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Recap: Horrors of Business Ownership Part I

Horror Stories of Owning a Business and How to Deal with Them

The seminar focused on stressful situations encountered by business owners and how to deal with them.

Horror Stories of Business Ownership: Recap of Seminar

How is the beginning of your November 2017 going? Are you scared there are only 2 months left till the end of the year? Well, speaking of frights, I did a seminar with the Better Business Bureau of Hawaii (BBB) this past Monday celebrating Hallloween. We told spooky stories, well sort of. We discussed the horrors of business ownership. Specifically, I talked about these broader topics:

  1. structure of entity – failing to plan properly;
  2. disputes with business partners and managers;
  3. government regulations – the revoking of permits and licenses; and
  4. intellectual property infringement.

Lisa Nakao,Director of Operations of the BBB, discussed the resources the BBB offers and how to deal with reviews and complaints by customers hosted on the BBB’s website (I will cover some of this in a Part II to this post). If you could not make it to this seminar do not worry. I will continue presenting seminars aimed at educating business owners about the legal issues. So be sure to check back and follow us.

Some of the Horrors of Owning a Business – Highlights

I’d like to take this time to discuss some highlights of the seminar. While, I will not cover everything from the seminar, as you will  just have to come to the next one, this post will touch upon a couple of issues. Particularly the ones that gave good discussion or attendees asked a lot of questions.

1. Managerial Authority in a LLC: Friends, Family Members, and/or Relatives of Friends as Your Manager

I’ve discussed in the past of business partner disputes, but this following scenario is derived on a similar theme. Consider the situation where many small and medium-sized business owners rely on family or friends to help run their business, including relatives of friends. This tight-knit network can be a boon or a misfortune. Especially, here in Hawaii where people tend to rely on local connections the trust and reliance can run high and sometimes too quickly. Specifically, I refer to hiring someone as a manager of your LLC or corporation and giving them access to the company’s bank account and credit cards. Then the business owner discovers the person they thought they could trust is gone the business account is empty and the credit cards are over extended. Worst yet, there is no written management agreement.

Don't lose your business account.

Be careful of giving your manager too much access to your finances.

Is there Nothing that Can be Done? 

While, legally there is a lot to do, such as suing them or attempting to report them to the police for theft – the reality is proof and evidence issues. Many times business owners in this situation rely on a handshake, only talk to their manager on the phone, and their emails and texts refer to managerial duties/obligations obliquely. There is no writing of the contract. Further, consider even if you have a good case, you have to find them and force them to give back the money, which by the time you get the the lawsuit filed, served, and litigated, they’ve probably spent it.

So again, this is an urging to slow it down and think methodically. I get it. Small business owners are trying to get help and tread water. However, consider the following ideas:

  1. conduct due diligence – find out more about them before you hire them;
  2. limit their access to the business bank account and credit cards – you do not need to give them unfettered access;
  3. if you cannot do a full-blown management agreement, then at least tackle the main terms in some of memorandum, letter, or lengthy email;
  4. as to point 3 make sure you get their signature, acknowledgment, and confirmation!

While, those things will not always save you, the point is getting you into the habit of preparing, doing your research, and record keeping when you finally decide to take an action that may be risky.

2. Shutting Down Business Operations Due to Lost of License or Permit

So I told a story during the seminar of a business owner who relied on their accountant to do the business entity’s Annual Filings with the State of Hawaii’s Department of Commerce Affairs (DCCA). Only problem with that was the accountant was not actually doing the filings; it was not a part of their services. So the DCCA administratively terminated the corporation’s existence. So leaving the account and taxation issues aside, the main focus of this section I want to focus on is government licensing and permitting. See LLCs and corporations are legal persons. They may not be a living, breathing individual like you and me, but they are persons under the law. So often time government licenses and permits, for example liquor licenses, issues to the business entity itself and not the individual owners of the business.

So when the DCCA administratively terminated this corporation the business owner also lost their government license. In this instance, they could not operate the business because it would be illegal to operate without a license. So they had to shutter their business and form a new corporation, then reapply for a completely new government license.

Did they Really have to Close Their Business?

Yes, unfortunately in this case they did. However, sometimes the government fails to follow proper procedure when revoking or suspending a business owner’s license or permit. If the government does not follow its own rules and regulations there may be opportunity to stop the government’s action. However, it depends on the type of permit or license being revoked and the applicable laws and regulations surrounding it.  In this instance, the business owner could have saved themselves by routinely checking the DCCA and communicating with their accountant. Finally, catching the administrative termination of their original corporation earlier could’ve resulted in a successful petition to reinstate it.

You should know the filings you need to make with the government and calendar them into your schedule. Further, consider an annual business checkup to assist you in navigating your business’s compliance requirements. If you are interested in an initial consult to begin the process of an annual business checkup contact us today!

Be vigilant in your compliance.

Keep your business compliant or you may be forced to shut it down by the government.

There will be a Part II to this post; it will focus on the BBB Reports and Complaints and resources/information they shared. So check back!

DISCLAIMER: This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained in the post without seeking the advice of  an attorney in the relevant jurisdiction.  Hew & Bordenave, LLLP expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Government and Business, Part III: The Legislature

Personal Update

Aloha everyone!

I apologize to all my loyal blawg readers, that have missed on so many months on posts from me.  I have been extremely busy, but have a lot new and exciting information, as well as simple little sketches to help you understand the law.  First off, let me state that my law firm will now be offering notary public services here in the State of Hawaii.  Therefore, if you need something notarized and are in the Kaka’ako area please contact my office to schedule an appointment.

Second, the reason I was not posting for the past several months is I was working for the Hawaii State Legislature for the House Judiciary Committee.  This was fascinating and informative work on the drafting of legislation, and I do recommend any young attorney get some legislative experience if they intend to work in government or even in private practice; it is an invaluable experience, and goes a long way if you intend to do lobbying or public interest work.  With that work finished, Draw the Law should be returning to semi-regular postings, as I will be holding regular office hours at my Ward Avenue location.  Of course with my legislative knowledge, I will be using it for today’s post to follow-up where we left off, and of course I will be talking about the Legislature and how it affects your business.

Lastly, you can expect New Law in the Brief posts, a series of posts of the legislative process, as I have interacted with many local business owners and advocates who have no idea how the Legislature operates, but are interested, and finally there will be new content updates, such as events, one-sheets, slides, etc . . .

Anyway, I’ve written enough on me, let’s get back to Draw the Law!

Draw the Law: Government and Business, Part III: The Legislature

The 3 branches of the federal and local state government balance and check each other.  Specifically, when it comes to lawmaking, the legislature creates the law, while the executive enforces, and the judicial shall interpret the laws application to a case.

So last time I discussed how the judicial branch of the government (both US and Hawaii) interacts with businesses when they sue each other or receive a suit against them by a customer or possibly an agency of the government charged with enforcing the law.  This brings me to the Legislature, as it is the place where the laws are made.  It is what gives a consumer the right to sue you for a defective product, it’s what gives the police and government agencies to chase you down for speeding tickets or having to go to the liquor commission for a license to dispense alcohol.

So why should a business owner care about what the legislature, state or federal or both do?

Let me generalize for a bit, so that you can understand what is happening.  Typically, what happens is that a new industry or business practice is implemented, sometimes with little problems to society, but other times causing problems for people.  In the case when it is not, the company is likely injuring a number of people, but sometimes that injury does not give those people a cause of action (aka a right to sue) the company doing the damage.  Therefore, people become advocates for a change in the law making a company responsible for the harm.  They do so by interacting with their elected official, which may either be a senator or representative and they introduce a bill into the legislative process.  Other times, the change in or the addition of a new law need not come from the advocacy of protecting consumers and clients, but many industries see benefit in engaging the government by either having access to information, resources, or possibly legitimacy.

So here, we have a widget plant in a neighborhood. The community does not like the smoke, and asks their elected official to speak to the legislative body and convince them to pass Bill 55 on the issue.  The legislature then passes Act 10, which orders any widget plant to put a red cap on their smoke stack.

Many times laws do not just benefit one company, but an entire industry. Therefore, the companies that mak up the industry will bandwagon together and form some type of organization to lobby for changes in the law on behalf of the greater whole.  A good example of this is the Hawaii Chamber of Commerce.

So the widget plants do not like putting a red cap on their smoke stack. Red paint is too costly, and they would rather put blue caps, which are more pleasing to the eye. So the widget companies band together to form the Widget Association of America, which hires a lobbyist to make their case heard in the legislature to change the law.

While, some business owners live in a legislative district separate from where their business is located, this should not prevent them from knowing who the representatives are for the area.  The reason being is that the local neighborhood business provides a valuable resource to the community, and in turn that community elects the representative.  Therefore, consider finding out who your representative of both where you live and do business in, and consider joining or forming some type of association to get more involved with the legislative process if you feel that their may be benefits to your business in influencing the lawmaking process, as the laws your legislator passes may affect your business. If you are in the State of Hawaii, you can find out who your elected officials are by using this website and entering your address in the top-right corner search box.

Next time I will touch upon the executive branch, the part of the government charged with enforcing the laws.

LEGAL DISCLAIMER: The information provided here is meant to be general information, and should not be taken as specific legal advice that pertains to any particular situation.  The reader should not base any decisions on the information here to act or refrain from acting regarding a legal problem.  If you believe you have a legal problem please seek legal advice from a licensed attorney in the relevant jurisdiction.

Draw the Law: Government and Business, Part I: The Overview

Happy New Year! Pardon the delay, but I have had a lot of work and been trying to deliver new interesting content and helpful services for local small businesses and startups here in Hawaii.
So I hope you all are off to a roaring start with your business plan, startup, second round of financing, or expanding your business to new markets.  However, if you were like me you were concerned with the “fiscal cliff” debate that raged with the US Congress at the beginning of the year.  Now in the upcoming weeks, here in Hawaii, as in Washington DC, lobbyists and stakeholders are preparing for a new legislative session to influence lawmakers.  Many of these lobbyists represent consumer advocacy, environmental protection, trade, and business groups.

So this brings me to a new series for Draw the Law, government and business.  I have a background in government, law, business and politics and I find that many small business owners do not appreciate the interaction of government. I realize that many business owners have not had civics in a while, nor did their class cover the nuances of government, regulation, and lawmaking, but that is why I think these posts should bring some clarity. So let’s get to it.

The Federal System

So let’s start with a refresher, our government is a federal system. This means there is a national government, located in Washington DC, and fifty state governments, one of which is the State of Hawaii, with its state capitol being located in Honolulu.  What this means is usually you have to worry about two sets of laws.  For example, your income taxes, you have federal income tax, and a state income tax.  Another area is labor law; federal law prohibits gender discrimination, as does Hawaii state law.  However, each of the states, in some areas, are allowed exceed federal law, such as how Hawaii law prohibits discrimination against domestic violence victims or gender expression.  Finally, there are some areas that federal law only exists, such as the registration of copyright or patents.

Imagine that there are 2 sets of systems, that there is a federal government in black, and 50 state governments in red. When you start a business you start it in a state and are subject to state taxes, as well as federal taxes.

The Three Branches

So we have two levels of government, but within these layers there are three parts of each government.  There is the Executive branch, which has the United States President if it is the federal government and the Governor of Hawaii if it is the state.  The Executive branch is responsible for carrying out laws. For example, the US Department of Agriculture Food Safety and Inspection Service is the public health agency responsible for ensuring the safety of meat, poultry, and egg products is safe. At the state level the Department of Commerce of Consumer of Affairs of Hawaii is under the governor and is responsible for registering your corporation or limited liability company with the state.

The Judiciary is made up of the courts, which have judges that rule on cases. We have federal courts and state courts, and there are specific rules and procedures that allow a court to have jurisdiction over your case (i.e. they have power to hear your problem).  So for a business, if their product or service injures a customer and the customer goes out, finds an attorney, and then sues the business they will get this resolved in a court.  Another example is if you were an independent contractor and did work for a client for $3,000.00, but never received payment, you could consider suing the client in Small Claims Court.

Finally, there is the Legislative branch, which in my personal opinion most people find confusing, unless they are a politico.  This is the case because of the politics played among all the personalities of senators and representatives. For the United States Congress there is the House of Representatives and the Senate, similarly Hawaii has a bicameral (2 chambers) legislature.  The sole goal of the legislative branch is to make laws.  Therefore, many businesses, by trade or industry, bandwagon together to lobby for the creation of laws that are favorable, such as the US Chamber of Commerce, the National Restaurant Association, as do other groups, such as unions, like the ILWU or HGEA, as they interact at the two levels of government.

The executive branch (blue) is responsible for enforcement, such as through the department of taxation (taxes). The legislature (red) creates laws and lawmakers are subject to lobbyists, voters, and stakeholders influencing them. Finally, the judiciary (green) decides on cases through laws made by the legislature, such as class actin law suits.

Upcoming Weeks

In future weeks, I will go over how public policy affects management of businesses, lobbying, where nonprofits fit in, and how legislation is driven by stakeholders, as well as other topics that business owners interested in government may be interested in.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Leadership Institute – We the People, Part II – Civility in Government

Following up on the prior Leadership post, the We the People seminar’s afternoon panel was very interesting. Recall that we had Chief Justice (CJ) Recktenwald, Senator Sam Slom, and former Deputy Chief of Staff, Andrew Aoki with Kirk Caldwell moderating.
I have to admit being a political junkie that I found it interesting having Senator Sam Slom and Andrew Aoki there, as I did not know what to expect. I definitely think that Senator Slom presented the best case for civility (and humor) in government and of course why shouldn’t he? He has the honor of being the lone Republican in the Hawaii Senate, and on the national level is the only one in such a position.

The civility in government subject, with the panelists present, turned on what civility meant in the judiciary, politics/executive, and legislative branches. What follows are some of the quotes that I took with me from that afternoon and my thoughts.

Judiciary

“Lack of civility increases the cost of litigation.” From CJ, and I definitely think he is right because civility means that the modes of communication remain open, as soon as they break down the barriers go up, which we all know from a purely market system causes things to be more expensive.

He followed that quote with, “Lack of civility undermines, fundamentally, the judicial system.” The basic rationale is that citizens watch their attorneys behaving badly and if that is the case what does that say about the system as a whole?

Politics/Executive

Echoing CJ’s tone, Andrew Aoki agreed that in politics that the lack of civility creates a barrier to access politics. Basically, that it turns people off from participating in the process. I think especially here in Hawaii that is the case, we found in the Hanabusa-Djou race, as mainland money poured in, the tone of the message became nasty (by Hawaii standards) and a lot of people felt that did not have to be the case.

Finally, Andrew felt that it is “Easier to run on fear, then hope.” I think that his blanket statement sounds nice, but I found that it sometimes too easy to fall back on. I think with times being very tough it is always easy to want to give people hope, but the reality sometimes is some of the people’s fears are legitimate and credible. The problem is from a top-down perspective you have to weed out all the noise of what is fear-mongering and what needs be addressed. Once again it boils down to communication.

Andrew felt that there was more civility than not here in Hawaii. In fact, that someone managing here needs to deal with passive-aggressive nature tendencies and that you need to learn how to cooperate and be agreeable.

Legislative

Finally, Senator Sam Slom felt that civility is a part of your ethics. He felt that in recent times we have created all these educational programs on corporate, government, medical, etc . . . ethics, but really there is just ethics. It comes down to your core.

Finally, in the legislative arena, lack of civility leads to escalation and tension-building. It was definitely evident you have thread that balance of sticking to your opinion and focus on the issues, but do not burn bridges. He also emphasized respect the people you serve.

I will leave off with he said something that I think applies to anyone trying to deal with people and gain their trust and buy-in:

Do not over promise, but over deliver.

See you next time for the Write-Up on Corporate Hawaii!

Draw the Law: Capital for your Start-up, Part III


Hey everyone, today’s Draw the Law will be brief, in anticipation of your 4th of July weekend!  Remember to enjoy yourself, be safe, and that the next post will be for Social Media and the Law on Tuesday, July 5th. Anyway, let’s get to it!

In the last post, I discussed raising capital from private sources such as institutional lenders, banks, or wealthy individuals or organizations, such as angel investors.  Today, I will discuss some of options through the government.

US Government Programs

The United States government does not lend money to small businesses.  Instead it has designed guarantee programs to encourage banks and other financial institutions to lend money to small businesses.  The main organization responsible for this is the Small Business Administration (SBA).  There are three main loan programs that the SBA offers to small business owners.

7(a) Loan Program

The 7(a) Loan Program provides financial help for businesses with certain special or unique requirements.  For instance, funds are made available to businesses that operate in underserved communities, in the export business, or operate in rural areas.   In general, the 7(a) Loan Program has a variety of sub-programs designed to promote very specific kind of businesses.

Microloan Program

The Microloan Program is exactly as it sounds.  It is made to provide small, short-term loans to small businesses and not-for-profit child-centers.  The maximum loan is for $50,000, but the average tends to be $13,000.  The monies received under this program come with certain restrictions.  Mainly, it cannot be used to buy real estate or pay off existing debt.  The money can be used for the following purposes: 1) working capital; 2) purchase of inventory or supplies; 3) the purchase of furniture and or fixtures; or 4) purchase of machinery or equipment.  Finally, the intermediary lender (the bank) is required to put you, the business owner, through certain training programs.

CDC/504 Program

The CDC/504 Program has the purpose of acting as an economic development tool for communities.  It basically operates through a Certified Development Company (CDC), a private, nonprofit corporation, which in turn works with the SBA and private lenders to provide financing to small businesses in the area.  It selectively targets businesses and then injects them with fixed-rate financing to acquire major fixed assets for expansion or modernization, thus insuring there is investment in infrastructure and development for the community. The funds must be used for fixed assets, for example: 1) purchase of land (including with buildings); 2) improving the area, such as grading, streets, utilities, parking lots, and landscaping; 3) the construction of new facilities or modernizing, renovating or converting existing ones; and/or 4) purchase of long-term machinery and equipment.  The funds CANNOT be used for working capital, inventory, or for the consolidating/repaying of debt, or financing.

*Please note I could spend dozens of posts talking about the variety of other loans and grants from other governmental departments and agencies.  Those tend to be heavily industry-specific types of programs, such as the US Department of Agriculture’s Farm Loans Program, designed for family-sized farmers and ranchers.  Today’s post is about very general small businesses.

Office of Hawaiian Affairs Programs

The State of Hawaii, as with many others states, has some unique funds or programs to help foster community and business development.  Those with Native Hawaiian ancestry have a couple of programs to look towards to help starting or growing a business.

Mālama Loan Program

First off, there is the Office of Hawaiian Affairs (OHA) Mālama Loan Program.  In this program OHA partners with First Hawaiian Bank to provide lending services to Native Hawaiian consumers and businesses.  Loan approval goes through the Native Hawaiian Revolving Loan Fund Board of Directors.  Some of the features of the loan are a 5-year, 5% fixed rate up to $75,000 for eligible businesses.  Typically, the business is used for business growth.  For more information, visit OHA at their website.

Kau Inoa Small Grants Program

The second program that I would like to mention is the Kau Inoa Small Grants Program.  This grant is dedicated to providing monetary incentive to encourage individuals and organizations for the purpose of nation-building. OHA suggests activities that grantees could participate, such as registering Hawaiians for Kau Inoa, conducting/hosting educational presentations, and/or the staffing of informational sites.  In general, this type of program is specifically geared toward events or short-term projects.  There is no non-profit or residency requirement.  The award amount is dependent on the type of event and hours of work required.  In certain cases, the award can be made on an accumulative and ongoing basis for a defined period of time, instead of singular events.  If you are interested please check out this link.

An Injection of Cash:  Not a Long-Term Financing Relationship

If you notice some these government guarantee-backed loans and grant programs are intended to be just quick shots of cash, especially like the SBA’s Microloan or the Kau Inoa Small Grants Program.  However, may be that is all you need to get over the expensive startup requirements your endeavor requires or that’s all you need to get your idea out there to gain supporters, customers, or clients.  For those with the entrepreneurial spirit, you might want to view your capital raising strategy as a three-legged stool with injections of money coming from all three sources.

For example, if you are one of those fortunate to qualify and receive a government-backed loan you could combine that with your personal money to get you past the startup phase. After you purchase all your equipment (usually the most expensive) part you can then use investors or private lending to get your company to the next stage of growth.

Last Word

The programs discussed today by no means represents an exhaustive list of everything that exists.  You should be aware that many loans or programs are hard to obtain given the overall problems with the economy.  However, remember sometimes the best times to start a business is during downturn, especially with commercial spaces very low, the cutting of valuable government services, and learning lean strategies to survive.  If you are seeking government-backed loans it is best to be prepared for some of the extensive requirements of the programs (i.e. lots of paperwork!).   It is best to have experts help you by developing strategies, processes, or general advice to address your concerns or compliance issues.

Next time I will discuss starting a business through “faster” methods.  Namely, buying an existing business or into a franchise.

See you on the next draw!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.