Going bankrupt

Every business starts with the best of intentions, but some businesses never reach financial success, and others that were once successful may eventually fail. The financial trouble can start slowly, at first by letting certain bills get paid late in order to pay others on time.

Soon, credit cards or other sources of credit are extended to cover operating costs. The hope of future increases in cash flow or the prospect of a financial windfall to pay the debts can keep this cycle churning, making financial conditions worse.

Debts beget more debts, and eventually the burden can become insurmountable unless something drastic happens. Many times, that means bankruptcy.

Bankruptcy is a governed by federal law, and bankruptcy cases from Napa County are handled through the United States Bankruptcy Court in the Northern District of California, at the bankruptcy court’s Santa Rosa courthouse.

Some people consider bankruptcy to be unethical, rewarding irresponsible business practices and harming the creditors who did nothing wrong. Other people see bankruptcy as a sensible approach to a very difficult problem.

The United States doesn’t have debtor’s prisons, and these issues must be resolved somehow. Donald Trump has famously used Chapter 11 bankruptcy multiple times with several casinos, and other companies such as PG&E, Chrysler and American Airlines have taken advantage of Chapter 11 bankruptcy as well.

It does not necessarily mean that the business will dissolve, close or even fail. As was the case with American Airlines, eventually the business may become successful again.

Depending upon the type of business and nature of its problems, there are different types of bankruptcy options available. While there are six types of bankruptcy under the Bankruptcy Code, most small businesses would most appropriately elect Chapter 7 or Chapter 11 bankruptcy.

Chapter 7 bankruptcy is a total liquidation and shutdown of a business. A business that enters Chapter 7 bankruptcy has no chance of continuing on. Chapter 11, on the other hand, is intended to give the business an opportunity to catch up, to repay most or all of its debts, and to get back on track to economic success and viability.

In Chapter 11 bankruptcy, a trustee is appointed by the court, and makes a plan for how to repay and reorganize the priority of existing creditors. The creditors and the court review the plan, and after approval of the plan the business may continue to operate, but be better able to pay debts over time and survive.

Creditors agree to Chapter 11 plans because it gives them an opportunity to be repaid in whole or in part, when otherwise they may not be likely to receive any payment at all. Chapter 11 plans are complicated, and may take a year to be fully developed and approved. Once approved, plans may be in place for many years after that.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on February 16th, 2016. You can read it on the Register's website here: "Going bankrupt"

Looking for love in the workplace

Dear Alex:

I am an unmarried business owner and I am picking up on flirtation from one of my employees.I admit that I flirt back, and I think that this could turn into something more, but common sense tells me it may be a bad idea to date an employee. What are the risks?

Valentine’s Day will be here in a matter of days, spring is right around the corner, and it is often the workplace where people meet and relationships begin.

It is easy to understand how workplace relationships start. People spend all day around their co-workers, where they interact and get to know one another. Outside of the Internet, the workplace might be one of the easiest places for working adults to meet someone.

The workplace, however, has many restrictions that social events and the Internet don’t have. Sometimes there is confusion about where mutual flirtation ends and unwanted harassment begins.

This severity of the situation and its associated risks are particularly true in relationships between supervisors and subordinate employees.

The prospect of sexual harassment is not to be taken lightly. If advances are unwanted, they constitute harassment.

Visual conduct, verbal conduct, and unwanted advances are all types of sexual harassment. For an employee being harassed, this can be a very terrible experience, and an employer can face liability for an employee’s harassment even when management is unaware of the harassment.

The harasser may not even realize that he or she is harassing the victim. The potential for a conflict of interest, even when the parties enter a relationship with the best of intentions, is high.

It’s easy to think of bad acts that can result in employer liability, but even without bad acts of the employer or employee, there are risks.

For example, after a relationship ends between an employee and a manager, perhaps the employee’s workplace performance decreases.

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If the manager has to fire that employee for poor performance, regardless of the relationship, is the employer going to have to defend itself in a wrongful termination claim?

Even in situations where the romantic involvement between the employees is mutual, there are risks to the employer.

“Sexual favoritism” is recognized as a form of sexual harassment in California. Employees who are not involved in an existing workplace relationship may suffer from a hostile work environment and have a claim against the employer if they feel that an employee who is in a workplace relationship is receiving preferential treatment to the detriment of other employees.

In consideration of the risks, what is an employer to do?

Companies have specific policies regarding conduct of employees in relationships with each other, to reduce conflicts of interest and conduct that could be controversial or disruptive. Other companies elect to adopt strict anti-harassment policies, and leave it up to the employees to keep their love interests outside the workplace.

There is no guaranteed method to accommodate workplace relationships while preventing harassment or discrimination, but establishing clear policies and enforcing them is a good way of reducing the incidence of bad conduct and the liabilities associated with that bad conduct.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on February 2nd, 2016. You can read it on the Register's website here: "Looking for love in the workplace"

Legal changes affecting business owners in 2016

Every year, California’s courts and state Legislature create volumes of new law. The year 2015 was no exception to that rule, and starting Jan. 1 many new laws affecting businesses became effective. Here are a few news laws that may be critical for your business:

Increase in minimum wage

The minimum wage in California is now $10 per hour, which is the highest minimum wage in the country. This is the second minimum wage increase in California in a year and a half. In 2014, the minimum wage was raised from $8 to $9 per hour.

In some California cities such as San Francisco and Oakland, the minimum wage is even higher, but all of Napa County remains at the state-established minimum of $10 per hour.

The California Fair Pay Act (SB 358)

It has been the law in California since 1949 that equal work requires equal pay among men and women. Despite this law, gender pay inequality remains a problem in the state.

The new California Fair Pay Act is designed to reduce the availability of loopholes and workarounds that previously made it difficult to compare employee wages for purposes of equal pay evaluation, and to improve transparency to ensure that employers abide by the state’s equal pay laws.

The law reduces the evidentiary hurdles that employees must pass to prove unequal pay based upon gender.

Previously, the employee had to prove that other employees within the same establishment were being paid more for “equal work.” Now, employees do not need to prove that the other person is within the same establishment, meaning the employee can compare the wages paid to employees working at different locations of the same company.

Additionally, the “equal work” requirement has been replaced with the standard of proving that the work is “substantially similar,” in terms of skill, responsibility and working conditions.

Once the employee has shown unequal pay for substantially similar work, it becomes the employer’s burden to prove that no such difference based upon gender exists, based upon either seniority, merit, quality of work, or another bona fide factor such as education or experience.

Employee Time Off (SB 579)

The use of paid time off and unpaid time off by an employee to care for family needs is expanded by SB 579.

The ability of employees to take time off for the medical care of family members is more clearly articulated by this law, and up to 50 percent of the employee’s paid time off or sick leave may now be used not only to take time off for the care of a parent, child, spouse or domestic partner of the employee, but also for the parent-in-law, grandparent, grandchild and sibling of the employee.

Additionally, unpaid time off may now be utilized by parents to enroll children in child care or school.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on January 19th, 2016. You can read it on the Register's website here: "Legal changes affecting business owners in 2016"

New Year’s resolutions … for your business

Now that the holidays have passed and 2016 has begun, ‘tis the season for New Year’s resolutions. Personal resolutions are common. People pledge to exercise more, or to quit a bad habit.

Usually, New Year’s resolutions are made with the goal of improving a person’s life in some way.

What about your business?

The milestone of a new year is a great time to set resolutions to improve your business as well. Here are my top four New Year’s resolutions for small businesses:

1. Create a one-year plan and a five-year plan.

Knowing where you’re going is the best way to get there. With a one-year plan, you can set attainable goals for your business; whether that is in operation, productivity, administration or all of the above.

However, a one-year plan may be short-sighted when taken in the context of the long-term success of your business. For that reason, it is equally as important to have a five-year plan as a one-year plan.

If your five-year plan includes an aggressive pattern of growth, your one-year plan might read very differently if your five-year plan includes retirement or an exit strategy.

2. Get your corporate house in order.

Your business’s entity structure and ownership organization is critical to your tax situation, your liability protection, your income and many other elements of your business and personal condition.

If you have recently neglected your corporate entity structure or the agreements among yourself, business partners, investors and debt partners, now is the time to address the situation.

This is critically important to protecting your personal assets from liabilities of the business, to knowing how much growth in the business you actually own, or to having predictability for worst-case-scenario situations such as death, disability or divorce. Proper maintenance and structuring of your business entity has an impact on virtually every element of your business.

3. Hire a tax professional.

The U.S. tax code is very complex and has many industry-specific rules that may be to your benefit or to your detriment. Unless your business is tax preparation, you almost certainly do not know, nor do you have the time to learn, all of these rules.

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If you could be saving thousands of dollars, wouldn’t you like to know? If you owe thousands of dollars, it’s better to know now than when facing an audit.

4. Adopt an employee handbook.

If your business has grown organically, from its start with one or two people to today at six, 10 or 50 employees, you may not have an employee handbook.

Employers face a lot of risk in having employees, and having an employee handbook can dramatically reduce that risk. If there are pre-established policies and standards to which all employees are held, employer risk is reduced.

Moreover, employees appreciate having a resource to verify their questions and concerns. This is a small cost that may save you big in the future.

Sit down this new year and think about your business, what your goals are and what risks you can help to reduce. Start a new habit or kick an old one, and have a prosperous 2016.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on January 5th, 2016. You can read it on the Register's website here: "New Year's resolutions ... for your businesses"

Is ‘use it or lose it’ vacation policy legal?

Dear Alex:

My employer offers a generous amount of vacation time, permitting me to take as many as four weeks of paid vacation each year.In years past, I have taken all of the days of vacation and haven’t had any left over at the end of the year, but this year I did not take many vacations and my employer has said that the vacation policy is “use it or lose it,” and at the end of the year my vacation days will be forfeited.Can they do that?

The state of California treats paid vacation time as wages, and once vacation days have accrued, they are treated in the same way as your other compensation (like salary) during employment and upon termination.

Vacation days accrue evenly over the course of the year; if you are allowed four weeks of paid vacation time, after the first three months (1/4 of a year), one week (1/4 of your total vacation for the year) of paid vacation will have accrued. By the end of 12 months (4/4ths of a year), four weeks of vacation will have accrued (4/4ths of your total vacation for the year).

Think of your vacation days like an un-cashed paycheck; they are wages earned, but not yet realized in your bank account.

If you were given a paycheck in November, and held onto that paycheck until January, would you lose your right to collect those wages? The answer is no. Does that mean that your employer’s policy is in violation of the law? The answer may not be so clear.

“Use it or lose it” is a shorthand phrase that may carry a different meaning to your employer than it does to you.

When you as an employee hear that phrase, you may think that the employer wipes the slate clean of all of your accrued vacation days. That kind of policy would be in violation of California law.

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What your employer might mean, despite the confusing nomenclature of “use it or lose it,” is that you will not continue to accrue vacation days in excess of one year’s accrued vacation time. If that were the case, next year you may not gain any new vacation days.

It is permissible for employers to cap the amount of accrued vacation that an employee may earn, and once that cap is reached, not vest the employee with any additional vacation days until accrued days have been used.

Another possibility is that the employer may buy back the vacation days of current employees, and pay the employees a set amount for unused vacation days in an amount that could even be less than the employees’ regular rate of pay. However, going back to the paycheck analogy, the start of a new calendar year would not permit an employer to revoke vacation days that had already been earned.

At the termination of an employment relationship, outside of limited circumstances including the existence of a collective bargaining agreement, accrued vacation days must be paid out in the same fashion as the employee’s final paycheck.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on December 22nd, 2015. You can read it on the Register's website here: "Is 'use it or lose it' vacation policy legal?"

Why form a corporation in Delaware?

Dear Alex:

I am starting a new business, and a friend told me I should incorporate in Delaware. I’ve heard this before but do not understand why this is recommended.Do you think I should form a Delaware corporation?

It is true that many companies choose to incorporate out of state, in more “business-friendly” states such as Delaware or Nevada, and for a variety of reasons.

For most small businesses in California, however, incorporating out of state is an unnecessary inconvenience and complication to conducting business. For some business types, however, it may make sense and might even be critical to the future success of the business.

Frequently, people tell me they want to incorporate in Delaware for “tax purposes.” While Delaware’s franchise tax is frequently lower than California’s minimum of $800 per year, foreign corporations doing business in California must still pay the $800 franchise tax to the state of California, as well as other registration fees.

Moreover, even if the out-of-state venue in which you elect to incorporate has friendlier tax policies, California’s State Board of Equalization is highly proficient at collecting tax on foreign corporations doing business in California, for all of their California business activities – just as if it were a California corporation conducting such activities.

Unless the corporation has a significant amount of out-of-state revenue generation and business activities that are not managed or the result of work performed in California, your business is unlikely to find any tax haven by incorporating out of California.

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Another viable reason for incorporating in Delaware is due to the body of law that Delaware has developed for their corporations, and the protections Delaware law offers to business management and directors.

Delaware has a long history of being a desirable location for corporations to form, and as such the state has developed a significant body of law that provides predictability and protection for the business owners. This is also desirable for a large company; however in a small-to-mid-sized business in which the owners are also frequently the only shareholders, this is of little value.

The most compelling reason for a small California business to incorporate in Delaware is often for the sake of appealing to financiers from venture capital and angel investment firms. Small businesses structured to grow via funding frequently incorporate in Delaware to appeal to venture capital firms.

Venture capital firms desire the benefits of Delaware’s body of corporate law; they prefer to keep consistent applicable laws across their entities to the extent possible to more readily stay in compliance with those states’ laws; and if they anticipate the company may file for an IPO in the future, at that stage Delaware’s combined benefits may become very important.

For your small business, however, unless you are a startup intending to seek rounds of venture funding, Delaware may not be as desirable as it is frequently made out to be.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on December 8th, 2015. You can read it on the Register's website here: "Why form a corporation in Delaware?"