Sometimes Dividing the Pie Makes it Bigger: Why Use Multiple Business Entities.

I’ve been trying to find a catchy description for the adverse legal implications of the too common practice of mixing different lines of business and types of risks in a single business entity. “Negative synergy,” the whole being less than the sum of the parts, doesn’t quite get it. “Dumb” is unkind because the human-owned businesses that make this particular mistake almost certainly had a business advisor that didn’t stop them.

Mixtures of disparate assets and risks occur as successful businesses evolve. It’s easy to imagine the scenarios: “Instead of paying these rents, why not buy our own building?” “Let’s lease a few trucks; we can transport our widgets better and cheaper than our current hauler.” “I really love ice cream. Why not make this a combination law firm/ice cream parlor?” (Ok, maybe “dumb” is sometimes appropriate.)

But a business that evolves without attention to structure can create significant consequences in matters such as wealth preservation, taxes and financing/capitalization, critical concepts for any business owner. These consequences are almost always discovered when a fix is too late or costly. To illustrate, consider the common situation of a building that is bought inside an operating business; that owner:
· could see a single mistake in the operating business wipe out years of equity in the property, or vice versa,
· may end up paying significant sums in otherwise avoidable income and estate taxes, and
· might find plans to finance further growth, whether through selling stock or borrowing money, thwarted.

Asset protection is the most common reason for incorporating a business. Folks, this does not need to be a one-time phenomenon. As you create value in your business, it is just as important to insulate that value from unrelated liabilities as it is to protect your home and savings from problems in the business.

Multiple legal entities can be used to segregate various aspects of a business. In my example, the building could be bought in a newly formed LLC that then leases the building to the operating business. The problems of the building stay in the building, the problems of the business stay in the business. It will also be easier and cheaper to finance and insure the building. And two or more distinct entities open up a number business and estate planning opportunities not available in a single combined company.

This divided-pie approach is not without its own set of issues. It costs a bit more for starters, but the few crumbs lost on legal and accounting fees will be completely eclipsed by the long term benefits to you. Inside the company can be problematic, too. You and your management team will have to work to avoid silo mentalities that could keep various entities, especially when there are multiple business units, from creating collaborative value.

And then there is “corporate veil.” Whether you have one corporation or ten, if you don’t treat each as a distinct legal entity then why should a judge? A family of related companies must be properly administered or else a creditor of one will get to the assets of another. Protecting the insulating veil is a bit of work, but the result is a more valuable and sustainable business.

A Law School Story of Love and Laughter

Back-to-school time and the law blogs are full of stories from the greatest back-to-school sale of all time (the entire inaugural class at the new UC Irvine law school has a three-year free ride through a program that looks to balance thinking with doing) to whether a bright 19-year-old should be going to law school (her statement “I don’t consider my academic situation to be a defining point of my life” tells me she has more emotional intelligence than many folks she will encounter in law school).

This is a good time to drop in a post about the beginning of my law journey at the University of Texas School of Law. The most important thing you need to know my time at UT Law is that I fell in love with the blonde who sat in the row behind me throughout our rigidly structured first year. I was a T, she was a W.

You can see her picture here. There is no hyperlink--I really mean here. Look at the top the page. That’s Candace. We married a week after graduating law school and four days later we moved to Colorado. Candace is my partner in everything other than the practice of law and in that she is my ground. She helps me keep it all in perspective. I love you CW.

Eyebeam is another fact of my legal education I would like to share with you.

Decades before suffering law students would use the internet for sharing anxieties and anger, the highs, lows and lowers of my law school experience were played out daily in four black and white newsprint panels. Candace and I were classmates with Sam Hurt. Sam, as an undergrad, created the cartoon Eyebeam and The Daily Texan, the UT newspaper, published it. When Sam was admitted to the law school, Eyebeam went with him.

Several years would pass before I would fully understand the great gift of having a comic chronicler in our midst. Seeing our angst, our foibles, our parties through Eyebeam's lens gave us reason to laugh at ourselves, an invaluable lesson for lawyers-to-be.

So for my guest contributor Red, for 19-year-old Kate McLaughlin, and for everyone starting law school, here are some of my favorite Eyebeams from 1980-1983--click on the strips to enlarge them. They are as relevant today as they were then. Good luck in law school. Just remember to laugh.

Thank you, Sam, for the laughter--the greatest death-ray of them all. You can learn more about Sam Hurt here and see more new and old Eyebeams on this site and in the weekly Austin Chronicle.

And thank you, Candace, for everything.

I Don’t Want Your Money: Free Help for Colorado’s New Human-Owned Business

Like a forest after a fire, new businesses are starting to green-up the aftermath (I sure hope we can call this the aftermath) of the economic crisis. That’s great news for a business lawyer like me; these new companies will need a good lawyer…someday.

Unfortunately for me, that someday is still a ways off for many of them. A new business must be strategic in its expenditures. So before spending scarce cash on me (or my sisters and brothers of the Bar), new entrepreneurs should first be taking full advantage of the enormous amount of free or low cost business resources available in Colorado that I am listing below.

Money spent on attorney’s fees before the homework is done is frustrating to clients and reputable attorneys. Believe it or not, a good lawyer cares about your success. Making a few bucks from advice to folks who are ill-prepared to start a company is not a good business plan for a lawyer. I would much rather trade that for the opportunity to represent you when you are ready for me to help you start making hay. That way I create a long-term relationship with you and your human-owned business.

But before I get to my resource list, a couple of readers have popped the question (no not that question), so others must be wondering, too: What do I mean by “human-owned business?”

Whether it is also called closely-held, entrepreneurial, private, family- or employee-owned, a human-owned business is a special kind of client for a business lawyer. These companies are the opposite of public, they are personal. The owners of these businesses deserve (and appreciate) legal advice from a lawyer who appreciates just how personal it is to them. But while a new human-owned business may be small, having a limited number of human owners does not equate to a small company. The companies on Forbes 2008 list of the largest private companies, admittedly not all human-owned, employ thousands and make billions. So do your homework, but dream big.

Here is my list of resources for new and emerging Colorado companies. If you have a link to suggest, I would love to have it.

State and City Resources

State of Colorado’s Small Business Development Centers This should be one of your first stops. Centers are located around the state; the one for Denver Metro has its own site.

Colorado Business Resource Guide

City of Denver, Office of Economic Development For new, growing and relocating businesses of all sizes.

Denver’s Business Toolbox

Denver Public Library’s Business & Company Resource Center, but you’ll need a library card.

Colorado Business Express A pretty cool tool from the State of Colorado official site.

Minority and Woman-Owned Business The State office.


Federal Resources

SBA’s Colorado district office

SBA’s FAQs

SBA’s assessment tool to tell if you ready to start a small business, but it helps only if you are honest with yourself. Luckily, I don’t need to be honest with you, so I won’t tell you how I scored.

SCORE Business counseling nonprofit affiliated with SBA.

University Programs  (credit and noncredit programs)
University of Colorado’s Bard Center for Entrepreneurship (including a Small Business Incubator)

Executive Education at the University of Denver’s Daniel School of Business

Center for Innovation at Metropolitan State College of Denver

Chambers of Commerce
There are many chambers, these are just a few where I am connected.

Denver Metro
South Metro
Fort Collins

Finance Help

Here are some non-profits that educate emerging companies about money matters.  They also provide direct help through loans, investments, or connections to funding resources.

Accion

Colorado Enterprise Fund

Kiva

Rockies Venture Club

Rocky Mountain MicroFinance Institute

Rutt Bridges Venture Capital Fund at the Bard Center

Funding Businesses

Since money is the biggest single challenge for emerging business, I beefed-up my original short list of non-profit aid groups with a more expansive, though still partial, listing of Denver-area businesses that provide equity and/or debt capital, or will help you find it.  I excluded commerical banks as those are easy for you to find.  The folowing investment banking & private equity firms focus on a variety of  industries and company sizes.  Explore the list, but don't infer anything from my inclusion or exclusion of any group.  Remember these are business, not free or low cost services, and contary to the rest of this post, if you are ready to work with one of these firms, you are ready to hire a good business lawyer to help you.

Altira Group 


Appian Ventures

CAPEX

Centenniel Ventures

CHB Capital

Crawley Ventures

Green Spark Ventures

Hexagon Investments

Iron Gate Capital

JD Ford & Company

KRG Capital Partners

Meritage Funds

Midas Financial/Venture Associates

Platte River Ventures

Pronet Capital Limited

Quest Capital Partnership

SDR Ventures

Silver Creek Ventures

Stolberg Equity Partners

Vestar Capital Partners Inc

Village Ventures

Job v. Responsibility: A Lawyer’s First (and most difficult?) Challenge

No Funny Lawyers is pleased to present, as promised here, guest contributor Carolyn Black. Carolyn, aka “Red,” is entering the University of Colorado at Boulder Law School. How lawyers can (and should) be better advisors to human-owned businesses is one of this blog's focuses. The journey from law student to lawyer is certainly relevant to that concern and Red will describe it for us from time-to-time. ♦

The reading has begun in preparation for the start of law school in two weeks. One assignment down, and just a few more thousands (millions?) of pages to go before I can call myself a lawyer (ahem, assuming all goes well with that little thing called the bar exam).

My summer reading assignment was to read the book Coal River by Michael Shnayerson. Coal River is a “real” book that has nothing directly to do with law school (unlike Scott Turow’s One L, which has since given me nightmares. The kind of nightmares where you show up to class in your birthday suit AND you’re unprepared to do battle the Socratic method way, and your absolute sole concern is that the professor is going to call on you. A hearty thank you to all who recommended reading this book before starting school.).

In any case, the purpose for reading Coal River is thus: what will be our responsibilities as lawyers? (Be nice, people.) This will be a topic of discussion at orientation, which starts next week.

I won’t get too much into the actual subject matter of the book, other than to say it’s a true story of coal mining in Appalachia (predominantly West Virginia) and the ramifications, particularly the legal battles, which arise. I do want to say, however, that while I recognize that at first glance it may be easy to dismiss this book as stereotypical Boulder fare – the virtuous left-wing tree huggers versus Big Bad Business – it is not. Coal River is significantly more complex and thought-provoking than that.

The surface answer to the question of what lawyers need to do comes across in Chapter 16. Joe Lovett is an environmental attorney who has been representing various Appalachian residents against a large coal company, as well as the federal government. Regarding Lovett, “[h]e wanted to be effective as he could, but his ultimate goal wasn’t to change the world, it was just to do the right thing.”

It’s easy then. As a future lawyer, all I have to do is the right thing. Only “the right thing” is pretty open to interpretation. Just because an action is legal rather than illegal doesn’t necessarily make it right – and that’s where I imagine the balancing act of being a lawyer comes in. While it may be a lawyer’s JOB to protect the best interests of his/her clients, it’s a lawyer’s RESPONSIBILITY to protect the best interests of his/her clients while still being able to sleep at night. Perhaps I’m just completely naïve at this point, but I’d like to think that in the majority of cases, the job and the responsibility will coincide. And in those (hopefully) few cases where there’s a disconnect, well, I’m not sure any school can teach you what to do. That’s a personal decision you have to make for yourself. But we will see!

So, as I start my three-year journey, here is my answer: as a lawyer, it will be my responsibility to defend and preserve the interests of my client (and yes, I still have every intention of pursuing business law – from Coal River I’ve learned what NOT to do as a business lawyer) while still remaining a productive, good member of society at large. How I go about doing that will be a combination of what I learn in the next three years blended with my inherent values as a living, breathing member of society – that is to say, who I am as a person. (Yes, lawyers are people too. Regardless of what some people might say, I might even venture to say that some lawyers are funny people.)

I’m curious as to how I will answer this question in three years.

Five New Colorado Laws Your Business Should Know

Yesterday, 153 new laws went to effect in Colorado. Without getting into industry-specific issues, I believe human-owned businesses, in general, will be most interested in:

Parental Leave. House Bill 1057 has received a great deal of attention, both positive and negative. This law, which only applies to companies with 50 or more workers, grants 18 hours of unpaid leave annually to parents to allow them to attend to their children’s educational activities.

Tax Credits for Jobs. Colorado has a major economic development push in House Bill 101. Political and business leadership tout it as an economic development game-changer.
Under this law tax credits will be available for businesses creating as few as 5 new jobs in rural Colorado and 20 in the remainder of the state. If you are thinking about the opportunities that come with a crisis, this might be one to look at in detail.

A Little Recruiting Help. When you recruit an employee from out-of-state, House Bill 1063 may give you a little help. Under this law, high school seniors who moved to Colorado because of a parent’s new job will be eligible for in-state tuition at our state universities.

Paycheck Fines. Not that this would happen to you, House Bill 110 has new penalties that apply to Colorado employers that bounce paychecks.

Golf Carts & Insurance. This one almost slipped by, but on further reflection I think you and your business should think first before taking advantage of House Bill 1026 allowing the use of golf carts and other “Neighborhood Electric Vehicles” on streets with speed limits of 35 mph and less. I hear through some insurance advisors that golf cart owners may not have the proper liability or casualty insurance needed for operating a golf cart outside of a golf course. Check with your insurance advisor to see that both the business and the employee have the correct insurance before allowing someone to zip off on a company errand.

These are just the barest highlights. See your business attorney for the details.