Category Archives: Small Business Owners

Financing Issues and Workouts

One of the most common causes for failure in a small business is a lack of capitalization. Businesses often start up with too little cash. Over time, this lack of money becomes amplified, and ultimately those businesses fail. The reason why they fail is not that they don’t have a good product, lack integrity in the marketplace, or fail to perform. They fail simply because they have run out of cash, in the middle of a normal learning curve in servicing the marketplace. Of course, loans can be helpful, but they do not replace a good business model, which allows for mistakes along the way and sufficient time to perfect your business approach.

Even without the luxury of borrowed funds, entrepreneurs feel much stress once cash flow problems arise. It’s hard to pay loans, salaries, utilities, and all the other bills that become due. The pressure increases. Whether there are loans or not, the bills must be paid, and relatives, credit card lenders, and banks are insistent. Frequently, the issue becomes the “burn rate”. In other words, “how long can a business hold on?”

Often the bank or lender have no idea what their financial problems are: sound projections and presentation of a good business plan can do much to assist with the renegotiation of debt. In any event, when default on the loan occurs everyone loses. Neithe the bank nor the borrower obtain anything from insolvency proceedings.

For this reason, our office seeks to help entrepreneurs with planning procedures, before cash flow problems arise. Nevertheless, when these crises do arise, sound counsel is necessary to navigate the dangerous waters of default and reassure the bank that the storm can be weathered.

Sometimes assets need to be sold, lines of business need to be assessed for profitability, and real estate mortgages or personal guarantees need to be added to strengthen security of outstanding loans. Nevertheless, if the entrepreneur believes his value proposition is sound, he is wise to “bet the farm” on his expertise, and continue to plow ahead. In these cases, reassuring the bank, returning liquidity to the business model, and moving toward profitability is an immediate necessity many lawyers lack this kind of business experience, and cannot be of help in this area of business. When faced with the task, most human beings like easy work. Negotiation of loans can be hard work.

I still remember the entrepreneur who came to me to explain his business was not profitable, and he didn’t need the large amount of warehouse space that was under lease. In addition, he was in danger of defaulting on the lease, and having the goods warehoused subject to a landlord’s lien. While exploring his options, he realized as we talked that a competitor (who was a dear friend) might be willing to give him storage space, and even assist him with expanded lines of credit. Since moving his location he is much happier, and profitable too!

In another case the individual owned the real estate from which his business operated. By selling the real estate he was able to become current with suppliers, giving him enough time to sell additional customers, enhancing his profitability. Further, the cash received from selling the real estate allowed him to progress forward without financial worries.

Of course, there are a myriad number of options that a good business lawyer helps his clients explore every day. As a small business owner myself, I believe that the key is flexibility. When we listen to our clients, their needs can best be served by applying our experience to assist them in creating satisfactory legal results.

If you are in need of this kind of help, please do not hesitate to give us a call for a candid opinion as to whether we can help in your situation. We would be more than pleased to be of assistance to you. Call us today at (317) 266-8888. As an alternative, you can email me personally at any time: mike@mikenorrislaw.com.

How The IN Department Of Revenue Enforces Tax Collection

Once a demand is made, the Indiana Department of Revenue (“DOR”) expects a reply in 10 days.  DOR has very powerful options at that point: if the taxpayer has not responded, DOR can cause liens to be placed on the property of the corporation or  individual. Of course, this affects credit ratings and the ability to borrow money.  The ability to sell titled properties is also hampered.  In short, a bad situation will rapidly get worse.

Many interesting possibilities are provided for by Indiana laws, specifically Indiana Code 6–8.1–8 –1 and following sections up to 6–8.1– 8–17.  These are the collection provisions for “trust fund” taxes in the Indiana code.  The first enforcement action from the Indiana Department of Revenue is the issuance of a demand notice. If the demand is not paid within 10 days, the Department of Revenue may issue a tax warrant, and add 10% to the unpaid tax as a collection fee. That warrant may be filed with the circuit court clerk in the county where property is owned, 20 days after the demand is mailed to the taxpayer.  It becomes an enforceable judgment at that point.

These “automatic judgments” can be entered without a trial before the circuit court.  This is a streamlined procedure that allows the state to garner a judgment fairly quickly. And these judgments are valid for 10 years from the date that judgment is filed  The judgment may be “renewed” for an additional 10 years, simply by filing an “alias” tax warrant at the end of the initial judgment’s 10 year effective period.

These tax judgments may be enforced by ordinary means, such as foreclosure and sale of real or personal property, with that sale by the sheriff or an auctioneer. Further, the sheriff keeps a part of the additional collection fee of 10%.  Thus, he has an incentive to conduct sales of property where warrants have been issued.

In addition, the state will often employ a collection agency to collect on unsatisfied tax warrants. In these cases, additional penalties may be assessed against the taxpayer, for the cost of private collection.  A restraining order may be issued by the courts of the county where the taxpayer does business, to restrain him from conducting business. In addition, the state may ask that a receiver be appointed, to manage the business so that those taxes can be paid over to the state.

The most significant power that the state has regarding a tax assessment is the mentioned automatic enforcement.  Note that this is without the normal legal protections of serving a complaint, waiting for a trial before the Circuit Court judge, and then obtaining a judgment.  The “normal” process for collecting on debt takes a number of months, and allows a full hearing of the facts before an impartial judge, before any lien or garnishment.  DOR can bypass that normal process.

The department may, without judicial proceedings, place a lien on monies of the taxpayer which are held by a financial institution, and require that the financial institution place a 60 day hold on funds. This includes not only funds the taxpayer has on deposit at that time, but also those that he subsequently deposits. In addition, DOR can garnish his wages by sending notice to his employer, without judicial proceedings as are normally required for garnishment. Further, the DOR can lien and sell property, or take it to a storage facility and require a bond before returning the goods.  The DOR can initiate a debtor’s exam, to inquire (under oath) about all assets that the debtor owns. Obviously, all of these requirements under the law are very powerful investigation tools for the DOR.  Of course, as the situation becomes rather grave, the use of seasoned counsel is recommended.

Retail Merchant Employees Can Be Responsible To Collect Taxes!

Not everyone in a retail business realizes it, but whatever goods are sold, taxes must be collected for the state by the business.  This applies to both sales and payroll taxes. Of course, some in the middle of a cash flow pinch will choose to ignore this responsibility, or pay the taxes “when they get around to it”. What happens in these cases?

Many don’t realize that the individual who runs the corporation, and those who cut the payroll checks for the corporation, can also be liable for payment of the taxes. The theory is that the taxes are held “in trust”, which means that the individual working for the corporation, and the corporation itself, are holding funds for the state.

It’s similar to how the bank holds funds for an individual in an ordinary checking account.  In this way of looking at it, the “bank account” which the business holds for the benefit of the state (which is the 7% sales tax and employee state income taxes withheld) cannot be drained of funds. It is the duty of the business, and the chief financial officer, to make sure that “bank account” is maintained for the state, and that those funds are paid over to the state. If those funds are not maintained, it’s considered embezzlement.

This theory can result in significant problems for the retail merchant.  Officers of the corporation who are considered responsible for its money affairs, are often unaware that they can be held personally liable. Of course, if the corporation goes broke, the liability does not go away; responsible officers can and will be pursued by the state for the trust fund tax liabilities, including both sales tax and state payroll tax withholdings.  Even if those officers move on to other employment, they can find that they owe significant liabilities due to their activities as past corporate officers.

All of these unpleasant possibilities can be avoided, if the taxes are paid on time. Nevertheless, where this is not possible, it is appropriate to consider the effects of delinquent tax payment, and how the corporation’s business or the assets of the responsible officers may be affected.

It should be noted that one of the more harsh but frequently neglected provisions of the Indiana code regarding taxes concerns the priority of payment, or how payments are credited against monies owed. When a taxpayer is behind, the partial payment is first applied towards penalties, then to interest, and last to the tax liability. This means that partial payments do not have a strong effect to reduce the original tax liability, until penalties and interest are paid in full.

In addition, the corporation which is struggling but which has not yet gone out of business may find that its registered retail merchant certificate (RRMC) will be revoked. In this case, the Department of Revenue will place signs on the taxpayer’s place of business, informing customers that the corporation can no longer conduct retail sales at that location. If those signs are removed or retail sales are continued, there is a risk of additional fines (or even imprisonment) as these offenses are considered a class a misdemeanor according to Indiana Code 6–2.5–4.

Of course, as long as monthly tax reports are submitted, along with appropriate payments, there will be no problems. But if those reports are not submitted on a timely basis, the state will investigate, and issue a demand notice for payment.  My next blog post will explain the problems that can arise in such a situation.

Debt Settlement Success Stories

Debt settlement can have fairly broad applications, as the examples below indicate. Whether in a divorce proceeding, a business workout, or an individual consumer’s return to solvency, debt settlement can be a very useful tool.

Recently an entrepreneur came to see us–the franchise he had purchased wasn’t making enough money to stay afloat. We negotiated with the franchisor, so that the franchise could be relinquished. In addition we negotiated with the landlord to make sure any claims he had were settled. The most difficult matter was the SBA loan: $220,000.

Fortunately, we were able to negotiate the SBA loan down, working with the bank and obtaining Small Business Administration consent, so that 11% of the debt was tendered in cash, after which the loan was considered paid in full. The entrepreneur is now back running a successful CPA practice, and much happier than he was trapped in a dying franchise operation.

In another case, an entrepreneur came to see us regarding his small business–again, his cash flow had dried up and he was going to be forced to shut down. After doing some cash flow analysis with us, he realized that although he was running three separate businesses, only one was profitable. He arranged to sell off the other two lines of business, and continue operations with the third. However, he had substantial lines of credit which were appropriate for debt settlement. These debt settlements were done on his behalf at approximately 40%.

When he first came to see us, this gentleman was in his mid 70s. He is now in a position to retire, as he preserved some retirement savings. He’s no longer burdened with unprofitable lines of business. As an added benefit, because his outstanding debt was significantly reduced, his credit score actually increased!

If you have these kinds of practical concerns please do not hesitate to call our office so that we can counsel you on the “ins and outs” of debt settlement. If you’re worried about these issues, call our offices now at (317) 266-8888.

Ownership Disputes

Ownership Disputes

It seems like a great idea to go into business with old friends or family–so much warmth and love spread all around. Unfortunately it doesn’t always seem like a great idea years later. This can be true whether or not a business is profitable, as the following cases will illustrate.

In one case that I handled, the shareholders were family, trapped in a situation lawyers are quite familiar with, called a “deadlock”. In a deadlock situation, none of the shareholders win, because no one has a majority of the shares. Of course, contractual provisions such as voting trust, proxies, dividing up the directors, or electing particular individuals as officers with specific powers, can all be used to move around a deadlock. But most people never consider these things. They move into a business, happy to be making a profit, without anticipating that loved ones or trusted friends can embezzle funds, take vacations on corporate time, or make poor business decisions for which all partners are liable.

Obviously, all partnerships and corporations, including LLCs, should have a detailed agreement to protect all parties concerned. In the case where this has not occurred, many people can be hurt and embittered. In addition, partners and shareholders can be driven into bankruptcy, with subsequent stress such as poor health and broken relationships.

In another case that I handled, the chief officers of the corporation embezzled funds to which they had no legitimate right. Of course, those who are dishonest will rarely admit that fact. These types of cases usually go before the court, with great expense for all concerned. In the event that a financial audit is done, often the dishonest party can be proved to be liable. Nevertheless, with significant bank loans against the business and the individuals, it can be a long painful struggle getting out of this financial quagmire.

For this reason, setting up, continuing, or dissolving business relationships should be done with counsel from attorneys with decades of experience in these matters. Otherwise things can get much too expensive and discouraging for all parties involved.

Does this sound familiar? If so, please do not hesitate to call and ask a few questions. I should be able, within a short phone consultation, to assess if I can be of service to you. Please call (317) 266-8888, and ask the receptionist to speak to Mike Norris personally. Or, you can email me at mike@mikenorrislaw.com. Looking forward to hearing from you soon.

Bank Workouts

While negotiating debt workouts with banks in the last few months, I’ve noticed a number of clients coming into my office with a significant financial problem: the bank has a lien on all of their assets, and they don’t have the cash flow to ensure that everyone gets paid, including the landlord, the bank, and other general creditors.

In these situations an old saying by Donald Trump seems appropriate: “When you owe the bank 1 million bucks and can’t pay it, you have a problem. When you own the bank 10 million bucks and you can’t pay it, the bank has a problem.” In other words, when cash flow is tight, the entrepreneur needs everyone involved to work with him.

Of course, if everyone can work together, the hard-working entrepreneur can pull his way out of a slump. However, sometimes in such a situation despair can set in, and the entrepreneur becomes filled with apathy, losing his drive. The obvious solution is to give the debtor a little breathing room, so that he can get back to focusing on what’s most important to resolving their financial issues: cash flow.

In a number of recent situations, my first approach was to sit with the bank, once learning they had collateral and all the assets of the business. This may seem like a precarious or risky position, but actually it is to the small businessman’s benefit. When the bank has the first claim on all the assets, there is nothing to fear from general creditors, who have no claim on assets due to the fact the debt is unsecured. As you can see, keeping the bank happy is critical.

But just because the bank is happy doesn’t mean the debtor’s problems are over. The debtor must continue to work hard, and work steadily. Creditors need to be alerted to the fact that bankruptcy is possible, if workout discussions are not productive for all parties. The debtor’s attorney will need to handle all lawsuits, and everyone involved needs to be given enough information to understand exactly what’s going on.

Are you worried about these kinds of issues? Call me on my small-business hotline, to discuss these matters, or schedule a consultation in the office by calling (317) 266-8888. We will try our best to get to the bottom of your issues, and help you to solve them quickly with minimal aggravation.

Top 10 Things Every Successful Business Owner Should Know

1) Every Business Must Make a Profit
This is the number one principle you must keep in mind as a small business owner. How can you maximize your profits? Which product or service makes a profit? Does it carry the other product lines?

2) Keep in Mind — Every Business Falls on Hard Times
No business is perfect, and every business will have its ups and downs. Just remember to keep in mind the fact that it’s not always the fault of the economy that your business is not doing well. It may be that the business man (you) may need to change his thinking.

3) Advertising Only Goes So Far
You can’t rely solely on advertising to bring a profit to your business. Examine your strategy: what product are you marketing? To whom, and at what price? What advantages can you offer, that set you apart for your customer?

4) Time and Money Are Limited
Both time and money are precious resources. Look at your sales vs. your production. Where can you best spend your time? In what areas is the money and investment really paying off?

5) Learn to Work Efficiently With Your Partners
Your customers, managers, employees, suppliers, consultants–these are all connected to the growth and profitability of your business. Learn to maximize your overall productivity by working efficiently with everyone involved in your business.

6) Listen to the Engine
As a small business owner, you have the power to “listen to the engine”. Cash = gas to power your “engine”, which means that in order for your business to run smoothly, you need a steady cash flow.

7) Who Makes What Decisions?
Examine your personnel. Who is the most effective, with what kinds of decisions? Employ the help of others–they can often provide valuable insight.

8) What Do Your Customers Want?
Will customers pay for the service you are offering? How is your product useful to your customers, and what benefit s will they derive from it?

9) Lead From the Front
You are often the only one who can make the “big” decisions for your small business. You must control all the processes and personnel of your business. For a business to function as a well-oiled machine, all the parts must work seamlessly together.

10) In the End, You Need to Ask Yourself–What Do I Want?
Every small business owner wants the same basic thing: steady cash flow. Money = freedom. What steps will you take this week to accomplish your goals? This month? What can you do today to help improve your business?

Planning the use of money (Part 5)

This is the video that shows a full month of expenses for our sample consumer, who can now see how the month’s spending all adds up.  Is more income needed?  Can some expenses be cut?  Which expenses?  How much?

All of these questions are the ones a prudent consumer or small businessman must ask himself, in any case where he is late on paying bills.  There is an obvious reason he is late on paying bills:  he did not have the money!

When the money is just not there, go through a three step process.  First, track expenses.  Second, ask yourself: can I make more income?  If not, step three comes into play: expenses must be cut.

Hopefully, this series puts it in perspective for you.  As always, we are here to help, just call (317) 266-8888.

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

Download This Episode

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Can inaccurate credit reports be corrected?

Yes, they can.  The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act (FACTA), allows the consumer to question accuracy of reports, and furnish proofs to be considered in making corrections.  Several years ago, I taught a seminar just after a change in the law.  You can examine those seminar materials here:  Fair Credit Reporting and mortgage reporting, bky issues .  If you want to read the law yourself, you can access it here:  FCRA as amended by FACTA

In essence, those rules provide that you have the right to one free report each year, and you can apply for that report from each of the three credit reporting agencies (CRAs): Experian, Equifax, and TransUnion.  If you would like the form to use, you will find it here:  Annual Credit Report Request Form .  If you are turned down for a loan, you can get the credit report which was used to evaluate your credit, and it is also at no cost.

In order to dispute inaccurate (including incomplete) credit entries, you must contact the CRA with information showing the inaccuracy, and they have 30 days to investigate.  Hopefully, they will make the correction with no further effort on your part.

Review my attached writing to consider all the myriad ways a credit report can get inaccurate.  Frankly, it is amazing we have accurate reports.  A number of years ago, it was estimated that 40% of the reports have errors which will lead to denial of credit, and 80% of reports have errors in general.  With that in mind, looking at your report once a year is a good idea.

One common area of inaccuracy is the listing of debt discharged in  bankruptcy.  Often, the report is not updated after bankruptcy.  Even though debt is washed out in bankruptcy, the credit report is silent as to that issue, giving the impression that the debt is still owed!  Thus, it is always wise to review the credit report 6 months after a bankruptcy discharge.  If you continue to pay on debt after a bankruptcy, the creditor must continue to report your payments after bankruptcy, in order for the report to be accurate.

A radio show…….why bother?

Most Saturday mornings, I start the day with a warm cup of coffee while I read the newspaper, or maybe several different newspapers, if I haven’t yet caught up with the news of the week.  After immersing myself in reading for a while, I take some time to peruse the articles that I’ve arranged on the kitchen table in front of me.

As the “theme of the week” becomes clearer, I’m typically lost in thought while I organize the main “themes” and my presentation.  And before you know it I’ve got the topic for my weekly radio show.

Once done, I critique it. Was it compelling?  Lucid?  Relevant?

Why bother?  Just for the thrill of thinking out solutions to everyday problems in a world where people need someone to trust.  In the practice of law, communication is everything.  Let us start with building trust, based on reliable and solid advice.

Time is Money, both are Freedom!

Time is Money, both are Freedom!

Money is derived from time spent focusing on a task.  We make more or less money for more or less time, but how one uses his time will, within certain limits, allow him to make money.  Likewise, how one uses his money will, within certain limits, allow more freedom in use of his time.

We want to focus not on making money, but the use of money once we have acquired it.  If both of these precious resources are conserved, this gives us more freedom.

In other words: Time determines how much freedom we have with money, and Money determines how much freedom we have with time!

So if we want more freedom and control in our lives, we must be careful in our use of our time, and our use of our money.  Since the burden of making money is one of the principal time constraints for most of us, when we have wisely accumulated and saved that resource, we are able to direct and channel our time into the issues which we consider more important than making money.

Because we use our time to make money, and often feel we are at a loss financially because the time has not been used productively, it is critical to make the connection between profitable use of one’s time, and conserving cash, so that one has more time for pursuits other than purely the making of money.

The prudent use of time and money allows one many benefits, such as

  • Maintenance of physical health
  • Improving family harmony
  • Involvement in community affairs
  • The ability to learn on new subjects, for personal benefit or profitable endeavors
  • Time to relate to others, with a more enlightened point of view
  • Time for relating to self, unburdened by money problems
  • Time to explore the use of solitude
  • Time to cultivate better personal habits
  • Time to exercise stronger self-discipline
  • Time to work on one’s marriage
  • Time to work on relationships with other people.

So I encourage you: use both time and money wisely!

Note: We are a debt relief agency.  We help people file for bankruptcy relief under the Bankruptcy Code.