Network questions and answers: reader-to-reader advice on miscellaneous topics.
Discount Suits
My small manufacturing business has a big problem. PIE Nationwide, our freight carrier, earned our business after offering us great discounts. Now PIE has filed for bankruptcy protection, and the trustees have filed a complaint for the amount of the discounts, totaling several thousand dollars. We can't pay a lawyer, and we can't pay the fees. What can we do?
JoAnne Forman
Executive Vice-President
Tearstrip Systems
Boyertown, Pa.
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The PIE case has prompted reams of news copy, legislative action in Congress, and legal action that has reached the U.S. Supreme Court. Briefly, this is what happened: Carriers file tariffs with the Interstate Commerce Commission (ICC), stating their shipping fees. In the early 1980s, carriers (like PIE) and shippers (like your company) began agreeing to discounts. Occasionally, the carriers failed to file the discounted rate with the ICC. When those carriers began to file for bankruptcy protection, auditors noted the discrepancy and questioned the legality of those discounts. Trustees then began to sue shippers for the difference, or undercharges.
That was the first phase of these lawsuits, according to lawyer Dan Sweeney, a partner with the Washington, D.C., firm of McCarthy, Sweeney & Harkaway. The second phase began when auditors questioned contracts that did not comply with ICC regulations, for various reasons, and trustees went after those undercharges, too. The third phase began in December 1991, when a Los Angeles court ruled that trustees for Trans-con, another bankrupt carrier related to PIE, also could sue for undercharges.
Shippers are going to the ICC to challenge the reasonableness of the higher charges. One question that's still being resolved is this: do shippers who are being sued have to pay the undercharges before filing challenges, or can they place the amount of undercharges in escrow -- or not do anything -- while they wait for an ICC ruling on "reasonableness"? That question is now before the U.S. Supreme Court.
According to Ken Siegal of the American Trucking Association (ATA), trustees of PIE and Transcon are seeking almost $1 billion in undercharges from hundreds of shippers -- including the ATA itself, which used PIE to ship its products.
Your options: Siegal hears that PIE is settling some cases out of court for about 50¢ on the dollar. Or you could join one of the defense committees sharing lawyers' fees among defendants in the PIE case, in a limited reverse-class-action suit. The ATA, which PIE is suing for $3,700, has joined one committee headed by Sweeney. He has filed answers to the complaint against the ATA and to all interrogatories, and has motioned to combine the several claims whose defendants he represents and dismiss them. All that has cost the ATA less than $260 so far. You could join this defense, for $200, after becoming a member of the National Small Shipments Traffic Conference. (Membership fees start at $240 for companies with revenues of $3 million or less; contact Bill Moran, 407-778-7782.) Your share of legal costs may run 5% to 10% of your undercharge claim. The Transportation Claims and Prevention Council also has formed a defense group representing about 600 defendants, headed by Northport, N.Y., lawyer Bill Augello.
Educate yourself about the entire affair. Conduct a Nexis search at a local library, and call 60 Minutes (800-848-3256) for a videotape ($33.45) of the segment "You're Kidding," which dealt with PIE and aired October 4, 1992. Or call 800-777-8398 for a transcript ($5).
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Written in Inc.
I'm working on a great business idea, but it will be at least two years before it generates revenues, so I need to keep my full-time job. When is the best time to incorporate? I've already incurred travel expenses (for site selection) and training expenses (for my M.B.A.), and soon I will have equipment expenses (for a word processor) and professional-association dues. The prospective business is not related to my present job.
Name Withheld
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You don't have to incorporate at all. A sole proprietorship is cheaper and easier -- you register at your town clerk's office for about $13 -- and it keeps taxes simple, since you pay as an individual (and deduct your business expenses on Schedule C of your personal tax form). The arguments for incorporation are that you limit your personal liability and you deduct business losses from your taxable income. So if you choose to incorporate, the sooner the better.
And the cheaper, too. The actual filing with the IRS will cost about $500, but you'll also pay legal and accounting fees. Since you're still at an early stage, those should total less than $100, but they'll rise if advisers have to organize your business's messy prehistory.
Neatness counts with prospective investors, too, says Tony Mendoza, a lawyer with the Los Angeles firm of Riordan & McKenzie. "It's best to have in place, from the beginning, a structure investors are used to, a clean history of the company."
You may form a C corporation and pay both corporate taxes and personal taxes on salary and dividends; or an S corporation, and pay only personal tax, as a sole proprietor would. In either case, you may deduct rent and salary, but you must keep business operations separate from personal financials. The Small Business Legal Advisor, by William A. Hancock (McGraw-Hill, 1992, $29.95; 800-233-1128), details the various legal forms a business can take.
What's in a Name?
We've been in business a year now, selling fax machines nationwide by mail order. Another Harvard Fax is doing business in New York State. That company wants us to change our name or do business under a different name in New York. What does the law require of us?
