Tag Archives | contract

Limited Liability Company (LLC)

See Also:
S Corporation
General Partnership
Limited Partnership
Partnership
Sole Proprietorship

Limited Liability Company (LLC) Definition

A Limited Liability Company or LLC is a business form which provides limited liability much like a corporation. There can be an unlimited number of members to the company. There are also many tax benefits that emerge from forming this type of business.

Limited Liability Company (LLC) Meaning

A Limited Liability Company means that it contains the same barrier to personal liability for actions by an employee or member of the company unless there is a case of fraud or gross negligence. Members are unlimited, but there are limitations in that all members must be domestic. In addition, a member can be anything like a private equity group, corporation, or any individual as long as they are an American citizen.


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Advantages of a Limited Liability Company (LLC)

Limited Liability Company (LLC) advantages range from taxes to the limited exposure by members discussed above. There are tax benefits in that an LLC has the choice of being taxed like a partnership or a corporation. The first option means that the profits and losses will flow through to the members, but this all depends on ownership percentages or an agreement by contract. Therefore, the IRS only taxes members once at the individual level. An LLC can choose to be taxed as a corporation as well. This means that the company would have certain salaries for its members and the actual entity will taxed as a whole.

Another large benefit of the Limited Liability Company is the ability of the company to own its own intellectual property. Because this is a private form, there is also greater protection from being acquired by other companies. This allows the company to grow at its own pace and make decisions without having to worry about pursuit of other companies.

Disadvantages of a Limited Liability Company (LLC)

One disadvantage of an LLC is the cost; it’s typically more expensive to operate than partnerships and/or proprietorships. There are annual state fees when you operate an LLC. In addition, banks usually have higher fees for LLCs than they do for other entities.

Another disadvantage is that you need to separate all records – business vs. personal. The money, meeting minutes, structure, and records all needs to be separate.

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Limited Liability Company

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Limited Liability Company

Originally posted by Jim Wilkinson on July 24, 2013. 

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Protect Yourself: A Guide to Non-Compete Agreements

Oftentimes, businesses see their competitors as their biggest threat. But what if your star quality team continues to leave to join your competitor’s team? That is, in my opinion, the bigger threat. You have already invested in hiring, training, coaching, and developing those individuals. Then, they leave and directly compete against you. We see this commonly in consulting practices, but it occurs in every industry. In this week’s blog, we are taking a look at how to protect yourself and your company with non-compete agreements.

Non-Compete Agreements, Guide to Non-Compete AgreementsWhat is a Non-Compete Agreement?

A non-compete agreement is an agreement between the employee and the employer that attempts to prevent the employee from working for a competitor within a specified time period and geographical area. Furthermore, it must adhere to all state and national employment regulations. It is best to hire a labor law attorney to verify conditions and ensure that it will uphold in court.  The laws for non-competes and the effectiveness of non-competes vary greatly from State to State. In addition, ever changing laws and precedent will challenge the effectiveness of your non-compete.

According to the American Bar, a good non-compete agreement should prohibit a former employee from doing the following

  1. “… Working with a competitor
  2. … Soliciting former coworkers to be employed in his or her new company
  3. … Soliciting or disclosing confidential information, such as customer lists and data, learned in the course of their employment.”
If you want to protect your company’s future, then it’s important to know what could potentially destroy value. Identify “destroyers” that can impact your company’s value with our Top 10 Destroyers of Value whitepaper.

Why You Should Use Non-Compete Agreements

Take a look at your sales persons and/or consultants. They have developed a relationship with the client and have goodwill with that customer; however, if they decide to leave for whatever reason, then that positive relationship may be in danger. In addition, if that same sales person works for a competitor, then they may poach that customer with the goodwill they have already built up.

Non-compete agreements discourage employees from leaving the current company and competitors from poaching those employees. This only occurs if the non-compete agreements will hold up in court and if the company (you) will take the employee to court. I have seen non-competes work and prevent stealing customers and employees. I have also seen non-competes not hold up in a case. It all depends on the case law, the State you are in, and your luck with the judge hearing your case. 

Tip: A contract is useless unless you enforce it. You must be prepared to take a broken contract to court.
Discover if there are any “destroyers” in your business with our free Top 10 Destroyers of Value whitepaper.

Who Should Use Non-Compete Agreements

You should consider these agreements for employees, clients, shareholders, suppliers, and partners; however, non-compete agreements are typically reserved for executives, senior management, research and development, and key sales people. Not all companies should use non-compete agreements.

Non-Compete Agreements, Guide to Non-Compete AgreementsA Guide to Non-Compete Agreements

Here is our guide to non-compete agreements. It covers trade secrets, how to protect yourself, and how to protect your company’s future.

Trade Secrets

Trade secrets need to be protected, especially from competitors. A non-compete agreement helps you to protect those trade secrets in the case an employee leaves for a competitor. Also, your company hand book should remind employees that all inventions, ideas, patents, and creative work they develop while at work, is the companies property. Please check your local laws and precedents for more information.

Protect Yourself

The goal for having non-compete agreements with employees is to protect yourself (your company). As said before, non-compete agreements are usually intended for the key management team or anyone with a direct relationship with customers. It’s important that you understand your State law. Certain states, like New York, do not allow for companies to extend non-compete agreements too far down in the organization. The goal of non-competes to protect yourself from growing competitors or new competitors that may pop up as a result of key players building their own organization.

Protect Your Company’s Future

Protect your company’s future by protecting your most valuable assets – your human capital. Don’t let gaping holes in your employee policy leave your open for financial loss. The American Bar says that, “Having a valued employee defect to a competitor and take sensitive proprietary information such as customer lists, pricing information, marketing strategies, or product and service expertise with him or her can be a devastating blow to any business – large or small.”

Protect your company’s future with our Top 10 Destroyers of Value whitepaper.

Example: Consulting Firm

Let’s look at an example of a consulting firm! They are trying to prevent any client from hiring one of their leading sales person or a critical member of the team. In an consulting firm, the top challenge faces is when clients hire your consultants out from under you. For example, you hire Tammy to work 20 hours a week, 50 weeks out of the year. A client will pay $150,000 for a 1,000 hours of her work. As the owner of the consulting firm, you get 40% of the $150/hour. It’s a win-win situation. You fulfill a client’s need and fulfill Tammy’s need for business.

As the relationship further develops, Tammy and the client decide that they don’t need you. Unfortunately, this option only benefits Tammy and the client. It hurts you. If the client offers, $200,000 a year in compensation, then Tammy is pleased. She has consistent work, focuses on one client, and does not have to worry about any gaps in her hours. On the other hand, the client is pleased because they now have a full-time salaried employee that works 50 hours a week for 50 weeks a year.

Let’s calculate the price difference for the client!

Tammy’s previous hourly rate was $150.

With the client, Tammy costs the client $80 per hour. Divide $200,000 salary by 2,500 hours of work to come up with $80 per hour.

Furthermore, you have lost an income stream. Then you have to find, hire, and train a new employee – continuing to cost more and more. If you continue to loose more consultants, you will no longer have a firm. All employees and clients have left.

Non-compete agreements would have protected you from loosing your company.

Don’t Destroy the Value of Your Company

In conclusion, you should use non-compete agreements to protect the value of your company. There are many other ways to make sure you don’t destroy the value of your company. To improve the value of your company, identify and find solutions to those “destroyers” of value. Click here to download your free “Top 10 Destroyers of Value“.

Non-Compete Agreements, Guide to Non-Compete Agreements

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Don’t put all your eggs into one basket!

don't put all your eggs into one basketEaster was just this past weekend. One of the common traditions of Easter is an Easter Egg Hunt where plastic eggs with candy (or if you’re lucky, money) are hidden for the kids to find and put in their Easter Basket. When I was a boy, I was greedy and piled too many eggs into my basket. All of them fell out as a result of being too full.

We’ve all heard of the saying, “Don’t put all your eggs into one basket.” This saying can be applied to many things, not just your personal choices. In business, you should never put all your eggs in one basket. Eggs ultimately means trust. Don’t place all of your trust into the same vendorsemployees, customers, or investments because one day, the world might come crashing down on you with no cushion to fall on.

In this week’s blog, I will explain a few tips about how to prevent putting all your eggs into one basket from my own personal experience.

Signs That Your “Perfect” Customers Might Not Be So Perfect

During the lifetime of your business, you’ve probably gained a few repeat customers (or at least I hope you have!). The sad truth is that these customers aren’t married to you. They don’t have any personal or legal attachment to you or your company. As a financial leader, you have to understand what (and who) is best for your business. Here are a few indications that those “perfect” customers might not be so “perfect”…

They’re Demanding

What do your contracts look like? If you have customers who have great deals, but always demand more, you should pay close attention. How do those customers treat the employees in your company? If they are rude, condescending, or constantly complaining, maybe you should rethink this customer relationship.

“But Jim, they give us a lot of money!” This is where you have to weigh your options and take a look at your financials. In some cases, it may be a better investment to fire your customers. If you don’t, you may be looking at hundreds, or even thousands, of dollars lost.

Would you rather pay for the consequences now, or a year from now when the expenses add up?

They Won’t Renew the Contract

don't put all your eggs into one basketThe customers who are only with you for a short period of time are the ones who were only in it for the deals, not the loyalty. How did you obtain this customer? Did they jump to your company because of a short promotion or sale?

We experience this in our business. Oftentimes, we will promote a “flash sale”, where our SCFO Lab is only $1 for the first month. What we’ve noticed is that a large amount of those customers obtained from the flash sale have unsubscribed after the first month. This shows that only a percentage of lab members find so much value that they continue their subscription for multiple month. However, this isn’t always a negative observation. Our value-adding customers utilize our products, and those are the customers worth investing your time and money in.

(Sound familiar? Pay attention to what’s happening in your company. Check out our Internal Analysis now!)

They’re Checking Out Other Companies

Customer relationships should be built on trust, not on a whim. Chances are, if you spent little-to-no time attracting a customer, that customer will easily leave you for another company for the same reason. Customers often play hard-to-keep by threatening to go to another company, or using their products alongside with yours.

If you notice these kinds of patterns in your customers, it’s time to change your priorities.

How to Obtain More Customers

So you’ve fired your customers… But you need more revenue to cover that cost. How do you obtain more customers to cover the loss? There are four primary ways that you can retain your current customer base and expand it:

  1. Allocate resources to broaden base
  2. Beef up the legal agreements and contracts
  3. Sign Non-Competes
  4. Create a back up plan

Allocate Resources to Broaden Your Customer Base

First, you should take a look at your financials – specifically marketing, advertising, and sales. How much are you allocating? When ramping up your customer base, you need to allocate more funds to marketing, advertising, and sales. This is to not only attract but also manage future customers.

Ask the questions when adapting your strategy… What are their main concerns? What can you do to help them, so that they may refer you?

Spice Up Your Contracts & Vendor Agreements

Trust only goes so far when it comes to customers. Legally, you can’t just trust someone to stay with you for another 2 years. Your contracts will ensure your customer involvement, and eliminates gray area.

In your contract, you should focus on the obligations that you and the other party should fulfill. This means the number of payments you should receive per annum, when you will see those payments, what you are allowed to change, what the customers are responsible for, etc. Basically, you won’t have 100% liability.

Non-Compete, Non-Compete, Non-Compete!

don't put all your eggs into one basketWe’ve been spending a lot of time on customer loyalty, but now let’s look at employee loyalty. Loyalty and trust are two very important attributes in the hiring process. Let’s say you’ve spent years with a customer, but the main point of contact was a salesman. Without a non-compete, it will be very difficult to retain a customer if that salesman/employee started his own similar business. Non-competes provide security for your company and your clients.

(Disclaimer: Non-compete Agreements must adhere to state and national employment regulations, and a labor law attorney should be consulted to verify conditions. You should consider Non-compete Agreements for employees, clients, shareholders, suppliers, and partners. Oftentimes, the buyer will require the seller to sign one as well.)

Always Have a Back-up Plan

Finally, have a back-up plan. Back-up plans ensure that your customers will pay you fully for your services. As mentioned in last week’s blog, credit cards are beneficial to the company because it ensures your cash.

Another good rule of thumb is to have a plan to constantly bring in customers. Sure, you don’t have to allocate all of your resources in a last-minute attempt to attract customers. You should, however, always keep watch for your financials and what might affect them.

Conclusion

In conclusion, don’t put all your eggs into one basket. You don’t really know who you can trust in terms of customers, employees, and vendors. For customers, you aren’t sure whether or not they will be back next year unless you have a legal engagement.

What you can do is make sure they have a useful experience. With vendors, you need to make sure that you get your money’s worth. Contracts are especially convenient when establishing who does what in the relationship. For the security of your company, employees should sign non-competes (another contract). As a financial leader, make wise decisions to take care of your business. In the end of the day, you are the person to reap the consequences. Download the Internal Analysis whitepaper to take a deeper look at how the issues discussed above are impacting your business. Take care of your business.

don't put all your eggs into one basket, How to Obtain More Customers

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Secured Claim

See Also:
Pledged Collateral
Collateralized Debt Obligations
Debt Ratio Analysis
Debt Service Coverage Ratio (DSCR)
Convertible Debt Instrument
Asset Based Financing

Secured Claim Definition

The secured claim definition is debt backed by collateral. It can refer to loans, mortgages, bonds, and other financial debt instruments.

As stipulated in the debt contract, the debtor backs the debt with assets that the creditor may claim in the event of default. In a secured claim contract, if the debtor defaults, or is unable to payback the debt, the creditor can take ownership of the collateral and sell it to pay off what the debtor owes. For example, if a consumer defaults on a mortgage, the bank can claim the house and sell it to pay off the consumer’s debt. In the event of default, the secured claim is worth only as much as the collateral that backs it.

In contrast, unsecured claims are debt contracts or instruments not backed by collateral. Secured claims are considered less risky. In addition, these contracts or instruments offer lower yields. In comparison, unsecured claims are more risky. These contracts or instruments offer higher yields to compensate the lender (or investor) for the higher risk.

secured claim

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Purchase Option

Purchase Option Definition

Purchase option, defined as the opportunity to purchase a piece of property which is being leased after the lease is completed, is part of the many options available in a lease agreement. A purchase option is often agreed upon by the two parties involved before the contract is made.

Purchase Option Explanation

Purchase option, explained by many business owners as an option to “try it before you buy it”, is available on almost any leased asset. The value of a lease purchase option agreement is evident. A party wants to lease a piece of equipment because they can not afford to buy it. However, to keep their options open they decide on a purchase option lease. This benefits the lessor by allowing her to choose, at the final moment, whether the item has created value and is worth keeping. Additionally, the lessor can account for changes in needs, expectations, or operations by leaving their options open and opting for a purchase option.

For the lessee, it allows them to make the income from leasing the item while also making the income from selling the item. In this way, a purchase option provides a benefit to both parties. It also allows access to and income from the asset almost instantaneously. A purchase option fee may be accrued while choosing to engage in such a contract.

Purchase Option Example

Asal is renting a piece of equipment for her graphic printing firm. Asal, because of her vast equipment needs, has to watch to make sure she has the cash flow necessary to operate her business based on the current needs it has. She currently can not afford to buy this piece of equipment. Still, she sees the value in having it available in her office. Asal balances these two needs by agreeing on a purchase option with the lessor.

Asal is creating a short-term agreement to lease the piece of equipment, a commercial quality printer. She will keep this printer in her office for one year, at which point she will buy the item. Asal and her lessor agree on a fair market value for the printer. So Asal completes the purchase option agreement and begins use of the item.

One year later, Asal is seeing a lot of growth in her business. So much growth, in fact, that she is going to outsource the printing for her customers to a better equipped company. She trusts this vendor and knows the quality of the products they produce, so she trusts the company.

This change of pace negates her need to purchase the printer she was leasing. Asal is nearing the end of her lease agreement, so she informs the lessor that she will not be accepting the purchase option at end of lease. She has more important expenditures to make at this point.

Asal is happy that she made a purchase agreement. She made the right business decision and will soon see the fruits of her labor. She opens the office the next day with the feeling of success.

purchase option

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Progress Billing Example

Find a progress billing example below.

Progress Billing Example


UNCONDITIONAL FINAL WAIVER AND RELEASE OF LIENS AND CLAIMS

OWNER: Business X, LLC.

PROJECT NAME: PRIORITY MANAGEMENT

For and in exchange of the sum of $, the sufficiency of which is hereby acknowledged, the undersigned Contractor, subcontractor, consultant, materialmen or laborer (hereinafter the “Undersigned”) warrants and represents as follows:

(1) The Undersigned has been employed by Business X, LLC. to furnish labor, materials, or services in connection with the construction of improvements on or to the above referenced project.

(2) The Undersigned has performed all labor, materials, or services required under its Contract, Subcontract or Purchase Order in full compliance with all terms and conditions thereof, and all applicable plans and specifications.

(3) Any and all contractors, subcontractors, laborers, suppliers and materialmen that have provided labor, material, or other services to the Undersigned for use or incorporation into the construction of the improvements to the Project have been paid in full for all amounts due and owing to them on the Project, or shall be promptly paid in full from the proceeds of the payment referenced above and there are no outstanding claims of any character arising out of or related to the Undersigned’s activities on or improvements to the Project. If this Waiver is signed by the Prime Contractor, then attached hereto as Exhibit A is a complete list of all subcontractors and suppliers retained by such party as of the date of this Waiver.

(4) The Undersigned waives and releases any and all liens, lien rights, claims of liens, and any other claims for payment for labor, material or equipment of any type or description that it may have against the Owner, the Owner’s Project Manager, the Owner’s Engineering Consultant, the Architect for the Project, the Prime Contractor (if this Waiver is signed by a subcontractor or supplier) and/or any person with a legal or equitable interest in Project, arising out of or in any fashion related to, any labor, materials or services furnished by, through or under the Undersigned on, or used in connection with, the Project, without exception.

(5) This Final Waiver and Release constitutes a representation by the Person signing this document, for and on behalf of the Undersigned, that the payment referenced above constitutes full and complete payment for all work performed and costs or expense incurred (including, but not limited to, costs for supervision, field office overhead, home office overhead, interest on capital, profit and general conditions cost) by, through or under the Undersigned relative to the work of improvements at the Project, including all retainage. More specifically, the Undersigned hereby waives, quitclaims, and releases any claim of damages due to delay, hindrance, interference, acceleration, inefficiencies or extra work, or any other claims of any kind it may have against the Prime Contractor (if this Waiver is signed by a subcontractor or supplier), the Owner, the Owner’s Project Manager, the Owner’s Engineering Consultant, the Architect for the Project, and/or any other person or entity with legal or equitable interest in the Project.

IN WITNESS WHEROF, the person signing this document, acting for or on behalf of the Undersigned and all of its employees, subcontractors, laborers, suppliers and materialmen, executes this document this _________ day of _____________________ , 20_______ .

By:________________________

Title: _______________________________

This instrument was executed and acknowledged before me on this ____________ day of ___________________, 20___ , by _________________________ , on behalf of said entity.

Notary Public


If you want to take your financial leadership skills to the next level, then click below to learn more about our SCFO Lab.Progress Billing Example

See Also:
Progress Billing for a General Contractor

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Partnership

Partnership Definition

A partnership is a type of business organization. Two or more individuals own and operate this business organization. These individuals are partners. Furthermore, it is unincorporated. Although it is not considered a legal entity separate from its owners, the details of this arrangement are stipulated in a contract. Call that contract a partnership agreement. This includes both profit and loss sharing and decision-making rights.

Types of  Business Partnerships

There are different types of business partnerships, including general partnerships and limited partnerships. Depending on the type of arrangement, the entity may be privately-owned or publicly-owned. The partners may have limited liability or unlimited liability for the activities and obligations of the business.

When there is a change in ownership or a change to the original partnership agreement, this relationship dissolves. If any partner dies or leaves the organization, then the other partners must dissolve the entity and create a new partnership. When any changes are made to the original contract, the partners must dissolve the entity and create a new organization.

Advantages and Disadvantages of Partnerships

There are several advantages to having this kind of entity. Business partnerships are easy to establish and are easy to dissolve. In addition, they give the partners a significant amount of operational freedom and flexibility. Also, partnerships do not pay corporate income tax (taxes are paid by the partners at the individual level). And as opposed to a sole proprietorship, a partnership can utilize the capital, entrepreneurial skills, and managerial expertise of more than one individual.

The disadvantages include the following:

  • Unlimited personal liability of the general partners
  • Limited access to capital resources

Partnership

See Also:
S Corporation

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