Category Archives: Small Business Owners

Financing Issues and Workouts

One of the most common causes for failure in a small business is a lack of capitalization. Businesses often start up with too little cash. Over time, this lack of money becomes amplified, and ultimately those businesses fail. The reason why they fail is not that they don’t have a good product, lack integrity in the marketplace, or fail to perform. They fail simply because they have run out of cash, in the middle of a normal learning curve in servicing the marketplace. Of course, loans can be helpful, but they do not replace a good business model, which allows for mistakes along the way and sufficient time to perfect your business approach.

Even without the luxury of borrowed funds, entrepreneurs feel much stress once cash flow problems arise. It’s hard to pay loans, salaries, utilities, and all the other bills that become due. The pressure increases. Whether there are loans or not, the bills must be paid, and relatives, credit card lenders, and banks are insistent. Frequently, the issue becomes the “burn rate”. In other words, “how long can a business hold on?”

Often the bank or lender have no idea what their financial problems are: sound projections and presentation of a good business plan can do much to assist with the renegotiation of debt. In any event, when default on the loan occurs everyone loses. Neithe the bank nor the borrower obtain anything from insolvency proceedings.

For this reason, our office seeks to help entrepreneurs with planning procedures, before cash flow problems arise. Nevertheless, when these crises do arise, sound counsel is necessary to navigate the dangerous waters of default and reassure the bank that the storm can be weathered.

Sometimes assets need to be sold, lines of business need to be assessed for profitability, and real estate mortgages or personal guarantees need to be added to strengthen security of outstanding loans. Nevertheless, if the entrepreneur believes his value proposition is sound, he is wise to “bet the farm” on his expertise, and continue to plow ahead. In these cases, reassuring the bank, returning liquidity to the business model, and moving toward profitability is an immediate necessity many lawyers lack this kind of business experience, and cannot be of help in this area of business. When faced with the task, most human beings like easy work. Negotiation of loans can be hard work.

I still remember the entrepreneur who came to me to explain his business was not profitable, and he didn’t need the large amount of warehouse space that was under lease. In addition, he was in danger of defaulting on the lease, and having the goods warehoused subject to a landlord’s lien. While exploring his options, he realized as we talked that a competitor (who was a dear friend) might be willing to give him storage space, and even assist him with expanded lines of credit. Since moving his location he is much happier, and profitable too!

In another case the individual owned the real estate from which his business operated. By selling the real estate he was able to become current with suppliers, giving him enough time to sell additional customers, enhancing his profitability. Further, the cash received from selling the real estate allowed him to progress forward without financial worries.

Of course, there are a myriad number of options that a good business lawyer helps his clients explore every day. As a small business owner myself, I believe that the key is flexibility. When we listen to our clients, their needs can best be served by applying our experience to assist them in creating satisfactory legal results.

If you are in need of this kind of help, please do not hesitate to give us a call for a candid opinion as to whether we can help in your situation. We would be more than pleased to be of assistance to you. Call us today at (317) 266-8888. As an alternative, you can email me personally at any time: mike@mikenorrislaw.com.

How The IN Department Of Revenue Enforces Tax Collection

Once a demand is made, the Indiana Department of Revenue (“DOR”) expects a reply in 10 days.  DOR has very powerful options at that point: if the taxpayer has not responded, DOR can cause liens to be placed on the property of the corporation or  individual. Of course, this affects credit ratings and the ability to borrow money.  The ability to sell titled properties is also hampered.  In short, a bad situation will rapidly get worse.

Many interesting possibilities are provided for by Indiana laws, specifically Indiana Code 6–8.1–8 –1 and following sections up to 6–8.1– 8–17.  These are the collection provisions for “trust fund” taxes in the Indiana code.  The first enforcement action from the Indiana Department of Revenue is the issuance of a demand notice. If the demand is not paid within 10 days, the Department of Revenue may issue a tax warrant, and add 10% to the unpaid tax as a collection fee. That warrant may be filed with the circuit court clerk in the county where property is owned, 20 days after the demand is mailed to the taxpayer.  It becomes an enforceable judgment at that point.

These “automatic judgments” can be entered without a trial before the circuit court.  This is a streamlined procedure that allows the state to garner a judgment fairly quickly. And these judgments are valid for 10 years from the date that judgment is filed  The judgment may be “renewed” for an additional 10 years, simply by filing an “alias” tax warrant at the end of the initial judgment’s 10 year effective period.

These tax judgments may be enforced by ordinary means, such as foreclosure and sale of real or personal property, with that sale by the sheriff or an auctioneer. Further, the sheriff keeps a part of the additional collection fee of 10%.  Thus, he has an incentive to conduct sales of property where warrants have been issued.

In addition, the state will often employ a collection agency to collect on unsatisfied tax warrants. In these cases, additional penalties may be assessed against the taxpayer, for the cost of private collection.  A restraining order may be issued by the courts of the county where the taxpayer does business, to restrain him from conducting business. In addition, the state may ask that a receiver be appointed, to manage the business so that those taxes can be paid over to the state.

The most significant power that the state has regarding a tax assessment is the mentioned automatic enforcement.  Note that this is without the normal legal protections of serving a complaint, waiting for a trial before the Circuit Court judge, and then obtaining a judgment.  The “normal” process for collecting on debt takes a number of months, and allows a full hearing of the facts before an impartial judge, before any lien or garnishment.  DOR can bypass that normal process.

The department may, without judicial proceedings, place a lien on monies of the taxpayer which are held by a financial institution, and require that the financial institution place a 60 day hold on funds. This includes not only funds the taxpayer has on deposit at that time, but also those that he subsequently deposits. In addition, DOR can garnish his wages by sending notice to his employer, without judicial proceedings as are normally required for garnishment. Further, the DOR can lien and sell property, or take it to a storage facility and require a bond before returning the goods.  The DOR can initiate a debtor’s exam, to inquire (under oath) about all assets that the debtor owns. Obviously, all of these requirements under the law are very powerful investigation tools for the DOR.  Of course, as the situation becomes rather grave, the use of seasoned counsel is recommended.

Retail Merchant Employees Can Be Responsible To Collect Taxes!

Not everyone in a retail business realizes it, but whatever goods are sold, taxes must be collected for the state by the business.  This applies to both sales and payroll taxes. Of course, some in the middle of a cash flow pinch will choose to ignore this responsibility, or pay the taxes “when they get around to it”. What happens in these cases?

Many don’t realize that the individual who runs the corporation, and those who cut the payroll checks for the corporation, can also be liable for payment of the taxes. The theory is that the taxes are held “in trust”, which means that the individual working for the corporation, and the corporation itself, are holding funds for the state.

It’s similar to how the bank holds funds for an individual in an ordinary checking account.  In this way of looking at it, the “bank account” which the business holds for the benefit of the state (which is the 7% sales tax and employee state income taxes withheld) cannot be drained of funds. It is the duty of the business, and the chief financial officer, to make sure that “bank account” is maintained for the state, and that those funds are paid over to the state. If those funds are not maintained, it’s considered embezzlement.

This theory can result in significant problems for the retail merchant.  Officers of the corporation who are considered responsible for its money affairs, are often unaware that they can be held personally liable. Of course, if the corporation goes broke, the liability does not go away; responsible officers can and will be pursued by the state for the trust fund tax liabilities, including both sales tax and state payroll tax withholdings.  Even if those officers move on to other employment, they can find that they owe significant liabilities due to their activities as past corporate officers.

All of these unpleasant possibilities can be avoided, if the taxes are paid on time. Nevertheless, where this is not possible, it is appropriate to consider the effects of delinquent tax payment, and how the corporation’s business or the assets of the responsible officers may be affected.

It should be noted that one of the more harsh but frequently neglected provisions of the Indiana code regarding taxes concerns the priority of payment, or how payments are credited against monies owed. When a taxpayer is behind, the partial payment is first applied towards penalties, then to interest, and last to the tax liability. This means that partial payments do not have a strong effect to reduce the original tax liability, until penalties and interest are paid in full.

In addition, the corporation which is struggling but which has not yet gone out of business may find that its registered retail merchant certificate (RRMC) will be revoked. In this case, the Department of Revenue will place signs on the taxpayer’s place of business, informing customers that the corporation can no longer conduct retail sales at that location. If those signs are removed or retail sales are continued, there is a risk of additional fines (or even imprisonment) as these offenses are considered a class a misdemeanor according to Indiana Code 6–2.5–4.

Of course, as long as monthly tax reports are submitted, along with appropriate payments, there will be no problems. But if those reports are not submitted on a timely basis, the state will investigate, and issue a demand notice for payment.  My next blog post will explain the problems that can arise in such a situation.

Debt Settlement Success Stories

Debt settlement can have fairly broad applications, as the examples below indicate. Whether in a divorce proceeding, a business workout, or an individual consumer’s return to solvency, debt settlement can be a very useful tool.

Recently an entrepreneur came to see us–the franchise he had purchased wasn’t making enough money to stay afloat. We negotiated with the franchisor, so that the franchise could be relinquished. In addition we negotiated with the landlord to make sure any claims he had were settled. The most difficult matter was the SBA loan: $220,000.

Fortunately, we were able to negotiate the SBA loan down, working with the bank and obtaining Small Business Administration consent, so that 11% of the debt was tendered in cash, after which the loan was considered paid in full. The entrepreneur is now back running a successful CPA practice, and much happier than he was trapped in a dying franchise operation.

In another case, an entrepreneur came to see us regarding his small business–again, his cash flow had dried up and he was going to be forced to shut down. After doing some cash flow analysis with us, he realized that although he was running three separate businesses, only one was profitable. He arranged to sell off the other two lines of business, and continue operations with the third. However, he had substantial lines of credit which were appropriate for debt settlement. These debt settlements were done on his behalf at approximately 40%.

When he first came to see us, this gentleman was in his mid 70s. He is now in a position to retire, as he preserved some retirement savings. He’s no longer burdened with unprofitable lines of business. As an added benefit, because his outstanding debt was significantly reduced, his credit score actually increased!

If you have these kinds of practical concerns please do not hesitate to call our office so that we can counsel you on the “ins and outs” of debt settlement. If you’re worried about these issues, call our offices now at (317) 266-8888.