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Business Basics 104

Part 1 – How to Form a Business, Sole Proprietorship and Partnership

The form of your business can have a tremendous impact on its long-term success. The three major forms of business ownership are sole proprietorships, partnerships and corporations. Each has pros and cons.

A sole proprietorship is a business owned and usually managed by one person. When two or more people legally agree to become co-owners of a business, it’s called a partnership. While these two forms of organization are relatively easy to form, there are advantages to creating an entity that is distinct from its owners. A corporation is a separate legal entity with authority to act and have liability apart from its owners. There are several options for a corporate entity, the most popular being the limited liability company, or LLC.

Sole Proprietorship

This is the easiest to start and end, all you need to do is just start or stop, as the case may be. You may need a license from your local government, but this is typically a simple task. All of the sole proprietorship’s profits are taxed as personal income of the owner, and the owner pays normal income tax on that money. However, the owners do have to pay the self-employment tax (social security and medicare), and have to estimate their taxes and make quarterly payments to the government to avoid penalties.

On the down side, a sole proprietorship offers no protection to its owner in terms of liability. In fact, the sole proprietor has unlimited liability, including the risk of personal losses. The sole proprietor and business are treated as one, so any debts or damages incurred by the business are those of the owner. This is a serious risk to be discussed with a lawyer, accountant, insurance agent and others.

Partnership

A partnership is a legal form of business with two or more owners. It can be a general partnership, a limited partnership or a limited liability partnership, and while not always required, it is wise to put the relationship in writing. In a general partnership, all owners share in operating the business and assuming liability for the business’s debts. A limited partnership has one or more general partners and one or more limited partners. The general partner is an owner with unlimited liabiity and is active in managing the company. Every general partnership has to have at least one general partner. A limited partner is an owner who invests money in the business but does not have any management responsibility or liability for losses beyond her investment. Limited liability means that her liability for the company’s debts is limited to the amount she put into the company, and her personal assets are not at risk. The limited liability partnership (LLP) was created to limit the disadvantage of unlimited liability. It limits the partners’ risk of losing their personal assets to the outcomes of their own acts and omissions as well as those they supervise. A limited partner in an LLP can operate without fear that one of his partners might commit an act of malpractice resulting in a judgment that relieves him of his personal assets. Many states, however, do not extend this personal protection to contractual liabilities such as bank loans, leases or business debt of the LLP.

It may be easier to own and mange a business with one or more partner. While you might excel at marketing, your partner might be skilled at accounting. When two or more people pool their money and credit, paying the rent, utilities and other bills becomes easier. It is also easier to manage the day-to-day affairs of the business when you have partners. Having one or more partner can free up time for you away from the business, as well as provide different skills and perspectives. Partnerships tend to survive longer than sole proprietorships, and like a sole prop, the profits of parnerships are taxed as personal income of the owners.

On the flip side, conflict and tension are always possible when two or more people are involved. In addition, sharing risk also means sharing profits. Plus, each general partner is liable for the debts of the business, regardless of who caused the problem. A general partner is liable for her partner’s mistakes as well as her own so, like a sole prop, her personal assets are at risk. A partnership is also more difficult to terminate than the sole prop. Although you can quit, questions remain about who gets what and what happens next.

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Business Basics 103

Part 3 – Corporate Social Responsibility

Corporate social responsibility (CSR) refers to companies as good citizens, concerned with the welfare of society and not just the owners. CSR is based on fairness, integrity and respect. While a company’s loyalty and obligation is to its owners, being a good corporate citizen can increase profitability in the long run. Companies with a good CSR reputation are cosidered ethical and often attract and retain better employees, enjoy greater employee loyalty, and draw more customers.

There are a variety of methods for CSR, including corporate philanthropy, corporate social initiatives, corporate responsibility and corporate policy. In addition to money, many companies allow their employees to volunteer during company time.

We know that companies have a responsibility to customers, pleasing them by offering real value. All things being equal, customers tend to favor the socially conscious company over its less socially conscious competitors. In fact, customers are often willing to pay more for goods from the socially responsible company. Thus CSR is also a tool to attract new customers. The question then becomes, how to make customers aware. Social media has become a low-cost, efficient way of conveying a company’s CSR efforts, allowing companies to reach and interact with a broad and diverse audience. However the company must live up to its hype or face dire consequences. If a company does not follow through on its CSR as claimed, it loses customers’ trust; customers do not want to do business with a company they don’t trust.

Many investors also believe that it makes financial sense to invest in companies engaged in CSR , and that ethical behavior adds to the bottom line.

Companies that treat their employees with respect usually earn the respect of their employees. This mutual respect can have a significant impact on the company’s profit. Retaining good employees saves money, is good for business and also good for morale. A disgruntled employee can wreak havoc on a business, thus loss of employee commitment, confidence and trust in the company can be extremely costly.

CSR has many benefits, each of which can increase a company’s profitability while also doing good for society as a whole.

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Business Basics – 103

Part 2 – Management’s role in setting ethical standards

Ethics isn’t so much taught as it is picked up vicariously. We tend to learn our standards and values based on observing what others do, not what they say. Organizational ethics begins at the top, with leadership and strong managers helping to instill corporate values in employees.

Intra-company relationships should be based on fairness, honesty, openness and moral integrity. Trust and cooperation between workers and managers is built on these foundational structures. The same applies to business-to-business relations as well. Businesses managed ethically often enjoy many benefits, such as maintaining a good reputation, keeping existing customers and attracting new ones, avoiding lawsuits, reducing employee turnover, pleasing customers and employees, and simply doing the right thing.

While some managers think ethics is a personal matter, having nothing to do with management, and that they are not responsible for their employee’s misdeeds, the business environment has moved the other way, that ethics has everything to do with management. There is recognition that individuals typically don’t act alone, they need the direct, or even implied, cooperation of others to behave unethically within a corporation. For example, poorly designed incentive programs might reward employees for meeting certain goals, and in order to meet these goals they need to act in their own best interests rather than the best interests of the customers. Here the message is clear, while their managers don’t directly say to deceive customers, overly ambitious goals and incentives can create an environment in which unethical actions are likely to occur.

A popular trend is that companies are adopting written codes of ethics. While these codes vary greatly, they fall within two broad categories: compliance-based and integrity-based. Compliance-based codes emphasize preventing unlawful behavior by increasing control and penalizing wrongdoers, while integrity-based codes define the organization’s guiding values, create an environment supportive of ethically sound behavior, and stress shared accountability. Stated differently, integrity-based codes of ethics go beyond legal compliance and create an environment emphasizing core values such as honesty, fair play, good customer service, a commitment to diversity and community involvement.

Business ethics should include the following:
1. Top management should adopt and unconditionally support a written code of conduct.
2. Employees must understand expectations for ethical behavior, that it comes from the top, and that senior management expects all employees to act accordingly.
3. Managers and other key personnel must receive training on the ethical implications of business decisions.
4. The company should create an ethics office, where employees can communicate freely. Make it clear to employees that whistleblowers are protected from retaliation.
5. Pressure to ignore ethics programs often comes from the outside. Help employees to resist such pressure by ensuring outsiders such as suppliers, subcontractors, distributors, customers, etc. are aware of the company’s ethical standards.
6. The code of ethics must be timely enforced if violated.

Enforcement might be the most critical component, it communicates to employees that the code is serious; a company’s code of ethics is worthless if not enforced. Select an effective ethics officer to set a positive tone, communicate effectively, and relate well with all levels of employees. The ethics officer should be comfortable in the roles of counselor and investigator, should be trusted to maintain confidentiality, conduct objective investigations, and ensure fairness. This demonstrates to stakeholders that ethics is important in eveything the company does.

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Paycheck Protection Program Update

SBA Issues Guidance on Good-Faith Certification

In order to receive a Paycheck Protection Program (PPP) loan, borrowers must generally certify that current economic uncertainty renders such a loan necessary to support ongoing operations. Throughout the month of May, the Small Business Administration (SBA) has been updating its PPP FAQs as they relate to this certification. On May 13, 2020, the SBA again updated its FAQs to address certification of economic uncertainty in light of COVID-19. Specifically, this update provides further guidance on the consequences of the failure to certify appropriately, including the requirement to repay any PPP loan. Additional guidance on how the SBA will approach the certification issue is outlined below.

Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?  Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue:  Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.  SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.  Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.

SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.  

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Force Majeure Contract Clauses

COVID-19 has caused us to take a deeper look at many of our business practices, including the physical workplace, business plans, and emergency contingency plans. Business contracts are another area that need review.

Business agreements routinely include boiler plate language, such as a force majeure clause. This language protects the parties in the event of an unlikely circumstance that would significantly impair either or both parties’ ability to perform, such as fire, war, flooding, earthquake and the like. While these clauses have rarely been relevant, the pandemic requires us to take another look.

One of the benefits of force majeure clauses is that they protect a party that is unable to perform from claims of breach of contract and related damages resulting from non-performance. The events listed in force majeure clauses differ from a breach of contract scenario because the party did not choose to not perform, rather circumstances beyond its control caused its inability and thus failure to perform.

If your business cannot perform under a contract due to COVID-19, either because of the virus itself or the government’s response to it (shelter in place orders, quarantine or other governmental restraints), look at your existing contracts to determine whether each has a force majeure clause and, if so, whether it is broad enough to include the current pandemic, and how the parties agreed to proceed in the event the clause is triggered. If there is no force majeure clause, or if it is not broad enough to cover COVID-19, there are other legal defenses that can help you, such as frustration of purpose and impracticability.

And while force majeure clauses and other defenses may be available, the best first strategy is to communicate with the other party to the agreement. Using common sense, issues related to non-performance or inability to perfom can hopefully be resolved without resorting to legal action.

Until now, virus, pandemic, quarantine and the like have not typically been listed in force majeure clauses. Many businesses are taking the time now to update their contracts to include such circumstances as a hedge against future unknowns.

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Business Basics – 103

Part 1 -The responsibility of businesses to their stakeholders: customers, investors, employees and society

Mover/entrepreneur Aaron Steed recognizes that “it [isn’t] so much about how we moved furniture, it was about how we made our clients feel.” This young man understands that the customers’ experience is critical, and in fact it is that same attitude that has led to the huge success of his moving company.

Aaron and his brother, Evan, of Meathead Movers, early in their young business, began moving women out of domestic abuse situations for free. They also implemented a policy of hiring student athletes: respectful, clean-cut, drug-free. These ethical entrepreneurs are moved by each call they receive from a domestic abuse survivor thanking them for turning something so bad into a celebration of moving to their new homes and new lives. And this, in turn, has led executives and employees of domestic abuse centers to recommend Meathead Movers throughout their local non-profit community, resulting in huge growth for the business.

Ethics is more than legality. A society gets into trouble when people consider only what is illegal and not also what is unethical. Ethics and legality are two very different things. Although following the law is an important first step, behaving ethically requires more than that. Ethics reflects people’s proper relationships with one another: How should we treat others? What responsibility should we feel for others? Legality is narrower; it refers to laws we have written to protect ourselves from fraud, theft and violence. Many immoral and unethical acts are legal nonethless.

We define ethics as society’s accepted standards of moral behavior; behaviors accepted by society as right rather than wrong. Many people have few moral absolutes, deciding on a situation by situation basis. They seem to think that what is right is whatever works best for them, that each person has to work out for himself the difference between right and wrong. This thinking may be part of the behavior that has led to scandals in both government and business.

This is not the way it always was. In the United States, for example, with so many diverse cultures, it might seem impossible to identify common standards of ethical behavior. But this is not true. Common statements of moral values include integrity, respect for human life, self-control, honesty, courage and self-sacrifice. Cheating, cowardice and cruelty are commonly deemed wrong. And of course there is Golden Rule: Do unto others as you would have them do unto you.

Ethics begins with each of us. It is easy to criticize business and political leaders for moral and ethical shortcomings. Managers and workers often cite low managerial ethics as a major cause of US businesses’ competitive problems. But employees also frequently violate safety standards, or goof off during the work week. Adults in general are not always as honest or honorable as they should be. Even though volunteerism is at an all time high, 75% of our population do not give any time to the community in which they live. Plagiarism is the most common form of cheating today. And while most teens believe they are prepared to make ethical decisions in the workplace, more than half of high school students admit they have cheated on tests in the past year. Studies have found a strong relationship between academic dishonesty and workplace dishonesty.

Choices are not always easy, and the obvious ethical solution may have personal or professional drawbacks. Aaron and Evan Steed were young entrepreneurs, scraping by, yet due to their sense of right and wrong decided to offer free services to domestic abuse survivors. Non-paying customers certainly pose drawbacks, especially for a new enterprise. But their ethical convictions not only lead them to doing good, it also resulted in them doing well.

It can be difficult to balance ethics with other goals, such as pleasing stakeholders or advancing your career. These three questions may help: Is my proposed action legal; does it violate any law or company policy? Is it balanced; am I acting fairly; would I want to be treated this way; will I win at the expense of another? And how will it make me feel about myself?

Remember, doing well by doing good is a good thing.

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Business Basics – 102

Economics – The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.

Business cycles – The periodic rises and falls that occur in economies over time.

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Economic boom – Business is booming.

Recession – Two or more consecutive quarters of decline in the gross domestic product.

Depression – A severe recession, usually accompanied by deflation.

Recovery – When the economy stabilizes and starts to grow again. This eventually leads to an economic boom, starting the cycle over again.

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Paycheck Protection Program

We are navigating uncharted territory: COVID-19 the virus, the economic fallout, the government assistance programs. It seems that the SBA’s assistance programs, including PPP and EILD, change daily, maybe even hourly. This New York Times article from yesterday provides answers to frequently asked questions for small businesses, freelancers and more.

We are here if you need us, please reach out and we will do what we can to help you through these difficult times.

Stay safe!

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COVID-19

We are experiencing unprecedent times in connection with COVID-19 – social distancing, business closures, mental and physical health concerns, school closings, and more.  We have likely all been inundated with emails, posts and the news about the pandemic, the numbers, the expected numbers, etc. Of the numerous articles I’ve read about the various financial assistance programs, most of which are extremely confusing, this one lays it out well.  It explains the available programs for small businesses and non-profits, collectively referred to as the CARES Act.  Please feel free to reach out if we can answer any of your questions or concerns, or otherwise be of assistance.

Stay safe.

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Business Basics – 101

Part 4 – The Business Environment

The business environment is the surrounding factors that either help or hinder business development. These include the economic and legal environment, the technological environment, the competitive environment, the social environment and the global business environment. Businesses that create wealth and jobs should grow and prosper in a healthy environment. Although businesses can’t control their environment, they should pay careful attention so they can adapt as it changes.

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People are often willing to start new businesses if they believe the risk of losing their money is not too great. Both the economic system and the way the government works with or against businesses can have a strong impact on the risk level. For instance, government can actively promote entrepreneurship by allowing private ownership of businesses and passing laws that enable people to write enforceable contracts, among others. The Uniform Commercial Code is an example of laws that regulate business agreements such as contracts and warranties, thus allowing companies to know they can rely on one another.

Information technology has had the most comprehensive and lasting impact on businesses, and affects all industries. It has changed the way people communicate with one another, as well as created ways to reach suppliers and customers. Technology is a broad term including phones, computers, copiers, mobile devices, medical imaging machines, robots, the Internet, social media and software programs and apps that make business processes more effective, efficient and productive. Effectiveness means producing the desired result; efficiency is producing goods and services using the least amount of resources; and productivity is the amount of output you generate given the amount of input, e.g. number of hours worked. E-commerce, the buying and selling of goods online, is important in both the business-to-consumer and business-to-business markets.

Competition among businesses seems to be at an all time high. Some have found a competitive edge by focusing on quality which, when coupled with good value, i.e. oustanding service at competitive prices, allows them to stay competitive. Exceeding customer expectations is critical. Today’s consumers want not only good quality and low prices but great service as well. In the past business had been more management-driven, in today’s competitive environment it is more customer-driven. Successful businesses listen more closely to their customers’ wants and needs, then adjust their products, policies and practices accordingly. Part of this customer-oriented shift requires customer-facing workers to have greater responsibility, authority, freedom, training and equipment to respond quickly to customer requests. This empowerment allows frontline workers to provide the great service demanded by today’s consumers.

The U.S. population is going through significant changes that are dramatically affecting where and how people live, what they buy and how they spend their time. The social environment requires companies to manage diversity, including not only minorities and women, as in the past, but also older adults, people with disabilities, married people, singles, those with a different sexual orientation, atheists, extroverts, introverts, religious people, and immigrants, to name but a few. People aged 65-74 are currently the richest demographic in the country, thus representing a lucrative market for many companies. By 2030 the popluation 65 and older will increase by 20%, and by 2050 it will more than double. Products and services for middle-aged and elderly customers will provide excellent opportunities in the 21st century. The number of single parent families is also on the rise, which has had a major affect on businesses, such as encouraging family leave programs and flextime.