Finding new clients requires new skills. Here's how to expand beyond your comfort zones.

From OLG
We have a small business with a number of federal government contracts. We would like to expand to the commercial arena, but have not been able to find a service or method that would provide market differentiation (other than offering lower costs than our bigger and better-known competitors). Would acquiring a firm offering a compatible "niche" be the best move for expansion? In terms of growing federal and perhaps state government sales, would hiring a "consultant" be wise? I am interested in hearing from business owners who have tried both methods. Thanks!

By Maya Payne Smart, CNNMoney.com contributing writer
With federal stimulus dollars gushing down the pipeline, some government contractors are looking no further for their next catch. That’s a mistake, because the government contracting boom of 2009 is unlikely to continue in future years.

Bob Venero grew his IT company from zero to $100 million in sales.

It’s important to diversify into the private sector, says Eric Dobyne, a regional director for the U.S. Department of Commerce Minority Business Development Agency. “If your sales force is really focused on government and federal work, you may have to hire from outside,” Dobyne says. “I wouldn’t say you need a consultant, but dedicate staff to that market. It needs to be a part of your business strategy and you need to have resources dedicated to make the transition.”

But be prepared to wait for results. The corporate sales cycle is generally shorter than government ones, but it still takes time to build relationships with clients. Bob Venero, president and CEO of Future Tech Enterprise, Inc., grew his Holbrook, N.Y., IT company from zero to $100 million in revenue organically. “In 12 years of business, we’ve looked at acquiring nine companies but never did,” he says. “They were overpriced, because someone wanted to retire or the wheels were falling off the bus. It wasn’t worth the debt or risk to acquire them.”

Venero says consultants can help you win government contracts, but you need to beef up your own sales force to thrive in the commercial arena. “Understand that corporate America is more political than government America,” he says. “Relationships with individuals become the most important component to success. With government contracts, you start to collect orders. There’s no real relationship built, because it’s a piece of paper versus a person.”

Robert Wallace, the president and CEO of Bith Group Technologies Inc., a Baltimore, Md., technology company, also says an insider offers the fastest route from point A to point B. For example, if you want to do more business with a specific government agency, recruit from within. “Find somebody who was in the space or who is in there now and will be leaving soon, and have that person join your team in marketing or business development to go back into that market and sell," he advises.

Marcus Carey expanded his company beyond the government sector through persistent networking and outreach.

If staffing up isn’t in the budget, you’ll need to take the lead. Marcus Carey is the owner of Saecur, a Hanover, Md., information security firm that subcontracts for the U.S. Department of Health and Human Services. He decided to be the front man for his company’s move into the commercial sector. “You have to hit the conference circuit, put on podcasts and just generally give the industry or community good content, good information, stuff that they can use,” Carey says. “It lifts your profile. If you give people what they want, you end up getting what you want.”

His information security “community service” includes a blog, monthly briefings at Capitol College, and participation at DojoCon, an information security conference. The outreach helps his company build brand recognition among prospects. Carey relies on virtual assistants in the U.S. and India help keep his costs down: They identify speaking opportunities, draft proposals and even court sponsors for his community events.

Carey is confident he’s expanding in the right direction. “The government contracting market is the most stable, but your margins are really tight because there’s so much competition and people are lowballing each other,” Carey says. “The commercial profit margin is way, way better.”

Give us your advice: Check out recent “Ask & Answer” questions.

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Small companies have a hard enough time finding affordable health coverage for their workers. When your staff is scattered throughout the U.S., it's even tougher.

Barbara, Westfield, Mass.
We are a small company of just over 30 employees based in Massachusetts. Our employees are across the USA, working out of their homes or at clients' sites. We are having a hard time finding good health insurance. Any suggestions?

By Catherine Clifford and Rose Fox, CNNMoney.com writers
You are not alone in having trouble finding a viable health insurance solution for your small business. In 2008, 69% of small businesses surveyed by the National Small Business Association said they want to offer health insurance to their employees, but only 38% were actually able to do so.

Nearly all of America is engaged in a debate over President Obama’s proposed health care reform, but the cost of health care has been a hot-button issue on Main Street for years.

"The cost of insurance has been the number-one issue for NFIB members for over 20 years," says Amanda Austin, the director of federal public policy at the National Federation of Independent Business, a nonprofit trade organization. "It is very hard for small employers to emulate large employers — small employers don’t have the ability to have large risk pools. They can have a very significant premium increase if they have one person get sick."

As hard as it is to find coverage at all, it's even tougher when you're trying to find an insurer willing to write a policy for a company with employees scattered around the country. But as businesses embrace the low overhead of a telecommuting workforce, that's become an increasingly common situation.

"The reality is that Massachusetts-based insurers are going to require more than half of the participating employees to be residents of Massachusetts," says David Kaplan, a licensed insurance adviser with Aronson Insurance in Needham, Mass. "Absent that, there are a few companies that offer national plans."

Amir Mostafaie, a consumer health spokesman at eHealthInsurance.com, echoes that assessment.

"If fewer than 51% of your employees work in your home state, it becomes more difficult to find a carrier to underwrite your plan," he says. "UnitedHealth (UNH) has been the exception here — in my experience — by being willing to quote group coverage for small businesses with more than 51% of their workforce residing outside the state. Instead, United has generated quotes using the state with the highest concentration of employees."

To make your search easier, Mostafie recommends going through a licensed agent or broker who works with businesses in your industry and geographic region. Do your own homework as well, reading up on industry definitions of terms like "coinsurance" and "out of pocket" to make sure you know what you're getting into when you choose a policy.

It may help to survey your employees to find out what kinds of coverage are most important to them. For example, if most are older adults with grown children, a plan without maternity coverage might save you money while still giving your employees all the benefits they need.

Finally, Mostafie emphasizes the importance of developing programs to keep your employees healthy, such as arranging for discounts with a national fitness chain or offering bonuses to smokers who quit. "Even if you can only find an insurance solution for the employees in your home state," he says, "having a healthier group will help you save money on premiums in the long run."

As insurance costs climb, fewer companies are able to afford those premiums. In 2009, less than half of companies with less than 10 employees offered coverage, according to a comprehensive Kaiser Family Foundation study released this week.

"We are seeing less and less new small business owners offering coverage, because it is very expensive and employers do not like to offer a benefit and then take it away," says Austin of the NFIB.

The scarce choices and unmanageable costs small companies face have advocates clamoring for reform — but like most of America, the small business community is divided in its willingness to see drastic changes made to the existing health-care system. The National Small Business Association is leery of expensive reforms.

"We don’t think there is enough cost containment incorporated in the bill" that is currently being negotiated in Congress, Brogan says. "To put [small businesses] in any kind of disadvantage now, when we need the job creation the most, is something that we are concerned with."

Give us your advice: Check out recent “Ask & Answer” questions.

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If you own your own company, you can skip a salary in favor of distributions, but the IRS still wants its share of the money you take home.

Erin, Kailua-Kona

Do shareholders have to take a salary in an S corp? Can they just take distributions? How about an LLC?

By Lenora Chu, CNNMoney.com contributing writer

In tackling your question, it’s important to first understand the difference between a salary and a distribution.

A salary is a payment by a business in exchange for services rendered. A distribution is a payment taken out of the profits or other assets of the organization.

There is no federal tax law requirement that shareholders of either an S corporation or an LLC pay themselves a salary, says Jonathan Moyer, an attorney at international law firm Reed Smith LLP.

Instead, they can decide to take only distributions, or even keep profits in the corporation as shareholders’ equity to be distributed at a later time, says Paul Jaskot, also a Reed Smith attorney.

However, payment of the federal self-employment tax — a Social Security and Medicare tax for individuals who work for themselves — should be weighed when considering how shareholders should take their compensation.

With an S corporation, salaries are subject to self-employment tax, but distributions are not. (Both are subject to regular federal income taxes.)

Even so, while it appears beneficial to take only distributions, many S corp shareholders elect to take at least a small salary, says Len Friedman, tax partner at the Bridgewater, N.J., accounting firm Rosenberg, Rich, Baker, Berman & Company.
Why? S corp shareholders who take only distributions must still pay self-employment tax on an “industry standard” amount of salary — or risk an IRS challenge, Moyer says.

“There’s the rub,” says Moyer, who suggests taking a salary limited to that industry standard to minimize self-employment tax liabilities. What counts as an "industry standard" is up to you to determine — but be prepared to back up your accounting if you set a lowball number. The IRS isn't shy about challenging salaries it deems too low.

With an LLC, owners whom the IRS considers to be self-employed must pay self-employment tax on all of their income — in other words, on both salary and distributions.

Thus, there is no salary requirement, because all income is effectively taxed as if it were a salary, Friedman notes.

So while LLCs provide more freedom for members to structure management operations and ownership of the company, they can generate higher tax burdens in certain situations, says Moyer.

There are many tax and legal implications involved in forming a business entity, so the experts advise discussing your specific situation with an attorney or tax professional.

Give us your advice: Check out recent “Ask & Answer” questions.

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The fair way to set employee salaries

Fair pay for you and your partners

Not sure if you’re underpaying or overpaying? Third-party salary surveys can help.

Thomas, San Francisco
I have a video production company with five full-time editors. I'm always stressed thinking I'm either overpaying them and I'm going to go broke, or underpaying them and am going to lose them and/or they're going to get resentful. Because of this, I realize I manage them nervously, which is not good management. How does one determine pay parity? I would like to pay them fairly so I can stop worrying and pay and manage them with confidence.

By Rose Fox, CNNMoney.com contributing writer
There are plenty of resources out there for both workers and employers who want to make sure that staffers are getting paid neither more nor less than they're worth.

To start with, look at free sites like Salary.com, PayScale.com, and CareerBuilder's CBSalary.com. You can also check the Bureau of Labor Statistics site at bls.gov. For more in-depth data, consider purchasing reports from survey companies that do research in your field. Salary surveys exist for almost every industry. Amy Kaminski, manager of marketing programs for Compdata Surveys, suggests sticking with surveys that get their data from employers: "This will help ensure the accuracy and reliability of the results."

Look for data that's applicable to the type of business you run as well as the type of employee you want. Ted Turnasella of WageLINK.net offers three helpful rules of thumb:

1) Make sure that the job being reported is a match for the job at your company. A good rule of thumb is for the job summary in the survey to represent at least 75% of the duties being performed by employees in the company.

2) Look at the effective date of the data and adjust it for the passage of time. For example, for data that is several months or years old, factor in an annual wage inflation rate of 3%.

3) If the data you are using is national data, it will need to be adjusted to your local market. Salaries in New York City are much higher than those in Brownsville, Texas.

Once you have all that information, consider how it applies to your company, factoring in regional and personal differences that may not be reflected in the numbers. "If a good editor is difficult to find, you may need to pay above market in order to keep these key employees," Kaminski says. "On the other hand, if you offer valued benefits such as flexible hours or above-average health insurance, you may be able to pay at or below market while still keeping your employees happy."

Jennifer Grasz, a CareerBuilder spokeswoman, agrees that soft benefits can matter as much as cash. "Companies are looking beyond salary and incorporating more flexibility into their packages to stay competitive in their recruitment efforts,” she says. “For example, we see more companies offering telecommuting opportunities, compressed workweeks and other alternative work arrangements."

Finally, if it becomes clear that a current employee's salary needs to be renegotiated, don't be shy about showing them the numbers that helped you to reach that decision. "Salary market data moves any pay discussion onto a less confrontational footing," says Dr. Al Lee, director of quantitative analysis for PayScale.com. "Yes, your employees may still look for work elsewhere, but it won't be higher pay that draws them away."

Give us your advice: Check out recent “Ask & Answer” questions.

How to keep laid-off workers honest

Fair pay for you and your partners

What to pay the boss's bosses

Experts reveal the best ways to keep company information in the building when the employees exit.

Tom Goll, Owner, U.S. Diversified Tech, Nashua, N.H.
We always hear about what employees should do to prepare for layoffs. But what should employers do to ensure that company data, contacts and customer lists don't walk out the door with terminated employees?

By Adriana Gardella, Fortune Small Business senior editor
You can take several steps to prevent or deter misappropriation and to bolster your legal position should you find yourself embroiled in litigation, says labor and employment lawyer Chris Arbery of Hunton & Williams in Atlanta. Arbery advises employers to implement a clear policy on confidential information, specifying that all business data, media, equipment and networks are company property. Let your employees know that any unauthorized use or disclosure of company information will be taken seriously. And be sure they sign confidentiality agreements to safeguard your trade secrets and other potentially sensitive data such as customer lists.

You may also wish to consider incorporating a noncompete agreement into your employees' severance packages, says Elizabeth Milito, a lawyer with the National Federation of Independent Business in Washington, D.C. Such an agreement, which must comply with state law and be reasonable in geography and scope, will prevent your former employees from working for your competitors or striking out on their own.

Because these measures may not dissuade the most determined sneak, Arbery also counsels, "Work with a network-systems specialist to secure electronic files to prevent – or at least trace – unauthorized downloads to flash drives and the like."

This column provides general information only and is not intended to replace the services or legal advice of an attorney. Always consult a lawyer regarding any specific legal concerns, as laws vary from state to state.

Give us your advice: Check out recent “Ask & Answer” questions.

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Fair pay for your and your partners

To fire or not to fire – the ethics of a layoff

'I signed a noncompete – but now I want a new job'

How much should you pay your company directors? First, take a hard look at what skills they'll need to guide your business.

Paul Dzera, MGBD, New York City
What would you recommend for determining board of directors' fee levels (annual retainer, board meeting fees, committee meeting fees, etc.), both in cash and stock options? I have a small public company with revenues of about $30 million. To date, I have reviewed the Director Compensation Report available through the National Association of Corporate Directors, but their "smaller" company information is for companies with revenues ranging from $50 million to $500 million.

By Emily Maltby, CNNMoney.com staff writer

Before you think about compensation, consider what skill sets you need represented in your board members.

"Twenty years ago, it was all the CEO's friends. So the qualifiers were, 'What's your golf handicap and how fast will you nod when I propose something?'" says Suzanne Hopgood, director of Board Advisory Services of the National Association of Corporate Directors (NACD). "This meltdown in particular has focused people on skill level. That will help define compensation. If you do rocket-science stuff, then you need highly educated, specialized people."

Also think about what you'll be expecting from your board. Startups that still require a lot of heavy lifting should pay their directors more than companies that are already chugging along at a steady pace.

One way to think about both skills and compensation is to imagine the board as a team of outside advisors, recommends Tom Juenemann, executive director of the Institute for Family Owned Business in Portland, Maine, which will be holding a conference in June on this topic.

"What would a good consultant cost you?" he says. "The answer will vary by industry and experience."

As you read this, board fees are in a state of flux. As the recession drags on, businesses are reducing the pay of senior executives and board members to keep costs down.

Taking this into account, Juenemann believes a good ballpark figure for a private business with about $30 million in revenues is $10,000 to $15,000 per board member, per year. Part of that should be paid as a base retainer, with the rest made up of attendance fees paid only when the board member turns up at board and committee meetings.

Another way to get sense of what you should be paying is to look at your competitors, suggests Hopgood. "Pick five public companies that are in your competitive range, go to public filings and see what they're paying," she says. "Then pick five that are in your revenue range, regardless of industry, and compare data points."

CEO salary is another commonly used benchmark. Juenemann says you can take your CEO's salary, divide it by the number of working days in the year, and come up with a reference point for a daily salary that you can pay your board chairman for each day that the board is working. Other board members typically command a salary about 80% of the chairman's.

Public companies like yours have other considerations: Do you want to pay part of your directors' compensation in stock or options? Fifty percent of public companies do so, Juenemann says; the rest pay only in cash.

As you figure all this into the equation, keep in mind that the economy right now has lots of supply and slow demand for seasoned business executives.

"Right now, people are looking to get board seats. Plus, there are more who are interested in smaller businesses than larger ones. The result is that you don't need to pay premium dollars," says Juenemann.

However, in this environment, it's imperative that you do extra vetting to ensure that your board members are skilled executives who are genuinely interested in helping your company succeed. You don't want a board member who is only in it for the salary.

If you need help finding candidates, try contacting NACD. They maintain a director registry that can help match qualified people with your needs.

Give us your advice: Check out recent “Ask & Answer” questions.

Free advice? Priceless

How to ditch bad business partners

'Should I hire a business coach?'

Not every business owner contributes equally to a company's success, but with advance planning, you can adjust salaries accordingly.

Michele Cosentini, Baltimore
I am planning to start up an LLC with three partners. We will be designing and facilitating retreats. What is the best way to figure out how much to pay each of us? We will each spend time working both individually and together, and I'm not sure how to measure how much time each of us is putting into the business so that salaries can be split fairly. Also, do we have to pay ourselves a salary and declare how much that would be up front, or can we just keep putting the money back into the business and then divide up earnings at some later point?

By Lenora Chu, CNNMoney.com contributor
To avoid trouble later on, you'll want to map out from the start a plan to allocate pay based on a measurable standard, such as each partner’s input into the business or how much his or her professional skills are worth in the marketplace.

You don't have to pay each partner equally: One partner's accounting expertise might be more valuable than another partner's administrative work. It's fine to pay partners variably based on what they bring to the business, says Jonathan Moyer, attorney at the international law firm Reed Smith, LLP.

One standard way to measure input is to pay by the hour, on a weekly or monthly basis. You can use a software program to minimize the administrative burden of tracking hours. Moyer also recommends building in checks and balances to prevent any partner from attempting to “game the system." For example, your LLC agreement might require that all paid hours be spent at a company office or that customers verify hours spent on-site.

Another option? Avoid tracking hours and make guaranteed payments at set times throughout the year, suggests CPA James Kellogg of Fullerton, Calif. The amount can vary depending upon the profits your business earned, with each partner receiving a set share.

That size of that share could be based on each individual's contribution to the company's financial success, Moyer says. For example, if one member is responsible for generating 75% of the firm's revenues during a specific time frame like a given month or quarter, he or she would be entitled to a distribution of 75% of the cash generated by the business during that time.

The allocations could be reviewed periodically and increased or decreased based on whatever performance criteria you and your partners agree upon, says Moyer.

Distributions could also be based on ownership percentages, which in turn would be structured to reflect partners' differing levels of input, says Moyer. That way, distributions from the company are more likely to be in-line with each partner's responsibilities.

For example, if it’s expected that you will put twice the time into the business that the other two partners will, the ownership could be structured so that you own 50% of the business and your two partners each own 25%.

Or, as you suggested, you can opt keep money in the business and take distributions at a later time. LLCs are generally set up so that each member has a capital account, to which contributions, profits, distributions or losses are allocated according to each member’s ownership percentages, Moyer says.

Money (or losses, if the business runs into the red) will build in each capital account and be available whenever you desire. To prevent problems down the line, you and your partners should have some frank discussions before forming an LLC about when and how you'll take distributions. Always delineate the commitments expected from each partner at the start, Moyer advises.

Equally important, Moyer says, is agreeing to the consequences if these commitments aren’t met. You should provide a written mechanism in your bylaws for dissolution of the business or removal of a member if things don’t go as planned. Confronting these issues up front can be emotionally tricky, but it often helps head off destructive legal problems down the road.

Give us your advice: Check out recent “Ask & Answer” questions.

Firing yourself: Unemployment benefits for business owners

Cut staff hours but keep the morale

To fire or not to fire – the ethics of a layoff

Is a court likely to uphold a restrictive noncompete agreement? It depends on where you live.

Ryan H. from Fort Wayne, Ind.
When I started my current job, I signed a noncompete agreement without really reading it. After reading it in full, I discovered that it sounds like they're trying to keep me out of the entire Web design industry, anywhere in the U.S., for two years after leaving. I am looking for a new job right now – should I be worried about this? Would a judge ever uphold such a sweeping contract, in spite of my signature on it?

By Kathleen Ryan O’Connor, CNNMoney.com contributor
A business has the right to protect its intellectual property, but the terms must be reasonable. Unfortunately for employees looking for clarity on their noncompete deals, what counts as “reasonable” is often left up to a judge’s discretion.

On your side is the current legal trend against overly broad noncompete agreements. California courts, where Silicon Valley litigation over top tech talent often ends up, have led the charge by effectively making such covenants unenforceable. The most high-profile recent case was that of Dr. Kai-Fu Lee, a former Microsoft IT executive whom Google hired away in 2005 despite a one-year noncompete agreement. The two software giants battled it out in California courts all year, until a private settlement was reached.

To find out about issues that might be specific to your geographic area, we spoke to Sam Hasler, an attorney in Anderson, Ind.

“Let’s assume they do business in the Marion County,” Hasler says of your former company. If you try to serve clients in the same area before your agreement runs out, having a lawyer at the ready is a wise move.

“I know people hate hearing that, but an ounce of prevention is worth a pound of cure,” he says.

But if you are trying to establish a relationship with a client in, say, New York, and your previous employer has never done business there, you have a very strong argument for a judge that preventing you from pursuing that work is simply punitive.

For workers thinking of using the soft job market as a catalyst to fly solo and launch their own business, are noncompetes an obstacle? A group of academic researchers studying the issue say there's some evidence that their use inhibits entrepreneurship.

"It’s the chilling effect," says Matt Marx, a doctoral student in business administration at Harvard. Very few companies actually take former workers to court over the agreements, but simply having them in place can discourage ex-employees from launching new ventures. “They think, 'I better play it safe. There is no upside for you; you have to protect yourself.'”

Marx and two co-authors published a 2007 study examining commerce in Michigan before and after the 1985 repeal of a state law barring noncompete agreements. By studying investors' patent records, they found a significant drop in employment mobility after the state began enforcing noncompetes.

The issue is a personal one for Marx, an active inventor in the speech recognition field.

Before embarking on his Ph.D., he worked at a Boston company and was bound by a noncompete agreement when he was recruited by another firm. Because the new employer was in California, he was able to disregard the contract. But, in an ironic twist, when Marx returned to Boston years later to attend business school, his original employer wanted to hire Marx as a consultant but couldn't because of his concern that Massachusetts courts would enforce the noncompete deal that the California company had Marx sign.

“You have California at one extreme and then you have a bunch of states at another extreme,” says Lee Fleming, a Harvard professor and one of Marx's co-authors. He and Marx believe businesses would be better served by ditching noncompetes and focusing their energy on enforcing covenants that specifically protect trade secrets.

The researchers hope the economic pressures of the recession will help weaken noncompetes. Companies are laying off workers en masse but insisting that those workers respect their noncompete deals, they say. That's a hard position to defend.

“Is that reasonable?” Fleming asks. “Do we really want to prevent [job seekers] from getting work where they can be productive?”

Give us your advice: Check out recent “Ask & Answer” questions.

If you need to cut costs, here's some tips on how to break the bad news to the staff.

Richard Ryan, Barberitos Southwestern Grille and Cantina, Charleston
I own a small restaurant that grosses around half a million a year. I am going into my third year and I currently employ six people. Most of them live off this job. I am holding a meeting today to explain why everybody will have their hours cut in half. Any advice on how to do this without losing the good performance and enthusiasm of the staff?

By Emily Maltby, CNNMoney.com writer

Many business owners today are finding themselves in the same position: The down economy forces them to make tough cost-cutting decisions, which may entail layoffs, pay cuts and reduced hours. These actions, while often essential to the bottom line, can make employees nervous, discouraged and sometimes depressed.

Because you don't want those negative feelings broadcast to your customers, you should prepare yourself well before diving into the meeting.

The first thing you need to evaluate is whether axing hours is actually the best course of action. Ask yourself whether eliminating jobs, for example, might be a better choice for your business and the employees, advises Bonnie Bernie, director of service operations at HR outsourcing firm Administaff.

"You have to look at all the options because you need to feel confident that you are making the right decision," she says. "Confidence is key when you are delivering negative news."

Keep in mind that employees probably see the writing on the wall. They know the economy is bad, and if they are seeing fewer customers, they can easily put two and two together. So make sure you give them credit for that by being open and honest.

"Acknowledge what they already know. You don't have to go deep into the company's financials, but you have to convey that you are in survival mode, that the downturn is impacting the business. Maybe that means stating that revenues are down a certain percent," Bernie says. "Convey that changes have to be made in order for the restaurant to remain open."

"You also have to send a message of hope," says Kevie Mikus, vice president of client services at The HR Group, another HR outsourcing firm. "Let them know that this was a difficult decision, and recognize that it will impact people's lives. But also stress that, because of these measures, you don't anticipate having to close the doors. If you believe this to be a temporary solution, then send them that message. If you can spell out the expected duration, then paint them a clear picture of what this will ultimately mean for the business when it's over."

Both Mikus and Bernie stress that leaders need to emphasize to the staff that everyone is in this together. Help them stay motivated by getting them involved in rebuilding the business.

"Ask for recommendations on cost containment and increasing sales," Bernie says. "Also consider cross-training them so that they can boost their skills."

Chances are that you know which employees are going to feel the impact of this decision the most – some may be struggling with bills, or with having other family members out of work. But don't make special concessions for them.

"You need to ask employees to step up their game, and if you are treating some people differently, others will hear about it," Bernie says. "That will take the focus off their own productivity."

One way to soften the bad news is to evaluate any other incentives that you may be able to offer to the employees. "Any little measure you can afford, like free meals, for example, could help to offset the blow," Mikus says.

As with any situation where you are dealing with people's livelihood, communication is essential. So make sure that following the meeting you are available and accessible.

Bernie recommends using this as an opportunity to hone your leadership skills. For example, keep the employees informed of the restaurant's progress so that they're not left making assumptions. Also, be sure to roll up your sleeves and show them that you, too, are stepping up your game.

If employees come to you with problems stemming from the new arrangement, do some research for them.

"Depending on where you are and on the employee's salary level, they may be eligible for benefits through a workforce commission. Give them some tools to work with if they need additional employment," Bernie says. "And when possible, be flexible if they have to take on another job."

Give us your advice: Check out recent “Ask & Answer” questions.

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To fire or not to fire – the ethics of the layoff

If you work with outside staffing agencies, both sides have some responsibility for ensuring that your workers are legal.

Sharon Rider, Lake Charles, La.
If a small business needs temporary help and uses a staffing firm to obtain hourly workers, who will be subject to penalties if the workers turn out to be illegal aliens? Is it the small business or the staffing firm?

By Adriana Gardella, Fortune Small Business Senior Editor

Both may be liable. "Immigration law generally imposes sanctions on those who knowingly employ unauthorized workers," says labor and employment lawyer Michael Thompson of Lehr Middlebrooks & Vreeland in Birmingham. So, depending on who knew – or should have known – that the employees lacked proper authorization, there could be liability for the business owner, the agency, or both.

There are also cases where neither will be liable. "If the proper employment documentation is presented by an employee who subsequently is found to be illegal, no one will be held liable as long as the employer acts to remedy the situation when advised," says Frida Glucoft, chair of the immigration practice at Mitchell Silberberg & Knupp in Los Angeles.

But that doesn't mean you can bury your head in the sand. "One of the regulations related to unlawful employment expressly extends enforcement beyond the direct employer to anyone who acts with reckless and wanton disregard for the legal consequences of permitting another individual to hire an unauthorized alien," Thompson cautions. He notes that in one well-known case, U.S. Immigration officials investigated Wal-Mart (WMT) because its contractors had hired cleaning crews that included unauthorized workers. In 2005 the retail giant settled the matter with the government for $11 million and agreed to create an internal program to ensure that its contractors comply with immigration laws.

So how can you avoid landing in a Wal-Mart-like bind? Thompson urges you to create a written agreement with any employment agency you use. "It should contractually obligate the agency to comply with all applicable employment verification procedures and, to the extent permitted by law, require it to defend you and hold you harmless against any claim or cause of action related to unauthorized employment."

Thompson also advises you to work only with reputable staffing agencies and to take appropriate action to investigate claims that they are assigning undocumented aliens to work at your firm.

This column provides general information only and is not intended to replace the services or legal advice of an attorney. Always consult a lawyer regarding any specific legal concerns, as laws vary from state to state.

Give us your advice: Check out recent “Ask & Answer” questions.

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Can I sue rivals for hiring illegal immigrants?

Prepare to hire your first employee

A father-son company seeks advice on formalizing roles and building a sustainable structure for growth.

James, Miami, Fl.
I am part of a small family-owned drywall contracting company, with previous experience in estimating potential projects. My father is the other half of the company, as he has experience in field work. We have experienced some success already, but I'm looking to create structure in our company and lack the experience to do so. What are the steps that I need to take to create clear-cut roles that I should follow? Do my dad and I need to assign responsibilities that we each stick to?

By Emily Maltby, CNNMoney.com staff writer
Defining roles is always difficult, and is even more challenging when the other party is a family member. Your general goal should be to establish clear spheres of responsibility – and then stay out of each other's area of expertise.

Gary Naumann, lecturer in entrepreneurship at the Carey School of Business Arizona State University, recommends sorting the critical tasks of the company into functional areas, such as operations, sales, office administration, finance and accounting. Then decide which of you is best suited to overseeing each area.

He suggests dividing and conquering so that you don't double-dip on every little issue. "In a small but growing business, there is no time for you to confer with each other about all the details of your respective areas of responsibility," he says. "My experience is that most of what each of you does in those areas should be done independently, thereby reserving the discussion time for those critical issues that require consultation."

This will become even more essential as you add employees – those who work for you will want to know what is going on and who to consult about various tasks. One tactic Naumann suggests is a "Who Does What" outline that you can hand out to your associates.

"This should not be limited to just the two of you," he says. "Rather, it should encompass all the key areas of your company so you are able to comfortably delegate certain tasks and everyone in the company knows who the 'go to' person is." This will also help you and your father concentrate on your key tasks.

Of course, with the division of responsibilities will come the challenge of remuneration. Formalizing pay arrangements is a key part of creating an official business structure.

"Compensation of family members is much less likely to be based on any objective criteria," says Allen Fishman, author of 9 Elements of Family Business Success. "The sooner the family business leader takes control of creating objective standards for dealing with compensation issues, the more likely it is the businesses will survive and flourish into succeeding generations of leadership."

Fishman recommends putting your policy into writing. "A clearly stated compensation policy often prevents conflict and is the best way to break through the emotional barriers that commonly come into play when discussing compensation," he says in his book. "It would be best if the family business developed its employee compensation policies to approximate the industry levels to some degree. It's not at all uncommon for family businesses to employ family members for more than the going rate."

If your company doesn't pay salaries and instead splits profits, compensation is generally based on ownership stakes. "From a tax standpoint, you can't start a business without a document that shows ownership," Fishman says. "If, for instance, one person runs a warehouse while another runs office operations, the payouts may be the same if they each own 50% of the company – even though their skill sets have different market value."

Fishman warns that in a very small business, such as a father-son operation, the issue of formalizing ownership stakes often isn't discussed unless there is a problem – when it's too late.

"Don't wait for a feeling of unfairness to arise before you sit down and talk," he recommends. "Documenting your visions for the company and how it should be run will help to ensure the company doesn't break apart in the future."

Health Savings Accounts are gaining popularity, but business owners need to take a close look to see if the low-cost, high-risk plans are right for their company.

Normand Savellano, Chino Hills, Calif.
I am president of my own company and my wife is vice-president. We pay ourselves a salary and get our health insurance through the corporation. Are we eligible for an HSA and for the corporation to contribute?

By Kathleen Ryan O’Connor, Fortune Small Business contributor
HSAs – or Health Savings Accounts – are a hot topic right now. Ever since President Bush launched a high-profile push to expand access to HSAs in 2006, an increasing number of consumers are choosing to spend their health care dollars on the IRA-like vehicle – to the tune of 6.1 million users, up 1.5 million from last year, according to the health insurance trade group America’s Health Insurance Plans.

But before jumping in headfirst, know that HSAs come with one very important eligibility criteria: You must first be enrolled in a high-deductible health plan, or HDHP, and not have coverage under any other health plan, including Medicare.

According to the Health Savings Account Resource Center a qualified HDHP is a health plan with a minimum annual deductible of $1,100 for an individual, $2,200 for a family. They recommend that an insurance carrier or licensed insurance professional verify that a plan qualifies for an HSA. You can get penalized for setting up HSAs without the appropriate insurance. The idea behind this combination is to strike that elusive balance between protecting against huge medical bills while still providing users with an incentive not to run to doctor with every sniffle or head cold.

But no two people are alike, so plenty of individual research is necessary before you decide to switch health plans. Some people balk at the fact that HDHPs feature higher annual deductibles than traditional health insurance. Small business owners also tend to like them because they can provide employees with health insurance at a lower cost.

The biggest lure with an HSA is that contributions to your HSA, within limits, are completely tax deductible, as are any withdrawals for qualified medical expenses. Plus, HSAs are fully portable, and the balance can roll over year-to-year up to a predetermined amount – a key difference between HSAs and FSAs (Flexible Spending Accounts). You won't face that year-end scramble to stock up on Tylenol to use up dollars that will otherwise disappear.

“You never lose it. It’s your account,” says Serena Yee, a St. Louis lawyer with Brian Cave LLP who specializes in employee benefit and retirement plans.

So what is the employer’s responsibility with HSAs? Very little, which is another thing that makes them attractive. Employers don’t have to contribute to their employees’ HSAs or even administer them. However, if you want to help your employees out, you're allowed to contribute up to the annual HSA funding limit. For 2008, that limit is $2,900 for individual coverage and $5,800 for a family. For 2009, it will be $3,000 for an individual, $5,950 for a family.

But there are some rules. Contributions among employees must be equitable – you can’t contribute $1,000 to one worker and a $1 to another – and if an employee leaves, your contribution walks out the door with them, even if they’ve only been there a short-time.

The National Health Policy Forum offers a great deal of information about HSAs. Other good information sources include Information Strategies, a media and marketing company that runs a Web site called HSA Finder, and the Small Business Guide to HSAs by JoAnn Mills Laing.

Consulting with a qualified tax professional is also a smart idea, since the tax implications for a corporation are going to be different than those for an individual or family.

Rob Wilson, president of Employco, a Chicago company that handles payroll and benefits for small businesses, says that while HSAs have been slow to catch on, companies continue to keep an eye on them. After all, an HSA is a radical departure from a more traditional health plan – and the full benefit isn’t necessarily felt right away, he says.

Typically, in the first year you are paying the higher deductible without accruing any significant balance on the account, so a consumer has to be committed for the long haul. With HSAs, the idea is, “The less I go [to the doctor], the less I spend,” Wilson says – which also might be a problem for some people.

“Part of it is education,” he says.

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Claudino Petruccelli, Owner, Petruccelli Pasta, Ridgewood, N.J.
My wife and I are selling our food business. Although we're exhausted emotionally and physically, we want to start another company – but not to the detriment of our three young children. How do successful owners manage their businesses without wrecking their home lives?

By Lenora Chu, Fortune Small Business contributor
Your question addresses an ongoing challenge for most business owners. "As entrepreneurs, we tend to take the world on our shoulders to make our businesses succeed, but success can come at the expense of our personal and family lives," says Jennifer Tyler, co-owner of the Los Angeles branch of OneCoach, a national small-business growth services consultancy. The major difference between entrepreneurs who manage to have it all (or come reasonably close) and those who don't, is how they work, Tyler says.

Start by identifying the tasks that you're naturally good at, Tyler suggests. Leave the chores that don't readily fall within your capabilities to smart, experienced hired hands. They'll produce results in half the time. In other words, delegate. To whom? Your resources can include part-time employees, consultants, or even virtual assistants.

It's also important to maintain a separation between work life and family life, says small-business consultant Doug Williams, based in Vancouver, Wash. Determine how you'll establish and maintain that separation before launching your new business. For example, tell clients they can reach you only during certain hours of the day, and when they do, give them your undivided attention. "It's amazing how much respect you'll get from clients once you set that boundary," Williams says. "Without it, you'll be receiving calls during dinner and on holidays – and families suffer."

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You can still cut back without shedding staff. Here's how.

Avery Wasoleck, Partner, Lane Office Furniture, New York City
When costs need to be cut, the first thought is often employee layoffs. Is there a more creative way for my business to achieve savings?

By Elise Reinemann, Fortune Small Business contributor
Layoffs, which can put a dent in company production and morale, are not as efficient as you may think. And the cost of severance packages and unemployment benefits can add up. So you're wise to pursue alternatives.

Steve Kane, managing director at Kane Partners in Hillsborough, Calif., suggests "spreading the pain." Instead of bidding your workers farewell, try cutting hours, the pay per hour, or compensation across the board. In fact, some employees may be okay with a reduced workweek that lets them temporarily trade money for time, says Pamela Brandes, associate professor of management at Syracuse University. They might welcome the chance to pursue other interests or care for children or elderly relatives. Brandes also advises rethinking your scheduling: Limit expensive overtime, ask employees to take extra, nonpaid vacation time, and don't fill vacant jobs.

Try to determine whether the dip is short or long term. Attracting a competent staff is expensive, Kane says. So if the problem is short term, it makes better sense to restructure temporarily rather than terminate employees permanently.

Layoffs can be especially trying for small businesses, notes Brandes, because they disrupt what are often close-knit networks of colleagues. Survivor employees tend to sympathize with departed co-workers and must struggle with increased workloads as they worry about their own job security. But if a layoff is inevitable, Brandes advises you to help your employees by putting the word out to business partners. A supplier or distributor might be looking for talented workers.
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Debbie, Harland Clarke, Blaine, Minn.
Is it possible to up the insurance premius for smoker employees in some divisions of the company and not others?

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Jeremy, Phoenix
I own and operate a small residential and commercial cleaning company. I want to grow it as big as I can. How do I go about hiring people (considering this isn't a career for the vast majority of individuals).  Also, considering gas prices are substantial, I'm assuming I'll have to increase overall wages per hour, correct?

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David Armstrong, Armstrong Fence Co., Pembroke, Mass
Is there a formula to help me determine how much more costly it is to pay overtime to complete a job the same day vs. going back a second day for a short period of time?

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Susan Kelley, Kellsson Linens Inc., Denver
Currently I have a traditional health insurance plan for my business partner and myself. However, I hardly use my insurance, while my partner uses all of his and more. I would like to change from this tradtional health insurance into either a Health Savings Account or Health Reimbursement Account, but find it difficult to get information in regards to how these plans operate, and which would be most beneficial to the company and/or to each of us personally. Can you breakdown these 2 plans, with the pros and cons of each plan, so I can make a more informed decision before our current insurance renewal date?

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Uninvolved owners can receive profit distributions instead of salaries, but mind the legal and financial fine print.

Antonio Costa, West Palm Beach, Fla.
I have two uncles living in Florida who co-own a successful business up north. Although they stopped running day-to-day operations about four years ago, they still receive full salaries. Because they no longer run the business, can their salaries become dividend payments instead? Can they still receive dividends if the S-corp shows a loss?

By Meg Massey, Fortune Small Business contributor
Dear Antonio: Before you attempt to work out an alternate form of payment for your uncles, make sure you understand the nature of their affiliation with their business. While they may no longer make daily decisions, they could still be waiting out contracts.

“If your uncles have employment contracts with the company, the business may be bound to pay them salaries until those contracts expire,” says Jonas Grant, a business lawyer based in Burbank, Calif.

Are they still occupying titular roles as directors or officers? If so, “they do ultimately run the business, regardless of whether they're handling day-to-day operations,” says Grant. In this case, they would still be worth salaries in the eyes of the IRS.

Double-check that your uncles are completely uninvolved with the company. “They can take profit distributions (the equivalent of dividends in an S-corporation) in lieu of salaries if they aren't providing any services,” says Kerry Bingaman, a CPA in St. Petersburg, Florida. Ask your uncles to be 100% transparent with you about their interactions with the business.

Once you're clear about their lack of contracts, titles, and services, you can encourage your uncles to accept profit distributions instead of salaries. If they're the only shareholders, it's easy to make the switch.

“They should stop taking salaries and start taking distributions, depending on the company's profits, or retained earnings,” says Bingaman. “Distributions must be pro-rata based on the ownership held by all shareholders. They should not exceed retained earnings, or they may have capital gains on the distributions.” She adds: “If there are more shareholders involved, the answer could be different.”

It's impossible for them to receive any profit distributions in a year in which the corporation shows a loss. “S-corporations are pass-through tax entities, so their profits or losses after expenses are distributed to shareholders in accordance with their ownership interests,” says Grant. So before you encourage your uncles to drop their salaries in favor of distributions, find out how the business is doing – and consult with a CPA.

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Mary Hardenbergh, Northville, Mich.
I run a a temporary staffing company. Clients often want to hire my consultant for the position we are temporarily filling. What is an appropriate "finder's fee" that should be charged to the client, considering they are taking one of my independent contractors?

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