Business Survival during the Age of the Coronavirus: Legal Ingenuity and Foresight Required
It’s scary owning and operating a business right now. As of this writing, the world has passed the milestone of 1.6 million cases of COVID-19. There have been over 200,000 deaths. Ninety-five percent of Americans are under stay-at-home orders from their respective state governors.
Both the federal and state governments have rushed in to try to stem the economic devastation to small business through SBA emergency-disaster relief programs, tax incentives, and government waivers and extensions.
Nearly 17 million Americans have applied for unemployment compensation benefits (about 11 percent of the workforce). “Nonessential” businesses throughout the country are ordered closed.
According to the U.S. Chamber of Commerce, nearly one-fourth of all small businesses are shut down and unable to operate. Nearly half of all small businesses believe it will take six months to a year to return to some sense of normalcy. Undoubtedly, by the time you read this article, these numbers will be conservative as to what lies ahead.
As Americans, we have never seen anything like it. Even those who survived the devastation and rationing in World War II marvel at this new reality. So what is a small-business owner like you to do?
In our daily lives, we are taught to plan. We plan vacations, plan for graduation parties, plan for weddings, plan to go to the dentist for regular checkups, and so forth. Few, if any, small businesses planned or could plan for the fallout from this pandemic.
Hopefully, however, we have done some legal planning along the way. If not, it is not too late to begin that process. In these times especially, being proactive instead of reactive is key. So, what do we do?
The first thing to do is to take an assessment of our business — its legal structure, operations, staffing, and finances. We have to start asking the “what-if” questions: What if I, as the owner, become incapacitated because of this virus? What if my business is shut down for an additional month or two months? What about my employees? What about my bills?
Let’s start with legal structure. Does my business structure allow for continuity if I, as the business owner, become incapacitated? It makes a difference whether you are operating a business as a proprietor, partnership, limited liability company (LLC), or corporation.
Proprietorships and partnerships have no continuity of life. LLCs may not either. Corporations have the ability for their owners to transfer interests to others and continue as an entity going forward.
Perhaps it is time to review the structure of your business as to whether it allows for continuance. What if I become unable to operate my business? Does my business structure allow me to transfer management or operational control to another? Can I transfer ownership to someone?
In general, the simpler the business structure, the less likely that you will have the ability to transfer management, operational control, or ownership to another. You may wish to sit down with your legal adviser to review the structure of your business and make any needed adjustments now while you still can.
What are my business operations? What industry am I in? How can I be innovative in times like these?
For example, many restaurants have resorted to takeout and catering as well as deliveries and online ordering. Perhaps it is time to think outside of the box. Is there a way I can revamp my business operations to allow for me to continue to operate within the confines of my industry in what I can permissibly do given my governor’s orders?
Staffing has been a key concern for both the federal and state governments with rising unemployment claims. Governments have created incentives, such as the new Families First Coronavirus Response Act, effective April 2 through the end of the year. It allows business owners to keep their employees through refundable payroll tax credits.
Additionally, the Payroll Protection Program provides for low-interest loans to businesses (fewer than 500 employees) who maintain their payrolls to have the loans forgiven under certain conditions.
Many states also have rolled out their own programs. In Pennsylvania, Gov. Wolf has implemented the COVID-19 Working Capital Access Program through the Department of Economic and Community Development to provide working-capital loans to small businesses with fewer than 100 employees.
All of these programs assist small-business owners with their operational needs. Have you considered applying for these programs? It may not be too late.
Practically, however, it is good to review present staffing authority and managerial concerns now. Does someone in your organization have the authority to make decisions on behalf of you, the business owner, if you are unable to do so? It may be wise for you to have a power of attorney in place where someone can act as your agent and handle your operational needs.
As long as you remain legally competent, it is not too late to plan with someone to handle those needs. Powers of attorney are one of the simplest legal documents for an attorney to draft, yet they are the most frequently overlooked by business owners.
In the absence of a power of attorney, someone may need to seek court approval for the business owner who becomes incapacitated to continue to operate a business. Tragically, we see businesses close in those situations.
It also pays to be proactive now and review insurance coverage. Do you have a business interruption policy? If so, does it have coverage that may apply during a pandemic? Ask your insurance agent about it. Carefully review the legal exclusions to the policy. In fact, start with a review of the exclusions. Then you know that the policy applies generally for all other conditions and circumstances for which you have coverage.
What about contracts you have, such as leases, vendor contracts, finance contracts, and the like? Unless a contract has a “force majeure” clause (i.e., acts of God clause), you may be obligated to perform under those contracts even in the case of a pandemic. You should review your contractual obligations with your attorney to see if there is a way out that excuses performance in case of a shutdown beyond your control.
Typically, force majeure clauses will extend the time for performance (which may involve an additional cost) without declaring the business owner in breach of contract. If your contracts do not have such clauses, then you should be proactive and contact your landlord, supplier, or bank and see if forbearance of terms can be negotiated to prevent an eventual default.
I have found in recent weeks that lenders and landlords are more than willing to renegotiate terms now before there is a default. Lenders and landlords are fully aware that many business owners are not able to operate and, thus, will have difficulty meeting their financial commitments. Pick up the phone now and have a dialogue with them.
What if your business is closed and you are self-employed? Are you eligible for unemployment compensation benefits? Typically, self-employed business owners were not eligible for unemployment compensation, and owners of S-corporations only were eligible for unemployment compensation to the extent the owners had wages paid to them.
The coronavirus stimulus package (the Federal Coronavirus Relief Bill or “CARES” Act) passed by Congress allows for the first time an allowance for unemployment compensation to self-employed individuals and other business owners.
The bill provides $600/week in unemployment compensation benefits in addition to any state benefits for four months. The bill is effective until the end of the year. If you are closed, maybe it is something for you to consider.
If all else fails, bankruptcy may be the only option. Bankruptcy does not necessarily mean liquidation under chapter 7. There are reorganization types of bankruptcies (most typically chapters 11 and 13) that allow the business to survive by reorganizing its debt and equity and moving on.
If you feel that debts are too much to bear, and you need relief from creditors who are not willing to extend you terms, then consult with a bankruptcy attorney who knows the ins and outs of the process.
Overall, keep your chin up, be proactive, and get your legal house in order. Success or failure generally falls to the individual business owner who either can adapt or fails to adapt to the stresses beyond the business owner’s control. Surviving the pandemic requires legal ingenuity and foresight.
Matthew C. Samley, esquire, is an attorney with Appel & Yost LLP, in Lancaster, where areas of practice include business transactions, small-business formation, and business buy and sell. He serves as parliamentarian for the Lancaster County Commercial and Industrial Real Estate Council and is on the adjunct faculty in the Department of Business Studies for Harrisburg Area Community College in Lancaster. He frequently presents at professional education programs on landlord-tenant, collection law, ethics, business formation, contracts, and bankruptcy. Samley is a member of the Business Law Section of the Pennsylvania Bar Association, the Estate Planning Council of Lancaster County, and the Eastern District of Pennsylvania Bankruptcy Conference. Email firstname.lastname@example.org; www.appelyost.com