Free Enterprise - The FindLaw Small Business Law Blog

April 2009 Archives

A study by the Kaufman Foundation indicates that entrepreneurial activity increased in 2008, to the highest level since the group began tracking such statistics in 1996. The specifics as to what types of businesses were started, however, indicate that much of this is due to people not having enough work and needing income in the downturn. One question often asked by those considering a new business is: what kinds of permits or licenses do I need?

The Wall Street Journal's blog, Independent Street, has a nice summary of the Kaiser Foundation's Index of Entrepreneurial Activity. Key take-aways are that:

  • A higher percentage of Americans started new ventures than any year since the Kaiser Foundation tracked new venture start-ups in 1996;
  • The percentage of these new ventures in "high income potential" industries (such as high-tech) went down, with more ventures in lower income industries (indicating more "necessity entrepreneurs");
  • The percentage of new business starters without a high school diploma jumped dramatically, while the percentage with college degrees went down; and
  • Construction had the most new ventures, with service industries second.

As illustrated in yesterday's run-down of some new venture ideas of FindLaw users, the types of new businesses people consider starting are only limited by the imagination. A question common to many of them is what types of permits or license are required.

After marathon efforts to renegotiate its debts, Chrysler declared bankruptcy today. Though their reorganizations don't garner massive government or media attention, many small businesses use Chapter 11 in attempts to become viable after tough times. Some small businesses receive different treatment under our bankruptcy procedures. Knowing the differences can factor into an evaluation of whether reorganization through bankruptcy might benefit a small business.

Reuters reports that Chrysler's Chapter 11 filing is the first bankruptcy by a major U.S. automaker. No doubt its reorganization, including an alliance with Fiat, will prove a massive undertaking. In Chapter 11 bankruptcy cases, a creditors' committee (typically the 7 largest unsecured creditors) plays a key role in consulting on the administration of the case, investigating the debtor's operation of the business and participating in the formulation of a reorganization plan.

Because creditors willing to serve on the committee can be harder to find in some small business Chapter 11 cases, the Bankruptcy Code provides special procedures for designated "small business cases."

Mortgage Loan Modification Negotiating Tips

For some small business owners, trouble on the home front (as in home mortgage front) threatens already precarious business conditions. Home mortgages that once seemed a good source of money for the business now could result in the need to lay off workers or even close. Homeowners with trouble making mortgage payments often hear that their best bet is to contact their lender about a loan modification. They should be well prepared when they do so.

As discussed in this blog post, home mortgages threaten millions of small business jobs in California, and likely other states as well.

Whether the problem making mortgage payments is short term or long term, the best option for homeowners often is to contact their lender to try to work out a new payment agreement. Lenders are not obligated to make mortgage modifications, however it is often in their interest to work out a feasible payment plan for the homeowner rather than foreclose and sell the property.

As discussed in this blog post, the Obama Administration's Homeowner Affordability and Stability Plan included refinancing of qualifying mortgages owned or securitized by Fannie Mae or Freddie Mac to a lower fixed interest rate (see As reported by the Washington Post, today the Obama Administration announced that the program will apply to previously excluded second mortgages.

In part to help those outside this program, the Obama plan also included $75 billion in matching cash to encourage lenders to agree to mortgage modifications. 

Here are quick tips to keep in mind when seeking a mortgage loan modification.

Toxic Mortgages, Small Business Owners and Looming Job Losses

A new study predicts that between 2 and 3 million small business jobs in California will disappear over the next 3 to 4 years. The reason? Risky home mortgages. Thought toxic home loans (and securities based on them) only caused the meltdown of financial markets? Unfortunately, due to the number of small business owners who took out mortgages to finance their businesses, those risky home loans may kill many small business jobs as well.

Prof. Samuel D. Bornstein and Jung I. Song of Bornstein & Song, CPAs & Consultants conducted a California Small Business Toxic Mortgage Survey using members of Merchant Circle, an organization including 750,000 small business owners. The survey measured how many California small business owners took out risky mortgages to finance their business (including Adjustable Rate Mortgages (ARMs), interest only and subprime mortgages, amongst others).

The survey explored how many small business owners are at risk of “payment shock” when their mortgage resets. As too many people have discovered, adjustable rate mortgages often balloon after an affordable introductory period, getting reset to higher interest rates. “Payment shock” refers to a dramatic increase in monthly payments due after the reset.

Small Business Ideas: Coming Soon to Main Street...

With layoffs never far from the news, unemployment in double digits, and hiring slowed to a saunter, it is not surprising that as big businesses scale down, new start-ups and small businesses are springing up.  In fact, a recent FindLaw survey showed that a majority of Americans have at one point started or considered starting their own business

With potentially lower initiation and operating costs and ability to capitalize on unique skills and talents to target niche consumer markets, small businesses may be better able to brace the economic turbulence. And with built-in tax incentives, it may be just the time to go big by going small.

On FindLaw Answers, the interactive message board that enables users to pose questions to the FindLaw community, the board dedicated to Small Business topics nets questions from budding entrepreneurs… ranging from unique business ideas, to logistics of starting and dissolving a business, to questions on codes and statutes in particular states… and really everything in between.

A common question from the potential small business person is about how to structure a new venture. Common legal structures for a business include sole proprietorships, partnerships, limited liability partnerships (LLC’s), and corporations. Each option has benefits and disadvantages regarding important factors such as ease and cost of creation, liability issues, and tax considerations.

Businesses large and small struggle to balance effective internet use by employees with unwanted personal use. A recent report by a Silicon Valley network security company portrays the scene at most large organizations as a free-for-all, with employees doing whatever necessary to use the applications they want and organizations knowing next to nothing about the file sharing applications running rampant on their networks. With increased risk accompanying the increased productivity technology brings, businesses should adopt a network usage policy and take a few key steps to make sure it's effective.

The technology website Ars Tecnica reported that firewall maker Palo Alto Networks recently issued its Spring 2009 Risk and Usage Report. For business owners, it paints a scary portrait. Amongst the conclusions reached:

  • Most applications found on business networks are built for accessibility and can bypass network security or allow the user to bypass security controls;
  • File sharing applications on business networks are rampant;
  • Many applications used for non-work voraciously consume bandwidth (file sharing, video, social networking applications, etc.); and
  • Businesses are spending more on their networks, but cannot control the applications living there.

So, what can a small business do? Establish and enforce a network usage policy.

Bratz, Barbie, New Hires and Info from Old Jobs

Bratz dolls may no longer be made by toy-maker MGA Entertainment after a ruling yesterday in a California federal court. The reason? A designer MGA used for the cartoonish yet scantily clad dolls for young girls was on contract for Mattel when he worked on the Bratz designs. As the downturn (and hopefully upturn) causes employment shifts, new employees and especially businesses that hire them should take care not to use work from a past job.

Doll designer Carter Bryant worked for Mattel for two stints -- from 1995 to April 1998 and then from January 1999 to September 2000, as reported by the BBC. In the legal saga following the Bratz power grab from Barbie and the toy giant Mattel, MGA insisted that Bryant came up with the Bratz idea while unemployed between his stints at Mattel. A California jury found otherwise last August. Carter Bryant settled with Mattel, and subsequently Mattel won a $100 million jury verdict. As the AP reports, yesterday's ruling rejected MGA's attempt to reduce the award, and order the Bratz brand and MGA assetts into receivership.

$90 million of the $100 million award was for intentional interference with the designer's contract with Mattel. Under his contract, Mattel was entitled to his doll designs while he worked for them. By hiring Bryant and using the designs he contractually owed to Mattel, MGA wound up losing its billion dollar Barbie nemesis.

Responding to increased frequency of having to provide customer refunds after a merchant has gone out of business, credit card processors have been requiring some merchants to set aside a cash reserve. Some processors have gone so far as to hold back funds from approved transactions until the cash reserve requirement is met. With no shortage of reminders to watch the fine print in your credit card processing statement, here are 5 tips on credit card processing companies.

Business Week reported that due to increased commercial bankruptcies, at least two large credit card processors, First Data and Elavon, have demanded that some businesses maintain a cash reserve in order to continue accepting credit card payments. Most agreements between merchants and their processing company give the processing company the right to insist on a cash reserve. Some allow the processing company to withhold money from approved transactions until the reserve amount is met.

The problem credit card processors cite is being left holding the bag after a purchaser demands a refund but the merchant has already gone under. Normally, after a customer demands a refund, their credit card company gets it from the processor, who in turn takes it from the merchant's account.

The solution, however, has some businesses being forced to go without one to two months worth of transactions.

With another reason for small businesses to hawk-eye their credit card processing statements, here are 5 tips regarding credit card processors (culled from these 7 tips compiled for the hotel industry but applicable to all small businesses):

Strapped for cash, California is considering legislation that could result in many online merchants needing to collect tax on sales to California customers. The bill, AB 178, would require collection of sales tax on sales to California customers by any online merchant who utilizes an affiliate marketer that is in California. As one would expect, California affiliate marketers and online merchants oppose the legislation.

First, we should explain what affiliate marketing is. Affiliate marketing networks are a form of "pay for performance" advertising. Ads for a merchant are placed by an affiliate (on other websites, for example), and the affiliate typically gets paid based on how many customers or visitors the ads bring to the merchant's site.

Currently, merchants who have a physical presence in California must collect sales tax from online sales to California residents. AB 178 would use California affiliate marketers to bring merchants with no physical presence in state under the duty to collect sales tax. Those with gross sales of less than $10,000 in California over the past year, however, would not be required to collect sales tax.

New York has a similar law. As recently tabulated by the Performance Marketing Alliance, states currently considering similar legislation include: Minnesota, Hawaii, Connecticut, Maryland and Illinois. There are rumors of similar initiatives in Florida, North Carolina and Tennessee.

Closing a Business: Basics of Corporate Dissolution

Many small businesses are grappling with the tough decision of whether to shut down or try to weather the economic storm. For those that must close their doors, there still remains the often laborious task of shutting down the business. What they must do depends on the type of legal entity utilized by the business, along with where they are. In the case of businesses that incorporated, shutting down involves dissolving the corporation. Here are some basics about how a corporation dissolves.

In order to dissolve a corporation, the corporation’s owners must agree to dissolve the entity by following either the procedures set out in the organizational documents for the corporation (such as its articles of incorporation or bylaws), or the rules set out in the state’s business statutes. Usually, these rules require at least a majority of the owners to agree on dissolution, but they could require a two-third’s or even unanimous vote.

Firing Employees and the Family Medical Leave Act

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It goes without saying that small businesses are having to let go of more employees than they'd like. A larger number of laid off workers means more likelihood that some of those laid off will have taken leave at some point under the Family Medical Leave Act (FMLA). Because its illegal to punish employees for taking FMLA leave, extra care need be taken in firing anyone who has taken or plans on taking FMLA leave.

First of all, what are the basics of FMLA coverage?

It does not apply to businesses with under 50 employees. FMLA applies only to workplaces with 50 or more employees for the past 20 weeks. An employee is eligible if they have worked for the employer for at least 12 months and at least 1,250 hours within the past 12 months. The FMLA does not cover independent contractors.

Today, President Obama met with top credit card executives regarding protections for cardholders. Small businesses hope that customers can keep paying with plastic, but also need to consider data safety when accepting payment. In addition to the Payment Card Industry Data Security Standard (PCI DSS) applicable to all who accept credit cards, Minnesota has enacted, and more states are considering laws making retailers liable to financial institutions for data security foul-ups. Now more than ever is a good time to make sure your business is PCI DSS compliant.

The President today called for an end to credit card practices including the abuse of sudden interest rate increases and fee changes. Obama also called for an end to the barrage of fine print and confusing rules in credit card agreements. As Bloomberg reports, he said, "[w]e want clarity and transparency from here on out."

One point on which small businesses should be clear is the need for PCI DSS compliance. If potentially losing the ability to accept card payments isn't enough of a threat, states are increasingly looking to punish merchants who don't comply with good payment data management practices.

Landlord Bankruptcy: What Happens to Commercial Leases?

Even small businesses doing well may need to brush up on the U.S. bankruptcy code -- particularly if they lease property. The uptick in bankruptcies declared by commercial landlords makes it vital to know: what happens to a commercial lease when the landlord declares bankruptcy?

As reported by the San Francisco Chronicle, the recent Chapter 11 bankruptcy filing by mall developer General Growth Properties was the largest real estate bankruptcy filing in U.S. history. General Properties owns over 220 malls around the country. Its representatives ensure that shoppers will not notice the company's restructuring.

Its tenants, however, may feel a bit less certain. As discussed regarding commercial leases of foreclosed properties, to commercial landlords, steadily paying tenants are particularly advantageous in these times. Nonetheless, if you lease, to protect your business you must be aware of the different possible scenarios that can follow your landlord's declaration of bankruptcy.

The stock market's loss of over half its value in just over half a year devastated many people's 401(k) plans. 401(k) plans represent the retirement hopes of many small business owners and their employees. With values having plummeted and more employers deciding to stop matching plan contributions, small businesses should make sure they understand their fiduciary duties in administering 401(k) plans.

Unfortunately, many people have found out that their 401(k) plan wasn't quite as conservative as they believed. In recent years, "target date" funds have become popular 401(k) plan investments. As explained by Investment News, target date funds are intended to mix investment allocations based on the participant's target retirement date. For example, in a 2010 target date fund, one would expect a conservative allocation weighted toward equities rather than riskier stocks. Except this hasn't really been the case. Investment News suggests that the magnitude of target date fund losses may be because varieties of funds were labelled "target date."

According to Investment News, Senator Herb Kohl, the Labor Department and the SEC have suggested that the asset allocation behind many target date funds was much less conservative than many participants expected. Senator Kohl's probe into target date funds may result in more regulation of how 401(k) plans are managed.

Though tanking 401(k) plans hit many small business owners personally, they also need to be aware of their fiduciary duties to participating employees.

San Diego has announced a program offering no-interest loans of up to $100,000 for small businesses to make energy efficiency improvements. Initiatives like San Diego's, and programs in other regions hope to give businesses incentives to invest in energy efficiency that will yield not only long term, but also short term benefits.

The San Diego Clean Enterprise program is a joint project by the city, the non-profit CleanTECH San Diego and San Diego Gas & Electric (SDG&E). As reported by the La Jolla Light, the loans will be for 10 years with no interest. SDG&E will provide the funds, with borrowers repaying through their monthly SDG&E bill. Examples of energy efficiency improvements include lighting retrofitting, improvements to heating and air conditioning systems, and installation of more efficient equipment.

The New York Times reports that planners from Mayor Bloomberg's office will announce an initiative to improve energy efficiency in New York's buildings. The New York Times notes that cities from Berkeley to Seattle to Austin are also attempting to make business more efficient by improving the energy efficiency of buildings. Under New York's plan, buildings will be slated for mandatory energy improvements only if an energy audit finds that improvement costs would be recouped within 5 years through lower energy bills.

The Houston Chronicle reports that yesterday the Texas Senate passed legislation to vastly expand the use of solar energy in the state. In addition to requirements that developers offer solar panels in subdivisions of more than 50 homes, the bill contains rebates for small businesses that install solar collectors.

Commercial Foreclosure: What Happens to Commercial Leases?

Though residential real estate markets figured largely in our economic woes, it looks like commercial real estate has begun, and will continue to suffer a wave of foreclosures. If your small business has been trying to meet its mortgage while income has slowed, this is not news to you. However, many small businesses who lease their space need to be aware of what happens to commercial leases when the property goes into foreclosure.

The Las Vegas Sun recently reported that 26% of the city's commercial real estate market is in default or has entered foreclosure. The Sun cites statistics showing Las Vegas' troubled commercial real estate loans skyrocketed from $4.7 billion in early 2008 to $6.4 billion now.

So, what happens to a commercial lease when the property enters foreclosure?

Lately we've heard much talk about the government attempting to spur innovations in energy and health care technologies. One way the federal government encourages innovation in specific areas of technology is through the Small Business Innovation Research Program (SBIR). Now, venture capital backed companies want access to the program as well. Here are some basics about the SBIR program and who is eligible to participate.

As the Wall Street Journal reports, companies backed by equity investors (typically venture capitalists or angel investors), and their investors, want some stimulus from the Small Business Administration. They want SBA assistance that is typically reserved for non-venture capital backed companies. Specifically, they would like a federal seed fund to back early stage equity investment in start-ups, tax credits, and perhaps most importantly, more access to the SBIR program.

The SBIR program is a highly competitive award system set up to fund small businesses to propose and perform specific research and development that meets stated needs of the different agencies within the federal government. It contemplates three phases: Phase 1 to study feasibility for up to 6 months with an award of up to $100,000; Phase II for up to 2 years of development with an award of up to $750,000; and Phase III commercialization through non-SBIR money.

Participating agencies, who select recipients and provide the funds, include: Department of Agriculture, Department of Commerce, Department of Defense, Department of Education, Department of Energy, Department of Health and Human Services, Department of Transportation, Environmental Protection Agency, National Aeronautics and Space, Administration National Science Foundation and Department of Homeland Security.

Investor backed companies would like to change who is eligible for SBIR awards.

Today the Supreme Court rejected an appeal by an ex-CFO many thought would be the first whistleblower protected under the Sarbanes-Oxley Act. While statistics indicate that employers have an almost insurmountable likelihood of winning Sarbanes-Oxley whistleblower cases, businesses are obligated to comply with a wide variety of whistleblower protections. Increased need to lay off workers calls for greater care in avoiding retaliation against a whistleblower.

Though newer Ponzi schemes and casino style investment banking have pushed the shenanigans at Enron into memory, the legislation passed in Enron's wake (the Sarbanes-Oxley Act) was meant to reign in duplicitous accounting practices and financial reporting. Under the Act, whistleblowers who report violation are to be protected against retaliation from their employer.

As CFO magazine reported in 2007, David Welch's case was the first Sarbanes-Oxley whistleblower case to make it all the way through the federal whistleblower claim process. He had been CFO at Cardinal Bankshares Corp. Fired in 2002 after reporting violations of Generally Accepted Accounting Principles (GAAP) as well as internal controls weaknesses, Welch won at the administrative law judge stage. As reported by the AP, this decision was later reversed by the Department of Labor's review panel, whose opinion was upheld all the way up the chain to today's Supreme Court ruling.

Though many doubt how well whistleblower protections work those reporting shady accounting, whistleblower protection in general is something all businesses should understand, particularly in a climate of layoffs.

Recent discussion of whether C.I.A. interrogators should be held liable for acts now considered to be torture highlights the questions that come up when deciding who should be held to account when an employee violates the law. Particularly because (unlike the federal government) small businesses can't claim sovereign immunity if sued, they must pay strict attention to the doctrine of "respondeat superior." This holds that an employer is liable for the bad acts of an employee if the employee was acting within the scope of their employment.

Hopefully most small business owners and employees will never have to confront questions of waterboarding. It's also likely that any bad acts committed by most employees will not have been specifically given the green light by written opinions from their boss' lawyers. This is good because unlike the federal government, businesses cannot claim sovereign immunity when they get sued.

COBRA Benefits, Premium Subsidies and Small Business Employees

Saturday was the deadline for many workers who previously declined COBRA coverage to be notified of their second chance to take it. This is part of the new government subsidy of up to 65% of eligible participants' premiums. Many businesses with less than 20 employees, however, wonder whether their employees have any access to the new benefits.

Under federal law, COBRA continuation of health plan benefits are available to people who participated in a group health plan of an employer with 20 or more employees.

Many states have enacted "mini-COBRA" laws to provide similar benefits to workers at smaller businesses. As reported recently by the AP (and compiled by the group Families USA), the states that do not have mini-COBRA benefits are: Alabama, Alaska, Arizona, Delaware, Hawaii, Idaho, Indiana, Michigan, Montana, Pennsylvania (legislation is pending) and Maine (only temporarily laid off and injured workers are eligible).

Can Men Be Hooters Girls? When Can Businesses Hire Only Women?

We all know that generally it’s illegal to discriminate in hiring based on a variety of characteristics. We also are all familiar with jobs that seem only to be filled by one gender or another. When is it legal to hire only women or only men?

Title VII prohibits employers from discriminating in employment decisions based on gender, race, national origin, religion or age. Many states make it illegal  to discriminate based on sexual orientation or transgender status.

Title VII also, however, allows for discrimination based on protected characteristics (except race), when that characteristic is what is called a “Bona Fide Occupational Qualification” (BFOQ). To be a BFOQ, being a member of that group is essential to the job.

To use this exception to the rule against discrimination, an employer must be able to prove that no member outside the desired group could perform the job. A simple example would be a job for a women’s bathroom attendant.

Employers can, and often do, however, go too far. For example, airlines have been prohibited from hiring only female flight attendants because men too can perform the basic function of the job.

Yesterday French workers at a subsidiary of Hewlett Packard released five of their bosses, whom they had sequestered for 10 hours in a standoff negotiation over jobs. Though American workers rarely adopt such radical tactics when their jobs are threatened, lately many employees, and their bosses wonder if, when and how employers must warn employees of impending layoffs.

The LA Times reported that the French hostage situation at FM Logistic ended peacefully. The managers were released in exchange for assurance that no criminal complaints being filed and that management would put forth new proposals for saving jobs.

It's hard to imagine this happening (or ending without firings) in the US. Many business owners are, however, having to imagine and experience laying off members of their staff in an attempt to trim costs. They, and their employees, often wonder what kind of warning must be given when a layoff happens.

The Arizona chapter of the Small Business Administration released figures showing continued decline in SBA backed lending to the state's small businesses. Other places, such as Florida, report a similar trend. This is despite recent government stimulus to bolster SBA backed loans. Lenders blame the government strings attached to the program. Small businesses blame stingy lenders. No matter who's to blame, there are ways to improve the chances of your business getting an SBA backed loan.

As the Phoenix Business Journal reports, for the fiscal quarter that ended March 31, 2009, SBA backed loans were down 67% in number and 65% in amount from the previous year. The Orlando Sentinel reported on recent attempts to open dialogue between small businesses and lenders in Northern Florida, where the rate of lending has plummeted.

Lenders blame the conditions attached by the federal government (such as capped interest rates) while would-be borrowers accuse lenders with money of cherry-picking only the most risk-free applicants.

So, what are the criteria for getting an SBA backed loan? According to the SBA, the primary consideration in obtaining an SBA backed loan is repayment ability with future cash flow from the business. Other important factors include management capability, good character, collateral and owner investment in the business.

With these factors in mind, here are 5 tips when applying for SBA backed loans:

One industry reporting record numbers for 2008? Data theft. A report released this week concluded that more than 285 million records were compromised in 2008, supposedly more than the previous four years combined. As one part of their defense against identity theft, businesses of all varieties should make sure to comply with federal Fair and Accurate Credit Transactions Act (FACTA) obligations to properly destroy certain types of consumer and employment information.

The Washington Post points out that credit card thieves have gathered so much personal data that they've driven down its price on the black market.

As Ars Technica quotes from the Verizon 2009 Data Breach Investigations Report, "[t]he best defense against data breaches is, in theory, quite simple--don't retain data. ... the next best thing is to retain only what is required for business or legal reasons, to know where it lives and flows, and to protect it diligently. The majority of breaches still occur because basic controls were not in place or because those that were present were not consistently implemented across the organization."

Part of the basic controls all businesses should have in place is FACTA compliance.

With firings up, so are claims of wrongful termination. The Equal Employment Opportunity Commission (EEOC) reports being swamped by claims of workplace discrimination. More than ever, small businesses need to understand what constitutes wrongful termination.

According to, the EEOC received a record breaking 95,402 workplace discrimination claims in fiscal year 2008. This is 15% more than 2007, and the highest number since the EEOC began in 1965. With more layoffs so far in 2009 and more predicted to come, now more than ever it is vital that small businesses take care when firing employees.

So, what makes a termination wrongful?

SBA 504 Loans at Record Low Interest Rates; SBA 504 Loan Basics

This month, the Small Business Administration has offered historically low interest rates on SBA backed 504 loans. For the small businesses in a position to capitalize on weakened commercial real estate markets, SBA 504 loans can be a good source of long term capital. Here are some 504 loan basics.

According to a press release from NADCO, the trade association for Certified Development companies (CDCs), the effective interest rate on 504 loans (including servicing fees) is currently 5.25%. Additionally, recent stimulus legislation that pumped up SBA backing of 7(a) loans also eliminated the SBA borrower's fee from 504 loans.

So, what are 504 loans and what can small businesses do with them?

Small business layoffs have been real to many people for a while now, but apparently not real enough for the folks over at Fox. The network will air a reality show — “Someone’s Gotta Go” — portraying a series of small businesses in which employees will choose who gets paid more, who gets less, and of course who gets the axe. Perhaps not while in from of a tv camera, but many small business owners face the question: which employees must receive equal pay?

As WSJ’s Independent Street quoted one executive working on the show, “We’re always trying to find the next thing that is topical and timely in the zeitgeist.” Layoffs are definitely “in the zeitgeist.” The fact that a reality show about them will enter the zeitgeist may be more depressing than the layoffs themselves.

The show aims to let employees in on the process, because, as Fox reality chief Mike Darnell told Variety, “When someone is arbitrarily let go the first reaction usually is ‘How come that person was fired when another idiot is still here?’” Employees also often wonder who gets paid more and why.

So, unless adopting the “Someone’s Gotta Go” democratic model of employees deciding who gets paid what, when employers decide people’s compensation, which employees must be paid equal wages?

The National Federation of Independent Businesses (NFIB) released today its Small Business Economic Trends for March. It is not a mood lifter. In terms of small businesses optimism, the prospect of continued layoffs, and reduction of capital spending, the report hovered near record bad numbers. With small businesses perhaps needing to continue layoffs in months ahead, and more newly unemployed individuals looking to compete, it's good to keep in mind exactly what departing employees may and may not do in regards to customers.

In addition to the second lowest level of confidence measured in its 35 year history, the NFIB report showed that about 12% of small businesses surveyed said they planned to cut jobs in the next 3 months. About 11% (a record high) reported that they had recently reduced employee compensation.

This means that more small businesses will deal with the unfortunate reality of continued layoffs. Some of those laid off may be looking to start up operations of their own, or may be lucky enough to get a job with a competitor. This can result in conflict over a small business' customers with whom the departing employee may have a relationship.

So, what are the rules of the road?

Odds are none of your business' supplies or shipments to customers is on one of the ships pirated off Somalia, but with the pirates upping the ante in the last day, who knows. Voice of America reports that they have seized 4 more ships off of Somalia in the last 24 hours. Even if less exotic, all small businesses have encountered shipping problems. One basic rule that applies to goods shipped by many small businesses is the "30 Day Rule."

If a business takes orders by phone, mail, fax or internet, it is covered by the Federal Trade Commission's Mail or Telephone Order Merchandise Rule (the 30 Day Rule). It regulates basic standards for when customers can expect shipment.

The 30 Day Rule requires that if you advertise the ability to ship within a certain amount of time, you must have a reasonable basis for thinking you can do so. Should you not mention when you can ship, you must have a reasonable basis to believe that you can ship within 30 days (hence the name).

With more businesses needing to employ independent contractors versus full-time employees, the all important line between employee and contractor has been in the news again this tax season. One way to clarify matters and avoid misclassifying an employee: an independent contractor agreement.

As discussed in this blog post, getting the contractor vs. employee distinction wrong can have dire consequences. The best way to get it right is to do so from the beginning.

One highly advised way to do this is to put an independent contractor agreement in place. Here are five key things an independent contractor agreement can do to help you.

For weeks there have been rumors of a coming Small Business Administration emergency loan program. Though its details are not official, here are some indications of what to expect from the program.

Much of the small business stimulus funded by the American Recovery and Reinvestment Act of 2009 (ARRA) involved expanded SBA backing of loans to small businesses. Details of the expansions to 7(a) loans and the attempt to stimulate small business lending were discussed in this blog entry.

As the Wall Street Journal’s Independent Street noted, some critics of the government’s small business efforts to date point to the fact that many small business will not benefit from more 7(a) SBA backed loans because they will not be able to obtain them. Many businesses in more immediate peril have waited for details on what if any emergency loan assistance the government may offer.

In addition to the expanded 7(a) loans, ARRA also funded a yet to be formalized SBA program to provide emergency loans to qualifying small businesses. The SBA has released few details, but has temporarily dubbed the program America’s Recovery Capital (ARC) loan program.

Here are some details about what we can expect.

Bankruptcy, Reorganization and Commercial Leases

Chapter 11 bankruptcy allows many businesses a chance to reorganize and attempt a comeback in tough times. However, we also see the remnants of those who do not make it, such as the dormant Circuit City stores still haunting many US shopping centers. Many business owners have been forced to face the realities of how commercial leases can affect their ability to reorganize.

Four years ago, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). One of the many features of bankruptcy law it changed was how  bankruptcy courts deal with the commercial leases of businesses attempting to reorganize.

Previously, companies in bankruptcy had a 60 day period to assume or reject their existing commercial lease, however, this period could be extended indefinitely by the bankruptcy court.

Under the BAPCPA, this provision was changed to allow a maximum period of 210 days for the business attempting reorganization to either assume the existing commercial lease (and all past and future obligations under it), or reject it and vacate.

Cities including Phoenix and Portland are considering streamlining their approvals and permitting processes for small businesses. Keeping in mind the significant hurdles zoning and permits can represent to small businesses, basic zoning tips are useful to those making a move and those just starting out.

As the Arizona Republic reports, Phoenix is considering making it a bit easier for small and medium sized businesses to get through the arduous planning and permitting process required to legally do business in the city. Noting that the city does fairly well when dealing with mega-businesses who enroll high priced zoning attorneys, members of the City Council and Mayor Boyd Dunn recognize that small businesses deserve improved service. City Councilman Jeff Weninger would like to see a one-stop-shop for planning and permitting to avoid small businesses getting different answers from different arms of the city government.

In a similar vein, the Portland Business Journal reports that Portland is thinking about streamlining its permitting processes. Its City Council is considering a measure that would consolidate the now separate bureaus of transportation, water, development services, environmental services, and the parks department into one agency.

More efficient planning and permitting systems have been desired for years, but perhaps the current need for stimulus will make them a reality.

Under old or new permitting systems, zoning often stands out as one of the most vital planning issues. Here are a few zoning tips to keep in mind.

After years of contention between the online review site and businesses, Yelp has agreed to allow business an opportunity to respond on the site to negative reviews. With the growing power of online reviews, many businesses wonder whether customer reviews can constitute defamation.

As reported in the New York Times, starting next week, Yelp will allow business owners to publicly respond to reviews on the site. It's been a long process getting to this point. A year ago, Yelp began allowing businesses to contact negative reviewers via email. Now they will be able to address complaints in a manner viewable to everyone.

So, can someone review your business in a manner that constitutes defamation? In short, yes. But holding them to account is an uphill battle.

State laws concerning defamation vary, but generally, defamation has four elements:

  1. A false and defamatory statement concerning the plaintiff;
  2. Publication of that false and defamatory statement;
  3. At least negligence on the part of the person publishing the statement; and
  4. Damages to the plaintiff (in defamation cases, this is damage to reputation).

What are some of the difficulties faced in pursuing a defamation case over an online review?

Interchange fees paid by merchants to credit card companies when customers purchase with plastic have reportedly risen 400% in recent years. Merchants have organized, and are pressing Congress to do something about it.

As the New York Times’ blog, The Caucus, reported, last week the House and Senate held hearings on potential consumer credit card legislation. A group called the Merchants Payment Coalition (MPC) has targeted key House districts with an intensive media campaign to raise awareness about interchange fees.

Here is the ad they are running:

The deadline for companies to petition to hire highly skilled foreign workers on H1-B visas ended this week, but has been extended. Due to lack of demand for new employees, the limit on H1-B visas has not been reached.

The government issues a limited number of H1-B visas per year. The cap is 85,000 (including 20,000 for foreigners with graduate level training in the US). Businesses petition to be able to hire H1-B workers. They typically hit the 85,000 limit days after the application period opens. As reported by the Los Angeles Times, however, this year’s application period ended Tuesday with over 30,000 slots left.

Companies can continue to petition for H1-B slots until the cap is reached, which could take until October.

H1-B visas are designed to help US employers fill temporary shortages in specialty jobs. Examples of specialty job areas include architecture, engineering, mathematics, physical sciences, social sciences, medicine and health, education, business specialties, accounting, law, theology, and the arts.

As the LA Times notes, H1-B visas have drawn criticism from those wanting to insert a requirement that no US citizens be available for the job before an H1-B worker is used. Additionally, as noted in Business Week, some allege that the program includes not only the “best and brightest,” but also lower salaried foreign workers, and puts them at the mercy of employers who control their ability to remain in the US.

Here are some basics about how H1-B visas work.

Each week seems to include the announcement of a new prong of federal or state response to the economic downturn. The multitude of stimulus benefits can become confusing, even in particular stimulus areas such as incentives to go green. To help navigate these green benefits, the Database of State Incentives for Renewable Energy (DSIRE) offers an invaluable map of federal, state and municipal incentives for both renewable energy use and energy efficiency.


DSIRE is a project of the North Carolina Solar Center and the Interstate Renewable Energy Council (IREC), funded by the U.S. Department of Energy. It updates its database of green incentives regularly, including those added by the American Recovery and Reinvestment Act of 2009.


When searching state and federal incentives, here are some areas to look for possible benefits for small businesses.

Fair Advertising Guide for Small Businesses

With businesses needing to make the most effective use of smaller advertising budgets, they can be pushed perhaps too far in claims they wish to make about their product or services (or those of a competitor). It's a good time for small businesses to remember the basics of unfair and deceptive advertising rules.

As explained by the Federal Trade Commission (FTC) in its Advertising FAQ for small businesses, the Federal Trade Commission Act mandates that advertisements must:
1. be truthful (and non-deceptive);
2. have evidence to back their claims; and
3. not be unfair.

Truth and evidence seem simple enough, but what does it mean for an ad to be "deceptive" or "unfair"?

A twenty plus year Chicago area Dunkin' Donuts franchisee, Walid Elkhatib, must soon remove the Dunkin' Donuts signs outside his two shops. The dispute was over pork, specifically, pork in breakfast sandwiches and Mr. Elkhatib's religious proscriptions against eating or handling it. Mr. Elkhatib's need to rebrand his business highlights a downside of some franchise agreements, and also calls for care when contemplating one.

As the Chicago Tribune reported, Elkhatib began operating as a Dunkin' franchisee in 1979. At that point Dunkin' didn't sell any breakfast items with pork. In 1984, it began offering breakfast sandwiches with bacon, pork and sausage.

As the Seventh Circuit would explain on appeal of the later lawsuit, Dunkin' had no problem with Elkhatib's refusal to sell pork at his first, nor at his his second franchise. For almost 20 years he operated Dunkin' shops without pork and without problems from Dunkin'. Dunkin' even provided signs stating that no meat products were available.

Things changed in 2002 during a meeting about relocating one of his shops, when Elkhatib reiterated to Dunkin' supervisors that he would sell breakfast sandwiches, but not with pork. Little did he know, but that sealed Elkhatib's fate as a Dunkin' franchisee.

Multiple New York eateries have drawn criticism for changing their names to "Obama Fried Chicken." Aside from questions about what such a name can be read to imply, this move begs the question: can the President's name be used on businesses or products?

As the New York Daily News reports, fast food joints in Manhattan and Brooklyn have taken the name Obama Fried Chicken. One used to go by S&T Fried Chicken, and the other Royal Fried Chicken.

Why? According to the Brooklyn restaurant's manager, "[b]asically, the owner loves Obama. He loves him seriously. He supports him." Or there's also the potential to cash in on the new President's popularity.

The name changes have drawn foreseeable outrage by some angered at the racial overtones of coupling our first black President with fried chicken. Putting aside questions of race and taste, what are the rules for use of a President's name?

2008 Tax Tips: New Carry-Back Options for Net Operating Losses

The American Recovery and Reinvestment Act of 2009 changed the tax code to increase the period of time over which small businesses may offset 2008 losses with prior year tax refunds. To maximize benefit from the new rules, care should be taken in choosing how to use the carry-back provisions and selecting the period over which to offset 2008 losses.

As explained by AICPA's Tax Insider, under the old rule (IRS Sec. 172), businesses could "carry-back" net operating losses (NOLs) in a given tax year over a period of two years or carry them forward 20 years. This means taking the net operating losses and applying them against taxable income from prior years or against future taxable income. If carried back over prior years, the business would get a refund corresponding to taxes previously paid on now reduced prior year income.

Under the new rule, eligible small businesses can carry-back NOLs against a period of 2, 3, 4 or 5 years going back to 2003. To qualify, a small business must have an average gross income of less than $15 million over the past three years. Sole proprietorships, partnerships and corporations are eligible, but related businesses must be aggregated.

On this year's return, businesses must make an irrevocable election of how they will carry back or carry forward 2008 NOLs. Those who have already filed may still make use of the extended carry back years, but must elect to do so by the later of April 17 or six months after the due date of the return (without extensions).

Here are some tips for making effective use of the extended carry-back years.

During a House Small Business Committee hearing on the burdens of tax compliance on economic recovery, House Representatives urged the IRS to lighten up on the recently booming numbers of audits on small businesses. With the IRS’s recent penchant for auditing small rather than large businesses, being prepared for a business audit can save money, time, and headache.

Today’s hearing was titled “IRS Oversight: Are Tax Compliance Costs Slowing the Economic Recovery?” As the Wall Street Journal reported, Committee Chairwoman Nydia Velázquez began by pointing out that from 2005 to 2007, IRS audits of small businesses went up 41% while audits of large businesses went down 40%.

She went on to say that “[s]mall firms have been battered enough by the recession. The last thing they need is the added nightmare of an IRS investigation. In the face of a deepening recession, tax policies should be a means for small business growth, and not the straw that breaks the camels back.”

In case your small business faces a potential audit this year, here are a few tips to help you prepare.

Small businesses are using a rising percentage of independent contractors. Currently, just under 4% of workers used by small businesses are independent contractors. Though important before, the line between classifying someone as an employee versus an independent contractor has become even more crucial.

As Small Business Trends describes, SurePayroll tracks the payroll trends each month for the 25,000 small businesses it serves. Each month's Small Business Scorecard includes a Contractor Index -- the percentage of independent contractors versus employees used.

As of the end of March, the Contractor Index reached 3.88, meaning that almost 4 of every 100 workers engaged by small businesses were independent contractors. This is up from 3.82 the month before, and also the highest Contractor Index measured yet by SurePayroll.

The increased use of independent contractors means the notorious line between contractor and employee is even more important. Unfortunately, different government agencies use different criteria for deciding when someone is an employee versus a contractor. Because tax liability looms as perhaps the most feared ramification of misclassifying a worker, here is a brief explanation of how the IRS makes the call.

Today a divided Supreme Court issued an opinion that workers covered by collective bargaining agreements which contain an arbitration clause must submit claims of age discrimination to arbitration rather than sue in federal court. Overturning the court below, today's decision further illustrates the strength of arbitration clauses in a growing variety of employment disputes.

The 14 Penn Plaza LLC v. Pyett opinion released today (discussed in detail on FindLaw's Law & Daily Life) held that a union can collectively agree to arbitrate claims of age discrimination and thereby waive individual workers' rights to bring claims under federal law. It also serves as a general reminder of the power of arbitration clauses in employment contracts.

Here are a few tips about making an employment arbitration clause enforceable.

284,000 Small Business Jobs Lost in March; COBRA Coverage Basics

The payroll processing giant ADP released its monthly employment report today. It stated that of the 742,000 non-farm private jobs lost in the U.S. in March, small businesses accounted for 284,000. With job loss numbers exceeding expectations, many small businesses will need to know who is entitled to COBRA health coverage and what the employer must do.

ADP’s Small Business Report indicated that of the 284,000 jobs shed by businesses with fewer than 50 employees, 173,000 were in service industries, and 111,000 in goods producing sectors. More jobs were cut in March than February, when ADP reported just under 700,000 total non-farm private jobs lost, and 262,000 small business jobs lost.

Many small businesses face the need to trim their size through either layoffs or reductions in work hours. As they do, they need to know who is eligible for COBRA continuation coverage and what employers are obligated to do regarding COBRA.