Tax Credits: The Easy Way to Save Money

In this episode we’ll discuss tax credits and we’re going to speak with Stephen Fishman, author of Lower Taxes in Seven Easy Steps (Nolo) In a previous episode, we talked to Steve about tax deductions.
Many people are confused as to the difference between a credit and a deduction.
Here’s how it works. Let’s say you’re in the 28% tax category. If you had a $1,000 tax deduction, you would deduct that from your taxable income and then you determine your taxes. The result of deducting $1,000 is that you would save $280 in taxes. But if you had a $1,000 tax credit, you could deduct that directly from your taxes. So you would save $1,000 in taxes. So, a $1000 tax credit is always going to be more valuable –maybe three or four times as valuable – as a $1000 tax deduction. It all depends on your tax rate.

Nolo: Okay, we asked Steve Fishman what could a typical family do to maximize their tax credits? What’s available to your average tax paying family member?

Stephen Fishman: Well, if they had a baby, bought a hybrid car, added new insulation to their home, installed a solar water heater in their home, incurred child care expenses so that they could both work, and took night classes at a local college they could have reduced their taxes by approximately $6,000 to $7,000.

Nolo: It’s been reported that the average tax credit for a hybrid car is $2,000. We asked Steve if that was accurate

Stephen Fishman: Not necessarily $2,000. That depends on the type of car and its fuel consumption statistics., In addition, another factor complicates things. Congress didn’t want to allow too many tax credits for hybrids, so once a hybrid manufacturer sells 60,000 vehicles, the credit will be phased out over the following 15 months for all hybrids produced by that company. You can find the phase-out times and percentages in my book, and at the IRS website.

Nolo: That brings up another point, tax credits come and go. Some tax credits have been around for years and are more or less permanent—for example, the child care credit and low income housing credit, for example. Others have been created more recently and have scheduled phase-out dates. Congress can, and often does, extend credits that are scheduled to end. Some credits like the research and experimentation, work opportunity, and welfare to work credits have been extended one year at a time for several years. However, there is no guarantee that Congress will extend a tax credit so it’s always wise to act before the expiration date if you want to use a tax credit that is scheduled to expire.

As Steve pointed out there are various tax credits for homeowners and as he indicates in his book, fuel efficiency is the primary target, here. Among the credits, there are great breaks for homeowners who put in fuel efficient windows, roofing, insulation, and heating and cooling systems.
However, there are some rules you’ll have to follow: Homeowners must buy these energy efficient products during 2006 and 2007 and the total combined credit you can get for all tax years is $500, and no more than $200 of the credit can be for windows. The other thing to keep in mind is you get the credit only if the items you buy meet the energy efficiency specifications established by law and a lot of these specifications are quite stringent—for example, an electric heat pump water heater qualifies for the credit only if its energy efficiency is over twice as great as the current federal standard. Make sure the product you want to buy qualifies—don’t take a salesperson’s word for it. Also, more generous credits are available to homeowners who install solar water-heating or electric power systems in their homes.

Steve Fishman also mentioned that there is a tax credit for having a child. That child tax credit was created for low and middle income taxpayers. We asked Steve about the requirements.

Stephen Fishman: It is subject to an income threshold and the amount of credit you can take each year goes down as your income approaches that threshold amount. For example, a married couple filing jointly with one qualifying child gets no child tax credit if their adjusted gross income exceeds $130,000.

Nolo: We asked Steve Fishman what about tax credits for couples who adopt children?

Stephen Fishman: Yes, there is a tax credit for people who adopt children. The credit is equal to 100% of adoption expenses up to an annual ceiling. The ceiling was $10,960 per child in 2006.

Nolo: As Steve mentioned, there are educational tax credits, as well. Congress figures that well-educated taxpayers will make more money and be able to pay more taxes so it has created two tax credits for expenses related to higher education: the Hope tax credit, and the lifetime learning credit. There are a lot of rules and restrictions for both. As a general rule, if the total expenses involved are $7,500 or less, Steve suggests in his book that it’s usually better to use the Hope credit if you have a choice. If your expenses are above that amount, Steve suggests in his book that it’s better to use the lifetime learning credit because the lifetime learning credit is larger for expenses over the threshold amount. Also, keep in mind that a parent can only claim the Hope tax credit for their child during the first two years at college.

As for retirement tax credits, there is one designed to benefit people with modest incomes who save for their retirement. There are a lot of restrictions, but the main one to keep in mind is that your adjusted gross income is not more than $50,000 if your filing status is married filing jointly, or $25,000 if your filing status is single.

What about tax credits for businesses? We haven’t touched on those yet? We asked Steve Fishman what are some of the choices for a small business owner.

Stephen Fishman: Right, if you have a business there are few types of activities that Congress views favorably enough to warrant a tax credit. These categories include:
• helping the disadvantaged or disabled
• improving the environment
• helping your employees, or
• investing in research and development.

You may be able to qualify for several different credits at the same time. However, there is an overall limit on total business credits you can take in a year which is based on your tax liability. If you exceed the limit, you can take the credits in future years or apply them to previous years’ taxes—within limits.

Nolo: As Steve reports in his book, one credit most businesses may be able to use is the solar power credit. Businesses can get a credit up to 30% of the cost of buying and installing solar equipment to generate electricity to heat or cool a structure, or to provide solar process heat. Unlike the solar credit for homeowners, there is no dollar limit on this business credit. We asked Steve about some of the business credits a business can get by helping employees?
Steve Fishman: There are a couple of credits you can get if you do some nice things for your employees. One is the credit for employer-provided childcare. This credit is limited to $150,000 each year. The other is a credit for small employer pension startup costs. If you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension, you can receive a tax credit of 50% of the first $1,000 of qualified startup costs.

It’s probably hard for most listeners to remember all these details. Tax information is not the most riveting subject matter. So we recommend Steve’s book for more details, Lower Taxes in Seven Easy Steps. And on the the IRS is the best place to keep up on tax credits, that’s www.irs.gov.

Second Homes: What Should You Know

This is our second interview with Craig Venezia, a nationally recognized mortgage expert and the author of Buying a Second Home: Income Getaway Retirement from Nolo. In our previous interview we discussed issues that arose when co-buying a second home. In this interview we’ll focus on several issues involving the financing and the location of a second home.

Nolo: Craig let's start with the location. When making a decision about buying a second home some people buy locally and some people buy in a vacation area while others buy in a location where the house prices may be lower than where they are currently living. Can you give us any suggestions for where to look for a second home?

Craig Venezia: A general rule of thumb for where to buy your second home is to keep it within a two hour's drive away. The benefit of this is that it doesn't take you all weekend to get to your weekend getaway. And you also have to think about not just enjoying your home but also property management and upkeep issues and that's true for investors who are renting out their place full-time, people who are buying a weekend getaway, or the person that's going to be using it as a retirement. One interesting trend that we've been seeing is that a lot of people are actually buying second homes locally, either in the same town or a neighboring town. And what’s interesting about this is a lot of people who are buying for future investment are doing that because they like the town where they live, they know the area, they’ve established family and friend connections. They don’t want to leave the area but they also know that when they retire they don't need this big home so what they're doing is buying in the general area, renting out their places, and then, when they retire, five, ten, fifteen years down the road they will move into their current second home and make it their primary residence.

Nolo: Let's say that you're considering buying a second home in an area that you are not really familiar with what's the best way to start that process?

Craig Venezia: First and foremost I always say pick up the Yellow Pages or go online, find a local real estate agent. They are the ones that knew the towns where you'll be looking. This is particularly true if you're coming to an area where you have less familiarity and that is true too, if you've been to the area but you just vacationed for a week or two and then leave. You want to know the ins and outs of an area. Your best resource is to go to a real estate agent and work with them and learn as much as you can about the area.

Nolo: Okay let's talk about financing. It's often hard for buyers to acquire a first home let alone a second home is there any way to bypass the typical bank loan?

Craig Venezia: There certainly is. I strongly recommend private home loans. This is where the purchaser borrows money from a family member or even a friend, usually at a reduced rate compared to what you would get from a traditional loan. Both parties benefit from this arrangement. The borrower enjoys the flexibility and usually a lower interest rate than that of the traditional bank loan while the lender receives a higher return than a comparable investment such as a stock or bond may yield. Just keep in mind that this financing option is still a business transaction and should be treated that way. You want to have a local real estate attorney draft the loan and mortgage documents while making sure that all parties understand their obligations—for example, your parents can't foreclose on your house just because you were late arriving to their 50th wedding anniversary.

Nolo: Still with so many people struggling to buy a first home it seems like only the wealthy can get into the second home game.

Craig Venezia: It’s a common misconception that only the wealthy can afford to buy second homes. Actually many everyday people with middle incomes are doing it. I've seen beauticians, contractors, middle managers, everyday people you pass in a street, who can afford to buy a second home. You just need to be smart about how you do it. First and foremost you need to create a realistic affordable budget to make sure that you buy within your means. Also consider renting out your place for part of the year to help offset your expenses. Another alternative is. as we mentioned earlier. to do a joint purchase with another buyer or buyers. This works especially well for investment properties or even vacation homes. By lowering your debt burden, you can purchase a home you might not otherwise have been able to afford. It also has the added benefit of saving time and money on property management.

Nolo: Craig in your book you mention that many people are overpaying on their home mortgages. Can you explain that?

Craig Venezia: Mortgages are very a complicated animal and a lot of people wind up taking out mortgages that they honestly don't know what the cost involved is. And one of the key things that I've seen in people that I've talked with is that they could've gotten a better deal on their mortgage, they could've gotten a lower interest rate. If you got an interest rate that's just a quarter percent or half a percent lower, that could be tens of thousands of dollars in savings over the life of your loan. So now the question becomes, well, great how do I get this lower interest rate? Well the first thing you want to do is work with a reputable mortgage broker who's going to be able to be shopping for mortgages on your behalf. They will compare all the mortgage products within the portfolio of the lenders that they work with and come up with the best rate for you. Now keep in mind that ‘lowest interest rate’ doesn't always mean you're paying the lowest amount on your mortgage. And that's what happened with a lot of people who went into ARMS. An ARM is simply an adjustable rate mortgage. They went win for a lower rate which is usually a teaser rate, it starts off at a low rate and then after certain fixed period, it starts to adjust and suddenly that interest rate is significantly higher than if they had been locked into a fixed-rate mortgage. So the point is when you're looking at interest rates, you don’t want to look at just the percent but you want to try to evaluate. Where is this loan going to go over the course of the time I have it? Am I going to be paying the same interest-rate I’m paying ten years from now? I will, if I have a fixed-rate mortgage but if I have an adjustable rate mortgage, I'm probably not going to be paying the same rate and it's probably going to be higher. So what you really want to do is spend some time with the mortgage broker, really look over the different options that are available to you, and don't sign anything unless you fully understand what you're getting into.

Nolo: Craig one thing that surprised me when reading your book is that the owners of some second homes must pay sales tax. Can you explain how that works?

Craig Venezia: Sales-tax really is an issue that comes up with somebody that's renting out their property and renting it out for a short period of time, usually a vacation rental. So you’re renting it out for a week or two weeks at a time. Basically what that means is that there are some cities and some counties that impose sales taxes. And these taxes go by other names. They call them lodging, accommodations, hotel bed, tourist, transient occupancy taxes, a whole slew of names. But the reality is it's a sales tax on the rental income that you are taking in. You'll need to check and possibly register with your state's department of revenue to see if this is an issue that will impact you know depending on where you buy your property.

Nolo: Craig, can the buyer of a second home deduct the interest on the mortgage for that second home as well as deducting it on the main home?

Craig Venezia: Absolutely. As with your primary residence, you can deduct the interest you pay on your mortgage on your second home. And that interest adds up. Over the life of the loan you can pay tens of thousands of dollars in interest on that loan. And all of that interest is tax deductible on your second home.

Nolo: But can you really deduct all of the interest I thought there was a million-dollar limitation?

Craig Venezia: As with the IRS and looking at taxes, it's never quite a black-and-white situation. The reality is most people will in fact be able to deduct the full amount of the interest. Basically what happens is if all the mortgages on your home exceed the fair market value of your home or one million dollars, you may not be able to deduct the full amount of mortgage interest. Also if the equity in your second home is more than $100,000 you may not be able to fully deduct your mortgage interest. Your best bet with any tax situation is to certainly review it with your tax advisor to see what you can and can't deduct. But by and large most of us are not going to have mortgages that are a million dollars on our second homes, so we will be able to deduct the full amount mortgage interest.

Nolo: Craig thanks so much for speaking with us today. You've been listening to Craig Venezia a nationally recognized mortgage expert and the author of Buying a Second Home: Income Getaway Retirement. from Nolo

Disciplining Employees: What are Some Common Mistakes?

We’re speaking with attorney Lisa Guerin, an expert on employment law issues and co-author of the Progressive Discipline Handbook (Nolo).

NOLO: Lisa, Let’s say you “inherit” an employee—for example, from another department—and you discover a discipline problem. You start talking to the employee’s old manager, and find out that the employee’s had the same problem before, but the former manager didn’t do anything about it. If you do decide to discipline the employee, can you discipline for the older incidents, as well?

LISA GUERIN: It’s really not a good idea to discipline for those older incidents, but the reason isn’t really legal, it's more practical. The whole point of progressive discipline is to give employee an opportunity to improve, to tell them what the problem is, and then work out an improvement plan. And you haven't really given this employee the opportunity to know what the problem is, for example, to talk it over with the manager and to try and come up with some way to improve.

NOLO: Lisa, in the book, you talk about “overdocumenting” employee discipline. How is that possible? Shouldn’t you write down everything that happens?

LISA GUERIN: Well, you should write down enough that you'll be able to remember later what happened and that anyone else who's reading your documentation can figure out pretty easily what happened. What you don’t want to do is to nitpick and micromanage. You know, from a practical level, if your employee feels that you’re always looking over their shoulder and marking down everything that they do wrong, they’re going to feel anxious and it’s going to be difficult for them to really improve and feel supported. And on the legal side, if you ever have to use your documentation for example in a courtroom, a jury who sees that kind of your documentation is going to smell a setup. It’s going to look like you were trying to write down everything that the employee was doing wrong so that you would later have an excuse to fire that person. And that's why it's best to, of course, document, and document thoroughly, but just don't go overboard.

NOLO: Lots of employees have attendance problems. Let’s say you have an employee who’s always calling in to say she won’t be in. You tell her that she has to call within the first half hour of when her shift starts. If she doesn’t call you, but it turns out she’s allowed to have the day off because her leave is legally protected—let’s say she has jury duty that day—can you discipline her?

LISA GUERIN: That’s a really great question and the answer actually has two parts. You can’t discipline her for taking the time off. Employees are entitled to take time off for a variety of reasons and jury duty is one of them. An employee can take time off for family and medical leave, or, in a lot of states, an employee can take time off to vote, if they wouldn't otherwise have time. But you can require employees who are taking time off for these reasons that they know about in advance, to follow your regular policies about checking in with a supervisor, or in this example, giving notice. So you could discipline the employee for not following your rules particularly because she must have known that she was going to have to go to jury duty that day.

NOLO: When disciplining employees you advise people not to make promises about the future. What happens if you do? And if you already have made promises, what can you do to undo those promises?

LISA GUERIN: The reason why you shouldn't make promises about the future is that you might have to keep them and you’re really not in a position, right now, to know what's going to happen. For example, if you promise an employee, ‘You know, as long as you can get those numbers up, we’re going to promote you to be a manager,’ and then let's say your company has to have layoffs and the employee is targeted or you have a great candidate, come up that you want to hire for that manager's position. The employee is going to be left wondering why you didn't keep your promise. And in a worst-case scenario that promise could turn into a contract with the employee.
The way it works ordinarily in this country, is that most employees are employed at will. What that means is that they can quit at any time for any reason. And they can also be fired at any time for any reason as long as your reason is not illegal, for example you're not discriminating.
But when you make a promise to an employee, you might potentially undue that at-will right and that means, rather than being able to fire the employee for any reason, you now have to keep your promise that's become a contract. So the employee, in the example that I gave, might be entitled to that managerial position if he or she can get those numbers up and that might not be what your company wants to do when the time comes.

NOLO: If you’re in a situation where you’re about to discipline an employee, and the employee gives you information that makes you think he or she might have a disability, what are the legal implications of going ahead with the discipline?

LISA GUERIN: An employee who has a disability is entitled to a reasonable accommodation and what that means is that your company might have to make changes to the job or the way the job is performed or the equipment the employee uses in order to enable the employee to do the job.
Examples of a reasonable accommodation might be making the workplace wheelchair accessible, for example, or using voice recognition software for an employee who is unable to keystroke or is blind. So if an employee tells you that he or she has a disability, then you have an obligation to start a conversation with that employee about what reasonable accommodations might be possible.
You don’t have that responsibility before you know that the employee has a disability, however. If you’re going to discipline an employee and the employee then says that he or she has a disability, technically you might have the legal right to still discipline the employee and then start your reasonable accommodation conversation.
But, really the best practice is to try and accommodate and set the discipline aside. It's not really fair to discipline someone for something that they can't really help. You know if your employee, for example, has depression and the employee has had a tardiness problem, a problem coming in the morning. And you're going to sit down and discipline that employee and the employee says, “Boy, I’m really sorry that I've been late so much, but I'm taking some medication for my depression and it makes me really groggy first thing in the morning and I've had a lot of trouble getting going.”
Rather than disciplining that employee for coming in late you might want to instead start talking about reasonable accommodations, for example, can you change the employee’s schedule so that he or she comes in later and then works later in the evening and that way you’re really giving the employee a fair shot to perform the job's requirements.

NOLO: Sometimes you hear about situations where managers get sued by employees for things that happen at work. In what kinds of situations are managers going to be personally liable to employees?

LISA GUERIN: There are a couple of ways that that might come up. First of all certain employment laws make managers and supervisors liable if they break the law and probably the one that people have heard of the most is the Family Medical Leave Act and that defines the term employer so broadly that managers can actually be sued for violating that law. So, that's one way.
Another way is if the employee sues for personal-injury. And in the workplace for example the personal injury that might come up is defamation, where typically a former employee says, ‘My manager gave me a bad reference and I'm not getting any new jobs and the manager’s lying about me and bad mouthing me.’ Then the employee can go back and actually sue the manager personally for damages.

NOLO: Why might an employee sue a manager?

LISA GUERIN: There are a few reasons why that might happen. I think often why it happens is that the manager is the person who has been involved with the employee and who has disciplined the employee, who has that personal relationship. And so often the manager is the person that the employee is really angry at. They’re the face of the company when a negative job action happens, when an employee gets fired or disciplined for example.
Another reason why an employee’s lawyer might choose to sue a manager is to put some pressure on the company to settle. They know it's a very unpleasant thing to have the manager in the hot seat and that might add a little bit of leverage there.
And finally, suing a manager personally for technical, legal reasons allows the employee to keep a lawsuit in state court rather than having to go to federal court. And in many states the state court is considered much friendlier to employees so the employee would want to stay in state court if at all possible. And naming an individual manager as well as the company helps the employee do that.

NOLO: When an employee sues the manager, what does that mean in terms of what a manager has to do.?

LISA GUERIN: When an employee sues a manager personally, that means the manager is a defendant in a lawsuit. So from a practical standpoint the first thing the manager should do is get a lawyer. Often, the company will supply a lawyer for the manager, but it also means that the manager is going to have to participate in discovery, which means being deposed, having to testify under oath having to produce documents. They’re going to have to spend a lot of time working with their lawyer to help prepare a defense. Ultimately, they will have to appear in a courtroom and if the company loses the case and the manager loses the case, the employee will have a judgment for damages against the manager and those can really add up in employment lawsuits.

NOLO: Probably the worst part of any manager's job is firing someone one. What are the employer’s legal obligations?

LISA GUERIN: There are certainly a lot of legal issues that come up when you’re firing someone. For example, most importantly, you can't fire someone for an illegal reason, because you're discriminating against them for example, or retaliating against them for exercising their legal rights. And you may also have legal obligations to an employee who was fired, for example, to give them a final paycheck by a certain date, or to offer to continue their health insurance and things like that.
There aren’t any legal requirements in terms of what you have to say. You don't have to use magic words when you’re firing someone. But what you say certainly is important. Studies show that the way employees are treated, particularly when they're fired, is the main thing that determines whether they're going to sue. An employee who feels that the person who fired them was disrespectful or unkind is much more likely to land in a lawyer's office.
So you need to remember when you’re firing someone that even though it's quite unpleasant for you, it's of course much more unpleasant for the employee. That person is losing a job. They are losing their paycheck. They may be heading for financially tough times. They may be headed for emotional issues or family problems. It can really tear you up to lose a job. You need to keep that in mind when you’re firing someone.
So I think the most important thing to do when you're getting ready to fire someone is to make sure you're prepared, to make sure you have good reason to fire them and you know you have your facts straight. And you should think a little bit about what you’re going to say. You have to tell the employee, obviously, that you are firing them. We recommend that you say, ‘Your employment was terminated.’
I think when you are firing someone, the best rule of thumb is to keep it short. You want to tell the employee, what you are there for – in other words, that their employment is terminated—and then you want to move the conversation fairly quickly to what’s going to happen next, talking about practical issues like getting back company property continuing their health insurance benefits, and so forth.
You want to try and not get drawn into an argument about why the employee is being fired. Really there's no point going there at this point. If you've done your homework, you know you're going to fire the employee. So, it’s best is to cut off that kind of conversation and say, ‘I'm sorry you feel that way, but my decision is final,’ and then move fairly quickly into the practical issues.

NOLO: Lisa, thanks much for talking with us today.

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.