October 2020 – Dickinson Law's Inside Entrepreneurship Law Blog

The End of the Business Road

By: Idan Ghazanfari

Many self-started businesses are built with a personal touch. Each grows as the person who founded the business grows alongside it. Often the two identities can merge. This is why the end of a business can be so difficult and emotionally charged for some.

Imperatively, however, neatly wrapping up this process requires level decision-making. The last stages of a business’s life cycle can carry different legal implications. Generally, these stages can be subdivided into four main categories: 1) Closing your business; 2) Selling your business; 3) Transferring ownership, and 4) Filing for bankruptcy or liquidation.

closing your business

Depending on what type of business entity you have established, your requirements for closing that particular entity may differ. Sole proprietorships may be closed by the lone decision of the owner. Conversely, partnerships require an agreement of co-owners to close (forced dissolution is a separate partnership consideration that will not be discussed in the scope of this post). Next comes a bevy of administrative, reputational, employment, and financial considerations. This is generally applicable advice for successful businesses at any stage of its life cycle but be sure to scrupulously maintain records – documentation is always key! More or less, you should follow these steps:

Decide to close your business and evidence it with a written document that adheres to your company’s articles of organization (if applicable).
File dissolution documents with any state your company is registered in. If not, be prepared for future unwanted taxes and filing requirements.
Cancel any unnecessary registrations, permits, licenses, and business names.
Make sure to comply with all federal and state labor and employment laws. The Worker Adjustment and Retraining Notification Act (WARN) provides some invaluable insight.
Cancel your Employer Identification Number (EIN), notify federal and state tax agencies, and prepare final returns. This IRS checklist for closing a business is handy!

selling your business

Best practices for selling your business dictate completing a valuation prior to marketing to prospective buyers. There are several common valuation methods to choose from, including the income approach, market approach, and assets approach. The income approach individually considers the business you are selling. It looks at your projected revenue while contrasting potential risks. This method is best for capturing the unique value of your company. The market approach, however, looks to similarly situated businesses that were recently sold. This history can provide an easy benchmark to base your company’s valuation. Finally, there is the asset method. This method is the most classic “accounting style valuation.” It simply subtracts total business liabilities from the total value of assets. For larger companies, some variation of all three methods should likely be used. For small companies, however, it is important to pick the right valuation method that accurately reflects your business’s value.

Although not the cheapest, the safest way to accurately value your business is by bringing in a qualified business appraiser. Additionally, having a third party come in will help remove inherent biases. Valuing a business this way may be more expensive but it is the most likely to accurately assess the value of hard to calculate assets, including brand value, intellectual property, customer lists, and future projected revenue to name a few. Finally, do not forget about the sales agreement! This document is vital to legally transition to the next owner. Make sure not to leave out any assets or liabilities as this can create lingering problems. If there is a single step in this process not to overlook or spare expenses, it would be this one. An attorney should look over the sales agreement prior to execution.

transferring ownership

Perhaps you do not wish to outright sell your business because it has been in the family for quite some time and you merely wish to pass it on to the next generation. Or perhaps you simply want an extended break and wish to travel for a year without the day-to-day restrictions of operating your business. Or perhaps you are thinking of planning ahead for arrangements to be made in the event of an unexpected passing. The wide umbrella of “transferring ownership” provides flexibility and contemplates both these scenarios.

This solution to ending (or momentary ending) your business responsibilities seems like the most worry-free, no strings attached approach. Be careful! Transferring ownership may trigger estate and gift tax considerations. Checking with your corresponding state tax laws upfront can save massive headaches later on down the road. To that end, Pennsylvania’s Department of Revenue provides an incredibly helpful page that explains the inheritance tax and its ramifications. That page can be found here.

filing for bankruptcy/liquidation

This course of action should be pursued as somewhat of a last resort. For the most part, it requires a team of professionals. Bankruptcy and liquidation are best accomplished through solid planning. Lawyers, accountants, and creditors should all be informed and involved. Once again, taxes are a critical consideration here. The IRS Bankruptcy Tax Guide helps to make this complicated information as straight forward as possible.

This post was originally authored on March 18, 2020, and can be found here.

Idan Ghazanfari is a recent graduate of Penn State Dickinson Law. He is currently working for Salzmann Hughes, P.C. out of its Harrisburg office, focusing primarily on environmental and municipal legal matters.

Sources:

[1] https://www.doleta.gov/programs/factsht/WARN_Fact_Sheet_updated_03.06.2019.pdf

[2] https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business-checklist

[3] https://www.sba.gov/business-guide/manage-your-business/close-or-sell-your-business

[4] https://www.thebalance.com/business-valuation-methods-2948478

[5] https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes

[6] https://www.irs.gov/publications/p908

Picture Sources:

https://www.google.com/search?q=business&sxsrf=ALeKk01I8b52zIACoRkGT_y2gHAJmj8V8A:1603030210655&source=lnms&tbm=isch&sa=X&ved=2ahUKEwjdqpTyqL7sAhVrhXIEHaM7DxoQ_AUoAnoECA8QBA&biw=1440&bih=740#imgrc=2KW17z2Am8fKDM

https://www.thebalancesmb.com/thmb/e1acErugTI3XoYfrbyQdul8qqMg=/2224×1571/filters:fill(auto,1)/garagestartup-56a82fcd5f9b58b7d0f1643e.jpg

A Good Board is Worth the Investment for Your Growing Business

By: Jacob Jeifa

Just about every large company you know of has a board of directors. A publicly-traded company is required to have a board that meets stringent standards, and most statutes governing corporations require one that meets much looser standards. Even without a statutory or regulatory impetus, there are many ways in which your growing business can benefit from a board of its own.

what is a board and what does it do?

The board’s job is to maintain the health of the company by overseeing management on behalf of its owners. The board serves as an independent level of accountability for management, particularly in areas of company finances, compliance, internal policy, and strategic planning. Typically, the board retains the authority to set the salaries of, as well as hire and fire, senior management, and usually must sign off on any transaction involving a major company asset.

The board of directors is made up of a group of individuals called directors. Directors tend to have extensive business, policy, or other administrative backgrounds, and generally don’t leave their day job when joining a new board. The size of the board may vary, but a typical privately-held business is likely to have 5 to 8 directors. Directors are chosen by a vote of the holders of the company’s stock (or stock-equivalent) or, for non-stock entities (like LLC’s and partnerships), by a process set out in the company’s operating agreement.

experience & expertise

A board gives management a handful of individuals to tap for advice and guidance. A good board has a diversity of experience, expertise, and perspectives. The needs of your company, in the present as well as the future, will play a role in helping you determine the right mix for your board.

Not every board member needs to be an expert in your industry or business. The directors with technical expertise have a role to play, both in pressing management and assuring that the other directors understand. A well-rounded board, capable of engaging in and understanding the business’s financials, operations, and strategy is an indispensable asset for an entrepreneur as their business grows and faces a new set of challenges.

accountability

A good board holds management accountable by monitoring and evaluating the business affairs. To be sure, management is tasked with running the day-to-day business operations, but the board plays an important role in setting the company’s strategic course, establishing benchmarks to measure progress, and ensuring that management is answerable to missteps and missed expectations. A budget that must be approved by the board is just one mechanism by which a board exercises this authority, as well as the power to set executive compensation and remove the chief executive.

risk management

A key function of the board is risk management. One area where the board can actively mitigate risks is in ensuring the company’s compliance with legal and regulatory obligations. As a company grows, so does the list of such obligations on the company. Meanwhile, an entrepreneur is typically not attuned to these looming concerns. A board comprised of experienced individuals who have “been here before,” is an invaluable tool for ensuring regulatory blind spots are attended to while freeing management to perform their day-to-day functions.

A board can also play an important role in settling management and/or ownership disputes without resorting to litigation. Independent directors – generally, those that have no relationship with the company besides their seat on the board – are viewed as particularly well-suited to play peacemaker, given their disinterested position.

Owners of small businesses may run a particularly high risk of being held personally liable for the company’s debts. Owners of a corporation, LLC, or LP typically seek the limited liability protection these entities provide, and there is a strong presumption in favor of ensuring that a judgment against the company does not touch the personal assets of its owners (beyond their investment in the company itself). However, this presumption is not absolute. There are certain circumstances where a court will allow a company’s creditors to “pierce the veil,” and collect outstanding debts from the personal assets of its owners.

Different states have different standards for determining when piercing the veil is appropriate. Generally, the key consideration in the court’s analysis is whether the company acts like a company which is deserving of limited liability protection. A company which ostensibly acts as the mere extension of one or several individuals – such as commingling assets, paying personal expenses with the businesses funds, or failing to keep adequate records of business decisions – runs the risk that a court will deem the company’s status as a limited liability entity a sham and allow creditors to ignore it. In making this determination, the court will ask whether the company follows corporate formalities. A board can help mitigate this risk by holding annual meetings, maintaining proper minutes, and ensuring the company’s officers act in accordance with the bylaws or operating agreement.

credibility

A company with a board comprised of respected, experienced, and engaged directors demonstrates that it takes the business of being a business seriously. Your business will not only benefit from the personal networks of each director, but the formality alone can provide valuable reassurance to potential investors, lenders, and strategic partners (provided that it’s performed adequately). Every business that chooses to work with yours is taking a risk, and a board with a reputation for ensuring internal accountability will make it easier for them to pick your business to engage with.

This may mean, for example, maintaining clean and understandable financial statements, and having ready answers for why certain things are recorded as they are, should the company need to raise capital.

should i have a board; do i need a board?

Are you required by law to have a board?
- If your company is organized as a corporation, it’s likely that you’re required by law to have a board and maintain adequate board records.
Do you have investors, or plan to seek outside capital eventually?
- Large investors will often demand a seat on the company’s board in order to protect their investment.

Short-Term Considerations

How experienced is management?
- Is the company’s management made up of seasoned professionals, or could they benefit from experienced oversight?
Why do/don’t you want a board?
- Would your business benefit more from a board member or employee with that particular skill set/experience?

Long-Term Considerations

Where is the business going?
- Is your company looking to expand into new and unfamiliar businesses?
Where is the industry going?
- Is industry consolidation forcing you to look toward acquisitions?
What is your exit plan?
- Whether you plan to take the company public, sell it or keep it within the family, a board can play a crucial role in readying the business for your eventual exit.

Personal Considerations:

How much authority/money are you willing to part with (now)?
- A good board is unlikely to be free and requires real authority. (see note on advisory boards.)
Who else is involved in making this decision?
- Does your company have other owners who must provide their consent?

Recruiting tips

Look For:

Character & ethics – At the end of the day, do you trust them?
Board experience – Do they have board experience? If not, what experience do they have which would make them a good fit for your board?
Availability & Willingness– Will they be able to commit the time necessary?
Interest level – Are they interested in helping your company reach its goals?
Value – What unique value would this person bring to the boardroom?
Conflicts of interest – Does this individual have business or personal relations that are, or may prove to be, at odds with your business?
Compensation – Does this individual have expectations for compensation? If so, are they agreeable?

What to Say

When pitching a prospective director, be direct and upfront with your expectations for the board and its members. This may include providing answers to:

What are your plans for the company?
What authority will the board have?
Why do you want this particular person on your board?
How much of a time commitment do you expect from your board?
How will the board be compensated?
What role do you see this person playing?

seek diversity of representation

When recruiting possible directors, one should not confine their search to only those individuals with direct industry experience. It is undoubtedly the case that this experience would prove useful to your growing business and may certainly be worth reserving room for on your board, but good directors and boards must bring more than technical expertise. However, a good board is also capable of supplying expertise in areas where management is either lacking or unable to give it the full weight of attention. For instance, if you operate in an industry that is rapidly moving from retail to e-commerce, it may behoove you to add a board member with IT and cybersecurity experience.

Social Diversity (gender, race, nationality, age, sexuality, religion, etc.) and Idea Diversity are also important for one’s company culture and success. Boards benefit from diverse perspectives which provide valuable insights and views. Those that lack diversity miss out on the ability of a diverse board to problem solve through multiple angles and collective experience.

a note on advisors & Advisory boards

An entrepreneur that is uncomfortable with the idea of ceding authority to a formal board of directors, or simply does not have either the resources or impetus to build one, but still wants to tap the experience of others can opt instead for an advisory board. An advisory board can be formal or informal, lend credibility to the company, and be a valuable source of insights as the company grows.

However, while its members may play a role in pushing management, an advisory board should not be viewed as a substitute for a board of directors. A board of directors operates as an institution within the company, and it is the formality of this relationship, combined with the specific authorities conferred upon the board, which provides real value to the company.

To search for local business advisors, see here.

Jacob Jeifa, at the time of this post, is a second-year law student at Penn State Dickinson Law. He is a graduate of the University of Delaware and is interested in corporate law. Prior to law school, Jacob ran a property management company and was a research assistant with the Weinberg Center for Corporate Governance.

Sources

https://insights.som.yale.edu/insights/even-small-businesses-need-corporate-governance

https://www.cfainstitute.org/en/advocacy/issues/small-company-governance

https://www.justia.com/business-operations/managing-your-business/legal-compliance/corporate-governance/

https://www.sba.gov/business-guide/manage-your-business/stay-legally-compliant

https://www.sba.gov/business-guide/plan-your-business/fund-your-business#section-header-5

https://www.uschamber.com/co/start/strategy/how-to-create-a-board-of-directors

https://www.score.org/blog/directors-and-officers-understanding-roles-corporate-management

https://smallbiztrends.com/2016/09/board-of-directors-for-a-small-business.html

https://www.uschamber.com/co/start/strategy/board-of-directors-nacd-steven-walker

https://www.sba.gov/local-assistance

Manar Morales | Entrepreneur of the Month | October 2020

By: Elikem Tsikata

Ralph Waldo Emerson famously said, “To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment.” In today’s world, we all feel external pressures to assimilate and to change who we are. We are taught that if you want to be accepted to A school, B and C is required. If you want to be in the X profession, you have to dress and act a certain way. For Manar Morales, a professional opportunity at the cost of compromising one’s individuality is an unacceptable proposition. The former litigator-turned-CEO not only personifies Emerson’s mantra but actively creates it for others.

Manar is the founder, President, and CEO of the Diversity & Flexibility Alliance. The membership-based think tank partners with organizations to promote diversity and inclusion within the workplace. The company consults and provides tangible plans for workplace flexibility and diversity initiatives, creating unique avenues that challenge traditional theories of various sectors.

Family matters

Manar and I quickly bonded over similar upbringings. We both had parents who immigrated to the United States and instilled in us a pride of our heritage. Both of our parents molded paths into their professional fields that were not considered the norm for people who looked like us at the time. For Manar, this instilled a natural belief that she could achieve what she wanted, but she knew that a conscious determination and effort was necessary.

Manar grew up in Long Island, New York. The daughter of Egyptian immigrants, she had an early interest in employment and labor law. Simultaneously, she gained early exposure to tangible business experience. After graduating from Cornell’s Industrial and Labor Relations School, Manar worked as an Assistant Buyer at Saks Fifth Avenue in New York City. This could be considered her first entrepreneurial work experience as she managed sales and purchase orders. She then went to Catholic University’s Columbus School of Law, where she refocused her studies on employment law. After graduating, Manar became an employment law litigator.

professional path maker

I asked Manar what influenced her transition from practice to starting the company, and she quickly responded.

“I had my first son.”

Smiling, she admitted than an experience with a less than stellar nanny made her reconsider staying on as a full-time employment litigator. She knew she wanted to continue the work she loved, but that it may have to be reduced to a part-time basis. Manar proceeded to switch firms in order to work a part-time schedule and became of-counsel, while simultaneously starting work as an adjunct law professor at Georgetown University, teaching employment law and entrepreneurship. As she adjusted to her new life, women in the legal field and some who had left it, reached out to her. They expressed their appreciation for her professional course and wished they had done something similar. This made Manar question why women in the legal field were not getting the opportunities she had experienced to this point.

“I don’t think I had a proven path. It was really about me creating a path. For all the people who said, ‘Oh there’s no way you can be a litigator and do part-time’, there was a part of me that said, ‘No, actually I think I can.’ I may not be able to in one given environment, but I know that I can find an environment where I can.”

This premise opened Manar’s eyes to the possibilities of where the legal profession could go. The crucial question she asked at that point was how can we take the profession to the next level, providing opportunities for people to have more choices?

core principal: flexibility

The Diversity & Flexibility Alliance is classified as a Benefit LLC. Their goal is to create a community of members who value diversity and inclusion by looking at ways to leverage workplace flexibility to increase top talent.

“For us, it’s important that when people consider flexibility, that they de-parent, de-gender, and de-stigmatize flexibility. Our goal is to emphasize that flexibility is something that’s available to everybody, and everybody needs it for a variety of reasons.”

The company’s primary membership consists of law firms and corporations. They also work with associations, non-profits, professional service organizations, and tech-companies. As membership grew, Manar saw great value in the exchange of best practices over various sectors. The company could provide organizations of varying functions the opportunity to learn from one another. For the legal industry, Manar emphasized the importance of this. Notoriously stuck in its ways, Manar discussed how our profession needed to avoid the “echo-chamber” of only listening to itself, and embrace the other industries’ proven methods of effective workplace flexibility.

operating a business in the wake of two pandemics

Manar and I discussed how the COVID-19 pandemic has affected her operation of the business. Operationally, Manar said they were lucky and well-prepared for COVID. The Diversity & Flexibility Alliance has always been a hybrid organization. They ran virtually in many aspects, with some team members being fully remote already. In terms of providing services for their members, Manar says one of the biggest challenges they faced prior to COVID was the status quo regarding working environments. COVID’s natural effect has been the changing of how the world views a working environment and what that future will look like. For Manar and her team, this uncharted future provides a new opportunity to consider how to further the ideals of diversity and workplace flexibility moving forward. Additionally, she notes that while her team has been accustomed to hybrid styles of work, many members have not. She appreciates how this has created avenues for more (virtual) face-to-face with members, a more conscious engagement through technology. She is hopeful this time can be leveraged to further improve her client’s approaches to the future workplace.

We also discussed the other pandemic plaguing our country: systemic racism. As an agent of change in her own capacity, Manar shared how the heightened focus on social and racial injustice has affected her approach. She began by reflecting on the widespread acts of companies who made public statements denouncing racism. While she believes these statements can be important, she knows the actions that follow are truly the key.

“You have to create change internally. Public statements without internal reflection and change… I don’t think are effective. So for us, it was really about asking our members ‘What are you doing internally? Where can you create change? What are systemic changes you will be making moving forward?’”

Manar was encouraged by the greater sense of urgency among members, but she was more than aware that these issues cannot be fixed without continued focus and effort.

“Everybody can have it all … all is defined by you”

Manar’s leadership as an agent of change extends beyond her role at the Diversity & Flexibility Alliance. She frequently speaks on the topics of diversity, inclusion, woman’s leadership, and individual success. When I asked her about the importance of educating others about these topics, she reemphasized her core mission of giving others options.

“There’s a lot of debate on whether or not women can have it all. I think that everybody can have it all because I am a big believer that ‘all’ is defined by you. My ‘all’ may look different than your ‘all’ or someone else’s, but it’s my strong belief that we need to create opportunities for people to be able to have what they define as their ‘all.’”

This quote really stuck with me. Manar’s ‘all’ includes her family, the work she loves and creating positive change for others. I think often we find the task of juggling our priorities to be daunting. Careers, family, social life, fulfillment; some would call the pursuit of all at once unrealistic. And yet, as I think about Manar’s words and mindset, it actually seems simple. Determine what you want. Make action steps to have it. Work hard.

what do diversity and inclusion mean to you?

“Not just creating opportunities, but creating opportunities where people feel valued for who they are. People want to go where they are valued, not just tolerated. We always have to ask ‘Are we creating opportunities where people can feel proud of who they are and show up as that?”

Manar lives and breathes every bit of Emerson’s words, fighting against societal norms that we must suppress aspects of our identity for professional success. Our differences enrich professional environments and make them better. Instead of changing herself, she’s made it her mission to change the environment.

advice for entrepreneurs

“Do what inspires you. I’m a big believer that mindset drives so much of our respect. People should do what they love. Once you make that commitment, you’ll figure out the path from there.”

Manar’s passion is undoubtedly at the core of her success. She encourages entrepreneurs and professionals not to negotiate against themselves. She notes that often we say we want something but immediately create a barrier for why we can’t have it. She implores us to reject this mentality, set our sights on what we want, then begin to act.

For more information on Manar and the Diversity & Flexibility Alliance, including details to their Annual Conference, you can click here.

Elikem Tsikata, at the time of this post, is a third-year law student at Penn State Dickinson Law. He is a Ghanaian-American from McLean, Virginia, and a graduate of Miami University (OH). Elikem is pursuing a certificate in Entrepreneurship Law with a Transactional concentration. Elikem serves as President of Dickinson Law’s Student Bar Association. He is also a Research Assistant to Professor Samantha Prince.