An early decision in the birth of a company is the jurisdiction in which to incorporate or organize.  Actually, I see this as a very easy question.  However, there is no shortage of legal advice (sometimes bad, which usually is free) out there.  For whatever reason, choice of jurisdiction seems to be a popular target and Nevada seems to be the darling (with Wyoming the first-attendant).  I thought it would be worth quick discussion.

As far as I am concerned, an entreprenuer generally should only consider incorporating or organizing her company in one of two jurisdictions: 1) the state of your principal place of business or 2) Delaware.  If you are based in Utah, form a Utah company.  Otherwise form a Delaware company.  The only exception for this (again, in my opinion) is you might consider forming the company in another state if you foresee moving the business in the future to that state.  There are certain reasons to favor Delaware over Utah (e.g., certain investors — typically VCs — might request or require it), but for a number of reasons, Utah is the natural choice for a Utah-based company.

Now you have my position, let me explain.  Incorporating (and for convenience, by “incorporating” I am including forming all non-corporate entities), in a state where you are not principally located comes with certain costs.  These costs can be monetary, time, administrative, risk, etc.  For one, you likely will need to hire a service to act as registered agent in that state.  You may need to use that service (or some other) to make all your state filings for you.  If you don’t, you need to deal remotely with the office of the Secretary of State of the state in which you incorporate.  You will need to qualify (and maintain the qualification) to do business in the state where you actually conduct your business.  You will need to find an attorney who is licensed to practice in the jurisdiction or is at least familiar with the business statutes and laws of that jurisdiction.  It is unusual to find lawyers in Utah who are licensed in and familiar the laws of other states (with the possible exception Delaware, California and to a lesser degree New York).  Finally, some states tend to be more difficult to work with than Utah administratively speaking.

Costs are costs.  They are not bad, per se, but the costs of incorporating in a foreign jurisdiction may not be worth it when compared to its benefits.  Probably the most commonly touted (and usually false) benefits of incorporating in a foreign jurisdiction are tax savings.  If somebody tells you that you can avoid income tax (either from the employee or company perspective) by simply organizing your company in Nevada, Wyoming, Texas or any of the other handful of income tax-free states, you likely are getting bad advice.

Generally speaking, employees are taxed by the state in which they performed the services for which they earned their wages.  The jurisdiction of formation is a separate question from employee income tax.  For instance, if you work in Utah, Utah will levy income tax on your Utah-source wages.  Incorporating or organizing in a income tax free jurisdiction will not get you out of those taxes unless your wages are tied to work performed in that state.  Many of us work for companies incorporated in a foreign jurisdiction (e.g., DE, CA, etc.).  However, none of us are receiving a tax bill from those states unless you perform work there.  The same is true for avoiding taxes. 

The same is also true for corporate income tax.  States generally weigh three items in determining whether an company owes income taxes in a state: location of property, location of sales, location of employees.  Realistically speaking, there is little or no tax benefit for a company based in one state to incorporate in a tax-free jurisdiction unless it has some actual business nexus with that state.

Another benefit touted for states such as Wyoming or Nevada are the company-friendly corporate laws.  While there may be some beneficial aspects of the laws of those states, in my opinion, they are relatively small for the average company compared to the costs of incorporating in those states and probably not worth the costs of doing so.

To be sure, Nevada and Wyoming are fine states and their laws are equally fine.  Indeed, were I an attorney located in Wyoming, I predict I would be saying to incorporate in only in Wyoming of Delaware.  In addition, incorporating in a foreign jurisdiction certainly will not destroy your company, but the costs associated with doing so are real and the benefits largely are immaterial.

Someone once said, “You should never tell Babe Ruth how to hold a bat”.

Truer words were never spoken and yet everyday, I work with managers, who have employees with a 1000 batting average, who insist on telling them how to hold a bat.

Process, policy and procedure are critical elements which allow us to consistently replicate desired outcomes.  But once those are memorizialized, routinely reviewed and improved, the employees who work within them should be turned loose and allowed to fly.

 Leaders who insist that employees should perform every task, approach every project, finalize every sale, exactly the way the manager would, is severely limiting the potential of the business and, more importantly, the employee.  If you have an employee who comes to work eager to do their job everyday, who knows themselves well enough to work efficiently and effectively, give them the sign to swing away.

My best advice to managers and leaders - get out of the battersbox today, don’t start coaching until they approach first and give them the room and equipment to knock the ball out of the park, every single day.  I promise you, they will.

Graduation was last Friday. The David Eccles School at the U graduated approximately 1,100 students with bachelor’s, Master’s, and Ph.D. degrees. I love graduation. It is a truly joyous event for everyone involved. Everybody is happy, families and graduates are rightly proud of the accomplishment graduation represents, and we had a huge crowd in the Huntsman Events Center. My guess is around 8,000 family, friends, spouses, in addition to approximately 700 students who attended graduation and approximately 50 faculty who were there to celebrate our graduates accomplishments.

One of the developments this year was a substantial number of graduates who had majored in entrepreneurship. Entrepreneurship as a major is subject to debate in entrepreneurial circles. The basic argument is that “appetite for risk” cannot be taught, and this is what it takes to be an entrepreneur. We can teach people how to get financing, how to put together pro formas, the fundamentals of market entry, and help them develop strategic entry plans and at the end of the day — so the argument goes — they are not entrepreneurs if they cannot make the jump off the cliff and start the firm.

There are others who view this slightly differently. Jon Huntsman spoke at the David Eccles School several years ago, and he strongly endorsed the idea of “getting paid to learn the business.” His point was that no one knows enough about their industry and the fundamentals of running a business coming out of school, so potential entrepreneurs should put in a few years really learning the business and industry they hope to enter. From this perspective, take a job, pay attention, and keep developing your business plan until you have the credibility to launch a firm.

These two perspectives on how potential entrepreneurs should launch their careers both have some validity, and they are probably complementary. I have a different take on the entrepreneur major and why it is becoming popular nationwide. The entrepreneur major is the only major in business where students are trained to think about value creation as their core activity in the world of work. Every other major is about mastering a technical body of knowledge necessary to occupy a professional position working for someone else. Entrepreneurs, on the other hand, are grilled from day one on how they are going to create economic value through their business activities, and they have to develop answers that are about running the business, including serving customers, financing operations, and developing the human resources necessary for the firm to grow and prosper.

Entrepreneur majors learn about business. Few of them will start a business coming out of school because they know what they do not know. Will they eventually start businesses? Some will, some will not. I do not see starting businesses as the most important contribution they can make, although I hope the risk takers have the preparation to avoid the more obvious landmines that tank start-ups in the early phases. For the typical graduate who is more risk adverse, I think the payoff is they look for opportunities to generate value, and these are the kinds of employees we all want working for us. They are also employees who advance into leadership roles in the firms where they work.
I think the growth in students majoring in entrepreneurship is going to make a difference for Utah’s labor force over the long run, and I think the students graduating with this major are going to be the contributors to the growth of firms in Utah for a long time. It is great to see students graduating with a business degree who are interested in business, and this is what the entrepreneur major is all about.

Later.

I was quite proud of my first foray into the blogosphere.  In fact, I had great ambitions to write a whole series of legal related posts for the entreprenuer.  However, the only two comments (the verbal kind) I received on my first post essentially were that it is the most boring thing they have ever read (and one of people saying this is a tax lawyer!).

Accordingly, I am revising my plan (though not giving up on addressing legal issues for the entrepreneur).  The posts hopefully will be less “bookish,” more practical and marginally more interesting.

With that in mind: Entity Formation

There are certain types of businesses that will form as partnerships, S-corporations, etc., but odds are, your decision of the type of entity you want to create likely will be a binary one between an LLC and a traditional “C” corporation.

While LLCs and corporations have many similarities (e.g., limited liability), they also have a number of differences.  The principal one of these is the tax treatment.  Corporations pay their own taxes.  LLCs do not.  Income and losses of an LLC flow through to the owners of the LLC, who pay any taxes directly.  This means that to the extent a corporation makes a dividend of taxable income, that income will be taxed twice (once at the corporate level and once at the shareholder level).  This can be a very significant benefit.  People often focus on this “double taxation” issue and assume LLCs are the superior business vehicle.  All else equal, that is true.  However, not all else is equal.

A number of factors tend to favor corporations over LLCs.  For example:

• due to the flow through nature of LLCs, the admnistrative burden of keeping track of capital accounts, allocations, distributions, etc., in LLCs can be quite high.  This is largely non-existant with corporations.  Quite possibly, the tax savings associated with LLCs may be outweighed by administrative costs.
• the “double tax” only is an issue to the extent (1) a corporation has taxable income AND (2) the corporation issues a dividend.  Most early stage companies are not going to fall in that category.
• VCs rarely invest in LLCs (primarily because they don’t want pass-through income).  If you are going to raise VC money, you need to be a corporation.
• Because LLCs are highly driven by tax issues, legal fees tend to be higher with certain types of LLCs.
• Operating agreements can be very complicated (and costly) documents to create.  By comparison, bylaws (the corporate functional equivalent) generally are very straightforward and inexpensive to create.
• The more an LLC wants to “look like” a corporation (i.e., equity incentive plan, different classes and series of membership interests, etc.), the more expensive they become.  Corporate stock option plans, separate classes and series of stock, etc., while not necessarily “cheap” to create, generally are must less expensive by comparison.
• Although LLCs apparently date back to 1892, they are a relatively new creation in the United States.  The body of law surrounding corporations is better understood, better settled and more predictable than LLC law.

While LLCs have many beneficial characteristics, one should not focus on potential tax benefits to the exclusion of other relavent factors.  While there may be an argument that some corporations would be better off structured as LLCs, there is good reason corporations outnumber LLCs.

Recently I’ve had to deal with an individual that, while powerful in her own business sphere and very rich, seems to have adopted the idea that because she powerful and rich (notice i did not say successful, because i beleive sucess is far more than money and power) she can be a jerk.  Some, in business have the idea that only the tough and agressive can win, which in the end may be the case (depending on what end you are looking for), but for me I think life is to short and relationships to important to adopt such an approach and propose this approach as taught by Mother Teresa which may really be success regardless of power and wealth:

“People are often unreasonable, irrational, and self-centered. Forgive them anyway. If you are kind, people may accuse you of selfish, ulterior motives. Be kind anyway. If you are successful, you will win some unfaithful friends and some genuine enemies. Succeed anyway. If you are honest and sincere people may deceive you. Be honest and sincere anyway. What you spend years creating, others could destroy overnight. Create anyway. If you find serenity and happiness, some may be jealous. Be happy anyway. The good you do today will often be forgotten. Do good anyway. Give the best you have, and it will never be enough. Give your best anyway. In the final analysis, it is between you and God. It was never between you and them anyway.” 

I knew the labor shortage was acute when I started seeing signs out on the street advertising for employees. The University’s parking services as signs in all the parking lots describing “great jobs” for students on campus, retail stores are trying to persuade customers to become workers, and companies are using signs out by the road and on the highways hoping someone driving by will decide it is a good day to apply for a new job. The shortage of qualified job applicants is particularly severe in many professional areas. It has gotten to the point that CEOs are approaching me at events and whispering: “Got any accountants you can send me?”

One approach to managing recruiting — and it is the approach most often used in Utah — is to let the market dictate the hiring process and just roll with the situation. This, however, can be a problem. When the business cycle is down and there is a labor surplus, firms can hire outstanding people, often at a bargain. But what about when business is expanding and there is a labor shortage? The difficulty is growth is impeded by an inability to hire qualified employees, and failure to grow in the good times means the company never grows to its full potential. Sure, some companies grow during when the general economy is in a slowdown, but even this growth tends to be during the transition from start-up to mature company, so at some point every firm needs to be poised to take advantage of the “good times.”

There is another hiring strategy that is based on establishing relationships in the job market, and this strategy yields the very best employees in good and bad times. In one sense it is more expensive because it incurs some costs that market-driven firms do not incur, but it is much more effective because it ensures firms have access to top employees when there are labor shortages and they need to take advantage of growth opportunities. Plus, these firms are not putting clowns in sandwich signs on the sidewalk out front trying to hire right now, which I have to believe is not the image you want to project for your business.

Firms that emphasize relationship building in human resources recruiting have a strong presence on university campuses with two types of programs, internships and campus recruiting. Companies with internship program are incurring costs with the pay for interns and some marginal costs for supervision of the interns, but they are saving an enormous amount by not making bad hires that take months to unwind and by hiring individuals who they know will be immediately productive, which can save months of learning investments in a new professional employee who is likely to make a lot more while they are learning than three interns. Plus, interns can be highly productive individuals who can be let loose on lingering problems that need fresh ideas and creative solutions. Finally, the management effort necessary to run an intern program is an excellent management development opportunity for a young manager who needs experience managing complex projects and running professional teams, i.e., every manager who is working up to higher level responsibilities.

In addition to the “preview” an internship provides, the internship program is a point of interaction with an emerging professional labor pool that is going to be working in Utah for the next 40 years. This group is not very experienced at age 22, but they may be just the people a firm hopes to attract when they are 42 and well established in professional careers. Internship and recruiting programs are an opportunity to establish a human resources brand in the labor market, and for some firms this is also an important opportunity to establish their services brand as well. The professional accounting firms “get it,” understanding presentations on campus to potential interns and as part of their recruiting effort are also an opportunity to tell the firm’s story as a service provider to a group who will need to hiring accounting firms in the future.

The second practice that defines excellent hiring is recruiting on campus. I have had several CEOs tell me, “Recruiting on campus is too much trouble. We just put an ad in the newspaper and your students apply.” Forget all the issues around labor shortages and the fact that newspaper ads do not seem to work right now and consider the possibility that “students apply” might just be the individuals who did not successfully interview with the companies that come to campus, i.e., you are getting the lower tail of the distribution. A president of a large national financial institution with a local office was stunned when I shared this comment with him, so he decided to do some “campus screening” to see how recruiting on campus might work. He told me he did not expect to hire, but he thought I had good points about having a campus presence. He ended up hiring two individuals from the first interview pool and is now on campus every year.

In addition to adopting the simple steps of establishing an internship program and recruiting on campus, firms with excellent hiring practices sustain their programs even when they are not hiring a lot of employees. First, most firms need to hire a few replacements for positions that are vacated by retirements and normal turnover every year, and excellent hiring practices are about getting the very best employees every year. Second, “employer of choice” is an investment worth sustaining, and like all investments, it is best made in advance of when the business needs the resources to grow and prosper. In the scheme of the investments most businesses are making every year, excellent hiring practices are a trivial cost with a high return. They just require a commitment to excellence.

And the answer is, “No, I do not have any accountants.” They all had offers in November to start jobs when they graduate in May. About all I can suggest is a clown with a sandwich sign down on State Street.

Later.

I must confess I am much more comfortable writing a contract than a blog.  Being unsure of what topic might be more salient to ConnectBlogs readers has resulted in weeks of not posting.  Much is written in Connect about entrepreneurship.  I work and have worked with a good number of entrepreneurs, their companies and those who invest in them.  There are a number of legal matters that regularly face those in the entrepreneurial world.  I have decided there might be some value in a series of blogs related those legal matters.  My hope is that at least some of you will find this blog worthwhile and useful, if for nothing else, to get you thinking about these issues.  My intent is not to give legal advice and my ramblings should not be construed as such (if you didn’t recognize, that was my CYA disclaimer).  Actually, my hope is that some of you will respond and even challenge me.  I would love this to be a collaborative effort.

I should also note that I plan to keep these posts fairly short.  I am doing this for two reasons: (1) to enable me to post more often and give the impression I am more of a productive blogger than I really am and (2) I don’t like reading long blogs and figure I am not alone.

With that, Topic 1…

Part 1:  Entity Formation - To Form or not to Form?

There is a lot to say here, and I could see this topic turning into several subtopics.  However, I’ll start from the beginning with what I think are some basic considerations.

Suppose you just invented a better mousetrap or perhaps a kit to make a snowman.  You begin having visions of success and decide quit your secure day for your shot at independent wealth.  What are the next steps?  Putting aside the bothersome details of creating and executing on a business plan, you need to determine whether to create a formal entity through which to operate your business, and if so, when (and what type - which I’ll cover on another post).  I can think of few if any good examples where a serious business endeavor (or at least one that has more permanence than, say, a lemonade stand or a yard sale) should not to form a business entity.  I recommend doing this prior to beginning business operations.  Businesses operated without creating a formal legal entity are deemed to be either sole proprietorships (1 owner) or general partnerships (more than 1 owner).  Sole prioprietorships and general partnerships offer little or no protection from personal exposure to the liabilities of the company (including those arising from lawsuits).  Better said, there isn’t a legal distinction between the sole prioprietorship or general partnership and their respective owners.  In other words, you could lose much more than just your investment in the company.  To the extent you begin business operations before you create a legal entity, you are exposing yourself (and most people don’t want that).  If you must conduct business operations before creating an entity, be careful (not to say shouldn’t be careful after you create an entity).

[Next topic: Entity Formation - Choice of Entity]

On the wall beside my desk sits a small bronze plaque.  It was a gift, purchased in Italy, from one of my partners.  On it are engraved just four words:  I am still learning. 
What’s unusual about that simple, seemingly mundane, statement is that is was spoken by the renowned Renaissance artist, Michelangelo – in his 87^th year. 

Given the scope of his achievement in painting, sculpture, poetry and architecture, this humility is striking and strongly reminiscent of another quotation attributed to the Greek philosopher Socrates.  He said, “The wise man knows that he knows nothing.”
Beside the Michelangelo quote is taped another gem, this one from the best-selling business book, Leading Quietly.  It’s a three-word motto that I also try to keep top-of-mind.  It reads, “Modesty. Restraint. Tenacity.”  I don’t think Michelangelo would mind that the two sit side by side on the wall.
At one point in my career, I helped create and produce advertising for Major League Baseball.  One spring it was my assignment to write and record a series of radio spots featuring Cal Ripken and his brother Billy, who happened to be his teammate on the Baltimore Orioles.  For those not so passionate about baseball as I am, Cal Ripken, now retired, was a perennial All-Star infielder who broke Lou Gehrig’s record for consecutive games played in the Major Leagues.  He’s hailed as the modern-day “Iron Horse” for that feat.  He won batting titles.  He won fielding titles.  He was a team captain, an MVP, a hero.  He had every reason to be proud, cocky and aloof.
His brother, on the other hand, was mediocre, as professional baseball players go.  He never earned any of the accolades that his older brother had.  Yet, during our recording session in an announcer’s booth high above the baseball field where their team was about to play a pre-season game, Billy was disruptive and foul-mouthed.  He acted how I imagined a superstar like Cal was more likely to act.  At one frustrating point, Cal, anxious to get back down on the field for more batting practice, looked Billy squarely in the eyes and firmly said, “Billy, it’s time to shut up.”  The session went smoothly after that.
For the most part, all of the seasoned baseball stars with whom I worked over a several-year period were well-mannered, humble and earnest about improving their skills.  They were, to use words from my wall quotations, tenacious about learning, and tempered with modesty. 
How much time do you set aside for learning?   How much money do you set aside for the training and teaching of your employees?  Since when did you know it all?  Since when can you rest on your laurels?  It’s a very competitive world, as you’ve no doubt discovered.  Resting leads to losing. Businesses can fail for any number of reasons, even if their products or services are unique and their leadership is charismatic.  All you can rely on, when all is said and done, is your own set of skills.  And skills at any level of the corporate heirarchy dull quickly without constant sharpening.

One of my neighbors is a successful, self-employed real estate salesman.  He works primarily by himself.  No one else is responsible to train him, teach him or motivate him.  Recognizing that fact, he’s wise enough to take two, self-imposed “feed the fire” trips each year.  He leaves home, kisses his family goodbye, and heads for a rented condo in Park City.  He then focuses for several long days on learning how to improve his performance.  Tapes, books, magazines, videos and fresh air are all part of his curriculum.  He readily admits that those one-man, learning soirees contribute mightily to his annual success.
A well-respected leader by the name of Thomas S. Monson once said, “Can we not appreciate that our very business is life is not to get ahead of others, but to get ahead of ourselves?  To break our own records, to outstrip our yesterdays by our todays, to give as we have never given, to do our work with more force and a finer finish than ever – this is the true idea: to get ahead of ourselves.”
And somewhere, Michelangelo is still studying sculpture.

Stand for something.  It’s a line you’ve heard before.  And it’s a line with great application in the world of advertising and branding.
I happened upon a recent example, packaged in the form of a trade journal article titled, “AFLAC CMO Says: Shut the Duck Up.”  You know the AFLAC duck – probably all too well.  It’s practically a cultural icon.  It shared a couch with Ben Affleck on The Tonight Show.  It made a guest appearance in the movie Lemony Snicket’s A Series of Unfortunate Events.  It’s a very famous fowl.
The problem?  Few people (myself included) clearly understand what AFLAC is, according to Ad Age.  Few comprehend what is sells, or what it stands for.  That’s after AFLAC spent about $310 million in media on the duck over the past five years.  Big oops.
So the new CMO will make the duck far less visible, and focus more marketing dollars on what AFLAC does.  Sounds like a good idea.  The supplemental insurance industry is a difficult one for people to comprehend in the first place.  Being known isn’t enough.  Not even close.  You must be understood at a deeper level than, in this case, an iconic duck provides. 
It’s a lesson for all of us.  The brand/ad idea has to be useful beyond just getting attention.  There’s a lot of “art for art’s sake” advertising that snags your attention — without having much, if any, affect on the advertiser’s bottom line.   Case studies abound.
A marketer’s job goes far beyond awareness.  It is to help your brand stand for something meaningful. 

The Intrepid Group regularly conducts media training sessions for clients. We focus on teaching, training and preparing them to present key messages effectively and professionally to the media. There’s usually a large focus on crisis in our training, where we assist them in dealing with the media in high-stress, demanding and often the most critical environments. Training includes an overview of media outlets, a discussion on communication techniques and then delves into message preparation and interview simulations. It’s intense. Our clients hate us during the process; they love us when they put the training to use. 

I’ve been conducting media training sessions for about four years and have never been interviewed on camera – I’ve done plenty of print, radio and phone interviews, but have always stood behind the camera while my clients went on air. I prefer it that way. My expertise comes from my education, from my experience under the auspices of Ari Fleischer while at the White House, from watching countless media interviews, and from conducting these training situations. 

Today I found myself on the other side of media training when a local news producer that I work with regularly called and asked if I would be a source for a story she was working on. The issue was easy and uncontroversial – she simply wanted to talk to me, on camera, about how my family’s financial savings situation. It would be brief – 10 minutes at the most – and she would only be using one or two soundbites from the entire interview. Cake, right? I agreed. 

An hour before the interview I was surprised at how nervous I was. Not because of the interview, but because I was testing my own expertise. I regularly conduct these training sessions where I tell clients exactly what to do when talking to the media and today I found myself in this exact situation. I was nervous because I had such high expectations for myself. I turned to my mentor and boss, Chris Thomas. Chris has been interviewed countless situations and under the toughest circumstances. He has been a spokesperson on national TV such as The Today Show, Good Morning America and CNN, as well as local broadcast news. I couldn’t have had a better expert at my disposal. 

Chris simply revisited the key media training points I’ve given so many times before. Since they’re fresh in my mind, I thought I would share them with you in case you find yourself in front of a news camera in the near future: 

1. What’s your objective? What are you trying to accomplish with this interview? What are you trying to avoid? 

2. What are your key messages? Have two or three prepared, know them well, and keep them short. 

3. Brainstorm possible questions – what could the reporter ask you? How will you respond? How can you tie your key message into each question. 

4. Ask the reporter ahead of time for as much information as possible. Know what the reporter’s objective is so you can help them accomplish their goal for the story, but also figure out how your objective and messages tie in. 

5. Don’t go off the record. EVER. 

6. Practice outloud. 

7. Practice Some More. 

8. Speak in soundbites. The average television quote is 12 seconds or less, so keep your messages short and simple. 

9. Look the reporter in the eyes and talk to them as they’re a friend and an equal, not a stranger or an enemy. 

10. Breathe, have some water, and stay calm. 

The world’s best athletes have coaches or trainers who work with them consistently to improve their technique, learn new skills and maintain their game. It should be the same with media preparation. Just because you had a media training session three years ago (or conducted one last month) doesn’t mean you’ll be ready when called upon by the media for an interview, especially in a crisis situation. The game is constantly changing. We highly recommend our clients continuously refresh their techniques and practice their messaging so when they do get the chance to be on national or cable television, they use that opportunity to their advantage. 

My interview went fine, although I’m sure I’ll hate how I look when the story runs. Such is the life of being a woman. But today I understand better what it’s like to have that bright light in your eyes, a camera and microphone right in your face, and the solid gaze of a producer questioning you and only you. It’s nerve wracking even under the kindest of circumstances. Luckily, I was ready for it. Are you?