Don’t be complacent because your business is small: Almost half of all cyber attacks in the U.S. are directed at small businesses. In recognition of this serious problem, in August 2018, President Trump signed into law the NIST Small Business Cybersecurity Act, requiring the federal government to provide resources to assist small businesses in reducing their vulnerability to cyber attacks.

What Should You Do?

It is important for you to take steps to protect your business’s data, reputation, and customer and employee information.

The following actions are among the most important for small businesses to consider:

• Establish easily accessible cybersecurity policies for your company, include them in your employee handbook and offer periodic employee training on what you require. As an aside, employees should be required to take any necessary steps to protect customer and business data. Some additional common practices include: 
• • separate user accounts for each employee, 
  • strong passwords for all laptops, tablets, and smartphones, that are changed every three months,
  • prohibiting the installation of any software on to company computers without permission, and
  • limiting administrative privileges to key employees and IT staff. 

Now that you’ve completed the  first step—choosing a business entity—it is now important to prepare an operating agreement. The operating agreement is a contract which governs the operations of the LLC and sets forth the arrangements made among the members, including their rights and responsibilities upon the withdrawal of a member.  Although departure from the business may be the last thing on anyone’s mind, it is important to plan ahead. A non-competition, or non-compete, clause can help protect the company from harm inflicted if a former member decides to form a competing business.

What Is a Non-Competition Clause?

A non-compete clause protects business assets like goodwill, confidential information, and trade secrets by preventing the former member from using the knowledge gained while participating as a member of the LLC to compete against the LLC. 

If the operating agreement contains a non-compete provision, a former member can be precluded from engaging in a similar type of business directly or indirectly in competition with the LLC. If the operating agreement does not contain such a clause, the former member is free to compete with the LLC.

In addition, the non-compete clause may prevent the member from soliciting the LLC’s clients or customers for business. Usually, such provisions take effect after the relationship has ended, although they sometimes may preclude members from competing with the LLC during their membership in the LLC.

An individual or entity obtaining a membership interest as a result of an involuntary transfer usually cannot fully step into the shoes of the transferring member.

This statutory protection—often called a pick your partner provision—acts as a safeguard that provides LLC members with a certain amount of personal asset protection. For example, whereas the creditor of a corporate shareholder could reach and exercise shareholder rights to their full extent, the creditor of an LLC member can reach and exercise only the economic rights associated with membership interests—not the voting or management rights. The recipient of this type of membership interest is called an assignee.

Statutory Provisions – Creditor Action

If an LLC does not specify any transfer provisions, creditor actions are subject to state LLC laws. Each state, in its LLC statute, has provisions limiting what actions a creditor can take against an LLC member for personal debt. Depending on the state, the statutory remedies available to an LLC member’s personal creditors may include:

• A charging order, which is a court order requiring the LLC to pay all the distributions due to the member-debtor from the LLC to the creditor.
• A foreclosure on the member-debtor’s LLC ownership interest.
• A court order to dissolve the LLC. 

These remedies protect the other LLC members from the risk of having the creditor of a debtor-member step into the debtor-member’s place and share in the control of the LLC. To a varying degree, they also address the creditor’s right to satisfaction of the debt.

Part of this protection hinges on the restricted transferability of LLC membership interests.  Restricted transferability protects the non-transferring members from creditors and unwelcome new members, which upholds the integrity and value of the non-transferring members’ membership interests.

• Most (but not all) LLCs impose requirements or restrictions on the transfer of a member’s interest.
• If the LLC’s operating agreement is silent on the transferability of interests, you must look to state law to be sure there are no default provisions restricting transferability.

This article, part 2 in a 3-part series, focuses on voluntary membership interest transfers done with the intent to grant full membership rights to the recipient.

What if you get a divorce? What if you have creditors seeking immediate repayment? What can you do with your membership interests? The answer depends on how transferable those membership interests are.

A transfer of LLC membership interests can mean selling, donating, assigning, or gifting—basically one LLC member turning over his or her membership interests to another individual or entity. The transfer can be voluntary or involuntary.

• Examples of voluntary transfers include selling membership interests to a third party or to the remaining members, donating membership interests to a charity, or leaving membership interests to a trust upon death.

• Examples of involuntary transfers include those prompted by divorce, bankruptcy, and termination of employment.

The transferability of LLC membership interests is subject to competing interests.  On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out of—in other words, the membership interests are more liquid and marketable.

Knowing how to get your great idea financed and properly managed, takes another.  However, it may be easier than you think.

What You Need, What You’ve Got, and Where to Get the Rest

If you think you’re in over your head when it comes to the financial aspects of your business, you’re probably not.  Really. In fact, all you need to do is sit down with an experienced business lawyer and determine what money you need, what you’ve got, and where to get the rest.  According to the U.S. Small Business Administration (SBA), the following are some of the financial areas in which to focus on when financing your new business:

Estimating Startup Costs.  While the most important startup cost will likely be “seed” money (the funds necessary to bring your idea to life), others include:

• ongoing costs – such as insurance, inventory, and utilities;
• one-time costs – such as incorporation fees;
• essential costs – such as fixed expenses (rent, utilities, administrative, etc.) and variable expenses (inventory, shipping, packaging,  commissions, etc.); and
• optional costs – such as advertising, signage, or grand opening activities.

The difference between community property and co-ownership of an asset

Let’s take the example of owning a car. If you and your spouse are both on the title to a car, you co-own the car. This means both of you have the right to use the car, sell the car, or do anything you’d like with the car. It also means you are both responsible for paying off any debt or liabilities that arise from the car.  If one of you passes away, the survivor automatically becomes the sole owner of the car, without needing to take any additional actions.

But let’s say only one spouse has his or her name on the title. That spouse is the only owner of that car and is the only one (with certain exceptions) with rights and responsibilities attached to the car. When the owner spouse dies, the car would have to be transferred to the surviving spouse via the applicable estate plan or post-death or probate proceeding; it isn’t already owned by the other spouse like in the previous example.

However, ownership of the vehicle may look a little different depending upon your state of residence. In many states, such as California, there are rules that make most assets acquired during the marriage “community property” of the married couple. In this situation, each spouse has rights to the property, no matter whose name is on the title.  All assets that are considered community property are split up equally between the divorcing parties. In our car example, if the car is considered community property, it’ll be put into the big pot of community property and split evenly. That can result in either one party getting the car and the other spouse getting something of equal value to offset it, both parties splitting the ownership of the car, or the car being granted to both parties but one buys out the other’s share. The main point of community property is that the parties get an even split for assets acquired during the marriage.

After all, your customers are there.  Connecting with your target audience in the social web can boost your brand and level the playing field between you and big competitors with larger advertising budgets.  But before you rush out to tweet a deal or share pics of your new logo on Instagram, take a minute to learn about common mistakes smaller businesses make with their intellectual property (or IP)  in social media—and how you can avoid them.

Mistake #1: Not having a plan

It’s important to remember that when you tell your customers something on social media, you’re telling your competitors too.  Think through what you want to disclose and whether you have taken the right protective steps to register or claim your branded IP (more on that below).  Make sure you have a social media policy in place both for site visitors and the employees who are able to post to your accounts. Your social media policies must take IP into account and clearly state the ways in which your content, images and logos may and may not be used.

Mistake #2: Under protecting your IP

Have you considered filing trademark or trade name applications for the proprietary names or logos you’ll be sharing in social media that are critical to your brand?  While it’s certainly not essential to register every word you write or every image you use, socializing a compelling motto or a trendy logo without protecting it first can be a risk.  Sure, it may go viral. It also may go on your competitor’s next product-- and there will be little you can do about it. Registration heightens your chances of prevailing if you need to ask a third party to cease and desist from using your IP or go a step further and file a Digital Media Copyright Act (DCMA) infringement notice to have the offending website blocked from search engines.

But for some businesses, operations would come to a grinding halt without certain essential contributors—key persons as we call them. If your business includes any key persons, key-person insurance should be a part of your business insurance planning.

What is a key person?

A key person is someone associated with the business that provides a significant, direct economic benefit. Economic benefit not only includes profits, but also considerations such as cost savings, goodwill, credit access, and customer access.

Business owners—particularly those of a small business—are often key persons. Some additional examples of key persons are:

• A salesperson with well-established or numerous business contacts
• An employee with specialized expertise
• The inventor of the product
• A programmer who wrote the foundational code
• The owner with relationships that result in favorable credit terms 

How does key-person insurance help?

Key person insurance compensates the business for any financial loss or cost incurred because the key person suffers an insurable event (death or extended disability).

Hanging a shingle starts with an idea that develops into a business plan, but not without careful financial and legal considerations. Among the decisions that new business owners grapple with is whether to form a limited liability company taxed as a partnership (LLC) or a corporation making an S election (S corp).* There are similarities and differences between LLCs and S corps that business owners should understand before choosing between the two.

Similarities

-Both entities are created by filing the necessary paperwork with the state. Unlike a sole proprietorship or a general partnership, LLCs and corporations are not recognized under state law until the filing has been made. In addition to state filings required to form the corporation, a special filing on Form 2553 is required for the state-law corporation to elect S status for federal tax purposes.

-Both entities provide owners with limited liability, meaning the owner’s personal assets are protected from any business creditors’ claims.

-Assuming an LLC does not make an election to be taxed as a corporation, both LLCs and S corps are pass-through tax entities, allowing business profits and losses to flow through and be reported on the owners’ personal tax returns.