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.

Draw the Law” is a weekly short post where I try to visualize a legal concept.  It is designed to be helpful to small business owners and give them a quick overview of various aspects of the law that affect them.  For the next couple of posts I will detail how to finance a start-up.
In the prior post we discussed personal sources of getting money for your start-up.  However, let’s say you have exhausted all personal sources that you know to get money from.  You have drained all your bank accounts on Oahu, asked all your siblings on the mainland, and asked your Aunties and Uncles on the Big Island, and you are still short for your dream bakery.  What do you do now to raise capital?

You should start consider contacting private lenders and/or investors.

Lenders

Your typical lender will be a bank.  While there are other types of lenders I am going to mainly focus on what the banks do.  The process of securing a loan is typically a lengthy one involving a lot of paperwork and discussion with your banker.  Especially, given the state of the economy many banks are wary to loan out money to endeavors they deem to risky.  It is here that a solid business plan is key to convincing banks.  If you are more an idea person, I do suggest seeking consultants, such as attorneys, financial advisors, accountants, and experts to help your business planning needs.  If the bank approves the loan it will still seek personal guaranties and collateral from you.

What is Collateral?

Collateral is the borrower’s (you, the business owner’s) pledge of some specific property that you own to the lender in order to secure loan repayment.  Basically, they typically want some sort of assurance that they can get back the value of the loan should your business go under.  Typically, it is going to be your house.  This means if your business goes under and you have no ability to repay the loan the bank could foreclose on your house to recover its money.

Investors

Investors, in exchange for their money, will have you give them a “slice of the pie” and you will consider them a partner, member, or shareholder depending on the type of entity organization you have chosen.  Investors fall into two general categories of co-ownership. They are either active or passive.

Active

The active investor is the owner that comes in and runs the shop.  They run the day-today operations and are active in managing the business.  They don’t just throw money at you and make check back on you later when they are seeking their return they are actually helping you run.  Raising money this way is more flexible because you don’t have to worry about state and federal securities laws.  When securing money this way you should have someone help you negotiate how much ownership you are willing to give up for what amount of money, what the duties are of each partner or member, and reduce many of these conditions to an agreement.

Passive

Passive owners or investors do not help run the business.  They give you money for ownership, and typically you pay them back in dividends of off the stock you have issued.  Stock represents ownership of your corporation.

However, there are many securities laws designed to protect investors from frauds.  Look at it from the public’s view, they do not want someone to say they are starting a business, sell them shares of a business for thousands of dollars, and then skip out on town never starting the business or giving a return to those people.  If this is the route you are seeking to raise capital, which is generally for very, large scale projects.  The laws and processes are extremely complex and you should seek an attorney for help.

A Word on Crowdfunding on the Internet

In this day and age of the Internet a new trend has taken place for many small businesses.  They turn to the Internet to raise funds for them.  Crowdfunding is a concept that many politicians are familiar with; it is basically asking for a small donation from a lot of people to raise large amounts of money.  With the Internet’s reach that becomes easier and many online businesses have based their model on this concept.

Most of the crowdfunding websites are not investment type sites, where you would put your business up and sell ownership.  Most of them are donation-based or allow you to conduct a pre-sale of products or services to the people who give you money.  Typically, businesses give specials to these people who helped them start-up.  While, generally easy to do you should be aware that these sites charge small fees to set you up, your business model while getting marketing, also is exposed to a large group of people, and the amount of money you raise is typically low, around $2000 – $10,000.

Many of these crowdfunding sites though are great for charities, non-profits, arts projects, and the like if you are seeking to do something to that effect.

Some Helpful Definitions of Financial Terms

In business you have probably heard certain words use time and time again, like “angel investor.”  Those terms tell you a lot about how the business interacts with its financing. To help round out the legal information I have given you are some of the definitions of those terms.  Please note that certain words in financial terms do not have the same meaning in legal terms.

Angel Investor – generally, a wealthy individual who provides capital for a startup in exchange for convertible debt or equity

Equity – in financial terms, equity is the ownership interest by shareholders of a corporation

Securities – in financial terms, a certificate of creditorship or property carrying the right to receive interest or dividend, such as shares or bonds

Seed Money – capital needed to set up a new business or enterprise

Venture Capital – is financial capital provided to early-stage, high-potential, high-risk, growth startup companies.  Venture capital funds or capitalists make money by owning equity in the company. Usually, this type of investing occurring after the seed money and the investor hopes to make a return by being a part owner when a company sells the company or sells stock of the company on a stock exchange.

Next post will be about getting money from the government for your business.  Don’t forget to subscribe to have new posts e-mailed to you and I will 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.

Draw the Law” is a weekly short post where I try to visualize a legal concept.  It is designed to be helpful to small business owners and give them a quick overview of various aspects of the law that affect them.  For the next couple of posts I will detail how to finance a start-up.
In the prior post of this series we finished up with the variety of entity organizations, namely, sole proprietorship and partnership.

Now, that we have a business drawn up and have its “skeleton” outlined we will talk about the “blood” of the business or the financing of it.  What we need now is money!

Sources of Capital

There are a variety of methods of funding your business.  I like to divvy up those sources of money into three distinct categories.  They are as follows:

  1. Personal – what can you leverage on your own to raise money?
  2. Private – lenders and investors
  3. Government

Today, I will solely focus on personal methods of securing capital and then in Part II, I will discuss Private and Governmental sources.

Personal Sources

Let me list the personal methods first and I will turn to each one and briefly discuss them.  They are as follows:

  • savings
  • life insurance
  • retirement plans
  • home equity
  • stocks and bonds
  • credit card debt
  • loans from family friends

All of these represent the variety of personal sources that you could go to for money needed for starting your business.  I will now handle each one.

Savings

Savings is one of the easiest methods.  You just take what you have and spend it on the business.  All your cash in the bank use it on purchasing equipment, supplies, etc . . .  and it is as simple as that.  However, the reality is unless you are starting a business that has very little capital needs you are going to need to turn to other sources that draining your checking and savings accounts.

Borrowing Against Various Assets

In the case of life insurance, certain types of retirement plans, home equity, and stocks and bonds many people end up borrowing against these assets to raise the cash they need.  While, it is true you could cancel your life insurance policy, sell your home or condo, or sell your stocks and bonds most people would like to keep these assets for the long-term.  Instead they opt to borrow against the value of the item.  Typically, the loan that you are get will not be the full value of the item being borrow against, but some percent.

For the life insurance loan you would need to contact your insurance company.  For a home equity loan the bank that you owe your first mortgage on would be the first to turn to.  To use any stocks or bonds you own as collateral contact your broker.

Credit Cards

This method is as close to using your own savings to generate the buying power you need for equipment and the like for your business.  However, everything that goes on credit generally faces high interest rates if you cannot pay the balance of immediately.  In general, a credit card for the business is a good thing to purchase office equipment, make quick small payments, and emergency purchases, but should not be the primary method of financing the business as the interest rates will drain you over the long run.

Family and Friends

Here in Hawaii, we generally have a good family system where mom and dad, aunts and uncles, grandparents, and even calabash cousins will loan us some money to help our dreams come true.  While we like to trust in our family and friends, and hope for the best, it is also smart to just put the terms down in writing.  It should not be taken as an insult, but help avoid the creation of two different stories and future conflict should the business be unable to pay back the loan.  In addition, by having a promissory note, your relative or friend is in a better position to tell tax authorities that the money given to you was really a loan and not a gift, which have differing tax consequences.

Promissory Notes

These  are simple legally binding documents.  All they need to do is outline the terms of the loan, which includes the following parts:

  • identifies the parties;
  • how much money will be received;
  • what the interest rate is;
  • the amount of time you have to repay;
  • and the rate at which you will repay.

You can draft a promissory note yourself, so long as it has all the above components.  Just be sure to sign it, make a copy (to remind yourself of the repayment), and have the appropriate family member or friend hold onto the note.

If you are either party, the business owner or the family member or friend, and really concerned about such a loan you can always speak to attorney to make sure everything is in order. In addition to seeing a lawyer, for any method of financing you will probably want to meet with a financial adviser and accountant to make sure you have a firm grasp of how you will raise the money, expend it, and any debt obligations attached to it, as you get your business off the ground.

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.

Draw the Law” is a weekly short post where I try to visualize a legal concept.  It is designed to be helpful to the laymen and for a quick understanding.  For the next several posts I will be detailing organizing and operating a business.
In the prior post in this series we talked about how in a corporation or limited liability company (LLC) a business owner’s identity is separate from the organization.  Today we will focus on the other type of ways one could organize a business, namely a sole proprietorship or partnership.

Flying Solo: Sole Proprietorship

Quick, easy, and simple that is a sole proprietorship.  One day did you decide to make things and sell them online?   You are a sole proprietor.  You are the business and the business is you.  Unlike, the LLC and corporation there is no separate legal entity status, and why?  Consider the fact that you did not take steps to formalize such an entity and because of it you need not do any of the formalities associated with corporations and LLCs.  One of the basic formalities that you may have to do is register a “Doing Business As Certificate” if you are utilizing a name other than your own to conduct the business.

The Ugly Side of Sole Proprietorship

Without the limited liability shield your business assets and obligations are not separate from your personal ones.  Your stuff will be used to satisfy debts and other liabilities of your sole proprietorship.  Your home, personal savings, car and everything else you own could be used to pay for a court judgment or creditor claims.

To highlight how personal assets become entangled with a sole proprietorship consider the situation if you are married.  You and your spouse’s stuff that are owned together are all personal assets and therefore, they would be used satisfy debts and claims.  It would be hard to say, which things are exclusively yours when you jointly own many things together.

It Takes Two to Tango: Partnerships

In the case of a general partnership it takes two or more persons, who have not incorporated, and are carrying on a business for profit as co-owners.  If all these conditions are met you are in a partnership even if you did not intend or know it.   No formal documentation is needed, all you need to is work together with another person, and try to make some money, and you will be considered in a partnership.

Similar to the sole proprietor of a proprietorship, each partner in the general partnership has unlimited liability for the debts and obligation of the partnership.  However, in the case of the sole proprietor it is just the one person on the hook.  In a partnership each general partner’s assets can be used to satisfy a debt or obligation even if that partner disagreed with transaction that led to the debt or obligation.

Limited Partners, Limit their Risk and Work

However, there are ways to limit liability.  In a limited partnership, there must always be one general partner and one limited partner.   The limited partner gets all the benefits of limited liability, but loses out on the ability to manage the business.  They cannot actively manage the business.  As you might have guessed, this kind of relationship needs to be filed with the state through a certificate of limited partnership.  In addition, the partners should have a documented partnership agreement detailing their arrangement, which an attorney can help you with.

 

Now you know all the types of business organizations that exist.  They are as follows: sole proprietorship, partnership, corporation, and limited liability company.   Next time I will do a quick recap of the four different types, highlight some interesting features, and the time after that we will get into the laws that may affect the operations of a small business.

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.

Draw the Law” is a weekly short post where I try to visualize a legal concept.  It is designed to be helpful to the laymen and for a quick understanding.  For the next several posts I will be detailing organizing and operating a business.
Last week I discussed the limited liability shield of certain business entities.  This is how a business owner’s personal assets are protected from the obligations of the business.  But, why is that case? Simplest answer is that they are two different persons.

Separate Entities

Say that again?!  The law treats the business owner(s), in the case of corporations and limited liability companies, as two separate persons.  Yep, that’s right a corporation or llc for legal purposes is a separate person than that of the living, breathing human person running/operating the company.

What does that mean? 

It means the corporation or llc is affected the same as a person.  It means that the following can occur:

  • sue others and be sued by others;
  • buy/sell/own property;
  • take personal actions;
  • be criminally punished for illegal actions (except imprisonment); and
  • exercise most protections and rights afforded to people.

So as you can see whatever legal actions you can take or happen to you can also be done or happen to a company because it is a person.

Thus when there is an obligation to pay the obligation is on the company and not the individual business owner.  This is why the banks need the personal guaranty to get at the owner’s assets.  If it helps with this concept think of the shield as another person.

When Two Persons are Really One: Piercing the Corporate Veil

While the personal guaranty is one way around the shield/separate person, business owners will be treated as one as the same as their company if they really act in that manner and act fraudulently.  Basically, if the people who started the business really only created it to try and perpetrate a fraud upon people who lend or deal with their business then it would be the case there is no separate person.  The business is a front.  In the law, we call it “piercing the corporate veil.”

Therefore, many attorneys urge their clients to treat their corporations and llcs as separate entities and not their own personal piggy bank.  Some of the biggest things that will cause business owner(s) to lose that shield and cause a court to “pierce the veil” are the lack of formalities, especially in a corporation.  These are those things like holding board meetings, taking down minutes, and recording major decisions.  In addition, commingling of funds, assets, and personal use of those items also could cause a court to treat the company as if it was not there.

Think about it this way, when you create a company, you start by filing paperwork with the state.  When the state grants you your charter, its like your company’s birth certificate, it expects your company to be a separate person from you that’s why you went through all that trouble to start it.  Bottom line: if you act like the company is not there, then why should the court or anyone else believe it is there?

So what did we learn?

A corporation or llc is a shield, person, veil.  Basically, the company is a separate person from the owner(s) unless they do actions that would make it seem that the company does not exist.  If that is the case the two persons, owner and business, are really one in the same and a court will disregard the limited liability.

An attorney can help draft and file your paperwork with the state and get you started.  In addition, an attorney can advise you on what is the proper route in keeping your business’s actions as its own and insuring that you two remain separate entities.

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.

Draw the Law” is a weekly short post where I try to visualize a legal concept.  It is designed to be helpful to the laymen and for a quick understanding.  For the next several posts I will be detailing organizing and operating a business.

What is Limited Liability?

Limited liability means that a business owner’s personal assets are not on the hook for financial obligations incurred by the business.  The business owner’s personal assets are “shielded” from those outstanding liabilities and in this way they are only at risk for what they invest into the business.  Therefore, an owner’s house, furniture, and personal bank account or not subject to the financial liabilities of their company if it goes under.

*In some states, the law makes shareholders liable for unpaid wages of the company’s employees.

How do I get this shield?

The limited liability shield is NOT automatic.  You will only receive this kind of protection from organizing a corporation, a limited liability company, or some time of limited liability partnership.  The formation and organization of your company is generally handled through an attorney that knows how to create and file the proper documentation with the state you are organizing in.

One Way Around the Shield: Personal Guaranty

Many sophisticated lenders, such as banks, already understand limited liability.  So when a bank lends money to small and new corporations it knows very well it cannot get its money back if the business has less assets than what the bank claims.  Its typical response to this is situation is to get the owner to sign a personal guaranty or some other form of personal obligation.  In this way, when the owner signs that document in their individual responsibility their personal assets can be gone after by the bank.

Despite this fact corporations and limited liability companies still remain viable options for a business owner seeking legitimacy and ways to raise funds for their endeavor.  If you are interested in starting a corporation or llc, and some of the ins and outs please contact an attorney.

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.