Law & Entrepreneurship News

Archives: Small Businesses

Indiana Gives Small Businesses A Voice In The Regulatory Process

Inc.com is reporting that Indiana is the third state to pass a law requiring state agencies to analyze the economic impact to small businesses when proposing rules and regulations. The other two states to pass such legislation are New Mexico and Virginia.

In addition to requiring state agencies to analyze the economic impact of the proposed rules and regulations, the law also requires these state agencies to evaluate alternative regulatory methods.

Regulatory flexibility laws are important to small businesses because they help reduce the costs and burdens that come with regulatory compliance. Hopefully, these three states are just the beginning of a nation wide trend to free small businesses from some of the regulatory stranglehold.

Pros And Cons Of Franchising

The May edition of the SBA's Solutions newsletter focuses on the pros and cons of franchising. It is a must read for any entrepreneur looking to buy a franchise.

Small Business Update 4/29/05

I am going to post stories from the past three days. Small Business Week has opened the floodgates to small business articles so here is a sampling:

- House Committee passes Small Business Checking Act which would allow small businesses to earn interest on checking accounts (NFIB)

- How women can enhance their bargaining skills (Business Week)

- The reasons why many startups collapse (Business Week)

- Tips on where to find funding (Business Week)

- The San Francisco Bay Guardian is calling on politicians to fight President Bush's SBA budget cuts

- An American Express survey shows that small business owners are optimistic about their growth prospects over the next six months (Inc.com)

- SBA Office of Advocacy testifies in front of Congress in an effort to eliminate the tax gaps between small business treatment compared to its big business counterparts (Press release here)

- Entrepreneur.com reports on why small businesses are vital to America

- SBA Office of Advocacy testifies in favor of regulatory reform

- Sen. John Kerry calls out the Bush administration and the SBA on its treatment of women owned businesses

Small Business Brief 4/26/05

- Tips for small business owners on delegating responsibility

- Pittsburgh Tribune Review has a nice article on financing startups and small businesses

- The Salt Lake Tribune has a nice story on how microloans have helped Utah entrepreneurs and how the Utah microloan program works

Happy Small Business Week

With finals taking up a majority of my time for the next couple of weeks, I am going to be providing quick hits (with links) for what is going on in the small business world instead of longer articles.

Yahoo.com is reporting that President Bush has declared this week small business week with programs and ceremonies to celebrate America's small businesses

Inc.com is reporting on the fastest growing counties in terms of job growth (interpreting a recently released Bureau of Labor Statistics report).

A Wal-Mart survey is indicating that small business economic confidence is waning.

The Chicago Tribune is reporting that spending on technology will be slow for small businesses this year.

Rising Interest Rates Sneaking Up On Small Businesses

The AP is reporting that the realities of the interest rate hikes over the past ten months are starting to creep into the small business consciousness due to increased capital needs because of inflation and skyrocketing energy costs.

Innovation And Entrepreneurship Study

The SBA Office of Advocacy has released an excellent study that statistically analyzes the connection between entrepreneurship and innovation in 394 areas in the country. Please click here for the full report. Please click here for the research summary.

The Small Business Counsel Of America Is Against The Estate Tax Repeal

Citing the loss of step-up basis upon death, The Small Business Counsel of America (SBCA) believes that the bill repealing the estate tax beyond 2010 is a bad thing for many small businesses. The SBCA is calling for immediate tax reform to aid small business owners.

Specifically, the SBCA is calling for the estate tax exemption to be increased immediately to $3.5 million, with gradual increases until it reaches $5 million. It is also calling for preservation of the step-up basis rules and an increase in the gift tax exemption in order to match the estate tax exemption. It also proposes an exemption for retirement plan assets of up to one million dollars if assets are going to a spouse and $500,000 if the assets are going to others. Finally, SBCA is calling for the top estate tax rate to be reduced if an interest in a closely held or small business is subject to the tax.

The death tax debate should heat up as the Bill nears Senate vote. It will be interesting to see where the small business community stands since it is pitting the estate tax against the step-up basis rules. Theoretically, the dividing line will be between the "have's" and the "have-not's" in the small business community. This is because a cost benefit analysis would make the step-up basis rules more appealing to "small" small businesses since they are probably too small to be subject to estate taxes whereas "large" small businesses would be more likely to gain from the estate tax repeal since the capital gains tax rate is less than the estate tax rates.

House Votes For Permanent Repeal Of The Federal Estate Tax

The AP (via Forbes.com)is reporting that the House approved a permanent repeal of the federal estate tax beyond 2010 by a vote of 272-162. It now moves to the Senate where similar bills have failed to gather enough support to become law in the past.  The repeal of the estate tax is strongly supported by small business advocacy groups.  One reason for such support is that estate taxe makes it very costly to pass down successful family businesses to the next generation. 

Small Business Bill Of Rights Awaits House Vote

The NSBA is reporting that the House Small Business Committee recently approved a Bill (H.R. 22) that would form a "Small Business Bill of Rights." It is now up to the House to vote on the bill.

The Small Business Bill of Rights calls for simplified tax laws that aid family-owned business succession, a right for small businesses to be free from frivolous lawsuits, the right to be free from restrictive and unnecessary regulation, the right to be free from high energy costs, right to equal tax treatment with large businesses when seeking access to start-up and expansion capital and credits, and the right to compete for federal government business.

Snowe Introduces The Small Business Compliance Assistance Enhancement Act Of 2005

The NFIB is reporting that Senator Olympia Snowe has proposed the Small Business Compliance Assistance Enhancement Act of 2005 (SBCAEA), a bill meant to make regulatory compliance easier for small businesses. The Bill would amend the 1996 Small Business Regulatory Enforcement Fairness Act. Under the Bill, federal agencies would be required to simplify the compliance process for small businesses by forcing these agencies to put out compliance guides explaining the complex rules and regulations.

Alleviating Stress Leads To Small Business Success

Azcentral.com has a nice article about the positive effects that reducing stress on both small business owners and employees can have on the business' success. The article also provides tips for reducing office stress.

A Nice Explanation Of Microloans

Fortune.com has a great article describing the microloan market and providing information on where a small business can obtain these loans. Microloans are loans that normally do not exceed a few thousand dollars.  They are meant to provide an alternative form of financing for high credit risk small businesses that need a few thousand dollars.

Tips For Marketing A Small Business

The Washington Times has a nice article that provides marketing tips for small businesses with limited marketing budgets.

Small Business Optimism Index Dips

The NFIB is reporting that its small business optimism index dipped 1.2 points in March due primarily to a six-point decline in job creation plans among American small businesses. The index is now at 102.5, which is still above its 30-year historic average of 100. NFIB's Chief Economist William Dunkelberg believes the dip in March's figures can be partially attributed to bad weather in certain regions. Please click the link for the complete NFIB story.

California: A Small Business Contracting Success Story

With all the problems surfacing over small businesses' involvement in the federal contract procurement process, it is refreshing to see California achieving phenomenal success in its ability to award state contracts to small businesses. The California Department of General Services is reporting that a record 30.21% of the total eligible state contracts were awarded to small businesses. This totaled $2.3 billion in state contracting dollars for small businesses. These figures far exceeded California's goals of 25% of all state contracts being awarded to small businesses.

California was also successful in awarding state contracts to disabled veteran business enterprises by achieving a 3.47 participation rate, exceeding the State's 3% goal.

California's focus on small businesses not only extends to direct contracting; California also encourages its large business suppliers to subcontract a certain percentage of work to small businesses and disabled veteran business enterprises.

Legislation Introduced To Enable Small Businesses To Participate In Cafeteria Plans

The NSBA is reporting that Sen. Olympia Snowe introduced a bill (S. 723) that would create SIMPLE Cafeteria Plans for small businesses. Cafeteria Plans allow employees to pay for fringe benefits with pre-tax wages.

The bill would ease the nondiscrimination and testing rules required for other Section 125 plans, thereby making it easier for small businesses to participate in the plans. The bill would also modify the "use it or lose it" rule of Section 125 plans by allowing up to $500 of unused funds to be rolled over into a 401(k).

DOL Makes Employee Recruiting Easy

The NIFB is reporting that the Department of Labor has implemented a new program called the Employer Assistance and Recruiting Network (EARN) which matches employer job openings with skilled employees with disabilities. The program is free for both employers and disabled employees.

Overview Of The Small Business Federal Contracting Procurement Fiasco

The Startup Journal has an excellent article outlining the current fight between small businesses and the SBA in regards to federal contracts. For more information on this topic please see my posts from 4/5, 12/28, 12/21, 12/12, 10/20, 10/7 and 9/30.

South Carolina Senate Approves Small Business Tax Cut

As a follow up on my post from 3/30, the South Carolina Senate has approved a bill that would cut the State's small business income tax rate from 7% to 5% (via Myrtlebeachonline.com). This bill now moves to the House where a heated debate is likely to ensue since the House will pit the Senate's bill against Gov. Mark Sanford's proposal for a broad tax cut which would benefit small businesses and anyone in the state's top income bracket.

IRS Targeting Small Businesses

Financial-Planning.com is reporting that the IRS is targeting small businesses for noncompliance with employment tax rules. The IRS is hoping that the new simplified form for filing employment taxes (introduced in February) will make it easier to spot questionable reporting.

Specific areas that the IRS is targeting include unreasonably low salaries to a C Corp.'s employed shareholders allowing those shareholders can take advantage of the lower dividend tax rate (i.e. taking compensation in the form of dividends), nonfilers (i.e. withholding payroll taxes from employees but not remitting the money to the IRS) and fringe benefit abuses.

Women Advocacy Groups Speak Out Against SBA Program Delays

Govexec.com is reporting that women-owned business coalitions are speaking out against the SBA's delays in implementing its women-owned business set aside program for government contracting which was created by the 2000 Small Business Authorization Act.

Under the program, government agencies are allowed to earmark certain contracts for women-owned small businesses. The SBA has not implemented the program yet because they have failed to identify the industries in which women-owned businesses are underrepresented.

Women-owned small business advocacy groups are charging that these delays have cost women-owned businesses $5 billion for each year that the program is delayed. The government has set a goal of 5% for all government contracts to be awarded to women-owned businesses. Currently, about 2.5% of all government contracts are being awarded to women-owned businesses. Please see my post from 3/24 for more information.

Pricing Strategies For Small Businesses

Webpronews.com has a nice article about how small businesses can repackage pricing strategies to make them more appealing without slashing prices.

Pricing Strategies For Small Businesses

Supreme Court Makes Age Discrimination Suits Easier To Bring

Some small businesses will be affected by a recent Supreme Court ruling that relieves plaintiffs in age discrimination suits under the Age Discrimination in Employment Act from the burden of proving an actual intent to discriminate if disparate impact can be shown (as reported by Inc.com).

This ruling equalizes the age discrimination standard with the race discrimination standard thereby making it easier for plaintiffs in age discrimination suits to proceed with their case. This ruling will only affect some small businesses because the Age Discrimination in Employment Act only applies to US businesses with over 20 employees.

Bill Would Allow Small Business Checking Accounts To Earn Interest

The NFIB is reporting that Rep. Sue Kelly has introduced the Business Checking Freedom Act of 2005, which would allow banks to offer interest-bearing checking accounts to small businesses regardless of the account's minimum balance. Under current laws, small businesses would have to get sweep accounts (which require a high minimum balance and substantial paper work) in order to earn interest on its checking account balances.

Small Businesses Speak Out Against Grandfathering

The SBA has received over 5,000 comments opposing the grandfathering provision in the SBA's proposed size standards for government contract procurement. The SBA's grandfathering provision would have allowed non-small business corporations to keep its government contracts earmarked for small businesses for up to more than five years.

This is just the latest episode in the government contracting fiasco that has been smoldering for the past six months. During that period, it has been revealed that a few very large corporations hold billions of dollars in government contracts earmarked for small businesses. These large corporations obtained these contracts by either outgrowing the small business definition or by purchasing small businesses with government contracts. Please see my posts from 12/28, 12/21, 12/12, 10/20, 10/7 and 9/30 for more information about the small business contracting problems

Small Business Advocacy Groups Stay Out Of Bankruptcy Reform Fray

The Patriot-News (via PennLive.com) is reporting that both the NSBA and the NFIB are not getting directly involved in the bankruptcy reform legislation.

The bankruptcy reform act would implement a means test, which would force many filers into a Chapter 13 reorganization (which requires a repayment plan to creditors) instead of a Chapter 7 (which allows a liquidation of a debtor's assets and then discharges the remaining outstanding debt). The largest lobby group in favor of the Bankruptcy Reform Act (BRA) are credit card companies because they will obtain a virtual windfall upon the BRA's passage. This windfall is derived from the fact that credit card companies are general unsecured creditors. Thus, as general unsecured creditors, they stand behind all secured creditors and unsecured creditors with priorities in the event of a Chapter 7 bankruptcy. Credit card companies factor this risk into their APR's when offering credit cards to the general public. By forcing many filers into a Chapter 13 repayment plan, the BRA is essentially guaranteeing credit card companies more money than they would have received under a Chapter 7 bankruptcy. Therefore, the bankruptcy risk is reduced for credit card companies but the corresponding APR's charged are still assuming the Chapter 7 risk. This allows credit card companies to obtain substantial profits.

The BRA presents a complex dilemma for small business advocacy groups since small business interests cannot be pigeonholed into either side of the debate. Small businesses with substantial unsecured receivables or debts stand to benefit from the BRA, whereas small businesses with secured debt may be hurt by the BRA since it will prevent secured small businesses from repossessing the collateral. Also, financially healthy small businesses may benefit from the BRA by possible reductions in APR on their small business credit cards. Yet, financially distressed partnerships or sole proprietorships may be hurt by the BRA since it will be much more difficult for the partners to obtain a fresh start. Thus, the BRA is a very complex issue for small business advocacy groups and it is therefore not surprising that they are choosing to stay out of the fray.

Common Funding Mistakes

The Startup Journal has an excellent article about common funding mistakes for small businesses and startups. It discusses the pitfalls of undercapitalization, assuming too much personal liability or investing too much out of personal resources, borrowing from friends and family and bad record keeping.

Small Business Owners Have Optimistic Outlook

Reuters is reporting that 70% of small and mid size businesses expect an increase in sales in the current half year according to a PNC Financial Services Group Inc. survey.

The poll also indicated that 59% of respondents expected their profits to increase and 50% expected to be able to pass on higher costs to customers. All of these figures exceed survey results from six months ago, indicating an upward trend in optimism amongst small businesses.

Even though the survey indicated optimism on a micro level, at a macro level, survey participants are less optimistic about their expectations for the US economy. The overall growth prospects of the US has tempered since least fall with a drop of 10 percentage points in optimism (from 30% last fall to the present level of 20%). This parallels the overall drop in consumer confidence.

Employers Must Notify Employees Of Their Rights Under The Uniformed Services Employment And Reemployment Act

The NFIB is reporting that as of March 10th, the DOL is requiring all employers to notify employees of their rights under the Uniformed Services Employment and Reemployment Rights Act (USERRA). The DOL is requiring employers to distribute a complete notice of rights to all employees. This applies to all employers, regardless of employer size and regardless of whether any uniformed service members are employed. Click here for the link to the DOL compliance page on the USERRA.

Bank Consolidations and Deregulation Changes Small Business Lending Landscape

The SBA Office of Advocacy has released a study that indicates that bank deregulation and the expansive use of bank holding companies (BHCs) has changed the lending market for small businesses (the report is entitled "The Effects of Mergers and Acquisitions on Small Business Lending by Large Banks").

The study shows that as BHCs grow in size their percentage of small business loans (as compared to its total business loans) decreases. The study also indicates that the organizational form of the BHC has an effect on its small business lending. When a BHC acquires banks but chooses not to merge the newly acquired bank into other subsidiary banks then the acquired bank's small business lending is little effected. But, if two subsidiary banks are merged to create one large subsidiary bank, then the large subsidiary bank's small business lending declines.

This study may provide an interesting glimpse into future small business lending problems. Clearly, the trend in the banking industry over the past couple of decades has been one of consolidation and deregulation. If this trend continues, this study may foreshadow a market in which fewer lenders are willing to serve small business customers.

Click here for the full report. Click here for the report summary.

South Carolina Legislators Looking To Lower Small Business Tax Rate

WLTX.com is reporting that the South Carolina Senate Finance Committee has approved a bill that would reduce the State's small business tax rate from 7% to 5% over the next four years. The bill now moves to the Senate floor for debate.

20% Growth in Angel Funding For Startups in 2004

The NFIB is reporting that angel funding for startups increased by 20% in 2004 (citing a report by the Center for Venture Research at the University of New Hampshire). The most popular sectors for angel investors were software (22%), health care services (16%) and biotech (10%).

Hope At Home Act Awaits House Approval

Inc.com is reporting that the Hope at Home Act, which was unanimously approved by the Senate earlier this month, is now awaiting passage in the House. The Hope at Home Act would provide a 50% tax credit to companies that pay the difference between company salary and military salary to employees called to active duty.

The Act would also provide a tax credit to companies forced to hire replacements for employees called to active duty. The estimated cost of the Act is $1.9 billion over the next 10 years. Proponents hope the Act can be implemented by January 2006 if it passes the House.

SBA Is Having Trouble Identifying Industries In Which Women Are Underrepresented

Govexec.com is reporting that the National Academy of Sciences has determined that the SBA's method of calculating under-representation is inadequate. This has prevented the SBA's Office of Federal Contract Assistance for Women Business Owners from implementing a program that would allow agencies to award contracts to women owned small businesses without going through the normal competition process.

The National Academy of Sciences found the SBA's calculation method to be inadequate because it relies on out of date data and it failed to segment women owned businesses that had the ability and desire to obtain the contracts from the general pool of women owned businesses. The report also recommended that women owned small businesses subcontract in order to gain experience.

Women Lag Behind Male Counterparts In Access To Small Business Capital

The Center for Women's Business Research has issued a study entitled "Women Business Owners Access to Capital: Where We've Been, Where We're Going" which finds that women owned small businesses lag behind male owned small businesses for access to capital.

The study finds that only 56% of women owned firms that have revenues in excess of $1 million per year use commercial credit whereas 71% of similarly situated male owned small businesses use commercial credit. Women owned businesses also lag behind in the venture capital market with only 4% of venture backed companies being run by women.

The overall thrust of the report is that women owned small businesses have come a long way in terms of access to capital by more progress must be made.

Commonly Missed Tax Deductions For Small Businesses

Business Week Online has an excellent article outlining some commonly missed tax deductions for small businesses.

Senate Amends 2006 Budget In An Attempt To Save Microloan Program

Inc.com is reporting that the Senate amended its 2006 budget proposal to add $78 million to the SBA’s budget late last Thursday.  The $78 million would be earmarked to save two Microloan programs that are cutout under President Bush’s proposal and the rest would be used to fund SBA Business Development Centers.

The Senate’s budget will head to conference where the House and the Senate will get together and try to negotiate a single proposal.  Even though the amendment provides some hope that the Microloan program will survive, Congresswoman Nydia Velazquez believes the amendment will be negotiated away in the joint conference just like similar amendments have been over the past couple of years.

The amendment was introduced by Sen. John Kerry and Sen. Olympia Snowe.

Is The ADA Being Used To Shakedown Small Businesses?

The AP (via Seattle Post- Intelligencer) is reporting that serial plaintiffs are suing many small businesses under the Americans with Disabilities Act for disabled access violations.

These ADA shakedown suits presents a conundrum for the legal community since, on their face, these suits are acting to further the policy goals of the ADA. Small businesses outside of compliance with the ADA are forced to meet the access requirements of the ADA thereby making more businesses accessible to the disabled.

Yet, like many other laws, the ADA has a great potential for abuse by allowing private claims along with attorney's fees awards. There is a strong incentive for an attorney to find a handicapped plaintiff and then drive around the city looking for noncomplying small businesses. Once a list of such businesses is compiled, the attorney can draft a standard form complaint and just interchange the defendant in each. Thus, the attorney has a low cost of production since he/she has been able to efficiently utilize past work product for numerous suits. The attorney will then levy these suits in the hopes of a quick settlement or an award of attorney's fees at the completion of trial. The article cites that one such attorney would sue small businesses for $4,000 per day for everyday that each business is in noncompliance.

Small businesses are then stuck without a defense because they are technically in noncompliance. The small business must then conform to the ADA access requirements and then either settle the suit or fight it. Again, many small businesses are probably better off settling the suits since the costs of litigation may be too cost prohibitive. At the end of this process, the ADA is furthered since many more businesses are in disabled access compliance, many small businesses are out of thousands of dollars above and beyond the compliance costs and the lawyer is enriched (unjustly?) by the percentage of settlement that they claim.

Congressman Mark Foley (Fla.) is looking to solve this problem by proposing legislation that would give businesses 90 days before any damages can be awarded. Yet, until such legislation can be passed, the moral of this story is that small businesses should take a preemptive strike against these sharp lawyer practices by ensuring that their business is in compliance with all ADA standards.

Bush's Plan To Cut SBA Microloan Program Is Under Attack

Both the NY Times and Inside The Bay Area have articles attacking President Bush's plan to slash the SBA budget and thereby eliminating the SBA Microloan program. Supporters of the Microloan program believe that its elimination would disproportionately hurt women & minority owned businesses and rural businesses.

The Microloan program is a federally funded program that provides smaller loans (the average is $13,600) to small businesses that lack the credit history or collateral to borrow from commercial banks. In fiscal year 2004, the SBA Microloan made 2,400 loans for a total of $33 million. The default rate for these loans was just over 1%. More than 60% of these loans went to women owned small businesses and 40% of Microloans went to small businesses located in rural areas.

The SBA defends the cuts by stating that the loss created by the elimination of the Microloan program will be picked up by the Guaranteed Loan Program. Supporters of the Microloan program argue that the Guaranteed Loan Program is an inadequate solution since recent changes has caused that program to charge higher fees to both lenders and borrowers thereby reducing small business access to loans.

The Small Business Health Fairness Act Passes US House Committee

Small Business Health Plans (a.k.a. AHPs) have moved a step closer to House vote with the passage of The Small Business Health Fairness Act in the U.S. House Committee on Education and Workforce by a 25-22 vote on Wednesday (via NFIB). The House is expected to vote on the Act in the late spring or early summer.

Setting Up A Retirement Plan For Your Small Business

Forbes has a great article about different retirement plan options available to small businesses. It has an excellent overview of SEPs, Profit Sharing Plans, Money Purchase Plans, 401(k) Plans, Simple Plans, Defined Benefit Plans and Paired Plans.

Arizona Small Businesses Fighting Mandatory Health Insurance

The Arizona Business Gazette is reporting that a recent NFIB survey within Arizona shows that 88% of entrepreneurs surveyed are against the State requiring employers to offer insurance to its employees. 90% of those surveyed are against being charged a fee to fund government-run services.

The survey was conducted in response to two pieces of proposed Arizona legislation. Senate Bill 1470 would require applicants of the Arizona Health Care Cost Containment System to identify their employers. House Bill 2545 would allow the Arizona Health Care Cost Containment System to charge back some of the cost from enrolled members to those members' employers if the employer has more than 100 employees. The NFIB believes that these two pieces of legislation will be used to hurt some Arizona small businesses.

Tips For Starting A Home Office

The March Edition of SBA Solutions is featuring home offices. It is an excellent resource for anyone looking to start a home business or looking to create a home office.

Survey Shows That Affordable Health Care Is A Big Issue For Small Businesses

A Wells Fargo/Gallup Poll survey (via Yahoo) shows that the health insurance issue is still very strong in the minds of small business owners with 3 out of 4 small business owners being dissatisfied with the US healthcare system. Please see the article for a full description of the survey results.

US Women's Chamber Of Commerce Sues SBA Over Contract Awards

Inc.com is reporting that the US Women's Chamber of Commerce is suing the SBA for failing to comply with the Equity in Contracting for Women Act of 2000. That Act stated that the federal government would raise its contract awards to female contractors to at least 5%, but as of now, the government only awards 3% of contracts to female contractors. The suit focuses on the SBA's failure to identify industries (as required by the Act) where women-run businesses are underrepresented in federal procurement.

A New Form Of Small Business Shakedown?

BusinessWeek Online has a nice article about how bankruptcy attorneys are using the bankruptcy preference provision to extract money out of many small business coffers through the threat of lawsuit.

The article cites that preference suits have almost doubled in the past three years making it a great concern for many small businesses. This trend is consistent with the trend that I see at work, where in the past six months I have seen a slew of preference suits being brought against out clients. In this post I will briefly explain what a preference is, possible defenses to preference claims and why there is such a great potential for abuse.

The Bankruptcy Code has a preference provision, which allows a bankrupt estate (i.e. the company in bankruptcy becomes an estate with either a bankruptcy trustee or debtor in possession in charge of maximizing the value of the estate) to recall all payments doled out in the 90 days prior to bankruptcy filing if those payments would provide the creditor with a greater benefit than they would have received under a liquidation bankruptcy. In plain English, this means any payments to unsecured or under-secured creditors made in the 90 days prior to bankruptcy. The Bankruptcy Code then allows the estate to take these payments back from creditors (i.e. the creditor must write a check out to the estate) regardless of the validity of the debt owed. Again in simple terms, if an unsecured small business is a supplier and one of its customers goes bankrupt then that bankrupt company can take back all payments made in the 90 days prior to bankruptcy, even though the small business had already supplied the goods. The small business is only left with an unsecured claim against the bankrupt estate to recollect payments. This will likely result in cents on the dollar being returned.

Some defenses to preferences include the ordinary course of business (OCB) defense, the new value exception and the contemporaneous exchange defense. The OCB defense basically applies if the payment type and terms were customary between you and the bankrupt company and is consistent with general industry practices. The new value exception applies where a payment was made and then you made a subsequent advance. This subsequent advance will shield some or all of the prior payment. Finally the contemporaneous exchange defense is where goods and payment are exchanged simultaneously (i.e. cash on hand transaction).

The problem that exists with preference recapture is that the bankrupt estate has an incentive to threaten small businesses with preference suits even though the small businesses may have a valid defense to the preference. The Trustee is Bankruptcy is an appointed attorney who receives a percentage of all funds brought back into the estate. In addition, the Trustee in Bankruptcy will hire his/her law firm to represent the estate's interest thereby tangentially benefiting from taking claims to litigation. Therefore, a Trustee in Bankruptcy has a strong incentive to be very aggressive in its actions against small businesses because small businesses can't afford litigation.  As such, if the preference payment is $10,000, a small business proprietor is probably better off settling the claim instead of challenging the preference since settlement will be cheaper than entering litigation. Therefore, a small business proprietor needs to have a basic understanding of the preference rules in order to do a cost benefit analysis of litigation and also to know at what level to settle the claim at. The numbers show that these shakedown suits are becoming more frequent so this is likely to become an issue for many small businesses. I put the basic test/explanation for the three defenses in the following paragraphs if anyone is interested.

The Ordinary Course of Business (OCB) exception test is: (1) debt must have been incurred in OCB, (2) the payment practices are ordinary for these specific parties (subjective prong looking at the past business practices between the parties) and (3) these types of transactions are ordinary within the industry (objective prong).

The new value exception (Br. 547(c)(4)) (a.k.a. subsequent advance rule). In essence, subsequent advances shied prior payments from the preference rules. For example: (1) A owes B 10k. (2) B pays A 10k, (3) A advances B another 10k, (4) B pays 10k, (5) A advances another 10K. In this sequence, transaction 3 shields transaction 2 and transaction 5 shields transaction 4 from being preferences. Therefore A does not have to give preference money back and must file a proof of claim for the remaining 10k from transaction (5).

The third defense is if the exchange was contemporaneous (547(c)(1)). This basically refers to an exchange where money was paid and goods were received at the same time.

Retail Sales Up .5% In February

The NFIB is reporting that retail sales were up .5% in February, thanks to a rebound in the auto sector (up .7% from last month).

Friend Or Business Partner? You Make The Call

The Startup Journal has an excellent article about problems that may develop when friends become business partners.

AHP's Struggling in Minnesota

With Small Business Health Plans (formerly known as AHP's) up for vote in the House Committee on Education and the Workforce on Wednesday, Minnesota Public Radio is reporting that the future of Small Business Health Plans may face many difficulties if Minnesota's history with AHP's is any indication.

The Minnesota Legislature passed enabling legislation for AHP's in the late 1990's and also helped many purchasing alliances get started with grants. Yet, these purchasing alliances had no impact on the cost of health care because the alliances were not able to gather enough members to achieve large group discounts. One such alliance was Prairie Health Care. In two years of existence, Prairie Health Care has only been able to sign on four businesses, amounting to a total of forty members. These numbers are far too low for AHP's to be successful.

Even if Congress was to pass the national Small-Business Health Fairness Act (H.R. 525), it could still suffer the same problems as Minnesota's AHP legislation. For AHP's to be successful, they must gather enough members to provide a diversified risk pool. Legislation alone may not be enough to make Small Business Health Plans successful. These alliances will need substantial financial support and promotion in order to convince small business proprietors to enter the plan. Therefore, passage of the Small-Business Health Fairness Act is just the beginning step in order for Small Business Health Plans to become successful in reducing health insurance premiums.

Montana's House Approves Tax Credits To Help Small Businesses Afford Health Insurance

The Billings Gazette is reporting that Montana's House gave preliminary approval (69-31 vote) to House Bill 667, which provides tax credits to small businesses that would not be able to afford health insurance for its employees. The Bill still faces a final House vote before heading to the Senate.

Like many other states, Montana is looking to fund the $17.5 million tax credit program from the voter-approved tax increase on tobacco products. In November, Montana voters approved a $1 per pack tax increase on cigarettes.

Opponents of the bill argue that this is just band-aid solution to the massive health insurance issue. Supporters of the bill cite this as a step in the right direction in helping to provide some of the 180,000 uninsured Montana citizens health insurance.

Commercial Banks Increase Lending To Small Businesses

The SBA Office of Advocacy released a report entitled "Small Business and Micro Business Lending in the United States" which shows that commercial banks increased lending to small businesses in 2002-03.

Despite the increase in small business lending, the report shows that lending trends have slowed substantially from the prior period. (2.3% increase in 02-03 compared to a 5.1% increase in 01-02). The report also indicated that the total value of outstanding business loans was $1.32 billion, an increase of .85% from the prior period.

According to the report, large banking institutions play a vital role in small business lending. For micro loans (loans under $100,000 in value), large banking institutions consisted of 47.6% of all loans (by value) as of June 2003, compared to 46.4% as of June 2002. This increase is attributed to the expansion of the small business credit card market. Yet, large banking institutions decreased in importance for loans between $100,000 and $1 million with their share falling from 46.1% to 44.6% (by value).

Click here for full report. Click here for research summary.

What To Do When You Can't Meet Your Small Business' Tax Burden

ABC News has a nice article about the different options available to small business proprietors who are unable to pay their taxes.

The article cites filing your tax return even if you can't pay the taxes owed as the most important thing you can do. Coming clean limits your penalties to late payment fees. The article also cites the fact that two filing extensions are available thereby allowing one to defer tax payments until October 15.

Banks Looking To Woo Small Businesses

The Startup Journal has an excellent article about how banks are competing for small business clients. This increased focus on small businesses should allow many entrepreneurs to shop for favorable terms and perks when seeking a loan.