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Sollertis_BlogFeatureImage_24AUG2020

Self-Improvement and Education Company Liability: Common Pitfalls for Founders & CEO’s Online and On-Stage in 2020

Dive deep into the liability swamp of the coaching and education industry with Sollertis. Learn the ways your self-improvement company is exposed to huge risk and how personal assets are within reach of your customers when business deals go south. Remedies offered include preventative measures to safeguard your nest egg.

Today’s top coaches and educators have gained much success first learning, and then teaching others in the areas of personal achievement, health and fitness, relationships, time and life management, career and business, real estate investing, personal finance and money management, just to name a few.

While it’s extremely rewarding, and profitable, to help others with something you have mastered, equally worthwhile is discussing some of the risks you face and the steps you can take to protect your brand, your company, and your personal assets.

The U.S. self-improvement market is now an $11 billion dollar industry and expected to grow to $13 billion by 2022. With so much money at stake, what risks do today’s top coaches face and how do they protect their wealth from those risks?

RISKS FACING SELF-IMPROVEMENT COMPANY OWNERS

Customer Dissatisfaction (Lawsuits or Class Action)

Customer complaints typically arise when customers are not satisfied with what they have received in exchange for the money they paid. To maintain long-term viability, the personal development, personal growth, and self-improvement industry’s current and future generation of gurus, speakers and experts will need to be more accountable to consumers, said John LaRosa of MarketResearch.com in his October 11, 2018 article titled The $10 Billion Self-Improvement Market Adjusts to a New Generation.

LaRosa goes on to explain that general motivational programs are less popular today and many consumers looking for more practical programs and a return on their invested time and money have found that programs and philosophies – such as the “law of attraction” – have overpromised and under delivered.

To succeed in today’s world, self-improvement companies will need to adapt to the new demographics of their audience or risk making their customers unhappy.

Because today’s customers are connected through social media, they can now quickly organize and dispatch, a situation that did not exist in the past. So, if you make one customer unhappy, that customer can vent his or her displeasure with other customers who may share the same sentiment and before you know it, a movement has started and the entire group is now demanding their money back.

For self-improvement companies selling the same event, product or service to thousands of people, a run on the bank with refunds can prove extremely costly. If you’re unable to deescalate the movement, they will soon be talking to a lawyer and you could be staring down the barrel of a class action lawsuit.

We at Sollertis have defended clients against class action lawsuits and I can assure you, they can be very painful. While one person may have a $500 claim, if there are 10,000 similarly situated people, you now have a $5 million claim.

That one person does not have to get all 10,000 people on board, he only has to allege that there are 10,000 more people that are in his same position and then, unless any of those people “opt-out” of the class, which is rarely done, he can sue you for the damage caused to the entire class, not just him personally.

FTC and Unfair, Deceptive and Fraudulent Practices

The Bureau of Consumer Protection of the Federal Trade Commission (FTC) is an independent agency of the Federal government. The Bureau of Consumer Protection‘s mandate is to protect consumers against unfair, deceptive or fraudulent practices. The Bureau enforces a variety of consumer protection laws enacted by Congress, as well as trade regulation rules issued by the Commission.

Its actions include individual, company, and industry-wide investigations, and administrative and federal court litigation. In addition, because the FTC is a civil law enforcement agency, it partners with criminal law enforcement agencies including the U.S. Department of Justice, U.S. Attorneys, and other federal, state, and local criminal law enforcers, all of whom can put you in jail, leverage that they will use against you to extract more extreme financial penalties.

In 2019, alone, the Bureau of Consumer Protection of the FTC obtained a record-breaking $5 billion penalty from Facebook and obtained $170 million from Google and its subsidiary YouTube. If you are in the self-improvement space, I have news for you – if Facebook and Google can fall prey to the FTC, so can you!

What exactly are unfair, deceptive and fraudulent practices? The answer is any practices the government bureaucrats working at the FTC believe to be unfair, deceptive or fraudulent.

It does not matter if they are right, or if they ultimately prevail, their investigation alone can destroy your business. I have learned of several instances in which the FTC raided company offices, seizing all electronic devices and documents, seizing all company bank accounts, creating widespread panic among the employees, destroying the reputation of the business, with the end result being the complete shut-down of the business.

This is what the FTC calls an “investigation.”

If this happens to you, it does not matter if you are right or if you ultimately prevail, you cannot undo the damage done to your business and it will take years to restore the damage to your reputation.

Just look at the power of the federal government as demonstrated in recent cases that have been featured in our national news. Is there any way your business can stand up to that kind of power? For Facebook and Google the answer is “no” and, it’s the same for you.

If you are advertising nationally to a large number of people, you could find yourself the target of an FTC investigation. It just takes one or more complaints by your customers to initiate the process which may appear very slow moving at first so you may not think much of it, but while you are preoccupied with operating your business the FTC is in their office determining whether to investigate you, a decision that could come months or years later and will build momentum like an avalanche thundering down the mountain.

You may believe that you are doing everything by the book, but with all of the consumer protection laws and regulations in place, it’s challenging to be in full compliance at all times, especially if you have many employees involved in your operation whom you do not directly control. You need to know that there may be something that the FTC believes you are doing wrong and if so, it may not end well for you.

Investments and Who is On Your Stage?

If you’re discussing, promoting, or selling an investment or are sharing your stage with anyone selling an investment, this could prove devastating for you.

In addition to potential Federal Trade Commission (FTC) and Securities and Exchange Commission (SEC) investigations, if the investment being sold goes bad those investors are going to look for anyone with money that they can include in their lawsuit. Often times, there will be enough investors to justify the certification of a class action.

It does not matter if the investment was not offered at your event, only that it was at your event where the investor was introduced to the company that sold the investment, or was introduced to the company, that introduced the investor to the company, that sold the investment.

Everyone in the chain is a target.

One of the most important facts will be whether you received any consideration (anything of value) for that company or person being on your stage and we all know that no one gets stage time for free.

I have untangled the “investment-gone-bad” situations for clients at Sollertis before. Often times the consideration for promoting the investment is in the neighborhood of 5-10% of the total amount of the investment but the total claim against you, if the investment goes bad, is 100% of the investment. Everyone in the chain is liable for the full amount of the investment, so it does not matter that you only received a small percentage of compensation. So, for a $5,000 – $10,000 benefit you are at risk of losing $100,000 for each investor who invested in the investment, which could be in the millions. In one case, I handled a case where the total amount of lost investment dollars was $7 million!

SEC Investigations

Let’s not discount the potential of the Securities and Exchange Commission (SEC) to disrupt or destroy your business. Just like the FTC, they can investigate you which may include a raid of your office and the seizing of your bank accounts and computers. I’m personally aware of one situation in which one company was raided by the SEC for doing something everyone else in the same industry was doing, something they all thought was legal.

I do not know whether the SEC was simply trying to make an example out of that one company or not, but it certainly worked. Just knowing that a competitor has been raided is enough to substantially disrupt your business. You can’t help but wonder if they are coming to your office tomorrow.

Employment Claims

If you have a large labor force, this may be the risk that you run most frequently.

There are so many laws and regulations to protect employees, both at the federal and state level, and it’s increasingly hard for even the most conscientious and honest employer to comply with all of them.

The riskiest type of claim you could face is the wage and hour claim which often can turn into a class action claim. Those are the big ones that draw out for many years.

The claim might be based upon an employee not getting their meal and rest breaks, and may include failure to pay the correct amount of overtime. Let’s do the math.

You have 100 employees and one of them claims that you did not comply with the law with respect to meal and rest breaks or overtime and therefore, every employee is owed $30 extra per work day, multiplied by 260 working days per year, multiplied by 4 years, and before you know it you have $3.1 million in damages and then, when they add in penalties and attorney fees, you suddenly are facing a $4-5 million claim.

It takes just one disgruntled employee to start this process and put you in the center of a legal inferno.

You can be in business for years and years with no problems, but then you receive one letter demanding what you consider to be an exorbitant amount of money from a former disgruntled employee who deserved to be terminated.

You did nothing wrong, so reasonably you reject the ridiculous demand. Next, you know her attorney has filed a class action lawsuit against your company. You might have employment practices liability insurance, but that does not cover this type of claim.

You might enjoy smooth sailing for many years and then one of these devastating risks could materialize, causing financial devastation to your business and personal affairs.

I hope this never happens to you, but why take this much risk?

Why grow your wealth for years and years through your blood, sweat and tears only to have it all sitting there as a potential target?

Why not protect your assets so even if you and your business face these unfortunate circumstances, all will not be lost?

ASSET PROTECTION FOR ONLINE AND ON-STAGE SELF-IMPROVEMENT EDUCATION COMPANY OWNERS

At Sollertis, all asset protection discussions are going to start with a review of your business practices, existing entities and trusts, an inventory of all of your assets and liabilities, learning about the trusted advisors who are already on your team (CPAs, financial advisors, insurance brokers, attorneys, etc.), and understanding your family situation (spouse/children), retirement plans and dreams, and risk tolerance.

During this discovery and planning phase we will use what we learn to develop your personal Master Asset Protection Plan®, which is a comprehensive plan for the growth and protection of your wealth. For all clients this plan will include one or more asset protection trusts, limited partnerships and limited liability companies, with particular attention spent determining the best jurisdictions in which to create these asset protection tools.

There are four basic tools that we typically deploy to protect self-improvement company owners from the risks they face.

Build The Wall

Your self-improvement business generates profits in various ways and at different times.

You take the profits out of your business and you invest them. These investments typically include a residence, investment real property, equities and bonds, and other business investments. We will refer to these investments as your Investment Assets.

We want to build a wall between your self-improvement business, where you face the most risk, and your Investment Assets. To do this, we use asset protection trusts and entities. With the wall in place, your Investment Assets are protected from the creditors of your self-improvement business.

Separate Intellectual Property and Other Business Assets

Often times, the most valuable asset of a self-improvement business will be your intellectual property.

Other valuable Business Assets may include a business real property that you own, for example, an office building where you conduct your business.

We want to LEGALLY separate these valuable Business Assets from your self-improvement business – they will still be used by your business but not a LEGAL part of your business.

Let’s start with your intellectual property. We would like to see your IP owned and registered to a separate limited liability company (LLC). The LLC will then license your self-improvement business to use that IP and in exchange for this use, your self-improvement business will pay a royalty to the LLC. By structuring the ownership of your IP in this fashion, we have removed it as an asset of your self-improvement business and therefore, the creditors of your self-improvement business cannot take your IP from you. And who owns this new LLC? You got it – a trust or entity that you own that is ON THE OTHER SIDE OF THE WALL!

Separating your IP from your business is a really great tool if you also license other companies or individuals to use your IP in their programs, trainings or courses. That revenue stream from the royalties paid to you by those other companies is now going directly into your LLC on the OTHER SIDE OF THE WALL and is protected from the creditors of your self-improvement business.

Now, let’s talk real estate. If you own a business office building, or other real estate that is used in your business, we would implement the same type of structure. We would put the real estate in a separate LLC that would then lease that real estate to your self-improvement business in exchange for rent that would be paid by your self-improvement business to the LLC. Again, who would own this new LLC? A trust or entity that you own and is ON THE OTHER SIDE OF THE WALL!

We would want to implement this same strategy for any other valuable Business Assets used in your self-improvement business with the end result being that they are no longer assets of your business and therefore, cannot be taken by your creditors in the event any of the above risks we discussed were to occur.

Another great benefit from separating Business Assets for your business is that your CPA will have more tools available to reduce your income tax.

Improving Your Routine Practices by Strengthening Your Docs

While each of the above tools is meant to minimize the loss should a large claim arise, we also want to get inside your business and proactively improve your practices by strengthening your documents at the ground level to minimize the occurrence of any of the above risks happening in the first place.

First, we want to look at your customer contracts and help you develop a rock solid system for doing business that will give you the leverage in the event of a contract claim. For instance, as for customers, we may be able to include provisions in your contracts requiring binding arbitration and eliminating the ability of your customers to form a class action. There is no guarantee that a court will enforce these provisions, but at the very least they will give your lawyers a defense to assert on your behalf and will therefore be an extra hurdle your customers’ lawyers will have to surmount, giving you more leverage in any litigation.

Next, we want to review your employment practices, policies and contracts and help you tighten them up so we can minimize the risk of labor law claims. We may also be able to limit the right of your employees to form a class action by including arbitration provisions in their employment contracts – similar to what we would do with your customer contracts.

Customer and employee claims are the two most frequent types of claims and cleaning up your practices and strengthening your documents will go a long way towards minimizing the frequency and gravity of future claims.

Retirement Planning

A little known fact, is the State of California has certain assets that it has mandated are exempt from attachment by your creditors and when we use these exemptions to protect our clients’ assets we refer to this as exemption planning.

The most common type of asset that we use for exemption planning is retirement plans.

You may already have a retirement plan in place for you and your employees, but it will probably be too expensive to use this plan to protect your assets. What you probably do not know is that you can create a private retirement plan under CA law that does not require you to allow your employees to participate.

With a private retirement plan you can protect much more of your wealth, but the rules are complex and there are certainly situations in which retirement plans will not protect your assets. In fact, a case was just handed down last year where a doctor’s retirement plan assets were ruled not to be fully protected from his creditors because it was not set up the right way. So, it is important that you have your plan created by good legal counsel to ensure it will protect your assets as intended.

WHAT NEXT TO DO

As you can see, there are many asset protection tools available to self-improvement company owners. But remember, asset protection is like insurance, it doesn’t work unless you have it in place BEFORE THE CLAIM.

Failure to take action today will prove to be too late tomorrow. You are working very hard for many, many years to build your wealth. Shield your nest egg from your personal and business threats today. See more at Sollertis.com.

 

This material has been prepared by Sollertis for informational purposes only and nothing herein is intended as legal advice for any particular or individual situation. You should not rely upon any information herein as a source of legal advice, and receipt of any such information does not create an attorney-client relationship between you and Sollertis. Viewers and readers should not act upon this information without seeking professional legal counsel. Prior results do not guarantee a similar outcome.

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