What Do You Do If Your Business is in Financial Trouble?

This week our topic is financially troubled businesses, and we’ll be speaking with attorney Fred Steingold, author of the best-selling title, “A Legal Guide for Starting and Running a Small Business.”

NOLO: Fred, your book, A Legal Guide for Starting and Running a Small Business, covers a lot of material. It’s easy to see why it’s one of the best-selling guides on the subject. But in this broadcast, we’re particularly interested in your chapter about the financially troubled business. One of the things you mentioned in that chapter is that a businessperson needs to think ahead to protect personal assets. How does a person develop an asset protection plan?

FRED STEINGOLD: Let’s say you own a home, car, you’ve got stocks and bonds, you’ve got a savings account… those are your personal assets. You’ve worked hard probably to acquire those things, and you want to protect those assets to the greatest extent possible in case your business fails. You don’t want to have some creditor seize those assets to pay for business debts, so your asset protection plan is all about protecting those assets, and it starts with your choice of entity. By that, I mean how you’re going to do business, and how your business is going to be structured. There are two basic ways. One is either having a sole proprietorship or a partnership, and in either of those cases, you’ve got complete exposure. If you’re a sole proprietor for example, all of your assets are at risk for whatever the business does. If you have a partnership, each partner is personally reliable for all the business debts, and so, you’re completely at risk. Now, the opposite of that is the corporation or the Limited Liability Company (we sometimes call that an LLC), and in that case, your exposure is limited, and the reason is this: the law treats a corporation or an LLC as an entity that’s separate from the owner. You’re a shareholder in a corporation, you’re a member of an LLC, and those are different from being the business itself, so for people who are concerned about asset protection, it’s a much better choice to have either a corporation or an LLC, and granted it costs a little more to set these up and there’s a little paperwork involved, but the tradeoff is that you have greater piece of mind. So, that’s one step if you’re going to have an asset protection plan. Another one is, if you can at all help it, don’t sign a personal guarantee for business loans or business credit. Sometimes you don’t have a choice; if you’ve got to borrow money from a bank in order to get started they’re going to want you to guarantee the note, but you try not to do that, or if you must sign a guarantee, see if you can limit its effects; see if you can limit the length of time that it’s going to be in effect, maybe one year or two years rather than indefinitely, and maybe put a cap on your liability. If you’re borrowing $20,000, maybe you’re only going to guarantee $10,000 of it. So, there are ways to try to keep that exposure to a minimum. If you’re going to sign business loans another technique is, don’t have your spouse co-sign the loan. The reason for this is that, in many states, if only one spouse signs the loan, then the creditor can’t go over jointly owned assets. One other thing: you probably shouldn’t pledge your home as collateral for a business debt, because if your business goes bad, you at least want to have a place to live. And probably something else is you of course want to maintain adequate insurance for your business; there are certain risks you can protect against through insurance, and that would also help protect your personal assets.

NOLO: Fred, you mentioned something about not having your spouse sign documents. Do you mean not having your spouse co-sign those documents?

FRED STEINGOLD: Co-sign a loan, particularly. If you’re going to borrow money for your business, it would be better if you sign it in your own name by yourself, and not have your wife as a co-signer, because as I said, in some states, if both spouses sign, then their joint-assets are at risk, their joint-bank account, a jointly-owned home for example, whereas if just one signs, then a creditor can’t go over jointly-owned assets.

NOLO: Fred, in your book you warn against penniless partners. What’s the danger there?

FRED STEINGOLD: Well, if you’re going to go into partnership with somebody or a couple other people and they don’t have any money, and there’s a claim against the partnership and someone gets a judgment, the person who gets a judgment is going to go after whoever they can, and if you’re the one with the deep pockets and the only one with any money, then it’s all going to fall on your shoulders, and if you have a partner who really messes up and really causes the partnership to have big debts, you’re going to be responsible for those debts, and it won’t do you any good to try to turn to the partner to collect from him or her, because we said that they’re without assets; they’re penniless. So, you want to have people in business with you who are on equal financial footing with you.

NOLO: Fred, some people believe that by forming an LLC or a corporation, it creates an automatic shield for their assets. But that’s not always true, correct? There are things like personal guarantees.

FRED STEINGOLD: Right; that’s a very good point. Some people say, “Look, I’ve got a corporation,” or, “I’ve got a Limited Liability Company, so I don’t have to worry; I’m free, I’ve got this great protection.” Well, these are good things to have, because you do get protection, but it’s limited liability; it’s not a complete freedom from liability. For example, you are protected if there’s some debt of the business that you haven’t personally signed, or if one of your employees commits what we call a torte – injures somebody or does something else, you’re protected. As we’ve noted, there are some exceptions: if you sign a debt yourself or personally guarantee one, even though you may have a corporation or an LLC, you still are personally liable for that debt. And then there are your own actions in running the business. Let’s say you send a defamatory letter about a former employee. You can be sued for defamation whether or not you have a corporation. Or, if you engage in sexual harassment, you can be personally liable to the employee who was harassed. So, there are a couple of examples of situations where the corporation can’t protect you, or having a corporation won’t protect you. And, there’s another area, and that is unpaid employment taxes. If you withhold taxes from employees’ paychecks and then don’t pay them and the company goes bankrupt, you’re going to be personally liable for those. And one general point, too, is that you need to follow all the legal formalities for having a corporation or an LLC; you’ve got to maintain the distance between you and the entity, and treat the entity as being separate. If you slip up, then a creditor’s going to say that the entity was just a sham, and in some cases, they can then go after you personally, so you always want to use the correct name of the entity, and you want to sign contracts as an agent of the entity; for example, as a corporate president, or as an LLC member, and that way it’s clear that you’re not personally undertaking liability but only acting as an agent for your entity.

NOLO: As an attorney, how do you deal with a company whose attitude is, “Gee, I should pay my employees first, then I’ll deal with the tax penalties later”?

FRED STEINGOLD: Well, I think if they’re going to do that, they have to be aware that it’s a risky course of action, and if their company stays insolvent, can’t pay its debts and ultimately has to go into bankruptcy, while the other debts may be discharged in bankruptcy, the liability for the employment tax will not, and that burden will fall on the owners; in a small company, particularly, that probably means all the owners, because they’re going to be involved in the day-to-day operations of the business. So, I guess if they’re going to try to cut some corners, they’re going to have to economize in some other way, maybe lay off an employment if necessary, but economize so they can still pay the taxes.

NOLO: Fred, one of the tips we provided earlier was that when a business is in trouble, it should not give preferential treatment to some of its creditors. What’s wrong with that?

FRED STEINGOLD: There’s a legal problem with it; the technical term is “preference among creditors,” and here’s how this works: if your business files for bankruptcy, the bankruptcy judge will scrutinize all the payments you made in the year before you filed for bankruptcy, and if you favor some creditors over others, the judge can order the favored creditors to pay back the money, so that it can then be more equitably spread among all the creditors, and this is especially an area where you have to careful if you’re going to be making any payments to family members or insiders, or transferring business property to them. These payments or transfers are likely going to be undone by a bankruptcy judge, so that’s an area where you should be cautious if your business is getting into financial trouble.

NOLO: Another tip we mentioned earlier – and you also mentioned it in your book – is that when a business is in trouble, it should try to get insurance that extends, and in your book you recommend for at least twelve months. Why is that?

FRED STEINGOLD: For businesses in financial trouble there’s a possibility that you may have to go into bankruptcy, and if that happens, you’re going to have a hard time finding an insurance company that will renew your insurance or issue a new policy. So, you want to try to get some insurance that lasts as long as possible into the future, and as long as you keep making the payments on the premiums, your insurance can’t be cancelled, and this means that your business assets are protected, and that you’ll sleep better at night knowing that.

NOLO: Fred, does it pay for a financially troubled business to get an appraisal?

FRED STEINGOLD: It can help in two situations. One is if you’re thinking of selling the business it could be helpful to be able to know what your assets are worth, but it could also be helpful if you’re trying to negotiate a workout plan with creditors. Then you could show them exactly what the assets are worth, and that will help them make a judgment about whether they want to cooperate with you in trying to keep the business going as long as possible.

NOLO: Last question, what’s a workout, and how do you develop a plan for one?

FRED STEINGOLD: Well, the basic principle is that you’re trying to get all or at least most of the creditors to agree to take a little less of what’s owed, and to give you more time to pay up. But to make this work, you’ve got to be able to convince them that they’ll do better by working with your business and trying to keep it alive than by suing your business or pushing it into bankruptcy, and of course, you’ll need to open your books to the creditors so they know the exact financial condition of the business, and you may have to get help from an experienced accountant to put together a plan that would be palatable to the creditors.

If you’d like to review tips for troubled businesses, check out the Article, “Ten Tips for Financially Troubled Businesses,” at the Nolo website.

Blogs, Websites & Podcasts: When Do You Need Permission?

In this episode we’re going to examine what happens if you use other people’s material in your business – for example, you use someone’s artwork on your blog, using someone’s music on your podcast, or using another company’s trademark at your website.
We’re speaking with Rich Stim, the author of the book Getting Permission from Nolo and an expert on copyright and fair use.

NOLO: First question, Rich do I need to get your permission to interview you for this podcast?

Rich Stim: Well, in my case, no and it’s similar to the case of most interview subjects for podcasts or newspapers or magazines. I see that you’re taking notes. You’ve told me it’s for an interview. And in this case I see the microphone, so I’m impliedly consenting to have my words broadcast or recorded or used for whatever purpose you’ve told me it’s going to be used for.
There are times when you should get a signed interview release. And I want you to keep in mind one thing which is we’re only talking, right now, about the right to use the statements that are made by an interview subject. I’m not talking about the rules for getting permission to use copyrighted music or photos or artwork or anything else. We’ll talk about that later.
But as a general rule, as you move from editorial uses to commercial uses for interview subjects, if you follow that meter from one side to the other as it gets closer to commercial and further away from an editorial use, you should get a signed release.
What’s the difference between editorial and commercial? Well, if you’re interviewing a lawyer, like me, for an article or information style podcast, that’s probably an editorial use. But if you were creating a book of interviews with lawyers, or if you were using this interview as means of advertising some other legal service like a lawyer directory, I think at that point you definitely would want to have permission from the person, something signed and in writing indicating consent for those commercial purposes.
Another situation you need permission from an interview subject is if you’re working on a project and it’s a project in which other companies or distributors are involved. For example, if you’re making a documentary film that involves distributors, production companies, and everyone up higher in the food chain is going to ask you for evidence of permissions – whether or not they’re following the rules I’m talking about. So even if the use seems purely editorial, the distributor, or the book publisher may want the release. So, it’s best to get those at the time of the interview; it’s hard to go back and get that release later.
Another thing that arises with interviews is that an interview subject may ask to read or edit the interview or to have some comments removed or kept “off the record.” Any agreement that is made with the interview subject, including an agreement for anonymity, should be documented. Failure to honor the arrangement may give rise to a lawsuit for monetary damages.
By the way, I’ve posted a downloadable sample interview release, along with a transcript of this podcast at nolopodcast.blogspot.com.

NOLO: What’s the best way to get someone’s permission without making it seem really legal and scaring the person away?

Rich Stim: Okay … now we’re moving beyond interviews and talking about all kinds of permissions … for example, permission to use someone’s music or photography or to use a model’s image in an ad. These cases are often different and it always it depends on what you’re using and what you’re using it for. But let’s just assume you’re going to need permission for what you’re doing.
When you want to get that permission it’s always best to keep it short and sweet – if you can – for example, I’ve met photographers for example who have reduced their model release forms to the size of a business card because it seems less imposing.
And the other thing you want to keep in mind is that you want your release to reflect the potential uses you might have for the material, uses that you may anticipate in the future. And of course, as I talk about in the book, Getting Permission, there are times when you don’t need permission at all.

NOLO: What happens if someone is creating work for you like doing photography or creating a website? Do you need to get permission to use that?

Rich Stim: Right, don’t assume just because you’re paying someone to do something that you own all rights. That’s a big mistake. A lot of people make it with photographers and graphic artists. Here’s the deal -- if someone is your employee and they – you withhold taxes, etc., and that employee creates something for you under your direction or in the course of your employment – then you’re probably never need to get permission to use that material. You’re going to own it. Now, you or your company can bolster that situation with some paperwork that assures or guarantees your rights. But generally even without the paperwork, a company is going to own what the employee creates.
But that’s not always the case if the person is a contractor. In that case, you’re going to have to make sure you’re getting the rights from a contractor and you can do that a few ways. You can ask the person to assign all copyright to you, or to acquire all rights under a work made for hire agreement – though not everything qualifies as a work made for hire. Or you can have the contractor sign an agreement that gives you the exclusive rights you want. But the important thing to remember is that there’s a difference between whether some3one’s creating something for you as an employee or a contractor. So if you’re paying someone as a contractor to take your photo or build a website, it’s best to get written permission.

NOLO: Your book, Getting Permission, explains the importance of getting permission before you sell or publish something … but don’t some people do better by not asking for permission? Isn’t it possible to get more attention by taking the unauthorized route?

Rich Stim: Yes that’s true but I’d qualify one thing you said. I don’t think doing something that’s unauthorized is what gets you attention. I think what gets you attention is that you do something unauthorized and you’re doing it really well. That’s been the case with a lot of artists. They become famous using unauthorized material without permission. That’s how Andy Warhol started his career. But to really pull it off, you’ve got to be good, and you’ve got to have some amount of artistic courage because you’re going to have to face down copyright or trademark owners who will come after you and you’ve got to have some original talent because eventually, the copyright owner will stop you from doing what you’re doing. And at that point you’ll need to come up with a way to make your talent work in an authorized way.
And I’ll make another point that’s also important. It’s all great for courageous artists to take that stance but you can’t take that “forget about permission” attitude if you’re working for a client or you’re working at a company. Some companies may take risks and nothing happens. And others - like Google, will take informed risks that they’re willing to support in court.
But generally, the business world is an “authorized” world and when you’re working work with or for these are people, you’re going to need to get permission. Because if you use an image for an ad campaign or a website or you use somebody else’s trademark and you don’t have permission that’s going to hurt your livelihood. So in these cases you need to follow the straight and narrow and get permission.

NOLO: You hear about people getting letters from attorneys accusing them of ripping off somebody’s music or artwork? What’s the best way to respond when this happens?

Rich Stim: The smartest thing to do is to investigate and respond as quickly as possible, and ideally, during the period when you’re investigating, take down whatever it is that’s offending the copyright or trademark owner. That doesn’t mean you’re caving in, but it’s an important risk-aversion approach because it demonstrates you are acting in good faith and if the person decides to sue you later that initial gesture of good faith will go a long way to saving you money on financial damages in the lawsuit, if there are any.
By investigating, I mean you’re going to have to look into the issue. Maybe you can do it by checking out some common resources that I’ve provided. But you may need to speak with an attorney who is knowledgeable in copyrights, trademarks
Once you’ve done your investigating then you need to decide if you’re going to take a stand on the issue. Is it going to be worth the hassle to you? It’s really a business decision and try to avoid deciding it solely on principle. Remember that lawyers love clients who are fighting on principle means that the fees will keep coming and keep coming.

NOLO: But aren’t these letters often just somebody trying to bully somebody else

Rich Stim: Yes, there are two types of bullying. Each is annoying in its own way. One type of bullying is when a company would probably prevail in a lawsuit against you – the company has a legitimate right to stop you -- but they’re pushing much harder than they need to get the job done or asking for much more than they really might be entitled to. You’ll have to deal with that type of aggressive behavior as best as you can … perhaps attempting to negotiate the best deal you can for yourself. A lawyer may be able to help. That’s part of the price for using unauthorized material.
The second type of bullying is the really awful type where a company doesn’t really have a legal claim or they have a borderline claim. They may or may not prevail in a lawsuit. But they have the legal muscle and financing to take you to court and you probably don’t. You see this a lot in trademark cases, where companies may try to stop another company from using a similar name. And you see it in copyright cases where you may have a right under fair use rules to reproduce something but you can’t afford to prove it in court.
Again, it’s a business decision. But I would add one thing if it makes a difference. I don’t know if it does. Try not to take the bullying personally. In most cases it’s strictly business. It’s just an aggressive or greedy company is just trying to squeeze somebody.

NOLO: So we’re doing podcast, can you give us some legal tips regarding permission and podcasts?

Rich Stim: Well, podcasts are like everything in the world of permissions. You’re more likely to run into a problem if you’re doing something without permission and it’s making the owner of that you’ve taken property mad. And of course, remember the other side of it … the tree falling in the forest thing. If nobody hears or sees what you’re doing, except a few friends, well, you can rip off as much as you want but once you land on the copyright owner’s radar screen, that’s when you’re going to may run into problem.
In a way, you’re really asking what makes the owners of a trademark and copyright mad… or at least so mad that they’re going to go after you. Well, one thing is if they feel like they’re losing money; another is if they feel they’re being publicly disparaged. So, for example, if you’re a commercial podcaster and you’re working with a corporate client, you’re always best off getting signed permissions from the talent, getting a written license to use music ( or better yet use license-free music), and you’re going to want to avoid using a title that’s confusingly similar to another company or another podcast that’s engaged in the same sort of information or services. For example, I’d advise against calling a financial podcast, “Don’t Leave Home Without It” because you’re likely to get a cease and desist letter form American Express. And they will be concerned that you’re confusing consumers that your podcast is somehow associated with theirs.

NOLO: What about linking to another website, are those ever illegal?

Rich Stim: As a general rule I’d say that linking is a non-issue except for one thing and again, that is what makes a copyright owner mad. If you’re linking to something unauthorized, yes, you’re going to run into a problem. For example, at Nolo we’ve had to go after to people who are linking to illegal downloads of our software. And those are links that are doing more than connecting you with another website. Those kinds of links do what I discussed before, they duplicate illegally and they make a copyright owner mad in the process because the copyright owner is losing money.

NOLO: You hear copyright is illegal. Is it ever possible to go to jail for copying things?

Rich Stim: Very very rarely does anyone do time for copyright or trademark infringement. Usually it’s only in large cases of counterfeit goods will you find law enforcement getting involved and charging someone with a crime.

NOLO: When don’t you need to get permission?

Rich Stim: You don’t need to get permission if something is in the public domain or if you are using something and it’s a fair use. Fair use is a great concept but it takes courage or money or to really face somebody down and claim a fair use. The principal is that the copyright law says that you can use something without permission if you’re using a small portion for purposes of commentary. That’s roughly the idea. And there are four factors judges consider but the factor that matters the most is whether you’re transforming the work. That is, it’s a transformative use. For example a parody or critical commentary are transformative, But the problem with fair use is that there are no real guidelines so you can never be sure of what it is --- unless you’re matching a court case that matches your facts exactly -- until you get to court. It’s only in court that a judge will decide whether it is a fair use. So, again it comes back to whether you want to deal with the hassle and expense of that kind of battle.

NOLO: If fair use is supposed to be about transforming the work then why did the lawyers shut down that fan fiction book at Amazon.

Rich Stim: Maybe you should explain what fan fiction is.

NOLO: Fan fiction or fanfic is when fans of a movie or television show create their own fiction using the characters from the movie or show. The case I was referring to is when a fan of Star Wars wrote a book called Another Hope using Star Wars characters and Lucasfilm complained and had it pulled form online websites.

Rich Stim: For the most part, it seems as if copyright owners are taking a laissez faire attitude to fan fiction on websites. I think they realize these people are fans and they should just let it be. That’s why you see so much of it on the web. There’s not much commerce involved, it’s being done out love for the characters and the work
But – and again we get back to this same point – once you start to make the copyright owner angry – usually by diverting commerce from their business – then somebody is likely to come after you. I think this author crossed that line by moving from a website publication to printing the material in a book and selling it. I think the same result would happen if somebody tried to make a movie out of Another Hope.

Thanks so much for speaking with us today, Rich.

Rich Stim: Thanks. I have a feeling some listeners will feel like we haven’t hit all the issues that are on people’s minds when it comes to blogs and podcasts and that’s true … so I’ve posted a few links at the nolopodcast.blogspot.com and I hope to set up another podcast in the future to talk about issues like the creative commons, and more specific copyright and trademark related issues.

Interview Release Form & Explanation

Nolo Copyright Center
U.S. Patent and Trademark Office
U.S. Copyright Office
Stanford Library Copyright and Fair Use Website
Example of a Sample Interview Permission
INTERVIEW RELEASES
EXCERPT FROM GETTING PERMISSION
Most reporters and writers do not obtain signed interview releases because they presume that by giving the interview, the subject has consented to the interview and, therefore, there can be no claim for invasion of privacy. In addition, many interview subjects don't have the ability or inclination to execute a written release--for example, a person interviewed by telephone for a deadline newspaper story.
Nevertheless, a written interview release is helpful. It can help avoid lawsuits for libel, invasion of privacy or even copyright infringement (since the speaker’s words may be copyrightable). It’s wise to obtain a signed release if the interview is lengthy, will be reprinted verbatim (for example, in a question and answer format) or if the subject matter of the interview is controversial.
It is common for an interview subject to ask to read or edit the interview or to have some comments removed or kept “off the record.” Any agreement that is made with the interview subject (including an agreement for anonymity) should be documented. Failure to honor the arrangement may give rise to a lawsuit for monetary damages.
If the interview subject is willing to proceed with the interview, but does not want to sign a release, ask if he or she will make an oral consent into a tape or video recorder or video. Although not as reliable as a written release, a statement such as “I consent to the use of my statements for use in the Musician’s Gazette” will provide some assurance of your right to use the statement.
An interview release is a hybrid agreement, part release and part license. The release, below is suitable if permission is sought to use an existing interview or to conduct a new interview.

Interview Release
Grant. For consideration which I acknowledge, I consent to the recording of my statements and grant to _________________ (“Company”) and Company’s assigns, licensees and successors the right to copy, reproduce, and use all or a portion of the statements (the “Interview”) for incorporation in the following work _________________________________________ (the “Work”).
I permit the use of all or a portion of the Interview in the Work in all forms and media including advertising and related promotion throughout the world and in perpetuity. I grant the right to use my image and name in connection with all uses of the Interview and waive the right to inspect or approve use of my Interview as incorporated in the Work.
Release. I release Company and Company’s assigns, licensees and successors from any claims that may arise regarding the use of the Interview including any claims of defamation, invasion of privacy, or infringement of moral rights, rights of publicity or copyright. I acknowledge that I have no ownership rights in the Work.
Company is not obligated to utilize the rights granted in this Agreement.
I have read and understood this agreement and I am over the age of 18. This Agreement expresses the complete understanding of the parties.
___________________________________________
Interview Subject Signature
___________________________________________
Interview Subject Name
___________________________________________
___________________________________________
Interview Subject Address
Date _____________
Parent/Guardian Consent. I am the parent or guardian of the minor named above. I have the legal right to consent to and do consent to the terms and conditions of this release.
___________________________________________
Parent/Guardian Signature
___________________________________________
Parent/Guardian Name
___________________________________________
___________________________________________
Parent/Guardian Address
Date _____________

Explanation for Interview Release Agreement
It’s possible that the Interview may already have been recorded, in which case the language “consent to the recording of my statements and” can be stricken from the Grant section. If the Interview will be included in more than one work, list all works and change the term “Work” to “Works” throughout the agreement. Unlimited or blanket releases for interviews are not common, partly because subjects usually are not prepared to relinquish unlimited rights.
If seeking unlimited rights (the interview can be used for any purpose) substitute the following Grant section.

Grant. For consideration which I acknowledge, I consent to the recording of my statements and grant to _________________ (“Company”) and Company’s assigns, licensees and successors the right to copy, reproduce, and use all or a portion of the statements (the “Interview”) for all purposes, including advertising, trade or any commercial purpose throughout the world and in perpetuity.
I grant the right to use my image and name in connection with all uses of the Interview and waive the right to inspect or approve any use of my Interview.

If the interview subject does not wish to waive the right to inspect the final work, strike that sentence and arrange for the interview subject to provide approval.
If the release is executed after the interview has been transcribed, it is helpful to attach a transcription of the interview to the release agreement. This provides an assurance that the interview subject has notice of what was said in the interview. Add a sentence to the grant section such as “A complete transcription of the interview is attached and incorporated in this Agreement.”
The release section provides protection against subsequent legal claims.
If the interview subject is under 18, a parent or guardian’s consent is required

What's the Best Way to Discipline An Employee?

We’re speaking with Margie Mader-Clark, an expert on human resources issues, and the author of, “The Job Description Handbook,” from Nolo. Margie is currently working on a book on progressive discipline.

QUESTION: Margie, to the layperson, the term “progressive discipline” sounds like a very unpleasant experience, sort of like corporal punishment. What does the term mean, and why has this term gained in popularity among human resources experts?

MARGIE MADER-CLARK: Well, it’s funny; I’m not sure that it is popular. In fact, it seems to be fading in popularity in human resources. I myself don’t like the term, because of all the connotations that you described. We’re using terms now more like, “Get-well plans,” or “Performance improvement plans” that are really designed more towards keeping people on board. “Progressive discipline” sounds very negative and very “you’re on your way out.” Keep in mind, the spectrum of reasons that you would employ discipline is huge; it’s broad ranging. It ca be from simple performance issues from absenteeism or tardiness, all the way up to horrible things, like sexual harassment, and violence in the workplace. So, to try to capture a term that gets all of those I think is a difficult thing, and it’s one of the reasons why we went with “progressive discipline.” Most of the time what you’re really trying to do is correct performance issues. So, things like corrective action plans, things like performance improvement plans, are a better sounding terminology for that function of this. But it is what it is; it’s sort of, this is a process, it’s a step-by-step process that’s intended to change the direction of performance or behavior of an individual, so, that’s discipline, so if you think about it in those terms, it is a progressive discipline process.

QUESTION: Some people describe progressive discipline as a ladder. Why is that?

MARGIE MADER-CLARK: Yeah, if you think about the steps of progressive discipline, or one of these other types or names for the same thing, certainly the way that this book is set up, the goal is to correct behavior. So, these would get ever more intense as that behavior doesn’t correct, I guess is the way to think about that. So, some of the different steps, you would start with basic coaching – here’s what’s going wrong, here’s what impact it’s having, here’s why we need it to get better, let’s talk about how we might do that. From there, if it’s not improving, you would go to another step called a verbal warning, which is, “You need to do this and this and this, by this particular time.” This book advocates a collaborative process to make that happen, where you actually are involving the employee in coming up with the solution for the issues, and that goes through all the steps of this. From a verbal warning you’d go to a written warning that says, “Okay, now we’re getting serious. If this doesn’t happen by this particular time, with these particular measures of success, we may move on to the next step, which would be suspension or termination.” Suspension is used pretty rarely, and it’s used primarily when you need someone off the premises while you either do an investigation, or you need a situation to cool down, so the most logical next step after written warning is typically termination. Basically, you can think of it sort of almost like a “three strikes, you’re out” type of process. For most of the behavioral issues, you would cover most of the steps; for some issues, you’ll jump right to the top.

QUESTION: Not every company appreciates progressive discipline; some prefer to avoid the counseling and strategizing. Instead, they reprimand, suspend, or terminate. This seems pretty efficient – what are the disadvantages of good old-fashioned punishment of bad employees?

MARGIE MADER-CLARK: For some, again, for some issues there are no disadvantages, and that’s absolutely the action that you should take. For what I’ve seen in my career, the bulk of the issues that you would employ a plan like this for are performance-related. So, the disadvantage of jumping straight to a quick-trigger firing is that you have this enormous replacement cost and process that would then need to occur. You would have lost time of the person that you’ve just let go, you’d have lower productivity of the team on the whole, you’d have the cost per hire that would be involved in hiring a replacement, their orientation and assimilation time, and their time to productivity… when you think about that whole thing, some work has been done in the Silicon valley to try to net out what those costs are, and for the average-knowledge worker, those costs can total up almost $250,000, which is a pretty significant impact to the bottom line. So, when you think about it from a business standpoint, being able to turn around the performance of an existing employee negates all those costs, and gets your employee more productive in a much shorter time frame than it would take to actually replace them.

QUESTION: In progressive discipline, an employee reads a reprimand, and then must sign it. Why have the employee sign it, and what happens legally if the employee refuses to sign it?

MARGIE MADER-CLARK: Typically on a reprimand, the signature is just acknowledgment of receipt, or acknowledgment of understanding what the document says, so they don’t actually have to sign it. If they refuse to sign it, all you have to do, it’s no less valid, you just have to note the date and the time that the employee saw it and that you presented it to the employee and that you can verify that they actually read it. Once you’ve done that, you’ve taken care of that step of notification, and you’ve started them down the road of the discipline process, and you have your documentation in place as well.

QUESTION: Okay, an employee has done something bad, and the company wants to suspend the employee. Let’s say the employee has threatened someone, or arrived at work drunk, or harassed another employee. How long should a suspension be for, and how do you implement that? Is it suspension with pay? Does a manager have to consult human resources before suspending an employee?

MARGIE MADER-CLARK: I wish there were some hard and fast rules about this, because it would be much easier to apply suspension consistently if there were, but suspension is basically, and I think I mentioned this earlier, it basically happens in two different times: number one, there is clear and present threat of danger to your existing workforce, or to the employee themselves, and you just need to get them off the premises. The second time it happens is if you need to do an investigation into an issue, and you don’t necessarily know if that employee is actually guilty of whatever that issue is or not, and it buys you some time when that employee is not present that you can do that investigation. Those are the two basic times you would actually use a suspension. So, the question about, “Is it paid or not?” kind of goes with those answers. If it’s an investigation and you don’t have proof of guilt, you probably want to pay them for that time. Again, it’s not hard and fast; you don’t have to, there’s no law that says you have to pay them, but a good practice is to pay them with sort of the theory of being innocent until proven guilty. If it’s the other case, where you’re getting them off the premises because you’re worried or there’s been violence, or a threat of violence, or anything like that, you don’t have to pay them; you can suspend them without pay, and that’s just basically buying you time to get your paperwork together, and get it documented, and so forth, to move ahead with the termination. Typically, if you’re suspending them without pay, the next step is termination.

QUESTION: What happens if the company acts inconsistently? For example, the company suspends one person for a week for being drunk, but another person who’s drunk simply is given notice, or sent home for the day. What kinds of issues arise if progressive discipline is not provided with consistency?

MARGIE MADER-CLARK: This is sort of the bane of progressive discipline’s existence. This is the way you can get into the most trouble; if you’re not being blatantly discriminatory and so forth, that inconsistent application will cause you the most trouble, and the reason is, someone will come up with a purpose or a reason why you treated somebody differently than you treated someone else for the same sort of instance. That can be easily interpreted as discriminatory, or showing favoritism, or nepotism, or a variety of different reasons. All those reasons can open you, and your company, you personally and your company, up to potential legal exposure, and costs associated with that. So, a written progressive discipline process that’s not followed to the extent that it’s written down, in the order that it’s written down, would be considered inconsistent application of that process, and would allow legal exposure. So, you definitely want to, especially when situations are similar, treat them as much the same as possible. Now obviously, there’s some things that you’ll do differently based on the personalities of the people that you’re working with, but for the most part, the basic steps need to happen in the same order, and at about the same point in the cycle, from person to person, as these different issues occur.

QUESTION: Is there a way for the company to implement the discipline without the employee taking it personally?

MARGIE MADER-CLARK: I think it’s always tied together; I think the most successful progressive discipline is done when you’re taking into account how it will be received, and what actions you want the employee to take, and how you want them to participate and be involved, because I’ve always seen the higher the level of employee involvement in a get-well program, the more likely they are to actually get well. So, if you’re approaching a personality that you think is going to be shocked and surprised that you’re actually taking a disciplinary step with them, then you need to walk them very slowly through the step. Don’t eliminate the step at all, because that puts you in the same trouble as the last question, but walk slowly through the step, have your reasons together, have specific examples together, and get them to a point of understanding, if not accepting; don’t worry too much about accepting in the first step of the disciplinary process, but at least get them to understanding the issue. Then you can start to bring them into actually collaborating with you on how to fix the issue. So, I think it’s very important to adapt your delivery to the person’s personality, and not try to do that very quickly, or without thought, ahead of time.

QUESTION: A big component of progressive discipline is documentation; that is, getting information into the employee’s personnel file. Where can a manager get help as to the proper wording for the types of statements that should be included in a personnel file?

MARGIE MADER-CLARK: I think the main thing to remember here is, documentation of these things, you want to basically keep wrapped around the facts and event details, just enough to trigger your memory. So, dates and times, who was present, where did this meeting or incident take place, what was said and how was it received, and if you note kind of those what, where, when, how type of statements, that’s all the documentation that you need for the most part. As you move to written warnings and so forth, obviously you’ll have that piece of paper that says what that warning is, but documenting these coaching sessions, or the verbal warnings and so forth, it’s really a who, what, where, when, and how it was received type of documentation. There’s lots more detail on that in this book, and in Nolo’s other titles.

QUESTION: What other types of things should trigger a media termination, not progressive discipline? And, do you have to notify employees that these types of things are exempt from the progressive discipline procedures?

MARGIE MADER-CLARK: There’s certain things that are just considered zero-tolerance, and most policies will list those out in sort of a comma format, and they would include all the things that you would think were very obvious. So, any violence towards another employee, harassment, blatant discrimination, any felonious actions, anything that breaks the law… these sort of jump right to the top of the ladder, and are, you know, certainly possibilities for immediate termination.

Is it Harder to Sell a Retail or a Service Business?

We’re speaking with attorney Fred Steingold, an expert on small business law. We’re going to talk to him about the issues that arise when you’re buying or selling a business. Fred is the author of “The Complete Guide to Selling a Business,” from Nolo.

NOLO: Fred, is it harder to sell a retail business versus a service business? What are the concerns when you’re selling these types of businesses?

FRED STEINGOLD: I think that those concerns are probably greater on the part of the buyer. The buyer’s going to be interested in what kind of inventory you have, for example, in a retail business, and the location will be very important. In a service business, the location may not be quite as important; if you have an electrical contracting business you could be out someplace off the main drag and still be doing business, but the buyer in that situation is going to want to know about your contracts; do you have long-term contracts and can they be assigned to the new owner? So, the buyer’s going to have different concerns and different focuses depending on whether it’s a retail or a service business.

QUESTION: Here’s a tough question for a lot of people: what makes a business saleable?

FRED STEINGOLD: In order for a business to be saleable, you have to put yourself in the shoes of a buyer, and look at what kinds of things a buyer will want. Probably the most important thing is that the business has a good profit history. The buyer wants to see that the business has made money for the last couple years at least. Also, not only that it’s made money, but if the buyer is going to work in the business, which is very common for a small business, the buyer will want to see that there’s enough money coming in to pay a decent wage for the time that the buyer puts in, in operating the business. The buyer wants to know that there’s a lease in place, and that he or she will be able to continue on in that location after the purchase. The buyer’s going to want to see that the place of business is in good repair and is neat and attractive-looking, and, if it’s a retail business, that the inventory of goods is up to date. Those are the main things I would say that a buyer is going to be looking at. If the business has an exclusive distributorship, the buyer’s going to want to be able to take that over as well.

QUESTION: So, what you’re really saying is that it’s all about timing, right?

FRED STEINGOLD: Yeah, that’s right, in terms of business itself. Sometimes there are external factors, though; sometimes there are business cycles, and of course you’d like to be in an upswing kind of a situation where business is perking, but even in a bad business cycle, there might be opportunities. For example, sometimes corporations are laying off managers, and they’re sometimes offering a buy-out package, and so those managers, who are tired of being wage-slaves, may have a pocket full of money, and may be looking for an opportunity to go into business, and sometimes even when things are bad in the big business world, there may be opportunities for someone to sell a business.

QUESTION: What if you want to sell your business, but your partners or the other owners don’t want to sell, or what if you can’t seem to agree on the selling price? How do you sort these things out?

FRED STEINGOLD: One way would be to see if they’ll buy you out. Give them a price for your interest in the business, talk to them about some installment terms, and maybe they would buy you out, and you’ll be free to go elsewhere, and they’ll wind up owning the business and they can continue it as they wish. If that doesn’t work, you might want to call in a mediator to figure out how to resolve it, or some neutral third party to help create a win-win situation. In some situations, you may be able to force a sale; for example, if you have a partnership, if any of the partners wants to dissolve it and there’s nothing to the contrary in the partnership agreement, you’d be able to, on your own, just say, “Well, we’re going to dissolve the partnership,” and that would mean the assets or the business would have to be liquidated, and you would get out that way. Probably it’s a good idea, when you go into business with people, at the very beginning, have a plan of action, so you don’t have to worry about this later; you might have an agreement upfront about what you would do if one of you wanted to sell and the others didn’t.

QUESTION: Sometimes you read about a business that sold, but the owners stay on to run it after it’s sold. How hard is it to negotiate something like that? And what’s your experience with these situations? Is it hard for former owners to work for someone else?

FRED STEINGOLD: It’s hard sometimes, but the former owner would have to put aside his or her ego. It’s not difficult to make these arrangements however. In fact, most buyers like the seller to stay on for awhile as sort of a transition. Buyers like to do it; for one thing, they get some extra money during that period, they’re going to be either an employee or a consultant, and whether it’s months or even a couple years, they’re going to get some cash for their work, and it lets them stay tied to the business. I suppose there are buyers out there who want to start with a clean slate and don’t want to have anything to do with the seller, but that’d be fairly rare, and if the seller is willing to stay on and watch as his or her baby changes hands, that is very workable. It’s important to have the ground rules set out in advance, though; it probably is part of the sales agreement for the business. Is it going to be an employment relationship? If so, how many hours is the seller expected to work? How long will the relationship last? If it’s an independent contractor relationship, what are the terms of it? Those things should be spelled out so that there’s no misunderstanding, and I would think as a seller if you have any questions at all about it, you’d want to have the option after a certain number of minimal months to just walk away from it, if you find you can’t work for the buyer.

QUESTION: You read sometimes, for example Ben & Jerry’s, where you hear that the owners say that despite the sale, the company won’t change the product, or won’t change the company’s method for dealing with employees. Is it unrealistic for a small business to seek these types of conditions as part of the sale?

FRED STEINGOLD: You know, in an ideal world, you could leave your imprint on the business, and have it run your way forever, but most buyers are gong to be as entrepreneurial as you are; they’re going to want to put their own mark on the business, they’re going to want to do it their way, they’re going to want to take advantage of the good things that you’ve done, but they may see things differently, they may see things that they think they can do better, and so it’s best to find someone as a buyer if you can who has the same philosophy as you do, but if you try to reign them in too much, you may lose the sale of the business, so I don’t think it’s realistic to expect that the business will go on exactly as you’ve always run it.

QUESTION: In your book, you talk a lot about the preparation needed to sell a business. Can you tell us some of the things a business owner needs to think about when they’re selling?

FRED STEINGOLD: First of all, if you have a business that has had a shaky profit record, you might want to put off selling. If you wait and build up the profits, and that may mean you have to cut back on expenses, or you have to increase sales, but you have to do what you can to show a good profit picture for two or three years. If you have some outstanding legal problems, suits by an unhappy customer or a disgruntled employee, you want to get those cleaned up so that those aren’t inherited by the buyer, or you don’t get any bad press over them. You want to be sure that you’re able to explain the finances clearly; some businesspeople understand the finances of the business but they don’t keep their books in a form that someone else coming in from the outside could understand, so you might have to get a CPA to get your books organized so that the cash flow and the month-to-month profits can be understood by someone who is a prospective buyer. If you can, have a business plan that will show that the business is capable of growing over the next several years. The buyer may have a business plan as well, but if you’ve got something to kind of lead the way, that’s helpful. You want to try to make sure you’re your relationships with your suppliers and your customers are going to stay in place; you want to have contracts if possible. This won’t be true in a typical retail business, but if you have long-term relationships with suppliers or major customers, if you have contracts that will keep those relationships ongoing, that would be a positive thing. You want to see if you can get a long-term lease so that you have something of value to offer to the buyer. Probably equally important, if your business premises are kind of run down, fix ‘em up, put on a fresh coat of paint, put in better lighting, do some things to make it look more attractive. Those are some things that a business could do to get ready to sell.

QUESTION: Your book has an excellent agreement for the sale of a business. But is it really possible to do the sale without the aid of an attorney?

FRED STEINGOLD: You could do the agreement; theoretically it’s possible to avoid any help from an attorney, but that’s not really a good idea. If you’re selling a business you’re going to be dealing with tens of thousands of dollars, maybe even, hopefully, hundreds of thousands of dollars, and I think it’s a good idea to run the final product by a lawyer. The more you can do the better; it’s going to save you lots of money. Where it might take a lawyer five or six or even ten hours to handle a transaction, you might be able to just use one hour of a lawyer’s time, so you’ll be saving a great deal of money doing it that way, but you’ll also have the piece of mind of knowing that some professional has looked over your handiwork.

Do Dads Get a Fair Shake in Divorce?

We’re speaking with Paul Mandelstein, the author of Always Dad: Being a Great Father During and After Divorce from Nolo.

NOLO: Many Dads don’t think the legal system is capable of giving them a fair shake in the divorce process. What do you think and what, if anything, can be done to balance the arrangement?

MANDELSTEIN: The arrangement might be unbalanced, but in the last ten years or so things have been shifting and more fathers are wanting to spend more time, and being more present and accountable. And basically, what you really need to do from Day One is to stay in your kid’s life, which might be hard, because everything’s emotional, but you’ve got to make sure that you create a legacy that you’ve been there from Day One, that you pick up the kids from school, doesn’t have to be full-time, any of that, but you need to show that from Day One that you’re in their life, that you’re not abandoning them. So that creates a clear pathway. Because often, you’ll move out of your house, and it’ll appear like you’re not taking care of them, and that you’re going to be the “weekend dad.” But if you just create a clear path that you are being there on a daily basis, and you’re very involved, and try to document that in some way, an email or whatever, that will help a lot.

NOLO: When you say Day One and you refer to the history … What point are you referring to exactly … the date of the divorce filing.

MANDELSTEIN: The history of when you split up, because when you’re an intact family, it’s hard to know who did what, and who’s taking care of who, but when you split up, you need to stay in the kid’s life. And if you want custody, if that’s your plan, then you should, from Day One, cut that amount of time for them, and ask for that amount of time. If you can only see them two days a week, then see them two days a week. But you need to set that precedent, because otherwise courts will look at this thing six months down the line and make a determination, and they’ll say “Well, you know, you haven’t been around, and you know, we’ll just keep it the way it is.” So it’s important to be pro-active in this way and step up.

NOLO: Paul, one point you make in discussing the initial breakup between a husband and wife with kids is that spouses should not jump right into the legal proceedings. Take it slow. Analyze the situation a little bit before you rush off to the lawyer’s office.

MANDELSTEIN: Exactly. One thing that’s going to happen is, as soon as someone goes to the lawyer’s office, that raises the ante quite a bit. And it makes things more emotional, more volatile, because even if you’re the one filing for divorce, things are going to change, right then. If the hot buttons are still hot, and no one’s in a big rush, your kids are okay, the money’s in place, and you can agree on things like that, it’s fine to wait until things settle down. Filing the papers is almost the point of no return.

NOLO: Your book is a very helpful manual for divorcing Dads. It even includes some advice on cooking. One tip you give is about using “right speech” Can you elaborate a little on what that is?

MANDELSTEIN: Right speech comes from a Buddhist term. And the Buddhists teach that right speech is essential for a satisfying life. And it means telling the truth, refraining from unjust criticism of others, using language constructively rather than harshly, and refraining from gossip. If you follow these principles, it can go a long way towards creating and maintaining a collaborative divorce. But because avoiding the truth, criticizing others and using harsh language and gossiping are all ways we vent our pain when our relationship breaks up, it’s far easier said than done.

NOLO: I liked your ten rules for communicating with an ex-spouse. One of the rules – listen to your ex-spouse without defending yourself – seemed a little unrealistic. Wouldn’t you have to be almost Zen-like to not want to defend yourself against accusations – especially unfair ones?

MANDELSTEIN: And right speech is also about staying focused on the future. You know, part of establishing a daily routine is figuring out how to communicate with your ex, and what this means. The first thing that you really need to consider is that this is about the kids. And it’s not about you right now. You’re not feeling good, you’re angry, you’re confused, you’re upset, so’s your ex, it’s a constant war. But what you’ve got to do is, you’ve got to end this war. Because the kids are unwilling hostages in an uncivil war.

NOLO: Let’s talk about custody issues. When it comes to resolving legal custody issues, you start with a quote from Virginia Burden Tower, basically ---nobody can get there unless everybody gets there. How can a divorcing Mom or Dad maintain that spirit of cooperation when dealing with divorce attorneys?

MANDELSTEIN: As I mentioned, in Virginia Towers’ book, she points out that a relationship of cooperation rather than combat begins with the thorough conviction that no one gets out of here unless everybody gets out of here. And it’s not that much different from the Buddhist philosophy where there’s no final and perfect enlightenment until everyone’s enlightened. So unless you create a collaborative path that works for everybody---so it’s not like your wife is out of the family---this is the extended family now. It’s not the broken family. Broken family is an old paradigm that doesn’t really work. This is the extended family. Which means there’s not just you and the kids, it’s you, the kids, your ex-wife, perhaps your mom and dad, the kids’ grandparents on either side, and different cousins and uncles, and everybody’s concerned. And also, if you’re going to be involved in another relationship, maybe you want to get married again, or maybe your ex gets married again, then you have perhaps her husband or your new wife and the kids. This is a large group of people and you have to take care of everyone. No one is expendable here.

NOLO: For some of our listeners who don’t know the basics, could you explain the difference between legal, physical and split custody?

MANDELSTEIN: Legal custody means that a parent has the legal authority to care for and make decisions concerning the child’s health, education and welfare. Legal custody is either joint or sole custody. Unless there’s a compelling reason to keep one parent from the involvement of decision making, the courts usually grant joint custody.

Physical custody refers to living with the children and seeing to their day-to-day physical needs, like feeding them and making sure they’re clothed. So you might have joint custody, you might have joint legal custody, which is you’re both responsible for their health, education and welfare, but one parent might be more responsible for the physical. Which means that, if you have the kids just on the weekends, well, on those days, you have physical custody. On the other days of the week, if your ex has them five days a week, then she has physical custody. Split custody---you know, in most families, siblings stay together. And that’s what split custody is about, it’s often giving others crucial stability and support---for example, if one parent tends to move to another city and there’s a great school system that would benefit their younger child, but the oldest sibling is in their last year of high school, and is involved in lots of activities and wants to stay, the parents might decide to have her live with the one parent who is remaining in that original city. But this doesn’t happen very often. In most cases, kids want to stay together. And it makes the most sense to do that.

NOLO: Tell me a little about your story? What prompted you to write this book?

MANDELSTEIN: When I split up---we split up in October--- and then a couple of weeks later it was Thanksgiving, and I have three kids, and they went over to mom’s. Where I would have been also, because mom’s a good cook, and throws a good party. But I was home, and I was feeling sad. I was sitting on my bed, and took out my yellow pad. My background is in publishing; I’ve foundered two publishing companies, I’ve been in the business for thirty years, so I kind of thought in terms of books. So I scribbled on a yellow pad, and then I went to bookstores to see what was around ,and I noticed that there were walls of information for women. And if you went to look for fathers, for men, there were about three books. And the books that there were about fathers, involving divorce, were all about men’s rights, and all about adversarial and trying to, for lack of a better word, conquer the ex-wife. I thought this was all wrong. And after talking to hundreds of people about all this, I felt that a new process should be created, and by doing that, I did my own healing by going through this and trying to help out.
NOLO: You’ve created the resource, www.father.com. First of all, I’m seriously impressed that you landed that domain name


MANDELSTEIN: You know, I bought it! I bought it! But I only paid $600 for it. It was in 1997, or 1996. Back then, I was going to do this great for profit portal. I found it very difficult and it was very hard to raise money because you couldn’t’ quantify your bottom line. And one day I woke up, and I said “You know, this is all wrong. I’m not doing this for money. I’m doing this to try to help.” And I turned it into a non-profit. And as soon as I did that, immediately I felt successful. Because in a non-profit, how you quantify your success is: Are you helping people. And I was helping people.

NOLO: And I’m also impressed that you launched this resource. It’s not just about divorcing dads, though is it?

MANDELSTEIN: No, it’s not. It’s about fathers and families in transition. We did a poll on the site and we asked “Do you have one, two, three, or four kids?” And almost half of them said “No kids” but that they were expecting. So it’s for new dads, and it’s certainly for divorced dads, and it’s for people dealing with end of life issues for their own parents, and maybe their own family. It’s basically for fathers and men for the tough transitions in life. And I believe that the father is a very vital and initiating force for the younger child. It’s very well-documented, the difficulties kids have in fatherless households. For example, 90% of the men in San Quentin are from fatherless households.

NOLO: Father.com has some great links. Can you tell us about any other online resources you recommend?

MANDELSTEIN: Of course, Nolo is a wonderful resource. Their specialty is self-help legal books. There’s also a site I really like called Dads and Daughters.com. As the title suggests, this is about relationships for fathers and daughters. And we have a ton of links on Father.com.

Can a Nonprofit Make a Profit?

We’re speaking with Anthony Mancuso, an expert on corporations, business forms, and nonprofits, and the author of, “How to Form a Nonprofit Corporation.” We’re going to speak with Tony today about the ability of a nonprofit corporation to earn income.

NOLO: Tony, most people understand that nonprofits get special tax breaks, but one thing that’s not clear about nonprofits is whether they can actually make a profit. Perhaps you can start out by defining the word “profit,” and then explaining whether a nonprofit corporation can actually make a profit.

TONY MACUSO: Well, it’s interesting, because the common meaning of profit is basically, you take in more than you spend, and you end up having a margin or a profit related to your activities that isn’t really what it is meant under the nonprofit statues. Basically, they don’t want you to be a commercial profit-making business; they don’t want the end that you’re trying to achieve to be the making of money. So, it’s not really in an accounting sense, it’s more of a common sense definition that has to do with your motives, your reasons for operating a nonprofit. They don’t want a substantial purpose to be simply to make money. It’s okay to make money, but they don’t want that to be your overriding interest, so it’s rather fuzzy and vague, the standard, but that’s really why they look very closely at your operations when you apply for tax exemption; they want to see your overall purposes of your program. If they feel, for instance, that you’re going into a publishing business simply to sell books to make money and not for any other reason, they’ll say, “Well, you’re a profit-making business; you really don’t qualify as a 501 (c) 3 educational nonprofit.” On the other hand, if you’re selling books that do the public good, that are clearly focused on benefiting the public and educating them in a certain way, then you can qualify, and you can make money from your sales.

NOLO: If a nonprofit can make a profit, then what can’t it do with this profit?

TONY MANCUSO: The big thing you can’t do, the major prohibition, is against self-inurement; you can’t help out anyone individually in their individual capacity associated with your nonprofit. So, you couldn’t take the money you made and simply pay it out as some kind of benefit to your CEO, and say, “Thanks a lot; we’re so happy you’re with us, here’s the extra profits.” In other words, give someone a participating profit interest in your nonprofit. Now, obviously, people try and get around that sometimes, but the whole point is, you’re not supposed to be their to benefit anyone in their individual capacity; you’re supposed to be benefiting the public at large, or a segment of the community. So, you can spend your money in any way you want to help that purpose, to help your nonprofit purposes, but once you start paying people simply to pay them, to kind of thank them, to incentivize them… basically, the nonprofits statutes and regulations say that’s not a valid nonprofit way to spend your money.

NOLO: You used the term “self-inurement?”

TONY MANCUSO: It’s an old-fashioned term, inurement, and it basically means a self-benefit. So, we’ve heard in the news over the last several years, there’ve been some scandals regarding some fairly well-known nonprofits where that’s exactly what they did; they bought yachts for their executive officers or had them available for them. So, spending money in that way, to benefit someone personally, is self-inurement, and it’s prohibited.

NOLO: You provided an example in your book, where Friends of the Library Nonprofit gets a lot of donations for its book sale, but after its sale, there are a lot of books left over, so the nonprofit sets up a way to re-sell these books using outside dealers. You write in your book that this can lead to problem, because it’s “unrelated income.” What’s the difference between related and unrelated income, and how can a nonprofit know when it has crossed that line from one to the other?

TONY MANCUSO: Well, again, as in many areas of nonprofit law and practice, it’s a fuzzy line, and it takes a bit of analysis, and it’s hard to predict all the time how the IRS or a court will decide the issue, but, basically, common sense is your best guide. So, if a group is clearly just getting rid of surplus books as a very, very small part of their overall operations, then perhaps it’s not a problem. But if you start looking more and more like a commercial bookseller, making more and more money from purposes that are not strictly related to your tax-exempt purposes, in other words, you’re no longer trying to educate people through the sale of books but rather you’re trying to make money in any way you can, then the IRS can quite justifiably say, “You’re engaging in purposes unrelated to your stated nonprofit tax-exempt purposes.” So, again, there’s no bright-line test for that type of income or activities, but common sense can be a helpful guide. I can give an example: I believe at one point I had heard of – and I don’t know how accurate this is, but it serves as a good example – a builder’s center who had the purpose of helping people produce environmentally sound and environmentally friendly homes, and they did quite well at selling the kits, and it served a valid nonprofit purpose, but they branched out and more and more became a more commercial operation, and I believe the IRS questioned them about it, and said, “You know, you’re really starting to look like a homebuilder,” and so they split off that part of their operations from their nonprofit to satisfy the IRS; so, it’s not always going to be the worst thing; it’s not always going to be the demise of the nonprofit all the time. As you get more and more successful with sidelines and certain commercial activities, you can spend them off perhaps, if you’re doing well at them, but you’ll need to separate them sometimes from your nonprofit activities.

NOLO: So the IRS is always the final arbiter of that line between related and unrelated income?

TONY MANCUSO: Generally that’s true.

NOLO: Some nonprofits earn income from royalty-generating sources. For example, the author of Winnie the Pooh donated all royalties to a nonprofit. How is this royalty income characterized?

TONY MANCUSO: Royalty income is basically unrelated income, in many ways, so if you’re getting that type of income, it gets a little bit technical, depending on the type of nonprofit that receives it. Nolo’s nonprofit books, the ones I’ve written for Nolo, deal with 501 (c) 3 public charities. They don’t have to worry about the strict rules about passive income usually; it’s more the 501 (c) 3 private foundations, which are a very special type of nonprofit that we don’t deal with. Rich families and well-to-do companies often set up foundations to receive passive income, and they have a lot of stringent rules about dealing with the income – recording it, spending it, how you spend it, and they have some fairly strict taxes and penalties that apply if you don’t do it the right way. So, passive income can present problems, but generally, if you get contributions and you’re a 501 (c) 3 engaging in your tax-exempt purposes, you generally don’t have to worry about it. I think the more important point for nonprofits, the kind we talk about, has to do with, if you’re going into a book-related field as a nonprofit, the IRS sometimes wants your authors to assign the copyrights to the publisher. I’ve had that happen when I’ve applied for nonprofit status on behalf of some clients that were in the book business or publishing books that they thought would help people, or educational materials. They wanted the nonprofit to own the copyright. They didn’t want the nonprofit to essentially be a conduit, to be helping out an author who had a proprietary interest in the material. That was the issue for them, so the one you cited is a little bit different; it’s on the other side of things, where they’re receiving income from a successful author. Oftentimes, the IRS, generally, it arises in a different context; they want the nonprofit to own the book; they don’t want the nonprofit basically to be a selling agent on behalf of an individual.

NOLO: You used the term “passive income.” Just so we’re clear, passive income is…?

TONY MANCUSO: As opposed to actively doing something to get it, they consider receiving rents or royalty income, and other types of investment income as passive income, and so there are some technical rules about it, but usually a small or medium-sized nonprofit engaging in an active nonprofit program doesn’t have to worry too much about it.

NOLO: So, that’s three types of income for nonprofits: related income, unrelated income, and passive income?

TONY MANCUSO: Passive income can be unrelated income; in many cases, it is.

NOLO: Let’s review the rules you’ve talked about for a second. Let’s say I want to create a nonprofit that furthers environmental awareness. Tell me how the following activities will affect the nonprofit status: the nonprofit starts a book store that sells only environmental books.

TONY MANCUSO: If you clearly have an environmentally-friendly mission, and you couch it that way in your tax-exemption application, you have a good chance of being classified as a 501 (c) 3 educational group.

NOLO: Okay, now the environmental book store decides to sell not just environmental books, but other types of books as well.

TONY MANCUSO: You have less of a chance.

NOLO: Okay, now the environmental book store offers a lecture series on environmental topics.

TONY MANCUSO: Lectures of any kind that are educational in nature, you can charge admission; just think of all the nonprofit schools and universities; they can teach almost anything they want. The requirement having to do with educational involving 501 (c) 3 is that you have a balanced perspective. So, you can’t limit, in a way, you can’t limit the type of educational materials, you can’t strictly say, “We’re only going to teach this,” I mean, we’ll present a balanced view of things; they can object on that basis. But, generally, charging tuition or charging admission for a lecture series is completely above board, and a very standard educational activity under 501 (c) 3.

NOLO: Okay, so, back to that environmental company, the book store that sells environmental books. It also out rates a web-based book store that sells environmental book.

TONY MANCUSO: The environmental site, if they limited themselves to that and made it clear that that’s really their mission, that’s probably okay. Again, though, the more it starts looking something like a commercial bookseller, the less of a chance it has of that activity being subsumed in its 501 (c) 3 nonprofit. So, the IRS, for instance, if you disclosed that on your exemption application and said, “We want to sell all types of books on our website,” they may say, “Well, you have a valid 501 (c) 3, but we feel that your website does not qualify, so that’ll have to be a separate activity.”

NOLO: Okay, now the environmental nonprofit is doing so well, they decide to become a publisher of environmental books. That is, the bookstore begins publishing its own books.

TONY MANCUSO: I don’t think becoming a publisher as opposed to simply a retailer is critical; I think that’s fine, being a publisher. Again, the despositive issue might be, what are you publishing, and how does it benefit the public?

NOLO: Back to the bookstore now for one more question. If you’re operating a bookstore in furtherance of your nonprofit goals, can everyone who shops there claim a tax deduction when they buy something? In other words, is making a purchase similar to making a donation?

TONY MANCUSO: Well, generally, charitable contributions are only to the extent that you don’t get value for what you pay; so, if you buy a $30 book, and pay $100, maybe you’re entitled to a $70 deduction, but if you’re paying market value for your book, there’s no amount that qualifies as a contribution.

NOLO: Let’s shift gears a little bit and talk about director liability. One purpose in forming a nonprofit corporation is to shield the members and directors from personal liability. As an example, if the nonprofit bookstore violates rules regarding earning money, will the corporate shield for liability disappear?

TONY MANCUSO: No, the tax statute is separate from the state corporate law statutes, so, you may lose your tax exemption, but your corporate entity is intact. It’s kind of a distinction without a difference, because a nonprofit corporation that isn’t tax-exempt is not a very helpful entity; essentially, if you lose your tax exemption, it probably makes sense to dissolve your corporate entity; nonprofits really only make sense if they have a tax exemption. There are some types that can operate fine without a tax exemption, but really, in the real world of 501 (c) 3-type nonprofits, you need both. Technically, it doesn’t destroy your Limited Liability status; that can happen if you don’t operate your corporation properly and keep minutes, and if you kind of play fast and loose with corporate formalities, but the tax statutes are separate, really.

NOLO: How much of a salary can a nonprofit member or owner receive? Are there limits established under the tax law?

TONY MANCUSO: Well, that’s a really good question, and it’s a very timely one, because there have been a number of scandals in the nonprofit world; some very well-known, reputable nonprofits have had trouble recently because of the amount of compensation they’ve paid their directors and executive officers, and the kind of lavish benefits they’ve given them, so the IRS has become very concerned about this and issued very complex and lengthy excess benefit regulations that they want nonprofits to comply with; it’s not required, but they’re strongly suggesting you do that. In fact, to help implement them, they’ve changed their tax-exemption application to lead you to disclose how you might comply with these excess benefit rules, and you don’t have to, but really what they’re saying is, if you don’t, you’re going to have a harder time obtaining your 501 (c) 3 tax exemption. So, the Nolo books have incorporated these new regulations into our corporate bylaws, and into our tax-exemption application responses to help people comply and understand the significance. It’s very important these days to try and satisfy the IRS from the start, so you don’t plan to excessively benefit anyone. Now, what does that mean? Again, there’s no bright-line test for this; it’s a fact-based determination the IRS makes, but think about how difficult it is to determine what excess compensation is. Symphony orchestras now are paying their conductors, nonprofits, at least 2 million dollars a year or more, so how can you say that a highly-paid executive officer of another nonprofit is getting too much money when the IRS kind of believes that a symphony conductor should get a lot? Well, the truth is that in certain fields you can get away with it, you can pay a lot of money, and in others you can’t, and it depends on the market rate; that really is what drives it. So, if you’re compensating your people in a way that is fair generally, given the kind of work they do, and the kind of organization you have, then you’re probably fine. But if you’ve gone out of your way to overpay somebody, if they’re really getting a golden deal that they could only get at your organization, then you probably are paying them excessively. Now, there’s a lot of safe-harbor rules you can get into, and the book talks about them, and how you can help satisfy yourself ahead of time, that you’re paying people fairly, and basically it has to do with taking a look at the data in your field, and getting some sample data and recording it in your minutes to show that the amount that you’re paying your people, your directors and executive officers, is comparable to what they would get in other organizations; that’s really the test.

NOLO: So, it’s really a matter of comparability.

TONY MANCUSO: It really is, and now they really want you to go out and look before you decide how much to pay somebody.

Should You Co-Buy a Second Home?

We’re speaking with Craig Venezia, a nationally-recognized expert on home mortgages, and the author of the soon-to-be released, “Buying a Second Home: Income, Getaway, or Retirement.” Today, we’re in the midst of a second-home ownership boom, fueled by such factors as the shrinking American family, older and wealthier households, and new technologies for working from home. One out of every three homes purchased in the United States today is a second home. A 2006 survey by the National Association of Realtors revealed that most second-home owners are married couples - 83% of vacation-home owners, and 75% of investment homeowners. Also, that minorities are playing an increasing role in the second-home market, accounting for 11% of vacation-home purchases, and 17% of investment-home purchases, and that buyers must be enjoying the second-home experiences. 21% of vacation-home buyers go on to buy one or more additional vacation homes, and 34% of investment-home owners go on to buy additional investment properties. Perhaps you’re thinking about taking the plunge, maybe as an alternative to other investments. For example, to rent or resell the property. Or, maybe you’re thinking of buying a cabin by your favorite lake or your favorite ski area. Or, perhaps you’re thinking ahead towards retirement; you may want to find a manageable, well-located home now. Whatever the reason, investment, vacation, or future retirement, the purchase of a second home can still be a burden. One solution is to share ownership of a second home. That can significantly reduce your debt burden. Co-ownership might also, depending on the background of your co-buyer, enhance your collective knowledge of home improvement, financing, property management, and other relevant matters. But, co-ownership of a second home may also have downsides. We talked about it with Craig Venezia.

NOLO: Craig, over the past five years, median home prices have skyrocketed 37% nationally, while household incomes have grown by only 4%. So, someone who is maintaining one household and home may be stretched to purchase a second home. One solution you discuss in your book is to partner financially with someone else interested in owning a second home. Why don’t you start out by listing the pros and cons of shared ownership?

CRAIG VENEZIA: Shared ownership, also called co-ownership, is effectively buying a home with another person, and what that means is that both of you are putting your money in, both of you are appearing on the mortgage documents, both of you have legal ownership of the property. Depending on how you structure the deal, it may be a fifty-fifty split, or it may be some proportionate amount based on who puts in what money, who is doing property upkeep and management, etc. But, overall, the things to think about with co-ownership are that it’s a way to have somebody else share the debt burden of owning a second home. For many people that can mean the difference between whether they even own a second home or not. Now, obviously, there are a couple of other benefits, as well, that you’d want to look at; depending on your co-buyer’s background, you may be able to round out experience where you’re lacking. So, for example, if you are sharing the purchase of a home with someone who is handy with a hammer and you’re not, that person can bring those skills to the table. Maybe you’re pretty good on the financial end and managing the books, you add that to the table, so everybody wins. It also saves a lot of time in the management and upkeep in a second home; you can share the responsibilities, which a lot of people find very advantageous. Now, you’re right, where there are pros, there are also cons, and the cons are something that you really need to look at, and then balance the two, and decide which makes sense for you. So, let’s talk about a few of the cons. Well, sometimes you could have a situation that becomes strained, and broken relationships can even occur. It depends on what expectations are laid out upfront, and that’s the key, doing it upfront. Who is going to take care of what? By not knowing what you’re going to do ahead of time, you can have a lot of miscommunication occur, and that can lead to problems. You’re not going to figure out everything right off the bat; things are going to come up that you’re going to say, “Jeez, we never even knew this existed,” or, “We never knew this problem was going to happen.” That’s okay; the key is to communicate with the co-owner, and make sure there’s a give-and-take. Silent treatment is the worst thing co-owners can do. Another con to think about is you really have to have the foresight to think about all the issues that are involved and, more importantly, nobody likes to do this, but what happens if a disagreement comes up? How are you going to handle it? Or, worse, what happens if somebody wants out of the deal, you know, two, three, or four years down the road? Does the person who’s going to stay in the deal have first right to buy the property? What happens if they can’t? So, these are all issues that you need to discuss and think about, and even pull in some professional such as a real estate attorney, who ultimately would draw up a contract between you and your co-owner. And, yes, I did say draw up a contract, and that’s an important thing. Sure, you’re going to have the legal documents in terms of being listed on the mortgage and listed in the promissory note, but you don’t have a legal document that is required that says who does what, what happens if someone wants out of the deal, what happens if somebody wants to bring another co-owner into the equation. These are the types of things that working with a real estate attorney who has experience in co-ownership agreements, you can work out these scenarios. Truth be told, you could do a contract on a napkin; that’s okay. It really depends on the relationship you have with your co-owner. I think the bottom line of co-ownership is that, for the right individuals, it makes sense; you just need to think about the issues that will come up, and make sure you map it all down, you put it in writing, and you have a contract between the parties. If you take care of it from that perspective, you should minimize the amount of problems that you’ll have down the road.

NOLO: Craig, co-ownership seems like it just makes the whole thing a lot more complicated, more of a hassle, and if you’re sharing it with a friend or a relative, it seems like a recipe for disaster. So, how do you know whether someone is right for you for co-ownership?

CRAIG VENEZIA: It’s interesting you should ask that, because I have a chapter entitled, “You don’t have to go it alone: Buying with others.” That chapter focuses on co-ownership, and within that chapter, I have developed the co-buyer compatibility questionnaire, and basically what it is is a half a dozen questions that you should ask your potential co-buyer, and they should ask you, and you should do it alone. Each answer them, and then compare your answers, and it’s going to be very telling whether you are compatible with that person or not. For example, the very first question is, “What is your primary reason for buying a second home?” Well, that sounds like a pretty simple question that everybody shouldn’t even have to ask the second person. But, imagine if you said “for future retirement,” and your potential co-buyer said, “for vacation.” Well, you may have a problem – what happens if, five years from now, when you want to retire into that house, all of a sudden your co-buyer keeps showing up at now your primary residence and saying, “Hey, we’re here to spend our two weeks this summer; move on over.” You got a problem. So, co-buying may not be the best with that person.

NOLO: Another question about co-ownership of a second home… although it’s probably not a common issue, I’m sure many owners are wondering, what happens if their co-owner dies?

CRAIG VENEZIA: It all depends on how you’re holding title on a property. There are two ways to hold title on a property: tenancy in common, and joint-tenants with rights of survivorship. With tenancy in common, what that means is that each of you can sell or transfer your ownership interest in the property without getting the consent from the other. That’s by far the most common way for unrelated co-buyers to take title, and if one co-owner dies, his or her share is transferred to the beneficiaries of the estate. So, in my book, I have an example about this. Let’s suppose that Thelma and Louise are best friends who buy an investment home together for $200,000. Thelma covers 65% of the purchase price, with Louise making up the rest. They agree that Thelma will take 65% ownership interest in the property, and Louise 35% interest. Suddenly, Thelma dies when her car goes over a cliff. According to Thelma’s will, her young beau Brad is her beneficiary. That means Brad gains a 65% ownership interest in the property. If you’re holding title as joint-tenants with rights of survivorship, it usually means your co-buyer is somebody that’s related to you, maybe your spouse, significant other, or even somebody that’s really close to you. With this form of ownership, you and your co-buyer have no choice but to have equal interest in the property, fifty-fifty, right down the middle. Unlike a tenancy in common, upon the death of one of the joint tenants, the remaining owners gain the deceased owners’ interest in the property, and this happens automatically. So, using the same example, under joint-tenant with rights of survivorship, if Thelma and Louise had taken title that way, each would have had a 50% ownership interest in the property, regardless of the amount each had contributed towards the purchase of the property. After Thelma’s death, her half would automatically be transferred to Louise, who now has 100% ownership in the property, while Thelma’s young beau Brad, well, he would just be out of luck.

NOLO: Craig, one last question about co-buying a second home… some co-buyers form a separate business entity, like an LLC, to co-own the second home. Will forming a separate entity to own the second home shield you and the co-buyer from a default on the mortgage?

CRAIG VENEZIA: Probably not. Your bank’s not going to let you off the hook that easily. Many mortgage-lenders will have you and your co-buyer co-sign your second-home loan. And they do that because they want your personal guarantee that you’re going to make good on the money that they’re lending to you. Think about it from their perspective – if somebody comes to you and says, “Can I borrow a few hundred thousand dollars? Oh, and by the way, if I default on this loan, you’re not going to come after me personally, because you can’t,” well, you may have a little problem lending the money. That’s how the banks think, so they’ll usually ask for your personal guarantee on the loan, in spite of the fact that you set up a separate business entity.

NOLO: Thanks very much to Craig Venezia. Following the release of his book, Buying a Second Home: Income, Getaway, or Retirement, we’ll be back with a second interview with Craig Venezia. You can pre-order Craig’s book at amazon.com.

Is Divorce Bad for Your Health?

In this episode we’re going to talk about divorce and health issues and we’re going to speak with attorney Emily Doskow, author of Nolo’s Essential Guide to Divorce. There’s little dispute that divorce has a negative impact on health.

For example, a study published in the August 2006 Journal of Marriage and Family indicates that women who had been divorced, widowed or remarried were more likely to develop heart disease than those who were married continuously. Other studies have shown that divorced males have higher rates of some types of cancer than their married counterparts. Premature death rates -- defined as occurring between the ages of 15 and 64, -- are significantly higher among divorced men and women compared to married persons of the same sex and age. There is considerable evidence that divorce can cause short-term and long-term emotional problems for children. And the National Institute of Mental Health has stated that "the single most powerful predictor of stress-related physical as well as emotional illness, is marital disruption."

Since divorce appears inevitable for many couples -- approximately forty percent of the marriages in this country end in divorce -- what can be done to alleviate the stress in the legal process and what can be done to preserve the health of everyone involved in a divorce?
We asked attorney Emily Doskow some questions that relate to divorce and health.

NOLO: Emily, in your book, you make the point that there’s not just one way to divorce. Perhaps you can summarize the various ways couples divorce and then explain – at least in terms of stress and emotional turmoil, which methods might get the highest ratings for preserving your health.

EMILY DOSKOW: There’s definitely a continuum that goes from “do-it-yourself” uncontested divorce where there are no lawyers involved and you just do the paperwork and figure it all out yourselves, to the opposite end, which is the sort of knock-down drag-out divorce trial that’s ugly and expensive and horrible for everybody. And then in between, there are a lot of other options, like a mediated divorce, a collaborative divorce, arbitration, or even a divorce that you settle by having lawyers negotiate for you.

From my perspective, a mediated divorce is the most conducive to people’s mental and physical health, because mediation is a process that supports everybody having their say, everybody getting heard, creating solutions that work for both people and for the kids, and promoting good communication that will support the ongoing relationship, especially between parents.

NOLO: Let’s talk about something that has a direct impact on people’s health -- health insurance. Many people are insured through their spouse’s health insurance. Can a divorcing nonemployed spouse ask that as part of the settlement, the health insurance will continue under the other employed spouse’s policy?

EMILY DOSKOW: The nonemployed spouse actually doesn’t need to take any approach…it’s not really a negotiation. That spouse has a legal right under a federal law called COBRA to continue their insurance coverage for three years after the divorce is final. All they have to do is make sure that they comply with some very strict time limits for notifying the employer and the insurer that they want the COBRA coverage, and then paying the premiums in time. They continue it at their own expense, but they have the right to keep it for up to three years.

NOLO: Can the nonemployed spouse request those COBRA payments be included as part of the spousal support payments?

EMILY DOSKOW: Sure, the employed spouse can continue covering the nonemployed spouse, and that could be considered spousal support, or in lieu of spousal support.

NOLO: What about health insurance for children? Can continuing health insurance be part of the child support package?

EMILY DOSKOW: If the employed spouse has coverage for the children, they’ll just continue to be covered, because there is no change in the parent-child relationship after the divorce, so again, it’s just a matter of making sure that you get a special order that notifies the employer that the employed spouse, especially if the employed spouse isn’t the custodial parent, if they’re the non-custodial parent. Occasionally, an employer or an insurer will balk at continuing to cover the children, but they have to by law, so you just have to get a special order.

NOLO: Let’s consider an example: A couple with a child divorces. The divorced husband is ordered to provide the child’s health insurance. The woman remarries, and her new husband adopts the child. I know that terminates certain child support obligations, but does it also terminate the obligation to continue health insurance payments for the child?

EMILY DOSKOW: Yes, if there is a step-parent adoption by the mother’s new spouse. The only way that that could happen would be if the biological father relinquished all his rights and that would also relieve him of all obligations toward those children. He wouldn’t be a parent anymore, so he wouldn’t be responsible for support or health insurance.

NOLO: Another important health issue in divorce and custody is substance abuse. Often in television dramas, this issue is portrayed as the basis for an ugly custody fight. Is this true in real life? What effect does one spouse’s substance abuse problems have on the divorce and on custody issues?

EMILY DOSKOW: Right, and what you see on TV is if somebody has a substance abuse problem of any kind, the other spouse is probably going to use it to try to get whatever advantage they can. I think most judges, if you were in front of a judge, and there was evidence that you have a substance abuse problem, the judge will order that your visitation with your kids be supervised and probably will order you to get treatment and be in recovery and be able to show that you’re in recovery, and that you’ve been sober a certain amount of time before they’ll take the supervision requirement off.

NOLO: Everyone agrees that divorce has an effect on a child’s short-term and long-term health. Any suggestions for parents?

EMILY DOSKOW: I think it’s universally agreed among experts on this issue that the single most important thing that parents need to do for their kids is to insulate the kids from the conflict between the parents, to make sure that the kids understand that the divorce isn’t their fault, to make sure that the kids understand that they aren’t losing either of their parents. So that means, for the parents, not to fight in front of the kids, for neither parent to bad-mouth the other parent in front of the kids. If it’s possible for the parents to be in the same space together, to continue doing things as a family, those are the kind of things that help children understand that they’re not losing either of their parents, they’re just having a restructuring of their family, and they can continue to feel secure in their relationship with both of their parents.

In terms of taking care of your kids on a day-to-day basis, you need to make sure that you’re listening to what they say to you, pay attention to what they DON’T say to you, making sure that there’s room for them to express their feelings and ask their questions so that you can do what you need to do, which is repeat, over and over, “it’s not your fault, you’re not losing your parents, both of us still love you”, all of those things that kids sometimes need to hear more than once.

NOLO: One factor contributing to health issues for women after divorce is economic. Studies indicate a woman’s standard of living drops an average of 27 percent after divorce while a man’s rises 10 percent. And it’s also been shown that these economic factors have an effect on health. One thing that may contribute to the disparity here is when a spouse hides assets. What are some red flags that a spouse is hiding assets and what are some things you can do to locate those assets?

EMILY DOSKOW: I would say the first thing that should clue you in that your spouse is hiding assets is if they don’t want to share information with you. So if you’re in a situation where you’re trying for an uncontested divorce, for example, but your spouse doesn’t want to give you financial information, you might want to reconsider the uncontested thing, and at least get a mediator, or somebody who’s going to require that information is turned over.

NOLO: What’s a common place where a spouse might hide assets?


EMILY DOSKOW: Spouses hide assets in businesses. If your spouse owns a business, there are a lot of ways in a business to hide assets. For example, paying fake salaries to relatives who aren’t actually working, and then the relative turns the money back over, or deferring a big sale until after the divorce is final, so those assets aren’t included in the marital property, or taking a big loss earlier, so that the loss is included in the marital property. Those kinds of things are what people do to try and hide money.

NOLO: So, if you suspect your spouse is hiding assets, you’re probably going to want a lawyer’s help.

EMILY DOSKOW: You probably want a lawyer. The other professional you might want is called a forensic accountant, somebody who is trained to look for hidden assets.

NOLO: Again, focusing on the women’s economic issues: What effect does a spouse’s bankruptcy have on spousal or child support?

EMILY DOSKOW: Spousal and child support are non-dischargeable in bankruptcy so if your spouse owes you past-due child or spousal support, they can’t get rid of that obligation in bankruptcy, they still owe you that money. So if you’re doing a Chapter 7 bankruptcy, where all your debts are just wiped out, the child and spousal support debts are excluded from that. They’re not wiped out. You still owe them.

If you’re doing a Chapter 13, where you’re reorganizing your assets, the Chapter 13 repayment plan has to call for repayment of 100% of those debts.

NOLO: One person who studied the health of divorced people remarked that divorce is deceptive because legally it’s one event, but psychologically it is a chain of events. One element in that chain of events may be a sense that the divorcing spouse has made the wrong decisions about divorce. Is it common for there to be some equivalent of “buyer’s remorse” after a divorce or custody settlement has been reached?

EMILY DOSKOW: It’s true and it’s part of why, for many people, anytime there is significant assets, anytime there’s a retirement plan, anytime there’s a good amount of money changing hands, even people who are doing an uncontested divorce, are wise to get an hour or two of a lawyer’s time to just look over their deal, and have somebody say to them “this is a fine deal”, or, “this is a deal you may regret later.” And people make a lot of different decisions. Oftentimes, people do things that don’t look like they are in their interest. But they do it for reasons. For really valid reasons, in terms of what they think is best for their kids, or why they feel like it’s fair for their partner to get more, or various reasons that they have for making a deal that doesn’t look like their best deal. And that’s fine, to make a decision like that. You just need to be sure you’re totally educated.

NOLO: And part of that education can be accomplished by reading Emily Doskow’s new book, Nolo’s Essential Guide to Divorce. Nolo has other books on the subject of divorce, and you can find an excellent selection of divorce books at GoodDivorceBooks.com