Planning For Success-ion

Planning For Success-ion

9 Tips to Help Your Business Succeed in Transition

“Proper preparation prevents poor performance,” my grandfather used to say, whether talking about his garden, his golf game or life. Certainly the adage is true when it comes to success in business, and even more so when it comes to the success of your business in transition. Transition is inevitable in business – business partners suffer significant changes in circumstances (death, divorce, bankruptcy, etc.), employees come and go, and elder generations seeks to pass the business on to the next. With a good roadmap to guide you, the storms of transition won’t throw you off your course to success. Here are nine quick tips to consider in developing your succession plan. 

1. Ask yourself the Who? What? And When? questions.

• Who are the stakeholders in your business? - owners, key employees or up-and-coming family members to consider.
• What are you trying to achieve in your business? - are you planning to grow your business and eventually sell it, or to create something that invites your children and grandchildren to get involved.
• When do I need to begin? The best time to plan is NOW! Whether your business is just getting started, or you have been at it for years, there is no time like the present to lay a solid foundation for the transition of your business. 

2. Seek out qualified advisors. An experienced attorney and accountant bring a wealth of knowledge to the table and can provide you with many ways to achieve your goals. There is no “one size fits all” strategy for business succession planning, but there are many proven avenues you can travel. Don’t be shy about telling your advisors what your budget is. Most will work with you to develop a plan that won’t break the bank.

3. Decide what type of entity is the best fit. There are no less than 10 different business entities available to choose from in Texas. Each has benefits and limitations. Limited liability companies are the most popular and provide a tremendous amount of flexibility.

4. Determine how decisions will be made. In a typical business structure, the owners (e.g. shareholders, members, limited partners) elect the day-to-day decision makers (e.g. board of directors, managers, general partner) who, in turn, delegate some of their authority to specific individuals (e.g. president). Decide how the authority within your company will be shared.

5. Deal with death. Small businesses are successful because of the unique mix of talents, experience and contacts that the ownership group possesses. Change the personalities - change the working relationship. In the event of a death, address the impact it will have on cash flow. “Key man” life insurance can provide necessary cash to help sustain the business during transition. Also consider including an agreement to acquire a deceased partner’s interest. You may really enjoy working with your business partner, but would you say the same about his spouse or children?

6. Don’t overlook the impact of divorce, bankruptcy, or disability. Like death, these are significant threats to the success of a business. Good planning will help you overcome these game-changing events.

7. Shareholders as employees. Many successful businesses rely on a key employee or two for its success. Offering those key employees an ownership stake in the business is a proven strategy to keep them employed and motivated to continue investing in the company’s success. If an employee becomes a shareholder, it is a good idea to have a well written employment agreement. Spell out the employee’s duties, salary and benefits. Include objective criteria for continued employment. Then, tie the employment to ownership of the stock. If the employment agreement is terminated for any reason, then a sale of the stock is triggered (or not) depending on one’s particular circumstances.

8. Business Divorce. Prospective business partners are always willing to figure out how they are going to divide all the money they are going to make but are hesitant to address the what-if’s of a breakdown in the business relationship. Disagreements happen in the best of relationships. Include what is commonly called a “Business Divorce” provision in your planning: a process that results in one or more persons continuing to own the company and one or more persons exiting the company and being compensated fairly for their ownership stake.

9. Valuation. Fairly valuing a stakeholder’s ownership position plays an important role in the transition of a business. Set the value too high and you punish the business. Set it too low and you punish the outgoing stakeholder. Strategies used to value a business include getting an appraisal, using a formula to arrive at a fair value, or periodically setting the value of the business by agreement.

Navigating your business towards success demands that you plan in advance for the storms that will come. Don’t be tempted to believe that it won’t happen to you. Take the time to develop a plan with your business in mind, your goals considered, and your success in the balance. As my grandfather also said, “When you fail to plan, you plan to fail.”

Better (?) Disclosure for Mortgage Consumers

The federal Real Estate Settlement Procedures Act (RESPA) is a consumer protection law for homebuyers that is enforced be the Department of Housing and Urban Development (HUD). The thrust of the law is to require that loan originators make certain disclosures to borrowers so that they can be more informed consumers, entering into more transparent transactions. HUD recently wrote new regulations requiring that borrowers receive both a standard Good Faith Estimate (GFE) that discloses key loan terms and closing costs and a new “HUD-1” settlement statement.

The format of the new GFE is supposed to simplify the process of originating mortgages by consolidating costs into a few major cost categories. The former GFE had a long list of individual charges. The new version includes this list, but also has a summary page containing the key information for comparison shopping by the consumer.

The new GFE also has a set of tolerances on originator and third-party costs. Originators must adhere to their own origination fees and give estimates subject to a 10% upper limit on the sum of certain third-party fees. The idea is to encourage loan originators to seek out lower costs for third-party services, to the benefit of borrowers.

The main changes in the HUD-1 settlement statement involve new language and the organization of charges that should make it easier to compare the GFE and the settlement statement, in order to confirm whether the tolerances in the new GFE have been exceeded. It will also be easier for the consumer to verify that the loan terms summarized on the GFE match those in the loan documents, including the mortgage note.

Mixed Reaction

Reaction to the new regulations has been mixed, with some consumers complaining about their complexity and vagueness and other consumers wondering if the regulations will, in fact, server to enhance protection for consumers. Since the forms provide for lumping lenders’ fees together rather than detailed itemization, some consumers think that lumping the fees together could make it harder to detect questionable charges.

In any event, the “bait and switch” tactic in which artificially low estimates of costs mysteriously balloon at closing has been addressed by HUD. Now a lender is largely tied to its good-faith estimates provided for such mortgage fees as points, origination costs, and appraisals.

Debit Versus Credit Cards

When you are pulling out the plastic to make a purchase, will it be debit or credit? It makes sense to know how each works, and their respective advantages and disadvantages. The bottom line is that debit cards are fine for small and/or routine purchases, but credit cards, as a rule, are better for major purchases and online transactions because they offer more protection if something goes awry.

Debit Cards

A debit card is like and electronic check- the consumer is spending money that he or she already has. As compared with credit cards, debit cards carry the potential for greater liability if the card is stolen. Under federal law, liability is limited to $50.00 for the fast-acting consumer who notifies the bank within two days after discovering an unauthorized transaction. After that, the cardholder could lose up to $500, or even more in some cases. On its own, a bank may choose to waive liability for unauthorized transactions if the consumer has taken reasonable precautions, but, of course, this varies depending on bank policies.

For transaction errors, banks, as a general rule, have up to 10 days to investigate after receiving notice from the cardholder, or up to 45 days in special circumstances. Pending the outcome of the review, banks generally must credit the account for the amount of the alleged error.

As with credit cards, debit cards offer convenience and an alternative to carrying cash. But, unlike credit cards, the consumer is not taking on debt when using a debit card. Nor is the consumer paying interest or an assortment of fees, assuming that the account is not overdrawn. It may be possible to avoid even the overdraft fees by linking a checking account to a savings account or a line of credit. A debit card can also be used to obtain cash without incurring charges that usually come with cash advances by means of a credit card. When there is a problem with purchased merchandise, there is no right to withhold payment if the consumer has used a debit card, as might be an option with a credit card transaction. Another drawback for debit cards is the practice of putting "holds" on funds. If the final amount is not yet known, a merchant may place a temporary hold on funds for more than is actually spent, which denies the consumer access to that amount until the hold is lifted later.

Credit Cards

Federal law limits a consumer's losses to a maximum of $50 if a credit card is lost or stolen, and also provides protection against credit-card billing errors. unlike with debit cards, federal law also may allow the user of a credit card to withhold payment under certain circumstances until a problem with purchased merchandise is rectified.

The most commonly cited drawbacks for credit cards concern fees, interest rate increases, and penalties. In addition to annual fees for some cards, there are usually fees for paying late and for exceeding the credit limit. Of course, unless a consumer is in an interest-free grace period, interest accumulates and adds to the overall debt, especially if the cardholder pays only the minimum amounts due each month. As any holder of a credit card can attest, having a credit card also makes overspending very easy, especially with high credit limits and enticements such as rewards programs.

Top 10 Property Owner's Association Questions.

If you live or own property in a subdivision with an owner's association, or serve on a property owner's association's board, this month's report from counsel will be especially helpful to you. I recently attended the 32nd Annual Advanced Real Estate Seminar in San Antonio, where two Texas attorney's presented an excellent paper on property owner's associations. Reprinted below are the top 10 Frequently Asked Questions regarding POAs, compiled by Sharon Reuller and Roy Hailey.


Ten FAQs About POAs

1. If a delinquent owner files bankruptcy should the POA write off the debt?
No! The mere act of filing for bankruptcy protection does not relieve a person of his debts. If the bankruptcy is "dismissed" because the debtor failed to fulfill all the requirements, the POA may pursue the owner as if he had never filed for bankruptcy protection. On the other hand, if the bankruptcy is "discharged" by the bankruptcy court, the owner/debtor may or may not be relieved of his debt depending on the type of bankruptcy and his plans for each asset. In a typical Chapter 7 discharge, the owner/debtor is relieved of his personal obligations other than those that he reaffirms. In a typical Chapter 13 bankruptcy, the owner/debtor tries to pay off his debts under a 3 to 5 year payment plan that is supervised by the bankruptcy court. The POA should not write off the debt unless the owner/debtor obtains a bankruptcy discharge and does not reaffirm his debt to the POA. A bankruptcy discharge does not effect the POA's lien against the unit or lot. The discharge merely extinguishes the owner's personal obligation for the debt.

2. As nonprofits, aren't POAs exempt from taxes?
Nope. Being a "nonprofit" entity is not the same as being "tax exempt." However, residential POAs are eligible for favorable tax treatments at all levels of government. Incorporated POAs may be eligible for an exemption from State franchise taxes. Common areas owned by a POA may be eligible for appraisal at nominal values for purposes of ad valorem taxes, under Texas Tax Code §23.18. Whether incorporated or not, POAs must file annual federal income tax returns, but may be eligible for alternate ways of calculating taxes provided especially for POAs in the Internal Revenue Code. Some small number of POAs may qualify as "tax exempt 501(c) entities", for purposes of federal income tax, in order to obtain a State exemption from sales tax.

3. Is a POA required to have open meetings under the "Open Meetings Act"?
No, not under that act. As a general rule, the "Open Meetings Act" refers to state and federal laws that apply only to governments and public bodies, but do not apply to private entities like POAs. In Texas, only a couple of huge master planned developments are required by unusual bracketed statutes to comply with the State's "Open Meetings Act" for municipalities. Although the "Open Meetings Act" does not apply, other laws and the POA's project documents may require that meetings of the POA board and POA members be open to all members of the POA. For example, every condominium in Texas is required by TUCA §82.108 to have open meetings, no matter what its documents say. And even if a law or a POA's governing documents do not require open meetings, a POA may want to open its meetings in a spirit of transparency and accountability.

4. Does the POA have to open its records to any owner who asks? What about the "Privacy Act"?
Like the "Open Meetings Act," the "Privacy Act" applies to government bodies and does not apply to private entities, such as POAs. On the other hand, the POA may be required to open its records under other authorities, including its own project documents. An incorporated POA is subject to the open records provision of the Texas Nonprofit Corporation Law. A condominium POA is also subject to the open records provision of TUCA §82.114. Other POA related statutes have requirements pertaining to the maintenance and availability of POA records. Even if a POA is not required by law or its documents to open its records, the POA may want to make its records avaiiable for inspection and copying in a spirit of transparency and accountability.

5. Who maintains a component of the property that is not specifically addressed in the POA project documents, the POA or the individual owner?
The answer relies on the interplay of two general rules. The first general rule is that the owner of property is responsible for maintaining the property. Under this rule, if the component is owned by the POA, it is the POA's responsibility to maintain It. Similarly, if the component is part of the unit or lot, it is the responsibility of the individual owner to maintain it. The other general rule is Tex. Prop. Code §202.003, which requires that the project documents be construed liberally to give effect to the intent of the document. Under this rule, the POA project documents must be read as a whole with an eye towards the overall maintenance scheme and the intent of the maintenance provisions of the project documents.

6. How much should the POA charge as standard fines for violations of the rules?
Although POA leaders and managers like the concept of fines for violations, as a practical matter they are difficult to collect. As a general rule, courts frown on monetary penalties. The purpose of a fine is to encourage conforming behavior and discourage violations. A fine must be large enough to be "felt" by the violator but not so high as to be outrageously punitive. Further, the amount and frequency of the fine should be reasonable in light of the nature of the violation and the frequency of its occurrence. The bottom line is that the POA should be discouraged from setting an inflexible fining schedule or a predetermined amount of fine for any violation regardless of its nature. Also, the POA should be encouraged to establish a "cap" for accruing fines to prevent them from reaching astronomical amounts. Faced with repeated or continuing violations, the POA should not sit back and merely allow fines to accumulate. Instead, the POA should seek other avenues for curing the violation, such as marching to the courthouse or exercising self help remedies if available. Finally, condominiums are subject to the fining provisions ofTUCA §82.102(d)&(e).

7. Does the POA have to pay for an audit every year?
Depends. If the governing documents of the POA require an annual audit, failure to obtain an audit may be a breach of duty. Every condominium in Texas is required by State law to have an annual audit of its financial records. That has been the law for condos since 1963, nothing new. See TUCA §82.114(c). If the POA is incorporated, the Texas Nonprofit Corporation Law (§22.352(b) of Tex. Bus. Orgs. Code) requires only that the board prepare or approve a financial report for the prior year. If an impoverished POA can't generate the funds for an audit that is required by statute or its documents, a decision to dodge a duty is best made by the general membership, and not by the board alone.

8. Don't you have to be an owner who lives at the property - or even an owner - to serve on the POA's board of directors?
Depends. Many folks think that officers and directors of a POA must be owners or residents of the community. No law has that requirement. The qualifications for service on the POA board are determined by the POA's governing documents, usually the bylaws. State corporation law does not require that the officers and directors of a nonprofit corporation be members of the organization. For condominiums, TUCA §82.103(e) states that directors need not be owners. If the project is new, the developer has probably reserved (in the declaration) the right to designate all the directors in the POA's early years. Those appointees are typically not owners or residents of the property. Bottom line, if the project documents say only owners or owner occupants may serve (after the developer is gone), then that is the case for that POA. Otherwise, neither ownership nor occupancy is required. However, as a practical matter, who wants to serve on a POA board who is not a member of the POA, a resident of the property, or involved with the property's development?

9. Can the POA be "disbanded"?
Not easily. This question is usually asked by owners who are so angry with their POA that they want to make it go away. If the POA is incorporated, the State has procedures for dissoiving the corporation. However, dissolving the corporate status of the POA does not by itself get rid of the POA, which may become an unincorporated nonprofit association under Chapter 252 of the Tex. Bus. Orgs. Code. What this question overlooks is the fact that the obligations and duties under the POA's governing documents that are publicly recorded against the land are unaffected by a corporate dissolution through the Secretary of State. To get rid of functions like common area maintenance and the obligation for assessments would require procedures and consents that are beyond the scope of these FAQs, and may require the involvement of platting authorities, city councils, special districts, and the owners' mortgage lenders, in addition to the owners themselves. Suffice to say that dissolving the corporation does not make the POA go away.

10. How can we get rid of a board that makes bad decisions?
Depends. First, try working within the system by constructively sharing your concerns with the board and volunteering to serve on a task force that gathers information or proposes options for the board to consider. Been there, done that? If your perspective is shared by a sizable percentage of owners, you may be able to remove the board and elect new directors by following the recall provisions of your POA's governing documents. If you are in the minority, support reform candidates in the next election. If you can afford to litigate and are willing to gamble with your money, you can try getting a court to see things your way. However, the POA may be using your assessments to pay for the defense of your lawsuit. If none of those options seem feasible, consider that differences of opinion exist in every POA and that the leadership will change .... eventually. Even so, it is possible that your POA will never embrace your point ofview. Different strokes ...

Report From Counsel - Understanding the Texas SAFE Act

Those in the business of financing purchases of real estate used or to be used as a residence need to be aware of recent legislation that will affect them. The Texas Secure & Fair Enforcement for Mortgage Licensing Act Texas SAFE Act) was passed during the 2009 legislative session (HB 10). It requires certain individuals to be licensed in order to make these types of loans. Narrow exemptions do apply for those who seller-finance their primary residence or those who lend to a family member. It is important to note that the Commission for the Texas Department of Savings and Mortgage Lending has extended the deadline for seller-financers to become licensed and be in compliance with the SAFE Act until August 31, 2010. The SAFE Act, and the state legislation it has spawned, are complex and demand a thorough study for those in this type of business. For more information, visit the Department of Savings and Mortgage Lending's FAQ page at http://www.sml.state.tx.us/tdsml_faq_mb_general.html.

In 2009, on a mandate from the Federal Government, the Texas Legislature passed an act that said lenders, including private lenders and seller financing lenders, must be licensed as mortgage originators. They did provide for an exception for people who are seller financing their primary residence or those lending to a family member. (Federal Bank employees and habitat for humanity is also excluded). If the lender himself is not licensed then the transaction must go through a licensed mortgage originator. In a nutshell, a mortgage loan originator accepts applications, provides lender related disclosures and, as much as possible, negotiates the loan. Fees for loan origination can run from $300 to $500.

The Texas Department of Savings and Mortgage Lending, through its Commissioner, Douglas Foster, recently extended the deadline for seller-financers to become licensed as Mortgage Company Residential Loan Originators until August 31, 2010.

After August 31, 2010, seller-financers not choosing to go through the process to become Mortgage Originators will need to involve a licensed Originator to handle the origination of the loan.

Report from Counsel - Choosing an Executor

CHOOSING AN EXECUTOR FOR YOUR WILL

The designation of an executor for a will is one of the critical steps in effective estate planning. The executor will be the individual responsible for the administration of the estate. He or she must execute the necessary documents to submit the will for probate. Then the executor must gather all of the testator’s (person who makes the will) assets and distribute them in accordance with the terms of the will. Good recordkeeping will be essential because an accounting may have to be filed. Creditors’ claims will have to be dealt with, and estate tax returns may have to be filed.

In short, the job of the executor is a substantial responsibility and can be very time-consuming, especially when it comes to large or complicated estates. So that a suitable candidate can be named, the testator should take into account a variety of factors. These include the trustworthiness, sound judgment, financial acumen, age, and physical and mental capacity of the proposed executor. More than one executor can be named by the testator, and these co-executors can share the duties of administering the estate.

In the case of married couples, the first instinct may be simply to name the other spouse as the executor and be done with it. While this may work just fine in some cases, the decision deserves more thought as to all of the ramifications of choosing one’s spouse as the executor. Will the mourning, surviving spouse be up to fulfilling all of the executor’s responsibilities so soon after suffering such a loss? If the spouses are about the same age, will the surviving spouse be too frail, physically or mentally, to do the job when the time comes, perhaps many years after the executor has been named? All in all, a better choice may be an adult son or daughter, a sibling, niece, or nephew, or a close and trusted friend.

The job of executor will be substantially easier if the testator has first done his or her job by keeping complete and accurate records of the assets that will comprise the estate. Upon naming the executor, the testator should review this information with the executor in detail. Another seemingly obvious matter that is often overlooked is simply making sure that the executor knows the location of all of the important papers relating to the estate. Testators should consider keeping the following documents with their will: life insurance policies, a brief description of assets, and the names and contact numbers of the testator's attorney, accountant, investment advisor and other professionals that will be helpful to the executor as he administers the estate.

As for payment for the executor’s services, if the estate is very simple, and especially if the executor is also a major beneficiary of the estate, additional compensation may not be necessary. Otherwise, the will may provide for a fee for the executor, which may be calculated as a flat fee, an hourly fee, or a percentage of the estate assets.

A testator should not forget an even more elementary first step: asking for the consent of the prospective executor, no matter how close a relationship there may be between the individuals. For the benefit of all concerned, the executor must be willing, not just able, to carry out the important responsibilities that come with this job.

Emailed Documents Allowed

Shortly before he left the employment of a residential treatment center for addicted persons, an employee e-mailed some of his employer's documents to his and his wife's personal e-mail accounts. The employee operated two consulting businesses of his own concerning addiction rehabilitation services. The employer's documents, including its financial statement and the names of past and current patients at the center, could have been useful to those businesses.

When the employer discovered that the documents had been e-mailed, it sued the then-former employee under the federal Computer Fraud and Abuse Act (CFAA). The CFAA provides civil (and criminal) remedies for knowingly accessing a protected computer without authorization or for exceeding authorized access. A federal appellate court ruled in favor of the employee.

The language in the CFAA prohibiting the accessing of a computer without authorization means that the person has not received permission to use the computer for any purpose (such as when a hacker accesses a computer without permission), or when a computer owner, such as the employer, has rescinded permission and the defendant uses the computer anyway. Neither scenario describes what happened in the case before the court.

The employee, so long as he remained employed, had permission to access and use the company's computers. There was no written employment agreement or set of guidelines for employees that might have prohibited or restricted employees of the company from e-mailing the company's documents to personal computers. If keeping in-house documents in-house was a priority for the company, it would have been wise to incorporate appropriate restrictions on computer access and use by employees into an agreement or personnel policy.

Moral: Have an employee handbook / policy manual that addresses access to and use of company information.