I constantly have clients that open small businesses and they tell me they are using money from friends or family members. I try to warn them about the downside of such arrangements and how to avoid future problems. There are several big mistakes that most people just do not think about in the beginning! However once a problem arises it is usually too late!
Recently I found this great new article that sums it up quite nicely.
Four Landminds to Avoid! by NFIB.com
I do not usually endorse specific businesses but if you are a small business owner you should seriously think about joining an organization called NFIB (“National Federation Of Independent Business”). This organization was formed to bring together small business all over the country and give them a very big voice!
This Article was originally published by Building Savvy Magazine (2014)
Most builders are all-too-familiar with the phrase, “Of course we will need a personal guarantor on this note.” Builders in Texas are often expected to ensure the debts of their companies, making them “personal guarantors” for those debts. This practice is not only common in the construction industry, it is expected. But, a bank would never pass up the deep pockets of a business to pursue the personal assets of the individual guarantor, right? Wrong. In Texas, when a personal guarantor waives certain rights under a note, without the same being waived by the guarantor’s company, the bank is left with only one option: sue the individual, not the company!
Texas is generous in protecting borrowers from the sometimes-shady acts of creditors. One of these generosities is Texas’s enactment of anti-deficiency laws. These laws, for example, prevent a bank from foreclosing on a $1-million note secured by property with a fair market value of $1 million, purchasing the property at its own foreclosure sale for $400,000, and then suing the borrower for the $600,000 “deficiency.” The rationale is that, through foreclosure, the bank has recaptured the full amount of the debt—$1 million worth of assets—regardless of the amount it received at foreclosure. A bank is therefore prevented from collecting the same debt twice (i.e., obtaining property at a discounted rate plus a deficiency judgment). Unfortunately however, Texas’s strong preference for “freedom of contract” has allowed banks to utilize language to waive this anti-deficiency protection.
This type of waiver is particularly dangerous for personal guarantors. For instance, imagine that in the situation above, the bank had allowed the original borrower to retain its anti-deficiency protection but had required the personal guarantor to waive the same protection. After foreclosure, the borrower would owe nothing due to the anti-deficiency laws because the bank has received $1 million worth of assets. Technically, however, a “deficiency” still exists on the note because the bank received only $400,000 at foreclosure, which is $600,000 less than the original debt. It is important to understand that nothing prevents the bank from collecting the $600,000 deficiency from the personal guarantor if the guarantor has waived his or her anti-deficiency protection.
So although a guarantor is usually liable only for the amount owed by the original borrower, which in this case is $0, without anti-deficiency protection, the guarantor remains on the hook for the full $600,000 deficiency. It is still unclear whether a court would allow the borrower—the guarantor’s company—to intervene in a suit against the guarantor and assert these anti-deficiency laws on the guarantor’s behalf. It is clear, though, that personal guarantors should seek to avoid this situation altogether. If the bank allows a company to retain its anti-deficiency protection, the personal guarantor should insist that he or she be allowed to do so as well.
Kyle B. Fonville is an associate with Decker, Jones, McMackin, McClane, Hall & Bates, P.C. in Fort Worth. His practice focuses primarily on civil and commercial litigation, including construction matters, and appellate law. He can be reached by phone at 817.336.2400 or by email at email@example.com.
Stephen L. Polozola is a partner with Decker, Jones, McMackin, McClane, Hall & Bates, P.C. in Fort Worth. His practice focuses primarily on construction law matters. He can be reached by phone at 817.336.2400 or by email firstname.lastname@example.org.
Who wouldn’t want free business advice from a CPA? Texas Wesleyan University School of Business in Fort Worth, Texas is offering a FREE 2 Hour Small Business Workshop. The event will be held at Hotel Trinity Inn & Suites at I-30 and Beach Street on Saturday July 14, 2012 at 9:30 am OR 1:00 pm. If you are interested in attending, call 817-924-2426. Space is limited!
Small business owners in the State of Texas are being inundated with costs which could put them out of business. One of those new costs, is the ever changing Texas’ Franchise Tax. The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.
The revised franchise tax applies to partnerships (general, limited and limited liability), corporations, LLCs, business trusts, professional associations, business associations, joint ventures, incorporated political committees and other legal entities.
Who has to pay the Franchise Tax? Most business who make more than the $1,030,000 (the no-tax-due threshold) for January 2012 through January 2014 tax years. On January 1, 2014, the no-tax-due threshold is scheduled to be $600,000. Keep in mind that the no-tax-due threshold is calculated taking the lowest of three calculations:
- total revenue minus cost of goods sold;
- total revenue minus compensation; or
- total revenue times 70 percent.
On January 12, 2012, the Texas Supreme Court dismissed the Nestle case, In Re Nestle USA, Inc., Switchplace, LLC, and NSBMA, LP, challenging the revised franchise tax, the so-called “Margin Tax,” on constitutional grounds. On February 10, 2012, the Texas Supreme Court rejected a second challenge by Nestle Case to the Texas franchise tax http://www.supreme.courts.state.tx.us/historical/2012/feb/021012.htm.
So for now, small business owners will just have to suffer through trying to calculate and pay this complicated business tax.
Many people are surprised to learn that the largest employer in the United States is the small business owner. All the small business owners combined employ more than 52% of the employees. This means that more Americans work for a company with fewer than 100 workers (a small business) than for the large corporations with more than 500 workers.
Small businesses are very important to our economic recovery because they create two out of every three new jobs. Small businesses have played a vital role in helping our economy add more than 5.1 million new jobs since August 2003; they have helped keep America’s unemployment rate below the average decade rate of the 1960s, 1970s, 1980s and 1990s.
In times such as these, when our country is in economic crisis, small businesses continue to grow and create jobs, which I expect will continue to be the case. However, while small businesses adapt easier to change than large corporations, they can be put out of business by drastic economic changes. For example, when the price of gas rose a few years ago it was the small business that was hurt the most. Increases in the price of fuel have affected small businesses in the following areas: farming, cattle, restaurants, clothing, tourism, auto sales, auto parts, freight services, computers, prescription drugs, electrical, construction, hospitals, lodging and real estate, to name a few.
One of the main problems facing small businesses today is that Congress appears to be more focused on helping large corporations, rather than the small business owner. The President started his term wanting Congress to do several things to help the small business owner, such as pass responsible housing legislation, make health care more available and affordable, ensure our workforce is prepared for the jobs of the 21st Century and re-affirm the principles of freedom and choice that gave rise to the labor movement.
While these changes might help, the real problem is that very few changes have been made permanent. Small business owners plan over the long term, not short term. Congress appears more focused on helping the large corporation through tax incentives, bailouts of financial problems, and set asides for different Congressional districts that have limited benefit to the economy as a whole, than the small business owner.
For example, in 1953, Congress created the Small Business Administration to provide professional expertise and financial assistance to persons wishing to form or run small businesses. On average, the SBA makes about $12.3 million in loans to small businesses yearly, usually in the form of purchase money for buildings and equipment, or working capital. They also help small business procure more than $40 billion in federal contracts last year alone. However, the SBA had done this with an ever shrinking budget. Now Congress has set the SBA’s 2008 budget to include 191 earmarks totaling $69 million in funds, which are to be used for everything from small business incubators to renovation of a riverfront park in Charleston,W.Va. These funds should have been used for the survival of the small business owner.
The HUBZone program was developed by the SBA to help economically distressed areas, but funds for the program were going to fraudulent companies more than half the time. Corporations received millions of dollars in federal contracts under the guise of being located in low-income neighborhoods when actually they were not. Also, since 2003, more than a dozen federal investigations have found Fortune 500 firms were the actual recipients of billions of dollars in federal small business contracts. An entity created for the benefit of small business owners should be available for small business owners. The SBA needs to be more proactive in watching over the interest of the small business owner if they want to improve the economic situation in this country.
Congress and our president will need to make small business a priority if there is any hope in economic reform to pull our country out of this recession. This election year might have a huge impact on the survival of the small business owner unless the politicians wake up and realize how their actions are killing small businesses. Employees need to ensure they are informed before going to the polls in November, because their vote will likely affect their employers and eventually their jobs.