Business Record - Iowa Biz

Avoid litigators – Don’t Destroy That Document

My posts deal with avoiding litigation. My last post addressed the benefit of putting business dealings in writing. Once you put something in writing, the next logical determination is how long to save that document.

Business owners regularly tell me they keep records for seven years because it is "the law." The magic seven-year rule may be a tax guideline, but it is a business and legal myth.

Prior to going Enron on your corporate records, take a look at the IRS’s Starting a Business and Keeping Records. The Record-keeping section addresses records for taxes. To address concern about potential lawsuits, work with your attorney to design a record retention plan. Be sure the plan covers paper records and electronic data. Once you have a record retention (and destruction) plan, integrate that plan into your business processes.

What if you don’t follow the plan?

Under Iowa law [Iowa Civil Jury Instructions contain a model instruction] if a jury concludes you intentionally destroyed or failed to produce evidence, it can assume that evidence would have been unfavorable to you. The jury may see the missing evidence as the :"smoking gun." A saved receipt may nail your case down; a prematurely destroyed receipt may become a nail in the coffin. Well kept records may be more productive than winning lawsuits; they may convince opposing parties not to sue you in the first place.

How do you devise and regularly apply a sound plan to avoid problems?

In Iowa, most oral contracts have a five-year statute of limitations [section 614.1] to enforce a contract (or to be sued for a breach). Depending on your business, you may wish to retain supporting documents for five years after the contract ends.

In Iowa, most written contracts have a 10-year statute of limitations [section 614.1]. Does your record retention plan keep the contract for 10 years after performance of the contract ends? How long do you keep record of payments made or received? Should you keep emails about the contract?

Under Iowa law, as a designer, manufacturer, distributor or seller of a product, can you be sued 10 or 20 years after production and multiple re-sales if the product causes damage? What are the time limits or Statutes of Repose [614.1(2A)] for such claims? What if your product is a Web-based application? How long must you keep the records of product testing? Of use? Was your product sold with warnings or safety devices, or for a Web-based application, was a warning included with installation or initialization? Do you have records that show your product was altered?

Although the questions are complex, setting consistent policy will make later involvement in litigation less likely or, at least, less painful.

Record retention is important. Failure can subject you to legal presumptions that could end your business. Find out the factors that affect your particular business. Implement a record retention and destruction policy. Put it in writing. Stick to it.

Or wait until you have a problem. Then come see me.

Avoid lawyers and lawsuits: Watch what you write and type

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What do you think is the best way to do business? Most clients tell me “by handshake.” The real answer is “in writing”.

Well-drafted, easy to read contracts stop arguments before they begin. A little nit picking up front saves money and business relationships in the future. The best businesses have known this for years.
Now, enter the computer age. As lawyer/blogger Nicole Black deftly notes: “The world has changed in ways we couldn’t have envisioned just 10 years ago-and the legal field is not immune from these changes, despite its repeated attempts to stick its collective heads deeply into the sands of time.“  So, have the rules changed? No, the rules are the same. They just apply to a vast new realm of media. The best business is still written. Given the pace of business, there is more “writing” now than ever before. Keeping writing consistent and accessible has become a new priority.

If you want to be scared, intellectual property author Brett Trout of BlawgIT offers bone-chilling insight on how your online activities and/or writings might prompt a frantic call to a litigator. Like the cute blonde in every thriller learns too late, if you don’t take action before the monster in the hockey mask breaks down your door, it gets gruesome. Hire a “happy lawyer” to review your Web site, your blog, your social-networking policy and your employment handbook.

Regular review of your documents, including Web sites, social media sites, e-mail policy, document retention policy (that includes electronic documents) and employee handbooks or network policy can save significant amounts of grief and money.

Or you may wait until you have a problem…then come see me.

- Christine Branstad

Fatal Mistakes Made by Business Owners

Arizona attorney Scott Gibson (Twitter profile: @Tradesecretlaw ) recently published a list of 10 Fatal Mistakes Made by Business Owners. I encourage you to go to his Twitter profile and check them out. You may need to dig a little bit because Scott is continually updating his profile to provide helpful information.

I wanted to address two of the fatal mistakes on his list.

No. 5:  Failure to Set Up a Buy-Sell Agreement. More often than not, this is a major reason why business partners end up in litigation. Every business that has multiple owners should consider having a buy-sell agreement. The typical buy-sell covers how an owner can sell shares and how to value those shares. A good buy-sell will also set forth what happens in the event of death, disability, retirement, divorce, bankruptcy or other considerations. Without a buy-sell agreement, owners may end up in court and business may suffer.

No. 8:  Failure to Follow State and Federal Employment Laws. Want to end up with a lawsuit quickly? The failure to abide by state and federal employment laws is perhaps one of the the easiest ways. But maybe even more important is how the employer actually interprets and administers its own policies and procedures. While it is technically not a "legal requirement" I have long suggested that treating employees with respect is the best way to avoid employee lawsuits. Treating others as you want to be treated is a concept that even young children understand. But while the concept is easily understandable employers often have a difficult time being fair.

In building on Scott's thought about fatal mistakes made by business owners, you may want to check out my post on Five Ways to Avoid Lawsuits Against Your Business. I wrote it some time ago but it is just as applicable today.

Preparing LLC Documents Under New Iowa Law

The post that has probably attracted the most attention on my blog is a post titled "Zoom Past LegalZoom," The reason is simple. Most new business people desire to save expenses when starting a business. One of the places these entrepreneurs cut corners is by using a document preparation company instead of a lawyer for incorporation and/or limited liability company (LLC) formation. In many cases, LegalZoom and other similar companies are less expensive than hiring a lawyer. While searching for LegalZoom information on the Internet, people often come across my post discussing why I believe using LegalZoom is a bad idea.

If you look at the comments on the post, you will see that others don't exactly share my view. Several commented that they were happy with the LegalZoom service. I don't make excuses for my bias though. I am a lawyer and I believe professional advice is better than a document preparation company any day of the week. Particularly if the costs are somewhat similar, which is often the case with Iowa business lawyers.

But if you are starting a new LLC in Iowa, particularly one with two or more members, I am even more adamant in my view that you should seek legal advice instead of cutting corners. As discussed in an earlier post, Iowa changed its LLC law effective Jan. 1, 2009. The law consists of several major changes. Frankly, I just don't see how a document preparation company can be up to speed at this point with those changes. (Unless of course they copied Marc Ward's outline from his recent LLC law seminar). As you can see from one of Marc's recent posts, even Iowa lawyers have differing statutory interpretation of some of the changes.

Typically, a company like LegalZoom will assist you in one thing, and one thing only: getting you the documents you need in order to incorporate or form your LLC. The bottom line though is that purchasing LegalZoom's documents is not equivalent to receiving legal advice, and when it comes to new LLCs in Iowa, legal advice is exactly what you will need. Don't cut corners - at least not this year.

More on Twitter and the Workplace

Several months ago Iowa Patent and Cyber law guru Brett Trout (Twitter:  @BrettTrout) introduced me to Twitter. Twitter is a social media site where people write "Tweets" in 140 characters or less. It is also known as micro-blogging. I actually don't think its creators initially envisioned Twitter as a business application but it is certainly has evolved into a very effective business tool.  Several of the authors of IowaBiz have their own Twitter pages.

I'll admit, my gravitation toward Twitter has been very slow. While I immediately saw the benefits with my own blog, it took me much more time to see the benefits of Twitter for the business person. Until recently there were many occasions when I thought of ditching the exercise. At times the "noise" on Twitter can be a bit overwhelming and it is tough for me to stay connected with it during the work day. But some things occurred over the past several months that demonstrate great promise for my continued use of Twitter:

1. There is a very active Twitter community in Des Moines. (See dmtweetup.org).  I have met several interesting and motivated individuals through this very diverse group. Some are interested in business while others are not, but I have learned about people and our community from all. Members of this group have met for roundtable discussions and also have planned business seminars and other events. Heck, even a dmtweetup with @ChuckGrassley has been scheduled.
2. A site called LexTweet popped up for lawyers and has made it much easier to identify and follow lawyers from around the country. This is important not only for networking purposes but also from an educational standpoint. Many of these lawyers post on important topics that keep me on the forefront of what is happening with cases throughout the country. Perhaps there is a similar site in your industry. If not, start one.
3. I had the opportunity to meet and talk with one of the real leaders in the legal social media network, @MattHomann. Without Twitter it is highly unlikely I would have learned Matt was in town for a project and I would have missed out on the opportunity to meet with him. The ability to connect with people through Twitter is downright amazing! 
4. Added bonus:  @LanceArmstrong started on Twitter. He's actually pretty fun to follow as he returns from retirement. 

In my blog post, The Workplace is All a Twitter, I discussed the fact that someone from YOUR company is probably already on Twitter and/or other social networking sites regularly.  I also warned that if you don't define how your employees use Twitter, they will define it for you.  It's better to get on board before it's too late. 

I strongly suggest that employers meet with employees to discuss potential issues regarding Twitter use. Remind employees how their Tweets could impact your business, both positively and negatively. This past week a story of an employee who Tweeted about the town of Memphis, home of his company's major client FedEx, touched off a firestorm of controversy. One can debate whether it deserved the amount of attention it received but it is tough to deny the incident reflected poorly on the employee and his employer. After all, the client's representatives took umbrage with the Tweet.  You don't want to be THAT company.

And if you are an employee, I would think twice about publishing negative Tweets about your employer. I think you will find that more and more employers will monitor Twitter and other social networking sites. You don't want to be THE employee whose career ends in one Tweet. Remember, be professional. It may be social networking and at times you will be off the clock. But people are watching you all the time.

    

P.S. You can follow me on Twitter @RushNigut

 

1099 Employees Don't Exist

I wish I had a dollar for every time I have heard a business owner say, "He's a 1099 employee." That  statement alone highlights the common misunderstandings business owners have regarding the differences between independent contractors and employees. But the importance of understanding these issues has increased as Governor Culver recently announced he supports an initiative to crack down on misclassification of independent contractors.

Many businesses make the mistake of treating employees as independent contractors so they can save money on taxes, red tape and benefit coverage. (Hence, the reason the state of Iowa is cracking down. Every tax dollar is important in this economy). The risks associated with this approach open the business up to fines, wage and hour lawsuits, tax penalties and lack of insurance coverage.

Sometimes businesses treat employees as independent contractors because they fail to fully understand the distinction between the two categories. The most important difference is whether or not the employer has a right to control the work. Other factors, such as where the work is performed, who provides the equipment, how payment is made and if there are set hours, also play an important role. 

Generally, an "employee" is someone whose manner of work the employer has a right to control, even if the employer does not actually exercise that control. True employees are W-2 employees because of the W-2 form issued to them for federal tax purposes.

As I said, independent contractors are not 1099 employees. You never want to refer to an independent contractor as an employee. An independent contractor is someone you engage to perform a certain task but whose manner of work you do not have the right to control. It is often helpful to have a contractual relationship with the independent contractor to provide support for such a position.

The issues regarding the classification of independent contractors are more complex than discussed here so be sure to consult an employment and/or a tax lawyer if you have any questions.

Iowa LLC Law Changes in 2009

There are significant changes to the Iowa limited liability company (LLC) statute effective Jan. 1, 2009.   The changes include everything from how an LLC is initially formed and filed with the Secretary of State to changes that apply when a member leaves (i.e. disassociates) from the LLC.

The changes in the law are too numerous to set out in one blog post. In fact, Marc Ward of the Dickinson Law Firm has devoted an ENTIRE blog to the 2009 Iowa LLC law changes.  

So instead of boring you with all the details, here are my top five Iowa LLC law changes for 2009:

1. Certificate of Organization: Starting with the new year, you will no longer file "Articles of Organization" with the Secretary of State to start your Iowa limited liability company. Instead, you will now file a "Certificate of Organization" to begin the process. Unless there are changes with the Secretary of State. The Certificate of Organization under the new Iowa LLC law will actually have less detail than Articles of Organization typically had in the past. The only information required for the Certificate of Organization are a) the name of limited liability company and b) the street and mailing address of the registered office and the name of the registered agent. 
2. Operating Agreement Pitfalls:  There are a couple of issues relating to operating agreements that LLC business owners must consider. The operating agreement is the document that sets forth how the LLC is governed and run. First, LLC operating agreements are not required to be in writing. While that may initially excite some LLC owners, the new law has provisions that may surprise and bite unknowing LLC owners especially with regard to management rights, profit distribution and transfers of interest. It is best practice to have a written operating agreement. Second, operating agreements may be amended orally. Again, while that may make it easy to amend the agreement it will likely remain best practice to override this statutory provision to include language in the written operating agreement requiring an amendment to be in writing. That way members may avoid the inevitable arguments that ensue when agreements are not memorialized in writing. People tend to remember things differently when agreements are not in writing and the agreement is more difficult to prove in court.
3. Statements of Authority: The new law also permits an LLC to file a statement of authority with the Iowa Secretary of State and the county recorder's office. The statement of authority will serve as notice of who does or does not have authority to act for the LLC, sign documents transferring real property, or otherwise act for and bind the LLC.  The statement can state the authority or limits on authority by position (e.g. member, manager, president) or a specific person or persons.
4. Pay Attention to Management:  The default provision with the new LLC law is one member=one vote. (Currently it's based upon ownership %). This means that even a member with a minority percentage may have the ability to have as much management authority as a member that has a majority of the membership units. Accordingly, if a majority owner wants to maintain management control, the written operating agreement will need to specify such arrangement.  
5. Disassociation of a Member: The new law has several provisions outlining what happens when a member leaves or is asked to leave an LLC. An operating agreement can vary the provisions contained in the law. The provisions relating to disassociation are a little complicated so it is important to get legal advice on these issues. For example, a person who disassociates may no longer have management rights but could still have the right to receive distributions. That may be a result that many members might not suspect could happen.

Please also know that the new LLC law will apply to older LLCs on Jan. 1, 2011, unless the members agree the new law will apply sooner to their company. Be sure to seek legal advice from a business attorney familiar with the new law. The changes are much more numerous and significant that set forth in this blog post. You certainly won't want unintended consequences to happen to you.

- Rush on Business

Thinking About Franchising? Research Carefully

With the recent economic downturn, layoffs are bound to occur.  As I write this blog post there are rumors that a large central Iowa business may lay off a significant part of its workforce and it's likely that others will follow suit.

A potential option for many former corporate employees is franchise ownership. While franchising does offer many advantages it is critical to approach a franchise opportunity just as you should any other business opportunity - with caution.

It is a misnomer that franchises are more likely to succeed than other businesses. In fact, the International Franchising Association has discouraged all franchisors from making such claims. The truth is that franchises fail at a rate that is similar to non-franchised business.  So careful due diligence is important when considering a franchise opportunity. One of the best things you can do is talk to as many existing (and former) franchisees as possible. Also, consider several key disclosure issues including:

1. Franchisor's litigation history;
2. Amount of the initial investment;
3. Vendor rebates and products you must buy from the franchisor;
4. Earnings claims made by the franchisor;
5. Franchisor's financial statements;
6. Trends concerning the number of outlets.  It is important to closely review the information regarding outlets. Carefully study the number of transfers and not just the number of closures.  A high number of transfers may be an indication that franchisees in the system are struggling, but bad stores have not been shut down. 

And finally, be willing to walk away. This is the paradox of successful negotiation. Those that are willing to walk away usually find they get more in negotiation.

For more on franchise due diligence be sure to visit the Federal Trade Commission's Consumer Guide for Buying a Franchise.

287,000 Reasons to Beware of Retaliation Claims

A former women's softball coach scored a jury verdict this past week against Iowa State University for $287,000 in damages.  The ex-coach had complained the university retaliated against her for complaining about the inequality in pay and budgets between the men's and women's programs at ISU.

Whether an inequality exists isn't really important for the purposes of the verdict. If employers remember anything from this post they should know that in retaliation claims the employee does not need to prove the underlying claim has merit. The key is whether an employer has terminated the employee for the complaint itself.

Employers are usually cognizant of discrimination and harassment claims. However, they are often blindsided by retaliation claims. Even the successful resolution of a discrimination or harassment complaint means you are only halfway home. Supervisors and employees must not retaliate against the employee who complained.

Here are some proactive measures employers can take in order to avoid retaliation claims:

1. Make sure your employee handbook includes a policy prohibiting retaliation.
2. Always have alternative reporting avenues.
3. Conduct supervisor and management training on harassment, discrimination and retaliation.
4. Make sure supervisors and management have been asked the tough questions of themselves when it comes to employee discipline. Make sure the discipline has nothing to do with the complaints of harassment, discrimination or retaliation.
5. Periodically talk with the complaining employee to determine if anyone has retaliated against them. If performance is an issue for the employee be sure to bring this to the attention of the employee and make sure to document your conversations. Document! Document! Document!

For more on retaliation claims I encourage you to take a look at this post from employment lawyer Michael Moore.

The Workplace is all a Twitter

One of the hottest social networking tools is Twitter. Twitter is a Web site which allows you to write one hundred and forty character micro-blogs, which others can read in a scrolling "feed".  Twitterers follow these feeds to connect with one another. The site has blossomed in popularity and is likely to gain even more traction since President-elect Barack Obama used the site so effectively during his recent campaign.

But a hot debate is taking place about whether sites like Twitter have a place in the workplace. While there are many positives to the site, a downside is the potential loss in productivity because employees "tweeting" away are probably not getting work done. Plus, there is always risk that somebody might say the wrong thing that could embarrass an employer, or worse, get the employer sued.

So the reaction of many employers is to ban Twitter, along with sites like Facebook and YouTube, completely. And while this may seem like a sensible solution, you really are asking for trouble from younger generation workers as well a growing number of the older set. I don't think banning sites like these will work long term in the workplace. Plus, you would be amazed by the things employees say about you online after you ban their favorite site. Trust me; sites like Twitter are here to stay so you better learn how to play the game.

The first step is to educate yourself with Twitter. The benefits to your business may be enormous. Many companies, both large and small, have harnessed Twitter to effectively market their brands.  Perhaps you could even turn that twittering employee into an evangelist for your company. Next, consider these steps in allowing employees to Twitter and/or blog:

1. Get advice from in-house and/or outside legal counsel with a good understanding of technology and social networking.  This area of the law is changing at the speed of light.  Talk with a lawyer that can help you navigate your way through these issues.
2. Update your employment policies to cover blogs and social networking sites.  Many companies have policies that cover Internet use, email, cell phones and other technologies.  But do your policies cover blogs and social networking sites?
3. Develop a corporate blogging and/or social networking policy. Make sure that employees understand the consequences of violating the policies. Make sure employees know not to disclose confidential or proprietary information on blogs or social networking sites. Tell them to think twice before posting anything that could be considered defamatory.
4. Train employees on the benefits and risks of using such sites.
5. Appoint someone who will be in charge of monitoring social networks and/or blogs for the company. Learn how to use RSS feeds to do this effectively.

Chances are someone from your company is already on Twitter and/or other social networking sites regularly. So don't wait. If you don't define how your employees use Twitter, they will define it for you. It's better to get on board before it's too late.