Protecting a Business Owner’s Family



A Question from one of Matt’s readers:


“Matt, should I buy some life insurance so my wife can pay off the bank loan I took out to buy my business?  I don’t want my wife to have to deal with the bank, if I die first.”


Matt’s Answer-


Probably, yes.  I’m glad to see my readers listening to my advice about the importance of insurance to business owners.


I’m not licensed to sell life insurance, but I am a big fan of insurance under the right circumstance.  Life insurance can be a great way to aid your widow to retire the business’ debt.  That would enable her to sell the business after your death and realize the full value of your company.  You might need some additional life insurance coverage to retire your home mortgage debt, car loans or other debt, and provide cash to support your family after they lose your income.


What about disability insurance?


You didn’t ask about disability insurance, but it might be even more important, given your circumstances.  You’re a young and physically active person.  And, your business is relatively small and cannot operate for long without you.  You’re more likely to suffer a disability in the next 20 to 30 years than to die.  So, I’d encourage you to discuss disability insurance with your agent.


Before you meet with your agent, please review this post-  Is Your Insurance Agent Reassuring.  In that post, teach you how to communicate with your agent in order to make the most of insurance purchase.


Remember this-  Your insurance agent is NOT YOUR agent.  Your agent actually represents the insurance company.  So, keep in mind that you always have the right to seek a second opinion from any professional advisor.  If you’re not comfortable with the advice you’re getting, seek a second opinion.  You might return to the original advisor, but you’ll have more information and possibly a higher level of faith and trust in the advice you’re getting.

Indiana Business Fraud Alert !


Todd Rokita- on the left Introduction by Matthew A. Griffith, Esq.

Here is an email-letter I just received from the Indiana Secretary of State.  Those of you who are clients of my law firm will remember that I alerted you to this fraud scheme almost two years ago in my law firm’s newsletter.  Amazingly, the fraud is still happening.



From Todd Rokita, Indiana Secretary of State

Dear Indiana Business:

I feel it is important to follow up with you on the actions taken by my office to address the deceptive letters many Hoosier businesses have received over the past several months. The letters come from “Indiana Corporate Compliance Business Division.” They attempt to secure a $125 or $150 payment in exchange for processing a company’s annual minutes. As we previously communicated to you, despite the fact these letters are made to appear as though they come from an official government source, they are a hoax and should be ignored.

In a multi-state investigation, my office tracked down the individuals behind these letters. Aaron V. Williams of Las Vegas and a Lisa Diane Brown of California are affiliated with several businesses including “Indiana Corporate Compliance.” The results of the investigation were shared with Indiana Attorney General Greg Zoeller, who recently filed a complaint against Williams, Brown and their businesses.

If the state prevails, these individuals could receive fines of over $1.5 million and be barred from doing business in Indiana. I will also continue to work with law enforcement agencies to pursue possible criminal action against these individuals.

If you have not done so already, please get in touch with our Business Services Division at (317) 232-6576 if you believe you are a victim of this scam.

Corporate images now available online for free

I am also pleased to let you know you can now access your corporate documents, business filings and any additional registrations on file with our Business Services Division instantly and free of charge through the INBiz portal found on our Web site: . You will also be able to find more than 6.5 million images of business filings that date back to the 1800s for other active businesses.

Government should always use technology to drive down costs and increase access for taxpayers. I am proud of my staff’s work and the culture we have created here at the office of the Secretary of State to meet, and often exceed, the efficiency standards that are in place in the private sector.



Todd Rokita

Indiana Secretary of State

Systems Are a Way to Limit Liability Risks



In the past, I’ve written about business systems as a way to maximize profits.  Systems provide another advantage that is near and dear to my heart-  limiting liability risks.  In fact, systems are an essential way to limit liability risks and protect the assets of a business’ owners.


Here’s an example taken right from the pages of my law firm’s operations manual-


My law firm is a “debt collector” under federal law, because we collect debts for our clients.  That means I have to comply with a set of rules found in the Fair Debt Collection Practices Act.  One of those rules requires my office to deliver the “Mini-Miranda” Warning each time we communicate with a consumer debtor.  The “Mini-Miranda” Warning reads:


We are debt collectors.  This is an attempt to collect a debt.  Any information we obtain during this communication may be used to collect that debt.


But how do we ensure that a staff and office of 18 people reads that warning each and every time we communicate with a debtor?


Systems!  That’s how.


Here’s what is in my office’s Operations Manual and systems to comply with the Fair Debt Collection Practices Act-


  • We have a written policy that all employees must read and agree to follow.
  • Our initial staff orientation includes training on the Fair Debt Collection Practices Act.
  • We hold regular staff training on the Fair Debt Collection Practices Act and any changes in the law.
  • We solicit from our staff ideas and new ways to improve our systems.
  • A brightly colored copy of the “Mini-Miranda” Warning is posted on, literally taped to, every staff member’s telephone.
  • A stack of brightly colored copies of the “Mini-Miranda” Warning are at the receptionist’s desk and handed to any debtor who comes to my office.
  • The “Mini-Miranda” Warning is printed on every collections documents we send from our office.
  • We police our staff and follow up with any questions or issues.
  • And more.


There are more components to our system, but that’s not the point.  The point is that we have systematized the way in which we handle this compliance issue.  Our system creates predictable results, which is the greatest advantage of systems.  We know that we are complying with the Fair Debt Collection Practices Act, because of our system.  We’ve taken all the “guess work” and risk out of the equation.  And, when the law changes, we can easily change the system to match the new law.


Every business needs similar systems to conduct its affairs.  There are no exceptions.  Every business needs systems.  Systems make it easier to become and stay profitable, while reducing risks.  But, you need to make sure the system is being implemented.  You have to “police” your staff to ensure the system is working.



What systems do you have in place? 


What systems need improvement?

Do you have systems that are not fully integrated into your business operations?

What are you doing to improve your business with systems as a key tool?

Protecting Your Business From the Lowest Common Human Denominator

warning sign


Recently, I was helping a client write a User’s Manual for a new product it is going to manufacture.  I was writing warnings about injuries that could result from the misuse of the product.  Later, as I was explaining to the client why I included some fairly obvious warnings, it struck me how ridiculous the law has become and how businesses are constantly under threat from frivolous lawsuits.


Mind you that this post is not about dangerous products or unsafe stores.  Rather, this is about customers and clients blaming you and your business for obvious errors made by the client or things clearly beyond your control.  Let me give you some examples to illustrate my point.


In products liability cases, manufacturers have to tell a consumer how to use and how NOT to use a product.  Manufacturers must also warn consumers about the consequences of misusing a product.  It is not enough to assume that a consumer will use a product for its obvious and intended purpose.  Nor is it enough to assume, for example, that a consumer understands that lighting a charcoal grill in the living room might cause a house fire or dangerous fumes that might harm people’s lungs.  You have to assume, as another example, that a consumer might try to scrap paint off an old house using a weed wacker.  Sounds ridiculous, but that’s a fair view of how the law now works.


The law requires you to protect your business against the dumbest customers imaginable.  Assume that your customers will make the silliest mistakes.  Now guard against those risks.  Unfortunately, that’s how you must now operate.  You cannot assume that your customers are of average intelligence.


Please understand that there is a gap between what the law says and how it is actually applied.  The law does not actually require you to protect yourself from injuries or losses sustained as a result of a customer’s unreasonable errors in judgment, but judges and juries apply the law that way.  Bad facts, as we say, make bad law.  Sure, you can appeal.  But at what costs?


Most people have heard of the “reasonable man” or “reasonable person” standard.  That remains the law.  There is, however, the reality of what judges and juries do in actual cases.


The solution to these business risks is to prevent claims and lawsuits by assuming the worst.  Create systems, policies and procedures that guard against claims by your dumbest customers and clients.  Get insurance.  Work with a good attorney, and take my warnings seriously.  In short. . .

Hope for the Best, but Plan for the Worst. 

Should You Include An Arbitration Clause in Your Contracts?


Glass & stock report


As the costs of litigating disputes continue to increase, litigants are increasingly settling their disputes through arbitration. Arbitration is a process in which a neutral third person (arbitrator) or panel, usually of three persons, considers the facts and arguments presented by the parties and then renders a decision. By utilizing arbitration, litigants can avoid trial, and the lengthy and expensive process of getting to trial. Arbitration usually results in a quicker decision than could be had by going to court. After the arbitrator renders a decision, that decision can be enforced by the courts. However, the courts cannot hear an appeal of an arbitration decision, except in the case fraud.

Arbitration is often preferable for the plaintiff who wants quick redress for the harm he or she has suffered, but defendants may prefer the longer and slower processes of trial and appeal in the courts. The rules of evidence in arbitration differ from those in trial. There are other differences between the two processes. Consequently, before a party agrees to submit to arbitration, thereby waiving the right to trial, careful consideration should be made as to which process is more likely to yield the better result.

How do parties choose arbitration over trial? They simply agree to arbitrate, usually in a written agreement. Written agreements to submit a dispute to arbitration can be signed before or after a dispute arises. So, for example, an employment agreement might include a provision requiring an employee to submit a wage dispute to arbitration. Nearly any agreement can contain an arbitration provision. Agreements can even be written to require mandatory arbitration only if requested by one but not the other party to the agreement.

Whether arbitration is right for you depends on a number of factors particular to your circumstances. However, all parties to an agreement in which significant disputes might arise should consider whether arbitration is a preferable alternative to resolving those potential disputes.

Stay Out of Court At (Nearly) All Costs


Stay out of court, because courts often make bad decisions that can have enormous impact on your business, your personal life and your finances.  If you stay out of court, you increase your chances of controlling your own fate.  If you let a judge decide, you have no control.


One of my law partners has a great expression about clients who get themselves entangled in lawsuits:


“When a client has to file a lawsuit or gets sued, he has already lost.”


What’s that mean?


It means lawsuits cost.  They cost you or your business:

  • Time spent in the courtroom, in depositions, reading documents, talking to your lawyer, in mediation, reading court documents, searching for evidence, etc.
  • Money for attorneys’ fees, expert witness fees, photocopies, travel, etc.
  • Opportunities to make money elsewhere doing other things, to grow your business, or to take personal time to be with family and friends.
  • Your health.  Lawsuits are stressful.  The only thing more stressful than getting sued is having to file a lawsuit.  Lawsuits are fun for lawyers.  I love them, from a professional vantage point.  I get to exhibit and sharpen my advocacy and strategy skills, but lawsuits are no fun for my clients.
  • Goodwill or reputation.  Getting sued can hurt the image people have of your business or you.  The newspapers rarely report stories accurately.  Allegations and even rumors are often reported as facts.  People who really, truly know you and your ethos will be unaffected.  Everyone else,  including your customers, vendors and potential customers, will develop doubt in you to some degree.


A good lawyer-friend of mine just got a horrible ruling from a judge in a divorce case.  The judge was wrong and should be appealed, but at what cost to the client?  The judge robbed a father of all time with his children in a visitation ruling.  The father in the case is not a bad guy at all, but the judge, for whatever reason, decided that the man should no longer see his own children. 


Amazing isn’t it?  How can one human being exercise that much power over another human being.  This father is dying inside, because he no longer can see the children he loves so much.  It’s very sad, and that judge should be ashamed of himself.


In a divorce case, there is not much you can do in advance to avoid a divorce lawsuit.  Save your marriage, if you can.  Or, don’t marry THAT woman in the first place.  Ladies, don’t marry THAT man!  That is the only lawsuit prevention available in a divorce context.


But what about your business affairs?


Do you take these preventative measures:

  • Meet with your lawyer when you are unsure of your rights?
  • Meet with your CPA, lawyer and insurance agent at least once every year?
  • Have your lawyer draft or review all your contracts?
  • Have your lawyer develop an asset protection plan?
  • Use limited liability entities properly to create a “corporate shield?”
  • Train your staff on a regular basis?
  • Have processes and procedures developed into an operations manual?
  • Properly use insurance to transfer liability risks away from you or your business?
  • Etc.


If you answered “no” to any of these questions, then it’s time to go see your lawyer.

Bloggers Beware! Copyright Laws Apply to You, Too.


There is a battle developing between bloggers and traditional print newspapers.  The battle is over content, and copyright law is at the heart of the dispute.  And, I believe that the battle is likely to spread from newspapers to other on-line content providers.


Is this a serious matter for bloggers?


Yes.  There have already been lawsuits filed against bloggers over content.  So, it’s important for bloggers to understand what this new trend is, and how to guard against claims and lawsuits.  I believe in prevention over the cure.  That means that I am first a “teacher” of the law to my clients.  If I can empower my clients with information and knowledge about the law and the legal consequences of their decisions, then they are more likely to make the right business and legal decisions in the future, even when I’m not around to help them.  Knowledge leads to wisdom, right?  So, the more knowledge you have, the wiser your decisions will be.


Plus, who wants to pay their lawyer to review each blog before its posted?


Why a battle now?


Increasingly, newspapers are seeing their markets evaporate as fewer and fewer people read the daily paper.  Subscriptions nationwide have been falling for years, and the trend seems to be increasing in pace.  Just in the past few months, we have witnessed dozens of newspapers stop printing second or weekend editions, or close their doors altogether.  Many newspapers are consolidating sections.    Here’s some of the carnage:


Rocky Mountain News-          shut down

The Journal Register Company-   bankruptcy

Philadelphia Enquirer-     bankruptcy

Chicago Tribune-    bankruptcy

Minneapolis Star Tribune-      bankruptcy

San Francisco Chronicle–    near death

Seattle Post-Intelligencer-    online-only publication

Gannett, owner of USA Today-   dividends slashed

The New York Times-   dividends slashed

Cincinnati Post-    dead

New York Sun-   dead


So, as a result, two things seem to be happening in the newspaper world:


#1-   Some newspapers are becoming non-profit, public interest entities.  Examples of this are ProPublica (“investigative journalism in the public interest”) and  ProPublica is funded by the Sandler Foundation and other trusts, while gets funds from certain trusts, the wealthy and foundations.


#2-  For-profit newspapers are trying to generate revenue on-line. 

And that’s where you come in, my fellow bloggers.


The for-profit on-line papers cannot charge readers for content, if bloggers are copying, re-posting or re-blogging meaningful parts of the newspaper’s articles, especially original stories/works generated by a single paper.  Readers won’t pay the papers for the same content you’re giving away for free.


EXAMPLE OF ONE LAWSUIT-     Silicon Alley Insider, a business blog, got sued for quoting 25% of Peggy Noonan’s article in a February issue of the Wall Street Journal.  And get this, Silicon Alley Insider even gave credit to and referenced Dow Jones, which publishes the WSJ.


Amazing, right?  You’d think that the WSJ would appreciate the free marketing.


The reality is that newspapers are nervous, and nervous companies do stupid things.  Take the music recording industry, for example.  Those geniuses started suing individual music lovers for on-line music sharing.  There was virtually no attempt to be creative in preserving their market share or generating other income streams.  Rather, they elected to sue their client-base and sought huge punitive damages awards.


Today, we are starting to see the same knee-jerk, reactionary approach from print newspapers.  I fully expect the trend to escalate.  So should you.


This blog entry is getting too long.  So, I’ll follow up on this soon.  In a future blog, I’ll explore the arguments on both sides.  This concerns federal copyright law and a concept known as “fair use.”  I’ll explore copyright rules and the “fair use” defense, and I’ll try to help you understand how this new trend might impact your “scraping,” copy-paste practices , and re-blogging.

For now, please recognize that you can’t fight City Hall, and you can’t fight Dow Jones either.  Most bloggers are too small to wage a legal battle with a large newspaper, even if the paper is slowing dying.  So, start to develop the mindset that you’re going to have to exercise more caution than you did before reading this blog; review your policies and procedures for re-blogging content; and develop ways to minimize the risk of drawing fire from an angry source you quote or paraphrase.  It may be that you’ll have to start getting permission in advance to re-blog meaningful amounts of someone else’s content.  You might have to change several things you do now.  For now, just start thinking about this topic.


Keep reading.  More to come.

WARNING- Asset Protection Is NOT Done Off-Shore


My blog just got spammed by some company trying to get people to invest in a corporation based on some Caribbean island.  The spam came across as an advertisement for “asset protection.”  I deleted the comment and will not be posting it on this site!  The spammer was trying to comment to my post Asset Protection-  “It’s As Easy As 1 – 2 – 3!”


So, I need a Caribbean trust or corporation to protect my assets?




Asset protection is the lawful use of entities, contracts, business practices and other legal structures that are recognized and permitted under existing law.  Everything you need to protect your personal and business assets can be found right in your home state.  You do not need to go off-shore to protect your assets.  In fact, going off-shore raises another type of risk to your assets and can, therefore, be self-defeating.


Asset protection is NOT trying to hide assets in a Caribbean-based trust or corporation.  Nor do you need a Delaware corporation or a Nevada corporation, unless you live or operate your business in those states.  Nor do you lawfully protect assets by trying to hide them, by committing crimes or by engaging into fraudulent transfers.


The law provides ways to protect your assets!  You’ve just got to understand what your risks are and what lawful means are available to address those risks.  It’s really not that difficult.  And there is no trickery involved.  Trickery usually leads to other problems.


Do you know what a “legal witch doctor” is?  It’s a term I coined years ago to describe people who talk about the law and who practice law without a license but with a particular financial motive impacting their advice.  If a legal witch doctor tells you that off-shore trusts are the key to asset protection, you can bet that off-shore trusts are being sold to you.


Buyer beware!  Avoid legal witch doctors.  Go see your lawyer.

What is “Phantom Income” for a small business owner?

Before I can define

“phantom income,” I’ve first got to explain how “tax flow through entities” work. Basically, if you own at least part of a partnership, limited liability company or S-corporation, you get a a tax bill each year based on your share of the business’ profits. That bill comes in the form of a K-1 tax form, which shows your portion of the profits or losses.

So, if you own 40% of a company (for the entire tax year) that had $100,000 of profits in 2008, then you would get a K-1 for $40,000. If you only owned that 40% for half the year, your K-1 should report $20,000 of imputed income to you. You then have to report that income on your individual income tax return and pay taxes on that amount.

But wait! What if the company never paid you a distribution (a/k/a dividend) equal to your K-1 number? Or, what if the company only pays you $12,000, but your K-1 shows $40,000 of income? If that happens, you have have “phantom income.” So, even though you only received a distribution of $12,000, you have to pay income taxes on the full $40,000.

If you want to avoid paying taxes on “phantom income,” then you should consider an agreement among all the owners and the company requiring the company to distribute at least enough profits to cover the taxes on your “phantom income. When I draft these agreements for my clients, I like to include a provision requiring no less than 40% of the company’s profits to be distributed, which should normally be enough in distributions to cover the highest marginal tax rate on any one owner. I include an exception, in the event the company has anticipated cash flow issues, or is about to make a large expenditure and needs the cash.

If you fail to include such a provision in your agreements, then you run the risk that the majority owners might try to “freeze out” the minority owners by causing “phantom income” to be reported on the minority owner’s K-1, year after year after year. In that case, it actually costs money for the minority owners to own a share of a profitable company.


Piercing the Corporate Veil/Shield


The single greatest advantage to operating a business as a corporation is that the owners of the business protect their personal assets from the corporation’s creditors. Incorporation creates a fictional “shield” or “veil” between the corporation’s owners and its creditors. Generally, incorporation protects its owners from personal liability and limits an owner’s risks to the loss of his or her investment in the corporation.

Unfortunately, many business owners form a corporation but fail to take the necessary steps to maintain the integrity of the corporation. Even worse, owners will blur the distinction between their personal affairs and the corporation’s business. The consequences are that the corporate veil can be “pierced”, and an owner may be subjected to personal liability by the corporation’s creditors.
Maintaining the corporate veil is not difficult, but it does require some simple tasks completed and vigilance. Here is a partial list of tasks which should be completed in order to maintain the integrity of the corporate veil:

1. Never commingle personal and corporate finances. Never pay personal expenses with corporate funds.
2. Corporate officers should always execute documents in their corporate capacity. For example, sign documents as “John Doe, As President of ABC Corporation.”
3. Hold annual meetings of shareholders to elect directors.
4. Hold annual meetings of directors to select officers.
5. Create and maintain a corporate record book, which should include minutes of all corporate meetings.
6. Prepare and adopt good Articles of Incorporation and By-Laws.
7. File biennial reports with the Secretary of State.
8. Register all assumed business names with the Secretary of State and appropriate county recorders.

This list is certainly not exhaustive, but completing these tasks will greatly help preserve the protections afforded to business owners by incorporation.

Go see your lawyer for help help in reviewing your present corporate documents.  Make any necessary changes to those documents.  Prepare notices and minutes of meetings.  Do all this and more ASAP.