A few weeks ago I got together with a friend I grew up with because he was looking for advice on creating a business entity. He wanted to know if he should create a corporation, a partnership, an LLC (limited liability company), or remain a DBA, “Doing Business As.”

Since I’ll use his business as an example for the discussion, and I like his product, and he’s a friend, I’ll give him a free plug: He sells V-Neck sweat-wicking t-shirts over the internet. The product is called Vdri, and the shirts are meant for wearing under a collared shirt, or while exercising or sleeping. I’ve been wearing my Vdri shirt happily for the last few weeks. Anyway, back to the business discussion.

In exchange for my t shirt I gave him what I think is thousands of dollars worth of legal and accounting advice in 30 minutes, and I’ll pass it along to BizBox audience as well. (Feel free to send me free samples of your business wares too!)

The decision to move from a DBA to forming a business entity comes down to
1. Do you need business and financial liability protection?
2. Is your business complicated enough to need its own bank account and credit card?
3. How do you want to be taxed?
4. What kind of employee and ownership structure do you have?

Let’s take it one at a time.....

Business and Financial Liability
What if the sweat-wicking shirt catches fire at your alumni bonfire and somebody decides to sue you and your company? I know its crazy, but it’s a litigious world out there. You definitely do not want a former customer and his lawyer to seize all of your personal assets as they seek redress over accidentally singed fibers. A separate business entity provides a layer of protection against that.

In addition, a business entity may provide financial liability protection, limiting your losses to the business rather than your personal assets.

Bank Account and Credit Card
In my experience, banks will not open business checking accounts in your company’s name without a proof of entity formation from your Secretary of State and a separate federal tax identification number, or EIN (employee identification number).

Credit card companies can be more lenient and may allow you to get a credit card as a DBA. Vdri in fact already had a credit card, but my friend has been selling enough shirts that it’s become time to open up a bank account solely for the business

Keeping business and personal financial records pretty much requires separate bank and credit cards accounts, so you’re going to need to form some kind of entity once you move beyond the simplest start-up.

How would you like to be taxed?
You’re not allowed to say “No Thanks!” to that question, even if you want to.

Here’s the basic choice: An LLC or limited partnership is not taxed on its own, but rather, passes through any tax liability to its partners or, in the case of an LLC, its members. So if Vdri becomes an LLC and racks up profitable tshirt sales, my friend will end up owing additional taxes on his personal tax return.

A corporation, in contrast, must pay taxes on profits generated by the company in any year, at the corporate tax rate. My friend would personally owe taxes only on dividends he received from the corporation, or on any salary he takes from Vdri. Profits on tshirt sales would be taxed once at the corporate level, and then again at the personal level in the form of dividends, a phenomenon known as ‘double taxation.’

Generally speaking, corporations are considered “tax-appropriate” if the business is capital intensive and needs to reinvest profits in any given year in order to grow. An LLC or partnership probably works best if profits do not need to be reinvested.

Since Vdri does not run a manufacturing plant (it subcontracts that kind of work) I think the pass-through taxation of an LLC or partnership is preferred.

(Incidentally I’m only speaking of C-corporations, not S-corporations, which may have ‘pass-through’ taxation similar to an LLC.)

Employee and Ownership Structure
Here’s where LLCs have great advantages over corporations for small businesses and entrepreneurs, and why I recommended an LLC to my friend for Vdri.

Corporations typically must officially maintain a great number of corporate positions such as president, secretary, and treasurer. Corporations must maintain records of meetings held. Perhaps most onerously, corporations must distribute profits strictly according to proportionate ownership. While this may make sense at first glance, in fact many companies have good reasons for making distributions of profit disproportionate to ownership.

LLCs by contrast may make distributions according to any plan lawfully decided upon by its voting members. I mentioned to my friend that Vdri, if it were an LLC, could decide that whoever wears the funniest hat at the annual Holiday party would reap all of the years’ profits.

Rewarding employees and negotiating with outside investors – key challenges for many small business owners – is helped greatly by the LLC structure. A corporation simply does not have that flexibility, but must distribute to owners according to strict ownership percentages.

I’m pretty sure Vdri will go the LLC route, as do many entrepreneurs these days, given its flexibility as a business structure.

The people you want to hire do not need motivating. They’re mature adults and probably have the energy level they’ll have for the rest of your relationship.

So, it’s not about motivating. It’s about alignment of goals.

Most of us have wondered many times; is this a job for the carrot or the stick? Let’s see…the carrot or the stick?

The fact is that smart people don’t respond -- on a long-term basis -- to either the carrot or the stick.

If the relationship is a simple, “You give me “x”, and I’ll give you “x” reward.”, it won’t be long before someone is scamming your process.

Conversely, if you threaten smart people with the stick, they’ll find another place to work.
The key is to find out what they want to do. Deep down, when they’re honest with themselves – what do they really want to do? Once they determine that and communicate it, you can see if it’s aligned with the company’s needs. If you don’t have common ground then just be honest with each other – life is too short to pretend otherwise.

However, once you find their passion, and know that helping them get to where they want to go will also work for the company, and then you’re on solid common ground.

So, OK, Joe, you’ve changed the rhetoric from “motivation” to “alignment”. Now what?

Once you have goals, you build the process around those goals. At The Phelps Group we have an annual process that starts with a 360 review by at least 6 of the people an associate works with. The associate can then fold that feedback into her/his individual performance objectives (IPO) which state what they’ll do in terms of the quality of client work, the generation of revenue for the agency and the agency’s environment. Our associates are encouraged to meet with the coach in their discipline, or their team leader once a month in a 1-2-1 and review their progress toward their goals. The coach or team leader is not there to judge, but rather to “hold a mirror up” for the person requesting the 1-2-1. A critical exercise in this meeting is to identify the obstacles preventing progress, and then work on ways to eliminate them.

This process, followed diligently will help the individual create and hone their goals. It’ll reveal and remind them of their progress. And it’ll clear the path for more achievement. The result is higher self esteem, raised confidence, greater productivity and a more transparent relationship between them and the company.

The essence of the thinking here is, find out where an associate wants to go and then help them hold themselves accountable to their own goals.

Call me Bruce X and heed me well. In an earlier incarnation, I used to be just like you – sprinting along the pathway of my strategically chosen career. I wanted to have it all, and I was intent on obtaining it. Oh, blissful ignorance! Little did I know the impending torment that was in store for me. But, wait. My story starts way before this.

As a kid, I always knew I wanted to be a lawyer when I grew up. After all, from a young age I could manipulate the truth to my advantage (usually directing blame to my sisters for some offense I committed). I had an uncanny ability to make statements that were entirely true but conveyed an opposite meaning. So, when mom’s favorite lamp was in shatters on the floor and I was accused of breaking it, I could honestly say, “I never even touched that lamp.” Truer words were never spoken, because it was the football I kicked from the living room that actually touched the lamp. That, my friends, is the essence of being a lawyer – to find ambiguity, and then to exploit it to your own advantage.

I enrolled at the University intent on proceeding to law school as quickly as possible. But when I couldn’t get “Rhetoric and Argumentation 101” as a 1st semester freshmen, I took “Theatre Arts 101” as an alternative. (I thought I might as well get a head start on honing my courtroom theatrics.) Alas, this is where the seeds of occupational discontent were planted. By the time I graduated, I was ambivalent about the lawyer gig and wanted to take a stab at show business.

I ventured into the comedy-club scene in L.A. But two unanticipated, insurmountable obstacles prevented any chance of my success as a stand-up comic. First of all, at a height of only sixty-six inches, people couldn’t really tell that I was standing up. Secondly, and perhaps more importantly, I wasn’t funny. Consequently, I got out of show business before anyone knew I was in show business.

I was soon enrolled in a prestigious law school, pretending with all of the other soulless automatons that I was going to be a lawyer for “the good of society.” But a short 3-years later I was arguing in Divorce Court that my client should have custody of the yellow bath mat. And when I wasn’t mired in marital dissolution disputes, I was defending a product manufacturer from wrongful death claims, arguing that purchasers knew or should have know that the vegetable chopper would explode when it was plugged into an outlet; thus, they should have anticipated the trajectory of the flying stainless steel blade; so, if they failed to duck, then their decapitation was the result of their own slow reflexes.

I was a good lawyer, a very good lawyer; but I was also a very unfulfilled person. For more than two decades, I tried to find passion in my life from my profession. I even left the mercenary Litigation Department and changed my specialty to Estate Planning and Probate. (Something seemed nobler about helping people plan for death. As a side benefit, the risk of a malpractice lawsuit is less if your client is dead.) Despite shifting my specialty and changing law firms, I was never passionate about being a lawyer. As much as I wanted lawyering to be a motivating force in my life, it was always merely a way to earn a living. Granted, it was a good living from a monetary standpoint, but for me, lawyering didn’t provide me with a life worth living. I grew increasingly depressed when I realized that I was doing something that I didn’t like to do simply for the money. (There is a strong analogy to prostitution, but I prefer not to dwell on the comparison.)

My malaise as an attorney never made me suicidal (although there were times when my wife want to kill me for my whining). But it did make me more introspective than most lawyers. (For many of my brethren and sistern of the bar, they can easily ignore their feelings because they don’t have any. That’s what makes them good lawyers.)

After years of self-examination, and a series of post-lawyer entrepreneurial endeavors, I’ve begun to understand that you don’t need to find your passion from your career, just so long as you find it somewhere. Instead of finding your passion in your work, you might discover that your job allows you the ability to find your passion in other endeavors. For me, I’m passionate about helping people find their passion, whether it arises from their occupation or from non-work related activities. That is the foundation for my company ConversantLife.com (that I’m passionate about but receive no income from – continuing the cycle of earning a living from passionless but worthwhile work).

I’m grateful to BizBox and Slate for the opportunity to blog about the passion/work interconnectivity. Yes, they are connected, even if your passion is not derived from your career. I have come to learn that I could have been an even better lawyer if I had given myself the freedom to let my passion flourish outside my legal profession. Alas, I’ve learned this lesson too late, because my law license has expired and I refuse to take the Bar Exam again. But if my insights can be helpful to you, then I’ll consider my litigation-induced ulcer to be worthwhile.

For people who actually write down their annual goals, achieving balance and working smarter nearly always rank within the top five. It’s no different for me. And yet here I sit writing a blog that’s well over due to the Biz Box folks (Sorry!) because I find myself constantly overwhelmed with tasks. The only thing I have yet to give up is sleep. Sound familiar? Do you know what I mean? At the beginning of the year I promised myself I would separate my work from my life and attempt to live a more balanced life. I began re-modeling my house, spending more time with my kids and even trying out a new relationship. People in the psychology world say we need this sort of “balance” – thus far, it has been a disaster for me, resulting in a huge backlog of work and more stress in my life.

I haven’t taken this goal off my list just yet but I have given up trying to change entirely; I know when to admit defeat! What I’ve come to believe is that more people are integrating their careers and their personal lives, resulting in an evolution for many people. Gone are the days of an 8-5 routine that we as Americans have lived by for generations.

A few examples of this trend include:

• We are connected 24/7 with either a laptop and/or a Blackberry device
• Corporate wellness centers offering “napping services” are beginning to pop up
• Companies such as Google offer every “non-essential” service an employee needs to make it easier to integrate work and life and remain productive
• Our personal, office and cell phones can be integrated into one device allowing us to always be there when a client, child or significant other needs something
• New types of high speed wireless networks such 3G, 4G and Wi-Max are about to integrate everything we do on the computer and phone and offer unlimited access to knowledge

So what have I done? I no longer consider getting to work at 8:00 a.m. of great importance, and 5:00 p.m. comes and goes like 2:00 p.m. I have taken the time to organize my home so I can watch the morning news in a corner of my flat screen TV while working on emails or a presentation. If my kids are at home and they need some time for something, it gets integrated into Outlook. When I am at work, if I need to order some tile for a bathroom project, I do it right then, when I have a moment. I work harder during the day, incorporating my personal life when necessary in a secondary way, and I work less at night, where my personal life becomes my primary focus.

Working smarter and finding balance really means:
1) Listening to our bodies and knowing when to slow down or do something else
2) Don’t get stressed out if you need to take a call at 7:30 p.m. in the evening – it happens
3) Stay connected and answer emails on the fly. It is more important to stay on top of things than to have total separation of work and home

So what about you? Tell me – are you resisting the change of our new 24/7 connectivity? How are you evolving your life into this new work culture?

Also.......One rule I do have, I never answer an email or phone call (unless it is extremely urgent) when in conversation with someone else.

Businesses succeed, businesses fail.

A company worth $16 Billion in January 2008 like Bear Stearns can disappear in March 2008 for 1.5% of that amount. So there is not necessarily shame in business failure.

For the small business owner, however, some planning should go into the “what ifs” of business failure.

At Cedarcrest we often work with companies that did not work out, and the common denominator is excessive debt.

As a frequent creditor in these situations, I can’t advocate not paying your debts. But, if you have to choose between who to pay, I would recommend paying your banker over your suppliers.

The simple reason is that your suppliers will likely do more business with you in the future, but your banker will cut you off and ensure, through credit reporting, that no other bank will treat you well in the future. Once a bank is burned, it has the ability, unlike most of your suppliers, of sharing that information with every other mainstream lender in the country.

But wait, it gets worse: If you have borrowed money from a bank, the bank typically made you sign - in fine print - a personal guaranty of the debt. That means that if your business goes under, the bank can still hold you personally liable for the debt. That may eventually mean personal collections, a lien on your home, or wage garnishment.

Few suppliers, by contrast, will try to collect money from you after your business is closed. You are not likely to be contractually personally liable for your accounts payable to suppliers.

Finally, we see too many small business owners who, in a last-gasp effort to keep their business solvent, borrow to the maximum on their bank lines of credit and credit cards. The thought is to raise as much fast cash as possible, and hope it works out. All I can say is, that is rarely a good idea. Blind hope is not a strategy. And that unpaid bank debt can be painful.

You're a business owner, you're a long-term planner and you'd like to have a succession plan that benefits you and the people who've helped you build the business.

If that's the case, then the you'd probably like to:

- Have your business continue beyond your own career.
- Sell your stock to the company's employees in a tax-free exchange.
- Balance compensation to your employees between salaries, profit-sharing and company stock, with the stock being tax-deffered for the buyer and the seller
- Have the employees act like owners instead of employees and drive the value of the business even higher.

An ESOP can help you achieve these goals. Many books and articles are available on this subject. So I'll keep this article short and simply hope that it stirred your interest in starting an ESOP to the extent that you'll research it further.

Related sidebar: 80% of America's workforce are employed by businesses with less than 100 employees. The future of our social security system is suspect. Wouldn't it be great if more citizens actually owned part of the business they work for? Think of the advantages for everyone involved

One of the hardest things to manage at Cedarcrest is late-paying customers. Sometimes it seems the time and energy spent on late and non-payers overwhelms in magnitude the actual amounts owed.

Given the direction of the economy in many areas of the country, I suspect a majority of small businesses will see an uptick in late and non-paying customers in the coming year. It’s a good idea to have a mind-set and a plan of action for what to do when payments don’t come in.

The mind-set part can be difficult. First, I try to tell myself: “it’s not personal.” By that I mean, the non-paying customer probably did not select me and my business to default on, but rather, that customer’s situation is tough all over. My business just happened to be the one to suffer. I find if I can depersonalize the affront of non-payment, I have an easier time making a plan.

The second part of a helpful mind-set is this: I have to understand that collecting payments due is going to cost money and time, one way or another. Be prepared to spend both money and time to get your money back.

In making a plan on how to recover money due to you, I think there’s an initial decision to be made depending on the situation. Can you manage the late payer yourself, do you need a collection agency, or do you need a collection attorney?

In the first case, I think you should only attempt to collect money yourself if you believe there’s a very high likelihood of success, without an adversarial relationship developing. The debt collection industry is highly regulated, and you do not want to be collecting certain types of debt without a license.

I think the second plan, using a collection agency, makes sense if you have a reasonably large number of uncollected debts, with a high degree of uncertainty about collectability. Collection agencies typically work on a contingency basis, charging between 20-40% of every dollar they bring in. They can quickly work on high probability debts and usually can bring money in the door within the first month.

How do you find an agency? I would start with the self-regulating trade group for collection agencies, ACA International. Any firm you hire should be a member. In addition, I always make sure the collection agency is licensed to collect in the states where the non-paying person lives.

In the third instance you may want to hire a collection law firm. This approach is most appropriate if the unpaid balances are relatively high and you have some belief that the non-payer has the ability to pay, but not the willingness. Law firms, through the use of the court system, can compel payment in ways that collection agencies cannot.

The downside to collection attorneys, however, is that they require greater up-front payment and often take longer than collection agencies to compel payment. You generally want to be confident that the payment actually will be made at the end of a long and potentially expensive legal battle.

How do you find a collection law firm? At Cedarcrest we frequently turn to the Wright-Holmes Law list, which allows you to find a local attorney by searching any zipcode in the country. There are numerous other online law lists like Wright Holmes but I’ve found the owner very helpful to Cedarcrest in the past.

PCs, the internet and wireless technologies are promoting flex-time and spreading work time across the 24/7 spectrum. Companies and their employees who go with the flow of these realities will reap the benefits. However, this new world requires a higher level of trust on everyone's part, while allowing people to enjoy more freedom and be productive in new ways.

Freedom, expressed as time and place - where I want to be when I want to be there - has to do with:

1) flexible time to take care of other life chores as needed
2) experiencing more of the joys of family, friends and new challenges
3) the flexibility to work from virtually any place at any time
4) being connected to families and communities more than ever before.

We can have that flexibility now, because technology finally allows us to sever the tether from our offices, yet be productive and stay in touch with our teammates.

Knowledge workers are often thinking about their work challenges in the shower, on the freeway and, too often, when they should be listening to their mates or children. They have the potential to work around the clock. This is a far cry from the "leave it all at work when the whistle blows" mentality of the factory workers and, to a great extent, many of the white-collar workers of modern day bureaucracies.

The combination of this desire for freedom, the flexibility made possible by communications technologies and the "always on my mind" mental work calls for new organizational system design. The"always in your face" pyramidal hierarchies invented for factory work are simply outdated. The answer is to organize around the customer and hire smart, self-starting people. The challenges are finding the best ways to do that!

The dream of owning your own business should not be out of reach of anyone with some savings and decent credit. The key to your acquisition success is the concept of OPM – Other People’s Money.

In particular, you want to find a situation in which you can pay for the purchase of the business by using cash from the business itself, using a loan from the person selling it.

The good news is that for most small businesses, the seller is willing to finance your purchase.

If you are looking to purchase a business you will find plenty listed with the national franchises of business brokers such as Sunbelt or VR Business Brokers. Each site allows you to search by your preferred industry or home state for a business for sale.

I have worked with brokers from both of these franchises, in addition to many other business brokers. One of the key things I’ve learned is that a great majority of Main Street businesses (with sales of say, less than $5mm annually) are sold using a seller-financed note.

Before you make an offer, be aware of how eager the seller is to get a deal done. The more eager they are, the more the seller should be willing to carry back a note.

If they object to taking back a note, remind them that they should be showing confidence in the cash flows of the business.

If the seller is not confident in how the business cash flows, perhaps the business is not worth the price they are asking. You see how the negotiation goes.

What is a reasonable down-payment vs. seller-financing? Probably 50% of the purchase price of the business. If you can get a bank to finance part of your purchase, however, you may be able to buy with for example only 25% in cash, 25% from a bank, and 50% in a seller-financed note.

Have you ever found yourself on the opposite side of an argument, unable to get your message across? Or worse, you know you are right and your opponent is wrong, and yet, you can see the audience siding with your opponent. Enter the “Art of Persuasion.”

One of my goals this year is to read at least 15 new books – five of them business-focused. To this end, I was recently in a bookstore, wandering the aisles, trying to decide what to read next. All of a sudden a title jumped out at me – “Thank You for Arguing” by Jay Heinrichs. Great title, right? But it was the subtitle that really sold me: “What Aristotle, Lincoln, and Homer Simpson can teach us about the art of persuasion.”

“Thank you for Arguing” is about the ancient art of rhetoric, made popular by Aristotle. Essentially, rhetoric is not as much about being right, as it is about winning the argument. It is about presenting your argument – finding the right form to deliver your message (Pathos, Ethos or Logos) combined with the right timing. What is most important is doing a little thinking up front, so that you can be sure that how and when you deliver your message it will win over your audience.

Much of today’s argumentative society seems to have lost, the forgotten art of rhetoric. Our talk shows are full of people like Bill O’Reilly or Sean Hannity who take a position and then proceed to verbally crush their opponents into submission. Our government is no different – the Democrats and Republicans go after each other on the Senate floor and in the press. Many people say our country is more divided now that we have been since the Civil War. I agree with this sentiment and believe most of the division can be attributed to communication.

Communicating should not mean a shouting match with the objective of pulverizing the opponent; the objective of communication should be delivering the right message.
I won’t spoil the details of the book but I do highly recommend reading it. And then reading it again.

OK, back to winning the argument in your office. Here are some quick tips to consider:
Arguments almost always come down to one of three issues:

1) Blame: Who did it? – Generally what occurs in the past. Rhetoric threatens punishment.
2) Values: Often a belief in a specific issue (abortion or same sex marriage) – Present thoughts and beliefs at this moment.
3) Choice: Should we dance or not dance? – What could happen – in the future – promises a payoff.

You can’t change the past so don’t argue about it (blame). The rhetoric of the present handles praise and condemnation, separating the good from the bad, distinguishing groups from the other groups and individuals from each other (values). So always try to focus your argument on what’s ahead – always try to make your argument about choice.
How to win an argument:

1) Set your goal: What do you want to accomplish coming out of this discussion? If there is no outcome, there is little reason to argue in the first place. Don’t argue just to be right. Argue to win.
2) Change your opponent’s mind by taking the anger out of the argument: Agree with them first; then use that point to change their mood and/or mind. Change the mood by softening them up with your agreement. If you resist instantly they will resist back. It is just human nature.
3) Create the desire to act on the idea: It is not just about showing them how you are right. It is also about how to get them to take action on your belief. Only then – when behavior is changed – will you know you have changed them.

Rhetoric tends to finish with people bonding or separating. The goal should always be to find what bonds. The most productive arguments use choice as their central issue and keep the argument in the right tense – future. Pick up a copy, you won’t be disappointed.

PS: A great movie is “Thank you for Smoking” – It highlights many of the same truths.