Recently an office manager for a local veterinary surgeon was sentenced to eight years in prison for embezzlement. She stole more than $200,000 over a four-year period. During that time, she took lavish vacations, remodeled her home, and bought herself expensive gifts. During the same time, the surgeon worked longer and longer hours, struggling to keep his business afloat.

Small businesses lose money due to fraud every day. In fact, the Association of Certified Fraud Examiners reported in 2008 that small businesses (defined as businesses with less than 100 employees) suffered a greater percentage of frauds AND a higher median loss than their larger counterparts. The median fraud loss for small businesses was $200,000, the largest amount for any size company.

Small businesses often lack fraud-consciousness and tend to have weak or nonexistent internal controls. Their owners feel that internal controls are only for big companies with many employees. But, even small businesses have assets that others might try to steal. They are also particularly vulnerable due to their size and the nature of their operations. As a result, internal controls are not only desirable for small businesses, they are essential.

Internal controls are checks and balances that are intended to prevent fraud, limit losses and reduce errors. Here are three internal controls that any small business owner can implement today:

1. First, improve fraud-consciousness. There is no such thing as the perfect, trusted employee. Most frauds are committed by first-time offenders. A lack of internal controls invites frauds to be committed. All it takes is one personal financial emergency or unshareable personal problem, and the trusted employee may step over the line. In the beginning, there is usually an excuse, such as “I’m just borrowing the money and I’ll pay it back.” But once started, frauds are very difficult to stop.
2. Second, remember that cash is king and directly monitor cash activity. Receive the bank statement directly, preferably unopened. Open the statement and look at the activity. Does it make sense? Ask questions about anything that seems odd.
3. Third, personally approve all new vendors. Fraudulent billing was the most common fraud suffered by small businesses. It involves billing the company for nonexistent services or using company funds for personal purchases. Fraudulent billing can be prevented by approving all vendors and monitoring cash payments.

Internal controls will enable better management of operations, greater control over cash flow and reduced risk of loss due to error or fraud. Implement essential internal controls today.

Jeanne H. Yamamura is professor of accounting emerita at the University of Nevada, Reno College of Business.

The protection of assets is generally one of the biggest reasons to form a legal entity. Specifically, the protection of business assets from an owner’s personal liabilities is critical to a business’ continuing success. In many states, a personal creditor may charge a stockholder’s stock with payment of a judgment. Such a remedy could result in the forced liquidation of a viable business to satisfy an owner’s personal debt to the detriment of other owners.

In Nevada, charging order protection is extended to partnerships, limited liability companies and, more recently, corporations. What this means is that a personal creditor’s only remedy against an owner’s stock is a charging order and, as a result, that creditor must wait for distributions from that entity to satisfy any judgment. The creditor cannot force distributions from the entity, nor can the creditor exercise any control over the entity, thereby allowing the business to continue operations despite the creditor’s claim.

LLCs and Partnerships

Nevada has long recognized charging order protection for limited liability companies and partnerships, but most states have not extended that protection to corporations. As stated above, this protection prevents a creditor from foreclosing on the ownership interest and from the forced sale of assets to satisfy the judgment.

Corporations

Nevada was the first state to provide charging order protection to certain corporations under NRS 78.746. This provision provides the exclusive remedy available to a judgment creditor related to a stockholder’s stock. The judgment creditor is only provided the rights of an assignee of the stock and has no rights to management or control of the corporation, provided that the corporation meets the following requirements:

(a)                Has more than one but fewer than 75 stockholders of record, at any time;
(b)               Is not a subsidiary of a publicly traded corporation; and
(c)                Is not a professional corporation

These restrictions closely mirror the IRS limitations for s-corporations and include most small businesses.

Conclusion

The expansion of these rights to certain corporations helps further Nevada’s business friendly reputation. However, it is unclear when and if other states will follow suit with similar legislation which leaves the answer unclear as to whether this law will be respected outside of Nevada.

© 2009 Drinkwater Law Offices

A trademark is a word, symbol or phrase used to identify a company or individual’s products or services and to distinguish them from the products or services of another. There are different levels of trademark protection, and rights can be acquired in one of three ways: (1) common law trademark rights, which require that the user be the first to use the mark in commerce; (2) state trademark rights, which require registration with a specific state; and (3) federal trademark rights, which require registration with the U.S. Patent & Trademark Office.

Common Law Trademark Rights

This is the lowest level of protection and simply requires the use of your trademark in commerce. Once a business uses a trademark in connection with its goods or services, the business acquires priority to use that mark in connection with those specific goods and services assuming no other trademark owner has superior rights. However, the priority to use that mark is limited to the geographic area the mark is actually used in and a limited zone of expansion. This right would provide the business the right to stop any infringing use of the mark within the business’ geographic area, but would not give the business the right to stop someone from using the trademark anywhere else and also would not prevent someone else from filing a federal registration for that same mark, effectively limiting the first users’ expansion into any new areas.

State Trademark Rights

The second way to obtain protection is to file for a trademark registration within the state in which the business is using the mark. This registration would provide protection only within the state of registration assuming no other trademark owner has superior rights.  This registration would not limit another business’ ability to obtain a federal registration, again, effectively limiting the ability to expand into new markets outside of the state of registration.

Federal Trademark Rights

This is the highest level of protection for trademarks in the United States. These rights require registration with the U.S. Patent & Trademark Office. Once registered, the business would have the right to use the mark nationwide, except to the extent that the mark is utilized by a third party with previously established rights. In addition to the right to use the mark nationwide, federal registration provides several other benefits, including: (i) the right to bring an infringement lawsuit in federal court; (ii) the mark becoming “incontestable” after five years of use after registration; and (iii) potential recovery of treble damages, attorneys’ fees and other remedies for infringement.

There is no way to fully protect a business’ trademark and its future expansion without obtaining a federal trademark registration. Businesses that rely on common law rights often find that the expansion into other geographic areas is limited by later in time trademark use and/or registrations. Registering your trademark federally ensures that all the costs and expense of building a business’ trademark is not wasted and helps you to build a valuable asset for your business.

© 2009 Drinkwater Law Offices

Entering into a commercial lease is one of the first steps entrepreneurs take when opening a new business or a new location. The lease process involves many important decisions, not only assessing the viability of the physical location, but also the provisions contained in the lease document. It is important to remember that not all leases are created equal. In fact, many provisions in a lease may appear harmless, but can have significant ramifications to your business and its operations.

Term and Renewal Periods

For a new business, a shorter initial term with several optional periods for renewal provides the most flexibility. Not only does a
shorter initial term limit the exposure if the new business does not do as well as planned, but it can also provide flexibility to the new business if it is so successful that the premises is no longer functional for its operations. Further, renewal terms should always establish a future lease rate. Failure to establish a method to calculate future increases can result in disagreements when the initial term expires.

Use and Exclusivity

The use provision should clearly identify all of the expected business activities, while at the same time, not limit future expansion. This provision does not ensure that zoning and other laws allow for the businesses use. It is the tenant’s responsibility to check into these items before the lease is executed. In addition, the Landlord should provide an exclusivity clause which protects against the leasing of space to another tenant who would directly compete against the business. This provides protection of the customer base and also protects your Landlord against vacancies from business failures that such direct competition may cause.

Personal Guarantees

Personal guarantees are generally standard for new business leases. These guarantees make the guarantor personally liable for the lease in the event that the business is not able to meet the obligations of the lease.

Maintenance and Repair

The lease should always clearly identify the parties responsible for maintenance and repairs. Generally in multi-tenant locations, the tenant is responsible for the maintenance and repair of the interior of the premises and the landlord is responsible for the outside and common areas, including all structural components. Additionally, the tenant generally has to return the premises to the condition it was in at the beginning of the lease term, excluding normal wear and tear.

These are only a few of the items to be aware of in any lease. The most important thing to remember is that nothing is a substitute to having an experienced attorney review your lease.

© 2009 Drinkwater Law Offices

Under both federal and state employment laws, employers are required to post specific employment materials for employees in a conspicuous area (such as a break or lunch room) and in a language employees understand. When there are changes to existing employment laws or new laws are enacted, the mandatory posting requirements also change. Accordingly, employers must be aware of and comply with changes in the mandatory posting requirements.

There have been several recent amendments to both state and federal employment laws and mandatory posting requirements. Effective November 21, 2009, employers with fifteen or more employees must post the updated “Equal Employment Opportunity is the Law” poster which includes information regarding the new Genetic Information Nondiscrimination Act (“GINA”) prohibiting discrimination against applicants and employees on the basis of genetic information.

In addition, following are several recent changes to state employment posting requirements: 1) Effective October 20, 2009, the Nevada Unemployment Insurance poster must include a new website address for filing an unemployment claim online; 2) The Nevada Minimum Wage poster was recently updated to reflect an amendment to exemptions that apply to retail or service workers and to reflect the recent increase in the state minimum wage.

We recommend that employers obtain the mandated employment posters from a provider that notifies employers of posting requirement changes and provides updated posters (e.g. www.postercompliance.com).

© 2009 Drinkwater Law Offices

If you are in business or thinking about starting a business in Nevada, there has been a change in the way that your business should obtain its Nevada Business Registration (the “License”). With a few minor exceptions, this License is required of every person or entity doing business in Nevada. This means anyone who performs services or engages in a trade for profit or if you have a legal entity with the State.

Effective October 1, 2009, State Licenses began to be issued out of the Nevada Secretary of State Office rather than the Department of Taxation where you previously filed for the License. As part of this change, the Secretary of State’s office will require that all businesses file for their annual State License in conjunction with the filing of the Annual List.

What if you should have a License, but never got one?

If your initial list is due soon (before the end of the year), you can simply apply for the License when you file your initial list with the Secretary of State. However, if your list is not due soon (say before the end of the year), you should submit a Gap Business License Application as soon as possible to avoid late penalties for failure to obtain a License. Thereafter, your License will be due when your annual list is due.

What if you have a License but it expires before your annual list is due?

You should submit a Gap Business License Application as soon as possible (preferably before the expiration date) to avoid late penalties for failure to obtain a License. Thereafter, your License will be renewed when you file your annual list.

What if you have a License, but it expires after your list is due?

Simply file your list when it is due and submit for your License renewal at the same time (even though it has not expired). You will pay a prorated fee for the balance of the year and, next year, your License will expire at the same time that your annual list is due.

To find more information and the appropriate forms, visit the Nevada Secretary of State’s website at www.sos.state.nv.us.

© 2009 Drinkwater Law Offices