal buyer is a company employee or a long time independent contractor who is immersed within the company. Often, employers sell to internal buyers as part of a long-term plan to reward key employees and a gradual transition of the retiring owner. However, internal sales typically bring the lowest sale price and often require seller financing. Additionally, the long-term plan of an internal sale may not be ideal for the seller’s timeline or the company may have cash flow issues if part of the sale is company financed.

Commonly, internal sale prices are discounted to reflect the buying employee’s “sweat equity” in years prior to the sale.  The sale terms will likely be more flexible than with a third party buyer. Some factors that could impact the ultimate sale price are: the upfront cash payment, the number of years the remaining payments are made, the tax treatment of the payments, and any element of payment adjustment such as a bonus payout based on certain targets. The more the factors favor the buyer, the higher the sale price should be.

Financial Buyer

Another option available is an external sale to a financial buyer. A financial buyer is an external buyer who sees the current business as something he wants to acquire and run. Depending on the industry, a seller can typically command a mid-market price from a financial buyer.  The financial buyer will be most interested in the financial health of the company and its ability to generate healthy returns.  These transactions can happen much faster than an internal sale depending on how quickly the buyer is looking to close the deal.  Sellers who prefer to sell the business and move onto the next venture would find financial buyers to be a good type of buyer based on the timing of the transaction.  Finally, sellers should ensure that of its corporate and financial records are in order to maximize the sale price and accelerate closing the sale. 

Strategic Buyer

A third option is another type of external buyer, a strategic buyer who is specifically looking for a niche company. Commonly, a strategic buyer already owns a business, which is either similar or complimentary to the seller’s company. A strategic buyer is looking to make acquisitions to expand the existing business, strengthen the company brand, improve the leadership team or to access recurring revenue. A strategic buyer usually brings the highest price.

In addition to determine the best type of buyer for the company, a seller must also consider other factors about the buyer regarding the buyer’s vision and plan for the company.   What are the buyer’s intentions for continuing with the business and is this something that is acceptable to the seller.  For example, if a business owner is looking to sell the company to someone who will continue to carry out the vision of the business owner, an internal buyer who is invested in the company culture may be a better fit than a financial buyer who has different plans for the company.  For more information on how to target particular buyers or how to sell your business, please contact Sheila Seck at 913-815-8485 or by email. 

Looking for Investors? Consider the Kansas Angel Investor Tax Credit

Seeking investors is an all too familiar hurdle for many new companies.   If a startup does not manage to entice the right investors, the company is often left to seek funding through bootstrapping or bank loans which may be hard to obtain. Without access to the right investors and capital, startup may not be able to grow and succeed.  For business owners in Kansas, the Angel Investor Tax Credit may be the additional incentive that entrepreneurial companies need to attract investors.

 The Kansas Angel Investor Tax Credit program offers an opportunity for certain investors in qualified startup companies to take a 50% tax credit for every dollar invested in a Kansas business certified by the Kansas Department of Commerce, up to $50,000 per business. Additionally, there is a limit of $250,000 per tax year per each Angel Investor.  Those investors who wish to be considered for the tax credit must register as Angel Investors, just as those businesses wishing to become qualified Kansas businesses must apply. It is important to remember that even registered Angel Investors are not guaranteed a tax credit as the program is usually a first-come, first-served program. Thus, an investor may not be certain that he or she will receive a tax credit prior to making the investment.

 Company Criteria The program is designed to help Kansas businesses in the early stages of financing and promote job growth in Kansas. Companies seeking certification must meet the following criteria:

              1   The business has a reasonable chance of success and potential to create measurable employment within Kansas.

2   In the most recent tax year of the business, annual gross revenue was less than $5,000,000.

3   Businesses that are not Bioscience businesses must have been in operation for less than 5 years; bioscience businesses must have been in operation for less than 10 years.

4   The business has an innovative and proprietary technology, product, or service.

5   The existing owners of the business have made a substantial financial and time commitment to the business.

6   The securities to be issued and purchased are qualified securities.

7   The company agrees to adequate reporting of business information to the Kansas Department of Commerce.

The ability of investors in the business to receive tax credits for cash investments in qualified securities of the business is beneficial, because funding otherwise available for the business is not available on commercially reasonable terms.

The business will also be asked to provide an executive summary, business plan, company financials and other relevant information.

Angel Investors

An Angel Investor is an individual or an owner of a permitted entity investor, who has a high net worth. This means that a) the individual’s net worth, or joint net worth with a spouse, exceeds $1,000,000 or b) the individual’s income is in excess of $200,000 in the two most recent years ($300,000 if joint with spouse) and the individual has a reasonable expectation of reaching the same income level in the current year. Anyone who serves as an executive, officer, employee, vendor or independent contractor of the certified Kansas business is not eligible for a tax credit for any investment he or she makes in that business.

More information on the program and how to apply can be found at Kansas Angel Tax Credits. If you believe that your business could benefit from the Angel Investor or are an Angel Investor seeking to invest, please contact Sheila Seck at sseck@seckassociates.com or call 913-815-8481.

Initial Public Offerings

 

            Initial public offerings or “IPOs” transition a company from being private to going public.  Most often companies go public to raise capital, but companies may also raise capital though other means such as a private offering.  Alternatively, some companies may be required to go public based on their size of the company and the number of shareholders such as Facebook.  Regardless of company size, entrepreneurs should consider whether going public is right for their companies.  Some advantages and disadvantages to going public are explained below.

Advantages

                Going public has several advantages from a capital raising and branding standpoint.  

                Raising Capital: An IPO may result in an increase in capital and access to a broader pool of investors than if the company remained private.  Private companies often raise capital through private offerings to friends, family and certain investors (angel investors and venture capitalists), but can be limited in the type of investor to solicit.  Conversely, in an IPO, the company can reach almost any type of investor without the same limitations as a private offering. 

           Employee Incentive: Public companies often use their stock as an equity incentive for employment.  Prior to going public, some companies issue stock to their key people to reward and retain these individuals after the IPO.

              Increase Liquidity: By going public, a company will have its shares listed on an exchange creating a market for those shares.  With a known value of the company’s shares, shareholders and employees may have an easier time selling publicly traded stock than privately held companies. 

              Retaining Control: With an IPO, a company may be able to retain some level of control of management as opposed to a company pursuing financing through venture capitalists who generally require some degree of control.  

            Brand Awareness and Prestige:  With an IPO can come a level of publicity, prestige and brand awareness.  The prestige of being an officer or board member of a public company has a certain appeal.  Also, brand awareness will increase after going public.  Millions of investors, investments analysis, and others will be able to access your company information and financials on the SEC’s database EDGAR.  

Disadvantages 

       While an IPO may bring access to capital and creditability, going public may be disadvantageous for some companies.  

             Expenses: An IPO can be a costly process to ensure that the IPO complies with all SEC rules and regulations.  This is an ongoing expense due to the periodic disclosures required by the SEC.

               SEC Filing and Reporting Requirements: Public companies are under more scrutiny than private companies because the barrier to becoming an investor/shareholder is relatively low.  Due to this low barrier, the SEC requires that public companies make certain periodic disclosures to keep shareholders informed about the company.  Public companies must report to all shareholders regarding management operations, executive compensation, legal obligations and financial statements.  A company may not want all of this information regarding the operations and financials of the company to be made public or potential competitors.

            Loss of Control:  Depending on the number of shareholders in the company, company management may lose some flexibility in managing company affairs when the shareholders must approve certain transactions.  

Phantom Equity Agreements

Most entrepreneurs are always looking for ways to incentivize and reward key management and top performing employees in order to keep them within the organization.  A common incentive is to offer ownership in the company to key employees through a stock plan.  While ownership may seem to be an attractive option, adding an owner to the business creates risks for the current and potential new owner.  Risk could arise from disagreement between new and old owners in leadership styles, the direction of the company and use of company funds.  Additionally, key employees may not have the financial capability of purchasing their shares of ownership or dealing with the consequential tax burden.

An alternative to offering key employees ownership is to set up a phantom equity plan.  Phantom equity is a promise by the company to pay key employees a bonus equivalent to the value of the company’s shares or the increase in the company’s shares over a period of time.   The key employees would receive this deferred bonus based on a particular vesting period.  Essentially, phantom equity allows key employees to participate in the upside of company as the company’s shares increase in value without the burdens of ownership.  

Phantom equity generally is non-taxable until the bonus is paid.  At that time, the employee recognizes income and the company may take a deduction.  Compared to offering ownership, the key employee does not have to purchase ownership or face an immediate tax burden upon introduction into the phantom plan.

Phantom equity plans may be an ideal incentive for employees; nonetheless, business owners should consult with legal counsel to make sure these plans comply with IRS regulations and avoid complex ERISA rules governing employee benefits.  If you have questions or are interested in implementing a phantom equity plan within your organization, we can assist you in implementing this plan.