Yeah, But Look At The Money You Saved... By Cliff Ennico www.creators.com I love the radio and television ads for a certain auto insurance company where someone is telling a friend his "tale of woe" - a laundry list of horrible things that has happened to the person - and the friend, after listening sympathetically, says, "well, yes, that's too bad, but the good news is . . . I saved a ton of money on my auto insurance!" Those ads, ladies and gentlemen, are my life. I'm getting a ton of e-mails these days from people who tried to save a few bucks in legal fees and found out - too late - what those bucks might have bought them. Here are a few: "I registered my corporation in Nevada several years ago because I saw this great online ad telling me I could incorporate there for only $50. Last week I just got a letter from my state tax authority telling me I'm getting audited for income and sales taxes because I never registered my corporation with them. Can I just tell them to go away because I'm registered in Nevada?" When you incorporate in another state, you still have to register your corporation in the state where you're physically located and pay taxes there. Sadly, many of the "do it yourself" incorporation Websites don't tell you that. Not only will you have to pay several years' worth of taxes, with interest and penalties, but I predict you'll be getting a similar letter very soon from your state Attorney General's office accusing you of running an illegal business in your state. But look on the bright side . . . you saved money in legal fees! "I formed a limited liability company (LLC) several years ago with two other partners. My accountant set up the LLC, and told us we needed a lawyer to draft our partnership agreement. We figured we didn't need one because all three of us got along pretty well. Now my two partners have moved to other states, leaving me to do all the work. Because we're listed as equal partners on our LLC tax returns, they're getting two-thirds of the profits, they're not lifting a finger to help me, and they refuse to pay me a salary. Is there anything I can do about it at this point?" Not a whole lot. Once someone becomes your partner, the only way you legally can get rid of them is to buy them out for a fair price. Without a written agreement, though, there's nothing to force them to sell out to you. You are now their "Cinderella," and the only thing you can do is quit the business yourself and let it die - a shame since it's doing well. But look on the bright side . . . you saved money in legal fees! "I recently hired a sales representative. I needed an employment agreement in a hurry, so I downloaded one from a Website that specializes in legal contract forms. Well, now my business isn't doing too great and I need to downsize this employee to cut costs. In reading the contract, though, it seems I can't terminate this guy unless he commits a felony! Is there any way the law would throw out this contract and let me fire him?" It actually works the other way - whenever there's a written contract that's more favorable to the employee than what the law allows, the courts will usually uphold the contract. While a lot of downloadable legal forms on the Web are pretty good, you still need a lawyer to look at them and "customize" the contract language. But look on the bright side . . . you saved money in legal fees! "I had to fire someone recently - my most senior employee. The exit interview went very well, he didn't seem upset, I offered him a generous severance package which he accepted, and he signed a generic release form that my attorney drew up years ago when I first started the company. Now, three months later, he's suing me for age discrimination! How the Devil can that happen after he signed a release?" It can happen because under the federal Age Discrimination in Employment Act, a release of age discrimination claims must contain very specific language. For example, you have to give the terminated employee seven days to sign the release, and an additional 21 days to change his mind. A generic release doesn't have these provisions. But look on the bright side . . . you saved money in legal fees! Nobody likes paying legal fees. But when you run your own business, they are a necessary cost of doing business. It always costs a lot less to prevent a problem from happening than it does to "fix" the problem once it happens. If you lose your business because you were too cheap to spend an hour of your attorney's time, the fact you saved money won't be a huge consolation. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and former host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

Is This Subchapter S Corporation Really Necessary? By Cliff Ennico www.creators.com "I am considering starting up a small business in the near future. In talking to accountants and lawyers, I could not find anyone who would even consider setting me up as a subchapter S corporation. They are all insisting I form a limited liability company (LLC) because it is supposedly more simple and straightforward to operate. Still, I've heard from some other folks - admittedly they are not attorneys - that tell me the LLC doesn't offer the same level of protection against liability as subchapter S corporations do. Who is right here?" Well, being a lawyer myself, I'm going to give you that most lawyerly of answers . . . "it depends." The lawyers and accountants you spoke to may be a little behind the times. I'm actually seeing an increase in subchapter S corporations in my own law practice, and there are a number of reasons why they still make sense for a lot of small business startups. Here are several: High Cost of Forming LLCs in Some States. In a few states, including New York and California, LLCs are more expensive to form than corporations. New York requires LLCs to file a "legal notice" (basically, a classified ad) in two newspapers of general circulation in the county in which the LLC does business for a period of six consecutive weeks. In some of the bigger cities in that state (such as New York City), the cost of publishing that notice can be hundreds or even thousands of dollars. Corporations in New York don't have to publish the "legal notice". In California, LLCs are subject to a "minimum tax" of $800 each year, whether or not you make money, which corporations don't have to pay. Compensating Owners. Owners of an LLC (called "members") have to pay income and self-employment taxes (FICA, FUTA and Medicare) on 100% of the LLC's profits. By forming a subchapter "S" corporation, the owners (called "shareholders") can put themselves on the corporation's payroll and withhold federal and states taxes with each paycheck, just like regular employees, which can save thousands of dollars in FICA, FUTA and Medicare taxes each year. Perpetual Existence. An S corporation has perpetual existence. An LLC is usually formed for a limited duration, and many states still require LLC owners to include a "dissolution date" in the Articles of Organization or Certificate of Formation that gives legal birth to the LLC. There are a lot of old LLCs with "expiration dates" out there that the owners have completely forgotten about. The Perception of Size. Although there's no reason why an LLC couldn't "go public" or otherwise become a large company, there's still a perception, especially in the investment and venture capital communities, that "LLC" means "small potatoes, Mom and Pop, not meant to grow big." Not true, but if you're looking to raise outside capital beyond your "friends and family," you need all the help you can get. Employee Benefits. It is easier for corporations to set up health insurance programs and other employee benefits than LLCs. Also, there are some employee benefit plans, such as profit sharing plans, that are available only to corporations. Other Tax Benefits. If your LLC acts as a contractor for other companies, they are required to send you Form 1099 at the end of the calendar year reporting how much they paid you. They don't have to send you a Form 1099 if you are a corporation. Better Protection Against Liability (??). There is no real evidence for this, but a lot of people, including some professionals, believe that corporations provide you with more ironclad protection against legal liability than LLCs do. In these highly litigious times, with people increasingly likely to sue because the bad economy makes it likelier people will default on contracts, you need all the protection you can get. And if forming a subchapter "S" corporation discourages even a single person from suing you, it's worth the extra time and trouble of setting one up. The disadvantages of subchapter "S" corporations are well documented - they're (usually, in most states), more expensive to form, are more of a hassle to operate, can be owned only by certain types of people, are difficult to convert to LLCs, and so forth. But the subchapter "S" corporation is far from dead, folks. When forming a new business, don't assume the LLC is the only way to go - talk to an accountant or lawyer and have her evaluate the "pros" and "cons" of both LLCs and subchapter "S" corporations with your specific business in mind so that you can make an informed decision you can live with for the long term. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and former host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

Making A Graceful Exit From A Franchise By Cliff Ennico www.creators.com "I bought a franchise a little over two years ago. I've followed the franchise plan to the letter, but so far I haven't made any serious money, and have barely recouped my investment. Some other franchisees in my area are having the same difficulties, but others are doing quite well. I've decided I really want to move on to other things, but can't figure out how to get out of the franchise. Can you help?" There are many reasons why franchises sometimes don't work out. The most common are: the franchisee (that's you) didn't have the necessary skills to run the business, or didn't market the franchise aggressively enough because he believed the franchise trademark would do all of the work for him; the franchise territory wasn't a good one - many franchises that start out in low-cost areas of the country "hit a wall" when they expand into areas where labor, real estate and other expenses are significantly higher; and the franchise was poorly managed, grew too fast, or otherwise launched its model before it was truly tested. In any case, it's highly unlikely you will get your upfront franchise fees back. Just about every franchise agreement says these are "nonrefundable". Also, many franchise agreements (including, I suspect, yours) do not allow you to terminate the franchise relationship if things turn sour. Getting out of a franchise is a four step process - all require patience, and a fair amount of time. Ask for Additional Training . The fact that some franchisees in your area are doing well may point to some deficiencies in your skills. Ask the franchise to evaluate your operation, and volunteer for additional training that may help you work your way through your current difficulties. Re-Negotiate Your Territory . It's quite possible that your territory isn't right for this type of franchise. Have the franchise send one of its real estate executives to your territory and look for ways to "redraw" it so as to be more productive for you. Many franchises will do this for no charge beyond the executive's out of pocket expenses. Find a Buyer . If you truly believe that there's nothing you or the franchise can you to improve your situation, then it's time to head for the exit. Let the franchise know you are willing to sell out, and (if the franchise agreement doesn't already provide for this) offer them a "brokerage commission" if they find a buyer. Contact all of your local franchise brokers - the best ones are members of Franchise Network ( www.frannet.com ), The Entrepreneur's Source ( www.esource.com ) and FranChoice ( www.franchoice.com ) - business brokers, commercial real estate brokers, and outplacement centers (where laid-off corporate executives with large severance packages are just dying to buy a local small business). Take out a "Business for Sale" ad in the classified section of all local newspapers, as well as online resources such as Craigslist ( www.craigslist.org ). Hand Back the Keys . Even though the franchise agreement doesn't give you an "out" if the franchise doesn't work, almost all franchises will let you out of your franchise and set you free on the following conditions: you agree not to sue the franchise, and to release them from any liability they may have to you; you pay all money that's due to them, and don't ask for any of your money back; you return the franchise Operating Manual and all materials that have the franchise's name and logo on them; and (most importantly) you agree to comply with the noncompete provisions in your original franchise agreement - these generally will prohibit you from engaging in the same or a similar business within an X-mile radius of ANY of the franchise's franchisees for a period of Y years. Take the Franchise to Court . When all else fails, you may have to consider going to arbitration or filing a lawsuit against the franchise. Before doing so, you should talk to an attorney who specializes in franchisor-franchisee litigation - preferably one who has sued this particular franchise before, and won. Review the "litigation" section of the franchise's Uniform Franchise Offering Circular (UFOC), contact franchisees who have sued the franchise, and ask them for the name of the attorney who represented them. In order to win any sort of litigation against a franchise, you will need to prove clearly either that the franchise committed fraud when it sold you the franchise (i.e. it knew the franchise model was a dud), or that the franchise failed to provide you with the support promised in your franchise agreement. Keep in mind that in most states the statute of limitations for "breach of contract" cases such as this is relatively short - usually only two or three years after you signed your franchise agreement. And your franchise agreement will require you to bring the suit where the franchise's headquarters is located, and where the cards will be stacked in the franchise's favor. If other franchisees are as disgruntled as you are, consider filing suit jointly - you will look a lot stronger, and will be able to share the considerable expenses involved. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

Competing With A Franchise, Before You Even Sign Up By Cliff Ennico www.creators.com #147;I am thinking about buying a franchise in a particular industry. There are three franchises currently operating in this industry, and I would like to buy one of their existing franchises rather than start one up myself from scratch. I have contacted all three franchises and asked them to send me their Uniform Franchise Offering Circulars (UFOCs). Two of the three have asked me to sign a nondisclosure agreement (NDA) before they will send me anything, but the third franchise wants me to sign a noncompete agreement saying I won#146;t work anywhere in this industry for two years after they give me #145;confidential information#146; about their operations. Can they legally do that? If I sign the noncompete with this third franchise, am I prohibited from buying a franchise from one of the other two?#148; One of the biggest fears any franchise has is that someone will show an interest in the franchise, #147;kick the tires#148; for several months, learn everything there is to know about running the business (most franchises deal with very basic retail and service business models, which are fairly easy to learn), then blow them off and set up in business on their own. Technically, a UFOC is not #147;confidential information#148; in any meaningful sense, because it is publicly available and on file with the Federal Trade Commission (www.ftc.gov). You can get a copy of any franchise#146;s UFOC from franchise oriented websites such as www.ufocs.com , www.ufochelp.com , www.frandata.com and www.franchisehelp.com , and in many cases from the franchise#146;s own website. If you can#146;t find it anywhere else, you can contact the franchise and they#146;ll send it to you #150; free. Once you have the UFOC, though, you have a list of all of the franchise#146;s present and former franchisees, and can call and visit them to find out whether they#146;ve had a good experience with the franchise or not. That#146;s where the franchise#146;s concern about confidential information kicks in, because the franchise can#146;t control what their franchisees tell you. Some franchisees are more #147;loose lipped#148; and candid than others when talking about the franchise and their relationship with it. Franchises are terrified you will gain access to detailed information about their operations and #147;trade secrets#148; that isn#146;t available in the UFOC #150; that#146;s why you are almost always asked to sign a nondisclosure agreement when you talk to a franchise. But a noncompete? As the Wizard of Oz would say, that#146;s a #147;horse of a different color#148;. Unlike a nondisclosure agreement, which requires you to keep information you learn about a franchise secret, a noncompete agreement bars you from buying a competing franchise, or even working in the same industry. I#146;m pretty sure that in most states this practice #150; asking you to sign a noncompete agreement as a condition to talking to you about the franchise #150; would be viewed as an #147;unfair trade practice#148; whose sole purpose is to prevent you from choosing among competing franchises. The good news is that if you violate the noncompete and the franchise sues you, you probably will win. The bad news is that you will have to spend years of your life, and thousands of dollars in legal fees, to win that court case. And you will probably be under a court #147;injunction#148; not to work for a competing company until the court makes up its mind whether the noncompete is an #147;unfair trade practice#148; or not. That could take years. I suspect what may have happened here is that you #147;tipped your hand#148; to the third franchise that you were looking to buy one of their existing franchise outlets, rather than start one up on your own in a new territory. Franchises are all about growth, and expanding into new territories. While franchises are happy to work with someone who wants to buy out an existing franchisee #150; it helps the franchise dispose of an unhappy franchisee in a very positive, #147;win win#148; way #150; it doesn#146;t add any new revenue to the franchise#146;s bottom line (other than a relatively small, one time #147;transfer fee#148; to pay for your franchise training). A franchise isn#146;t going to risk divulging its #147;trade secrets#148; to someone who isn#146;t helping them grow. In order to buy an existing franchise, you will have to ask their existing franchisee lots of detailed questions about the franchise#146;s operations, earnings, and so forth #150; precisely the sort of information the franchise doesn#146;t want #147;floating around the industry#148;. So I understand why they asked you to sign a noncompete agreement #150; although they should have talked to their lawyers before doing so. The bottom line: don#146;t sign any noncompetes with a franchise before you commit to the franchise and sign their legally binding Franchise Agreement. If you do, you will be #147;giving them a sword#148; to use against you should you decide to buy a franchise from one of their competitors. I would focus my attention on the other two franchises, and, when talking to Franchise A#146;s franchisees, keep your mouth shut about what Franchise B#146;s franchisees may or may not be doing. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

Ten Questions To Ask Before Buying A Franchise [Part 2] By Cliff Ennico www.creators.com Here are five more questions to ask when reviewing a franchise's Uniform Franchise Offering Circular (UFOC): 6.Is the Management Team Seasoned and Well Experienced? Don't gloss over the management biographies in the back of the UFOC; take out a magnifying glass and pay close attention to them. How long have these individuals been with the franchise? If the entire management team has been with the franchise less than five years, watch out - high turnover could indicate a fundamental problem with the franchise model. Also, look for relevant industry experience - a former marketing director for a consumer products company may not be the best "fit" for a fast food restaurant franchise. 7.How Good Is the Franchise's Real Estate Team? Successful retail franchises are all about location, location, location. Meet with the franchise executives who will help you find a location for your franchised business. If you don't like these folks, don't buy the franchise. Period. Ask tough, hard questions. Will these people fly to your area and help you scout out locations? Will these people roll up their sleeves and help you negotiate with a difficult landlord? Beware of real estate professionals who have spent their entire careers in only one part of the country. 8.Are The Franchise's Startup Cost Projections Realistic? Many franchises start up in areas of the country where real estate and labor costs are relatively cheap. These franchises often get into trouble when they branch out to the East and West coasts and urban areas, where everything's more expensive. Always talk to local real estate brokers, insurance brokers, construction contractors and - especially - the franchise's other franchisees in the area to "reality check" the startup cost projections in the UFOC, which are often based on national or regional average costs. 9.Are There Any New Technologies or Business Models That Are Threatening the Franchise's Business Model? Many traditional retail and service businesses are facing serious challenges from new technologies, business models, and changes in consumer attitudes. Ask anyone who was in the publishing business 10 or 15 years ago what the Internet has done to their industry (and their career), and you will get an earful. Some franchise models are a bit like those characters in bad horror movies who've have their heads cut off but don't quite realize they are dead yet. You will have to ask the tough questions, and deal with the fact that often the franchise's executives haven't given serious thought to these challenges themselves. Some examples: if you are looking at an after-school tutoring franchise, ask the executives how "e-learning" and online Webinars are impacting their business model. if you are looking at a check cashing franchise, how will the evolution of a "cashless society" based on online payment systems impact that business? Will laws making it easier for illegal immigrants to become U.S. citizens and qualify for bank accounts have a serious impact on the franchise model? if you are looking at an eBay "consignment shop" franchise (where people bring things to you and you sell them online), how will recent eBay system changes favoring high-volume sellers over occasional "Mom and Pop" vendors impact their operation? 10.What if the Franchise Owners Sell Out? When starting any business, the founders give serious thought to their "exit strategy" - how will they cash out of the business and recoup their investment once it's become successful? Franchises are no different. For most large franchise operations, the most common exit strategy is to sell out to someone else - sometimes another franchise, sometimes a large corporation in the same industry. When buying any franchise, you have to consider that at some point the franchise will buy, or be bought by, someone else, and you will be required to make changes, sometimes radical ones, to the way you do business. Ask any UPS Store owner who formerly ran a MailBoxes Etc. franchise how easy it was to make that transition, and you will get an earful. Here are some tough questions: looking at other franchises in the industry, who would be the most likely merger partner for this franchise? are there any large non-franchised businesses in the industry who would possibly buy this franchise and require franchisees to sell only its products? if this franchise were to merge with another franchise, would this franchise be the acquirer (and therefore more likely to impose its model on the acquired franchise) or the acquiree (and therefore more likely to adopt the other company's model)? what rights will you have if the franchise merges with another franchise and the other franchise has a competing franchisee in your territory? Will you be forced out of business if your franchise agreement expires before the other guy's does? Most franchises will tell you they have "no immediate plans" to merge with another company, but if they tell you they've never thought about it or would never consider selling out, don't believe it. It's on their minds, and it should be on yours as well. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

Ten Questions To Ask Before Buying A Franchise By Cliff Ennico www.creators.com "I was recently laid off from a corporate job, and have decided not to return to corporate America. I'm thinking about buying a franchise, but their Uniform Franchise Offering Circular (UFOC) is over 100 pages long, and I really don't know where to begin. Do you have any tips for reviewing UFOCs, and the questions I should be asking these folks?" Here are ten things you should look for when reviewing a franchise's UFOC (the disclosure document franchises are required by law to deliver to prospective franchisees): 1.How Many Other Franchisees Are There, and How Long Have They Been in Business? The first place to look is the number of franchisees. If there are relatively few, and the franchise has been in business only a few years, then this is an "early stage" franchise. There's good news and bad news there. The "good news" is that you might be able to buy "area development rights" to an entire state or region of the United States. This means you are the "master franchisor" for your state or region, and can sell franchises to the local folks who will actually grill the hamburgers, dry clean the shirts, or whatever. You can get filthy rich that way - all you have to do is collect the royalty checks from your franchisees, deduct your fee, and remit the balance to the franchise headquarters. Not a bad way to make a living, no? The "bad news" is that this franchise's model hasn't been tested yet. There's a good chance this franchise will fail, and you will lose your investment. Unless your appetite for risk is unusually high, what you want to see is a fairly large number of franchisees who bought into the franchise at consistent intervals (in other words, the number of new franchisees is fairly consistent from year to year). Be careful before buying into a franchise if (1) all of the franchisees have bought into the system within the last three years, or (2) all of the franchisees have been in place for more than three years and there are no "newbies". 2.Where Are the Franchisees Located? Are They All Over the Country, or Concentrated in Certain Places? Many franchises are "regional" in nature - they work well in some parts of the country, but not so well in others. For example, a franchise that serves "smoothies" and other healthy food products is bound to do well in California and college campus towns. Will it do as well in cold-climate states, or rural areas? A franchise that originates in the Midwest and South - where real estate prices and labor costs are relatively low - may well have problems when it expands to the East Coast and West Coast. 3.How Many Franchisees Have Left the System in the Past Few Years? A franchise is required to tell you the names, addresses and telephone numbers of franchisees who have left the system for one reason or another. The better ones disclose that information in their UFOCs; the rest will tell you, but only if you ask. Call these folks and find out why the franchise didn't work for them. Most of them will have an "axe to grind," of course, but by listening carefully you should be able to determine if the problem was the franchise, or if these people simply weren't a "good fit" for the franchised business. 4.Typically, How Long Does It Take For a Franchisee to Recoup the Initial Upfront Investment? This information probably won't be in the UFOC, but by calling lots of franchisees (I always recommend talking to at least 10), you should be able to get a sense of roughly how long it will take for you to recover your upfront investment in the franchise. If it's less than three years, great! If it's more than five years on average, I would ask the franchise lots of tough questions. 5.Has the Franchise Sued Any of its Franchisees, or Vice Versa? If So, What Are These Lawsuits About? The "litigation" section of the UFOC is probably the most valuable in the whole document, and is often overlooked by prospective franchisees because "only a lawyer can understand this stuff". Bad mistake! A franchise that sues its franchisees over relatively minor infractions of its rules is not a franchise you want to be involved with. If a franchise is more than five years old, and there are more than one or two lawsuits with franchisees, you need to ask some questions. If the franchisees were clearly in default and the franchise had to sue to recover its royalties and boot the "bad apples" out of the system, that's one thing. If, however, the claims are for antitrust law violations and were brought by state attorneys general, that may indicate a fundamental problem with the franchise's business model. Ask your attorney to review this section of the UFOC (most will not charge more than an hour's time for this) and explain the contents in "plain English". More next week . . . Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

"Wikis" and the Law By Cliff Ennico www.creators.com "I'm widely considered an expert in a particular field, and am thinking of contributing an article to Wikipedia - the online encyclopedia - as a way of promoting my consulting practice. What are the legal ramifications of contributing to a 'Wiki,' and how do I protect myself against liability?" For those who don't know, a "Wiki" is a collaborative Website where anyone can contribute content, and edit other people's content. Probably the best known "Wiki" is www.wikipedia.org , an online encyclopedia with more than 2,500,000 entries in English. Here's how it works: you write an article (if one hasn't already been done) and post it on Wikipedia. By so doing, you agree to Wikipedia's "Free Documentation License", essentially waiving your rights under the copyright laws. If other people see your article and feel they have something to add, correct or contribute, they can "edit" your content, so that over time the article will become longer, more thorough, more fair and balanced, and more up to date than any article by a single author could possibly be. Likewise, if you feel someone has edited your content incorrectly, you can "re-edit" your content and send e-mails to other contributors explaining why you are doing what you're doing, and so forth. Posting an article on Wikipedia can be a terrific way to get exposure for your business. Wikipedia has done an amazingly good job of search engine optimization - search for any relevant topic on your favorite search engine, and a Wikipedia article is likely to be in the first 10 listings. But there's a catch: because "wikis" are democratic by nature, you don't have to establish your credentials as an expert to post an article on Wikipedia. Indeed, anyone can post content on a "wiki", whether they know anything about the subject matter or not. And there's the rub. To quote from the Wikipedia article on "Wikipedia": "Users should be aware that not all articles are of encyclopedic quality from the start, and may contain false or debatable information. Indeed, many articles start their lives as partisan, and after a long process of discussion, debate and argument, they gradually take on a neutral point of view reached through consensus. . . . However, eventually additional editors expand and contribute to articles and strive to achieve balance and comprehensive coverage." Wikipedia, and other "wikis", have adopted policies and procedures to guard against editors whose goal is to distort the truth - called "vandals". Most wikis have an online dispute resolution mechanism for conflicting editors, and will bar repeated "vandals" from editing content on the site. But what if it's too late? What if someone edits your article on Wikipedia and does something bad that upsets someone so much that they sue you? Some examples: someone edits your article and posts false and misleading information about another person - a celebrity, a politician, or just an average person - with the goal of ruining that person's reputation (see the Wikipedia article on "Defamation"); someone edits your article and posts embarrassing - but entirely true - information about someone that invades their privacy (see the Wikipedia article on "Privacy Laws in the United States"); someone edits your article by "cutting and pasting" someone else's content into your article ver batim (see the Wikipedia article on "Copyright Infringement"); you have enemies, and they deliberately change your content by inserting incorrect or damaging information that makes you look like a fool (see the Wikipedia article on "Personality Rights"). When contributing content to a Wiki, or editing someone else's content, the word "partnership" should pop up in your head. Wikis are by nature collaborative - each article has several or more authors and "editors" - and collaborators usually are viewed as "partners" when it comes to legal liability. That's not a good thing, because partners have "joint and several" liability for their acts and omissions - if one partner gets sued, all partners are liable, regardless of the person who actually was at fault (see the Wikipedia articles on "Partnership" and "Joint and Several Liability"). So if someone sues the authors of a Wiki article because of a false or misleading statement made by only one of the authors, all contributors to that article are subject to the lawsuit. Of course, the "innocent" authors of the article will have recourse against the "guilty" author. This is called "contribution and indemnification" - see the Wikipedia article on "Contribution Claim (Legal)". But if the bad author doesn't have much money, has filed for bankruptcy, has given Wikipedia false data about his or her identity, or is otherwise "judgment proof", then the innocent authors, including you, will be left holding the bag. When contributing content to a "wiki", do your homework well - make your article as comprehensive, fair and balanced as possible to keep the number of "editors" at a minimum, and check your "wiki" contribution at least once each week so that you can catch and correct any wayward "edits" before they get you into legal hot water. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

Collecting Your Overdue Bills "From A Distance" By Cliff Ennico www.creators.com "Your recent columns on collecting from deadbeat clients were truly inspiring. I am an electrical contractor who is owed $3,000 from a customer located way on the other side of the state. His business is selling a product, made by others, and installed by electrical contractors such as myself. He has no business assets, works from home, and has no job site work (he may be on a site for 1-2 hours). He is, however, incorporated. I won a small claims court judgment against his corporation, but the courts will not enforce the judgment because of the great distance, and I have spent approximately $2,300 for my attorney to get the judgment. Collection agencies will not help either. I am at wit's end. Are there any options I may have overlooked?" First of all, here are a couple of tips about suing in small claims court. Generally, courts are required to enforce judgments rendered by other courts elsewhere in your state - this principle (known as "comity") is enshrined in your state constitution. But there's a catch. A court is obligated to enforce another court's judgment only if the case was fully litigated - the other side showed up on the court date, both of you argued your case before the judge, and the judge rendered a decision based on all the facts presented to him. If (as I suspect) what you got was a "default judgment" - the other side simply didn't show up in court because of the great distance involved - his local court may refuse to enforce your judgment on the grounds that a local citizen didn't have his "day in court". Whenever you sue someone in small claims court, and that person lives remotely from you, you always, always, always bring the action in the court where he is located or has his place of business - not the place where you are located. Yes, it's inconvenient for you, but at least you will know that if you win the other court will always enforce its own judgment against the deadbeat (even a "default" judgment). Also, if your case is a really strong one, you may (no guarantee here) be able to persuade the court to reimburse you for travel, lodging and other out of pocket expenses you incurred in getting the judgment. Secondly, I always advise against hiring an attorney to represent you in small claims court. Some judges don't like to deal with attorneys, and it takes just as much time for an attorney to prepare for a small case as it does a much bigger one. This is one situation where you are better off representing yourself, as it doesn't make sense to spend $2,300 and countless hours and days of your life to collect a $3,000 judgment. Lastly, you are assuming that your customer was the one-person corporation and not the individual himself. People are allowed to form corporations and limited liability companies (LLCs) for the sole purpose of avoiding personal liability to creditors. But if you can prove that you dealt with the individual directly, and not his corporation, you may be able to enforce your judgment against the individual's personal assets, such as his house, automobiles, and his salary from his day job. Look at the invoices you sent him - were they addressed to the individual, or to his corporation? If you treated his corporation as your customer, then there's little you can do to reach his personal assets. You will have to prove in court that he treated his corporation as a "personal piggy bank" and otherwise treated his corporation with so little respect that it should be disregarded (this is called "piercing the corporate veil"). This will be very difficult for you to do. If, however, your bills were addressed to him individually and he wrote checks to you from his personal bank account, you may have a case for pursuing him individually, which is much more likely to get you paid. Going forward, you should have your attorney prepare a short (one to two pages maximum) retainer agreement which your customers will sign before you begin working for them. Make sure the agreement contains the following clause: "My agreement is to perform services for the person or persons signing this agreement in their individual capacities, and I will look to them personally for the payment of my fees and expenses. While I may accept payment from a corporation, limited liability company, or other legal or business entity that is related to you, I will not be obligated to rely on such entity for the payment of my fees and expenses unless I expressly agree in writing to do so." That language could have saved you a ton of time and frustration here. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

Making Money, And Paying Taxes, One Click At A Time By Cliff Ennico www.creators.com "Do you have any thoughts on the legal and tax aspects of 'affiliate marketing' - when you use your website to sell other people's products through Clickbank or other affiliate sites? This system creates a link on your website where the customer doesn't actually see content on your site but goes through it directly to Clickbank's site and you are paid a portion of the sale for the link to Clickbank's website." There's nothing new about affiliate marketing - it's been around as long as the Web itself. Basically, by becoming an "affiliate" of another website, you become a "sales representative" of that website - you help that website sell their stuff and if they make any money from a customer who clicks on the "affiliate link" on your website, they pay you a commission. Websites like Clickbank take this process to a different level. Think of Clickbank as an intermediary between websites that are looking for affiliates to help sell their stuff (usually digital information products such as e-books), and people who want to be affiliates. For example, if I had a digital e-book (I don't, at least not yet), I could become a "Clickbank publisher" and allow Clickbank to sell my e-book, either directly or through its affiliates. Now, let's say you fall in love with my e-book and want to sell my book on your website. You would set up a Clickbank account, tell them you want to sell my book, and create a link to the Clickbank website. If someone clicked on the "Cliff's book" link on your website, Clickbank would process the order, collect payment from the customer, pay you your commission, pay me the rest (less Clickbank's fee, currently 7.5%), handle refunds, issue IRS Form 1099 at the end of each year, and provide other services. With Clickbank and other similar sites you can offer a whole bunch of other people's stuff to your customers and get sales commissions without having to lift a finger. Pretty cool, huh? But there's a catch (isn't there always?). When doing business with Clickbank or any other affiliate site, the words "drop shipper" should pop up in your head immediately. Whenever you are selling someone else's stuff but don't actually take possession of it, and that someone else handles all of the order fulfillment tasks (the shipping, handling, packaging and so forth), you are a "drop shipper" for legal and tax purposes. Full disclosure: I'm not a Clickbank scholar, and I haven't studied their website in detail. But a quick look at their operation leaves me with the following questions, which you should ask if you're planning to become a Clickbank "affiliate". Sales Taxes . By becoming a "Clickbank affiliate" for one of Clickbank's "publishers", you are creating a three way business relationship between you, the information publisher, and Clickbank itself. This means someone will have to collect sales taxes whenever any of the following people click on your "affiliate" link and order from Clickbank: people who live in the same state you do; people who live in the same state the information publisher is located; and people who live in Idaho (where Clickbank has its headquarters), Colorado (where Clickbank has an office), and any other state where Clickbank has a physical location or "nexus" for tax purposes. Will Clickbank keep track of this, by charging the customer sales tax and remitting it to the appropriate state tax authority? Or is that your responsibility (or the publisher's)? Legal Claims . Let's say someone clicks on your "affiliate" link, downloads my e-book from Clickbank's website, and discovers to his horror that I've invaded his privacy by disclosing all the lurid details of his private sex life. Clearly, as the publisher of this e-book I am legally responsible for its content, and will have to indemnify Clickbank (defend the lawsuit at my own expense, and pay the judgment if the customer wins) in case the offended reader sues them. But where do you, the poor "affiliate", stand in all this? Since the reader ordered the book from your website, you are in the "chain of sale" and may well be sued along with the rest of us. Is anyone indemnifying YOU if that happens? "Pyramid" Schemes . Clickbank allows its "affiliates" to set up their own "affiliate" programs where other websites (let's call them "sub-affiliates") can create a link to the affiliate's website which automatically links to Clickbank's website (getting dizzy yet?), with everyone in the upstream affiliate "chain" getting a piece of the purchase price each time something is sold. If these programs aren't set up properly, there's a risk that you will be creating an illegal "pyramid" scheme where people get commissions for bringing on board sub-affiliates who aren't actually selling anything. Make sure a good lawyer helps you set up your "Sub-Affiliate Agreement" to make sure you're not caught between a rock (angry sub-affiliates) and a hard place (Clickbank and its legal team). Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>

Doing Business When You Can't Stay Put By Cliff Ennico www.creators.com "I'm an Army wife looking to start up a home-based graphics and web design business. I know I need to set things up legally -- and desperately want to, but my problem is our upcoming out of state move. My husband's been given orders to become a recruiter which means he'll be shipped off to Recruiter School soon and upon graduation in the middle of next year we'll be moving to a new location. We won't learn where we're moving until early February. As my husband has at least another eight years in the Army, this kind of thing is bound to happen at least three more times. How do I even begin to set up a business? Do I work as a sole proprietor until we're relocated? Or do I set up something more structured now? " Until your situation changes and you get more settled, you are probably better off operating as a sole proprietor, as you will be able to "move" that from one location to another a lot easier than you can a corporation or limited liability company (LLC). LLCs and corporations are "state specific" - each time you move you will have to shut down the old one and set up a new one, which can be very expensive and time consuming. By operating as a sole proprietorship, you will be able to use the same federal tax ID number whatever state you are in. As you move into a new state, you will register with that state's tax authority and obtain a state tax ID number. If you move from one state to another in the middle of a calendar year, you will have to file two state tax returns for that year only - one in the "old" state for the time you spent there, the other in the "new" state for the time you spent there. Of course, if you're in a business with a high risk of legal liability, you will be sacrificing the protection from personal liability that a corporation or LLC affords. But since you're doing Web design work, it's highly unlikely you will be sued - if a client is unhappy with your work, they will refuse to pay you, or you will give them some of their money back to keep them happy. Still, just to be safe, I would take out a basic "errors and omissions" insurance policy so that if you ever are sued, the aggrieved customer will go after the policy and not your house or other personal assets. "I need a federal tax ID number because I am opening a new business here in the United States. I am originally from Sao Paulo, Brazil and don't have a Social Security Number. The IRS says that I cannot get a federal tax ID number unless I have a Social Security Number (SSN). There's part of me that thinks I don't really need a tax ID number at all - do I need a tax ID number to invoice my clients?" You will need to retain an accountant to help you with these matters. Tax ID numbers can get very tricky and do not want to do this without professional help. You will need to check your immigration status. If the visa allowing you to live legally in the United States does not allow you to operate a business, then there's nothing you can do about that -- you cannot operate an illegal business here. If your visa status allows you to operate a business here, then you should consider getting an ITIN (Individual Taxpayer ID Number) from the IRS -- it's like an SSN for people like yourself who do not qualify for an SSN (for details, go to www.irs.gov and check out IRS Publication 1915). Once you get the ITIN, you can use that to get a federal tax ID number for your business (perhaps -- the rules are very complicated, which is why you need an accountant). As for invoicing your clients, it depends on the type of business. If you are selling goods at retail or wholesale, you normally do not put your tax ID number on the invoices you send to your customers. If you are in a service business, however, and you perform more than $600 worth of services for a customer during a calendar year, that customer is required to send you a Form 1099, with a carbon copy to the IRS. They will send you IRS Form W-9 requesting your federal ID number, and you sure as heck better have one by that time! I always put my federal tax ID number on every invoice I send to law clients. That way if they wish to send me a Form 1099 they don't have to send me Form W-9 - they just look at their latest bill and there's my number. Otherwise I would have to spend an hour a day each January fielding telephone calls and e-mail messages from people asking for my federal tax ID number. Life's too short. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com. More >>