Blog
I’m Skeptical About Building Business Credit
August 25th, 2008
I read your site about building business credit to obtain loans. I donʼt believe it works. I build a perfect business credit with DNB and intermediate credit with Experian. However, it all goes back to personal credit. Additionally, I know for a fact that you cannot obtain a unsecured line of credit with business credit. They only work with FICOʼS of 680-700. So, what makes your program different than others? I tried and seen all other companies saying the same thing and I end up paying a lot of money. Please let me know your thoughts.
Thanks for giving us the chance to respond to your question. It’s pretty clear you’ve had some really bad experiences in the past. We get frustrated, too, by all the ads that promise hundreds of thousands of dollars in unsecured business credit lines virtually overnight even if your credit is terrible. It just doesn’t work that way.
There are many things that figure into a business loan besides the credit scores (personal and business) including:
- How long your business has been established,
- The type of business you are in (try getting a loan for a construction company in many parts of the country today and you’ll get laughed out the door),
- What you plan to use the money for,
- The growth prospects for your business,
- Your track record in your field.
At the same time, we believe strongly that personal and business credit go hand in hand, and you cannot ignore the personal credit side of the equation.
That’s one reason why, in our program, we work with serious entrepreneurs over the course of a year. We know it takes time to set things up correctly, and that your willingness to do what it takes to get your business to the next level is a major indicator of your success. We’ve found, for example, that many entrepreneurs have personal credit issues because of the amount of revolving business debt they carry on their personal credit. We actively work with these business owners to establish non-personally guaranteed, non-reporting business credit cards. A business owner can then shift their business debt to these cards and dramatically improve their personal credit and access unsecured lines of credit and other financing.
Finally, I would encourage you to remember that unsecured lines of credit aren’t the only types of business credit that are valuable. I recently obtained a line of credit for computer equipment. No personal guarantee was required and the loan will not report on my personal credit. In addition, as I pay it off on time I am helping to protect my business cash flow while building a business credit reference. I consider that a win-win.
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Home-based Business Success Stories Wanted!
August 22nd, 2008
I’ve been contributing to the Start Up Nation website, one of the top websites for entrepreneurs. In case you haven’t checked them out, you’ll want to. They have an amazing wealth of information for small business owners including articles and podcasts by yours truly.
Today they have launched their 2nd annual home based business contest and I hope that some of you will enter. Here’s how they describe it:
Welcome to the one and only ranking focused on you – the outstanding unsung heroes of our economy – home-based entrepreneurs.
The second annual 2008 StartupNation Home-Based 100 will once again rank the best performing home-based businesses across America in ten distinct categories.
This year’s categories are:
- Best Financial Performers
- Most Innovative
- Boomers Back in Business
- Greenest
- Yummiest
- Wackiest
- Grungiest
- Recession Busters
- Most Slacker Friendly
- Most Glamorous
Building on the fanfare surrounding last year’s winners, the 2008 competition has the makings of an even bigger celebration of contestants, and ultimately, finalists who will claim their place among the 100 winners.
We hope to see you in the Winner’s Circle!
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Protect Yourself from Your Assets
August 21st, 2008
How can you best protect your personal assets? Here are some things to consider.
- Keep Your Personal and Business Assets Separate
If you don’t insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business.
As an example, if you’re a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you.
Or perhaps you’ve formed a two-man partnership with your friend. This may perhaps be an even worse idea than a sole proprietorship is. What this means is that you are as liable for your friend’s errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner’s signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag.
To protect yourself, use a registered corporate entity, such as a C or S corporation, a limited liability corporation, or a limited partnership. You’ll need to keep your company’s registration up-to-date, hold annual meetings and keep annual minutes, keep business clients separate from your own, and avoid signing any business-related documentation in your name. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business.
- Protect Your Business Assets
You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business’s assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though.
A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for? The liability insurance should cover injuries to third parties on your property. It should cover trespassing, especially if you have undeveloped or vacant land. If you have people working on your property as your employees, you should also have Worker’s Compensation insurance. The insurance should also have “increased cost of construction” additions if your building should become damaged or require reconstruction. That means you’ll be covered at today’s construction prices instead of those of previous years. If you are a landlord, “loss of rents” riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it’s being rebuilt to offset right losses. A final consideration is a “higher limits” rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories.
But as we know, insurance companies have an economic incentive not to cover every claim. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims.
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Don’t miss this free teleseminar series!
August 12th, 2008
My fellow XBanker co-founder Garrett Sutton and I have been asked to be part of a tremendous teleseminar series for business owners. Not only am I presenting during this virtual event, but I am attending these sessions myself as a guest because there is so much I want to learn from the other presenters in this power-packed event. I’ve heard a few of them speak, and there are others I can’t wait to “meet.”
Oh, and it’s free…so how can I resist? How can you?
Here’s the official announcement, but I’ll give you my opinion: if just one of these presentations puts money in your pocket you’re way ahead of the game!
Who Else Wants To Learn ‘Secrets’ That Most Small Business Owners/Online Marketers, Entrepreneurs, Writers and Coaches Will Never Know About How To Really attract more leads, close more sales, set up automatic marketing systems, increase profits, and keep more of your cash each month as you build wealth?!
Give us about 28 hours over the next few months and we’ll force 22 of the world’s top marketing & small business experts to reveal their most powerful, most clever, and most profitable & guarded secrets for unparalleled personal & financial success.
Learn more and register here.
Not sure? Here is an example of what you will learn;
The Freedom Formula author Guru Christine Kloser who will show you “How to Put Soul in Your Business and Money in Your Bank”
Rich Dad’s Advisor Garrett Sutton will tell you about the 5 mistakes most small business owners make when setting up a corporation
Million Dollar Lifestyle Business Coach Melanie Benson Strick shows you 101 Ways to Triple Your Income by Outsourcing Your High Payoff Activities
Branding expert Kim Castle shows you through interactive exercises how brand worthy your business is.
James Roche, (The Info product Guy) will show you how to get paid for your knowledge via his Info Marketing Action plan (iMap program)
PR and marketing expert Susan Harrow will show you How to Get a 6-figure Book Advance
Online Marketing expert Katrina Sawa will tell you what you need to know to get more exposure and clients FAST
Elizabeth Potts Weinstein (CFP(r)& Attorney) shows you an Easy, GUARANTEED System to Take Control of Your Cash Flow in Just 15 Minutes per Week
For full details and to register for the FREE events!
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Save Your Business in Bankruptcy
August 11th, 2008
My Xbanker colleague Garrett Sutton has written extensively on the value of incorporating a small business, and here’s another reason to do so:
Incorporating can literally save your business.
I doubt many sole proprietors realize that filing for personal bankruptcy (due to medical debts, divorce or many of the other reasons people file) could mean the end of their business.
I didn’t.
But in a recent post on the Bankruptcy Law Network, California bankruptcy attorney Cathy Moran describes a recent case in which a couple who owned a business as a sole proprietorship were in danger of losing it – even though it was doing just fine – because they had to file for personal bankruptcy due to real estate investment debts.
She points out that:
…(the) business was a sole proprietorship. If we filed Chapter 7 now, Chapter 7 trustee’s first reaction to a going business is to shut it down. The trustee is concerned about his liability for regular business debts the operation may incur and the possibility that a customer may be hurt on the premises. The trustee wants to preserve the status quo by shutting the doors, even if there is nothing in the business that he can sell for the benefit of creditors.”
In this case, she was able to incorporate the business to save it.
But as another California bankruptcy attorney Douglas Jacobs points out in another post, waiting until you are contemplating bankruptcy to incorporate your business is risky business. It can be considered a “fraudulent conveyance” and can backfire.
If you haven’t been convinced yet that you need to incorporate, what else can I do to convince you that you need to check it out? It may literally save your business.
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Keys for Using an S-Corporation
August 6th, 2008
If you have been considering forming a corporation or other business entity to provide yourself with limited liability and financing options in your business venture, you have made an important first step. You may have compared the tax benefits of corporations and limited liability companies or limited partnerships. If you have done so, you likely realized that corporations are taxed twice, while limited liability companies and limited partnerships are taxed once. While a corporation’s profits are taxed once as the corporation’s income and again when the profits are distributed as dividends, a limited liability company or limited partnership’s profits flow through the entity and are only taxed once as personal income to the individual member of the limited liability company or partner in the limited partnership. This is referred to as flow-through taxation. Based solely on the tax treatment of corporations, you may be prepared to use a limited liability company or limited partnership for your business.
While limited liability companies and limited partnerships feature outstanding charging order protection, Nevada has recently extended such protection to corporations with between two and seventy-five shareholders.
Before you decide which business entity to use, there is one more option for you to consider. If you choose to use a limited liability company or a limited partnership, your business may limit its financing options. Financing for a limited liability company or a limited partnership may not be as readily available as financing for a corporation, because interests in such entities are not as transferable as interests, or shares of stock, in a corporation. An S-corporation is the alternative that provides both financing options and flow-through taxation; however, to be treated as an S-corporation, your business must do the following:
- Incorporate the Business - As with a regular corporation, referred to as a C-corporation, an S-corporation must prepare and file Articles of Incorporation with the state, prepare and operate under Bylaws, operate under a Board of Directors and corporate officers, and engage in corporate formalities.
- File an S-Corporation Election Form - To be eligible for S-corporation tax treatment, the corporation must (1) be a corporation organized in any U.S. state, (2) not be an ineligible corporation (certain types of businesses are not eligible), and (3) have only one class of stock. If eligible, the corporation may file an S-corporation election form, Form 2553, with the Internal Revenue Service within forty-five days after incorporating. While this will allow flow-through federal taxation, it is important to note that five states do not recognize S-corporations and may tax the corporation as a C-corporation. It is also important to note that S-corporations are not eligible for certain tax deductions that C-corporations may enjoy.
- Notice and Obey S-Corporation Limitations - Once the corporation has made its S-corporation election, it must notice and obey the limitations on S-corporations to maintain its flow-through tax status. If the corporation violates any of the following limitations, it will lose S-corporation status and will not be eligible for flow-through taxation for five years: (1) it must have one hundred or fewer shareholders; (2) all of its shareholders must be individuals, descendants’ estates, estates of individuals in bankruptcy, or certain trusts, because business entities may not be shareholders; and, (3) all of its shareholders must either be United States citizens or resident aliens in the United States (nonresident aliens may not be shareholders). If the corporation loses its flow-through tax status, the Internal Revenue Service will treat it as a C-corporation.
Every business is unique. Your business’s form should be based on your specific circumstances. While the limitation on the number and types of shareholders allowed in S-corporations may affect financing options, such limitations may have less practical importance than the limitations on financing options created by using a limited liability company or a limited partnership. Accordingly, S-corporations’ tax benefits, management structure and transferability of shares may provide the benefits that your business needs in an entity that also provides you with limited liability. By considering your business’s options and choosing the best available business form, you will ensure that you take advantage of available opportunities.
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Five Mistakes People Make When Incorporating
July 30th, 2008
1. Choosing the Wrong Entity
Problem: Many incorporating companies are not run by lawyers but by promoters, people who have no experience and training in corporate law. These companies are geared to sell you something, not to assist you in carefully selecting the right corporate entity. Choosing the wrong corporate entity can cost you hundreds of thousands of dollars in extra taxes and can fail to protect your assets. It is so crucial to make the right choice.
Solution: Corporate Direct is owned and operated by lawyers, Our staff is trained to work with you to select the correct corporate entity, be it a C corporation, S corporation, LLC or LP, for your specific situation.
2. Creating Too Many Entities
Problem: Many incorporating companies are staffed by commissioned sales people. Their goal is to sell you as many entities as possible in order to earn a higher commission. We have seen situations where as many as six entities have been formed where only one was needed. Creating too many entities is costly upfront and costly on an annual basis.
Solution: Our staff is trained to protect you with the right amount of entities, not an overabundance of them. Our staff is not on commission and thus has no incentive to sell you more than you need.
3. Paying Too Much Money
Problem: Many companies will lure clients in with promises of low cost incorporations only to have high pressure sales people upsell them into products and services they do not need or want. We have seen cases where services that should have cost under $1,000 have been inflated to over $10,000 in fees. The clients may never know they have been cheated, or learn only when it is too late.
Solution: Corporate Direct charges a flat fee per entity and provides you with an upfront statement of what your specific strategy will cost. There are never any hidden fees or surprises.
4. Bogus Office Packages
Problem: Many companies will tell you that state law requires you to have an office in your state of incorporation, for example, Nevada. They will then sell you on a $3,000 annual office package to keep you in compliance. In truth, there is no such law requiring a fully staffed office and you have been ripped off for $3,000 a year.
Solution: Corporate Direct does not sell bogus packages. If you need mail forwarding and the like we can assist for as little as $360 per year. But we will not misrepresent state law to take money out of your pocket.
5. Incomplete Formations
Problem: Many companies will file articles with the state and then only provide you with forms to fill in for the bylaws, minutes, and stock certificates. Do you know how to fill in these forms? Will they ever be filled in once you receive them? Of course not. And by not having complete documents you open yourself to having the corporate veil pierced and thus exposing all of your personal assets to creditor claims.
Solution: Corporate Direct provides a complete formation package in your own corporate binder. All of the bylaws, minutes, and certificates are completed and you are protected.
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Monitoring Your Business Credit
July 30th, 2008
By Trent Lee
I am currently in the market for a new SUV for my wife. As I’ve researched and shopped around I’ve learned an important lesson: BEFORE you step foot into a dealership, make sure to have previously pulled your personal credit score and know exactly what it contains. This is sound advice, because you never want to be surprised by wrong information on your report when you are ready to use it. Fortunately, my wife and I both have high personal credit scores that we keep a close eye on with a monitoring service that alerts us of any minor or major change.
As I thought about it, I realized, business owners are in the same boat. BEFORE applying for any financing, you should know exactly what business credit scores you have what what your report contains.
Here are 3 simple reasons to monitor your business credit reports:
- Avoid Unpleasant Surprises: How much will your business qualify for? What interest rate will be granted? Both of these questions are determined, in part, by what is on your business credit report. Monitoring makes sure that you are not surprised by anything on your business credit report.
- Inaccurate Information: I can’t tell you how many times I’ve … Read More »
Building Business Credit webcast available now
July 28th, 2008
The Wells Fargo Small Business Webcast Sound Credit Practices for Your Business is now available. I was honored to be chosen to participate in this panel discussion with leading financial industry insiders and business owners as we talked about how to build business credit, and effectively manage business credit and cash flow. The program focuses on financial management principles that support long-term stability and growth.
Sound Credit Practices for Your Business offers tips and strategies to small business owners looking for ways to safeguard and strengthen their businesses. This webcast will provide informative, relevant and timely advice on how to implement and manage sound credit practices.
If you haven’t viewed a webcast before, it is like attending a seminar…from the comfort of your home or office. You simply watch online with both audio and video.
The webcast was moderated by Rich Sloan, co-founder of StartupNation.com. I’ve seen and admired Rich’s work for years, but was even more impressed when I met him in person. He’s both very smart and very funny. And I learned a lot working with the other panelists:
• Michael Billeci, Regional President, Greater Bay Area Region, Wells Fargo
• Scott Anderson, Ph.D. Senior Economist, Wells Fargo
• Jerry L. Mills, CPA, Founder and CEO, B2B CFO
• Sharon Evans, President and CEO, The Business Resource Group
Free registration for this webcast is now available at www.wellsfargo.com/biz/webcast.
About the Wells Fargo Small Business Webcast Series
Wells Fargo’s Small Business Webcast Series of interactive, online sessions is designed to help small business owners meet their business growth and management goals. The series, which launched in 2007, is one of Wells Fargo’s many resources to help small business owners succeed financially.
The latest addition to the library of small business resources in the webcast series is Sound Credit Practices for Your Business. The webcast series library also includes: Financing Strategies for Your Business, Protecting Your Business, Technology and Your Business, and Health Care Options for Your Business.
For more information on the series or to view one of these programs, visit www.wellsfargo.com/biz/webcast.
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The Series LLC
July 22nd, 2008
The Series LLC is supposedly designed so that by setting up (and paying the fees on) one asset-protected LLC you can protect a number of properties in separate series within the one LLC. A graphic example follows:
1. ABC, LLC (a Series LLC)
a. Series One (duplex) b. Series Two (fourplex)
The supposed benefit is that if there is a claim against the duplex in Series One a creditor could not reach the fourplex in Series Two. It is in a separate asset-protected series the promoters will claim, and therefore can’t be reached.
There are several problems with the series LLC. The first is, conceptually it doesn’t make sense. If you form one entity and it is sued, all of the assets within that entity are exposed - whether they are in a separate series (or buckets or whatever else the promoters use to describe them) or not. Significantly, there is not one court case extending asset protection to assets held in a separate series. I personally do not want to put my assets into an entity and hope for the best in a future court ruling. By using separate LLCs we have the certainty that assets in a remote LLC will not be exposed to claims brought against a target LLC. As mentioned, the series LLC has been sold as a state-fee-saving device. By using a series LLC holding, for example, four assets, it is claimed that you only have to pay one filing fee instead of the four fees for the four separate LLCs. That argument worked until the state of California decided that each series would be taxed as a separate LLC. So instead of paying just $800 for one series LLC in California you would pay, in our four-asset example, $3,200 for the series - the same as if you’d used four separate LLCs with greater certainty of protection. While not every state is as aggressive a tax collector as California, you can be certain that some will follow suit and charge a filing fee per series.
There are other issues surrounding the various unknowns posed by the series LLC. Will the supposed “internal liability shield” of the series LLC be respected in states that do not have series provisions? No one knows. In a bankruptcy of one series would a court consolidate all of the various series into the parent? No one knows. But you can be certain that by forming separate LLCs you will not face such sleep-losing unknowns.
It is interesting to note that the American Bar Association committee on uniform state laws looked into the series LLC. After reviewing all of the uncertainties and record keeping complexities of the series LLC, the ABA declined to endorse them. When some of the nation’s smartest lawyers take a pass on the series LLC, maybe you should too.
-excerpt from the newly released, revised and updated 2008 version of “Own Your Own Corporation” by Garrett Sutton
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