Forfeiture Sharing in Arizona

July 11, 2017

Legislative directives have required law enforcement to rely to some extent on the proceeds of forfeitures since the Arizona Anti-Racketeering Revolving Fund was created in 1980, followed by federal legislation allowing federal sharing with state and local law enforcement agencies in 1984.  Sharing of forfeiture case proceeds has evolved rapidly since these early days, with state amendments in most of the years since 1980 and federal statutory or policy adjustments almost as frequently.  In 1994 the Arizona Legislature made substantial changes to its financial directives in this field.  Meanwhile, the U.S. Department of Justice was amending its “Guide to Equitable Sharing of Federally Forfeited Property for State and Local Law Enforcement Agencies” (“Guide”), dated March 1994 but disseminated in April and May, after the Arizona statutory changes were finalized but before the July 17, 1994 effective date of the 1994 act.

The net effect of these changes is substantial enough to create concern among police administrators and supervisors who have responsibility to keep their department’s forfeiture funds within all of the applicable guidance.  This summary is intended to alert the reader to potential issues that may require administrative attention.  It is not a detailed explanation of the applicable statutes or federal guidance.  These are found in A.R.S. § 13-2314.01 (Attorney General’s Anti-racketeering Revolving Fund), A.R.S. § 13-2314.03 (County Attorney’s Anti-racketeering Revolving Fund), and A.R.S. § 13-4315 for state issues and in the Guide and 21 U.S.C. § 881(e)(1)(A) and (e)(3), 18 U.S.C. § 981(e)(2), and 19 U.S.C. § 1616a for federal issues.

Funds derived from Arizona state court forfeitures and racketeering cases are subject to A.R.S. § 13-2314.01 (Attorney General’s Anti-racketeering Revolving Fund), A.R.S. § 13-2314.03 (County Attorney’s Anti-racketeering Revolving Fund), (collectively referred to as the “Revolving Funds”) and A.R.S. § 13-4315(B), which takes precedence over “any other provision of law to the contrary.”

The Revolving Fund statutes direct all monies from state cases or from federal sharing into one of the sixteen funds, one for each county and one for the Attorney General.  If the receiving agency is a state agency, the money must go into the state fund. Otherwise, the agency/political subdivision may elect either the state fund or the fund of the appropriate County Attorney.

The application of A.R.S. § 13-4315(B) will supersede this if the money can be identified as being from its investigative funds or as having been exchanged for property from its investigative property.  This means that “reversal” and “sting” monies go directly back to the agency.  The other exception to the rule that all monies go to the Revolving Funds is that the investigative agency may make a showing of costs and expenses which it incurred in connection with the investigation and prosecution, in which case the court is to order that amount returned to the agency.  In practice, few agencies have used this mechanism, since it requires time accounting.

Advertisements

Money Laundering – Financing of Crime

June 28, 2017

There are many different forms of money laundering, both State and Federal, and there are an infinite number of methods used to launder money.  Criminal Enterprises are composed of sects within their organization; for example, Criminal Enterprises may be divided into Production, Processing, Transportation, Sales and Money Laundering.  Money Laundering is a necessary element of the Criminal Enterprise.  The Money Laundering aspect of any Criminal Enterprise is often the key to the organization as the top echelon of the organization has a greater need to launder money as it is the key resources due to the fungible and powerful nature of this type of property.

There are two basic types of money laundering transactions from an investigative perspective; Cash Out and Cash In.  Cash Out are those transactions in which the money is flowing away from the launderer.

Statutory Controls aimed at Money Laundering are either prohibitions on certain types of conduct, transaction reporting requirements designed at making money laundering harder by making it hard to get cash into the financial system or use it in large quantities, and the licensing and regulation of money transmitters or those plugged into the financial system.  These Statutory Controls are enforced by State and Federal prosecutors using criminal and civil remedies.

Money Laundering and the Financing of Crime is an ever evolving area with creative and complex legal issues that revolve around the discovery and concealment various financial activities.

Administrative Subpoenas

June 27, 2017

Through A.R.S. § 13-2315, the Arizona Legislature authorized the Attorney General to issue administrative subpoenas to obtain information from financial institutions “in order to investigate racketeering as defined by § 13-2301, subsection D, paragraph 4 or a violation of § 13-2312 [relating to racketeering conducted through a criminal enterprise].”   A.R.S. § 13-2315(A).  In the event of noncompliance, the Attorney General is authorized to petition the superior court for enforcement and the court is directed that “enforcement shall be granted if the request is reasonable and the attorney general . . . has reasonable grounds to believe the records sought to be inspected are relevant to a civil or criminal investigation of an offense included in the definition of racketeering in § 13-2301, subsection D, paragraph 4 or a violation of § 13-2312.”  A.R.S. § 13-2315(B).  Thus, under the statute, the information must be relevant to an investigation of racketeering, not relevant to a known act of racketeering.

The general rule of administrative subpoenas is broad application:

Because judicial power is reluctant if not unable to summon evidence until it is shown to be relevant to issues in litigation, it does not follow that an administrative agency charged with seeing that the laws are enforced may not have and exercise powers of original inquiry.  It has a power of inquisition, if one chooses to call it that, which is not derived from the judicial function.  It is more analogous to the Grand Jury, which does not depend on a case or controversy for power to get evidence but can investigate merely on suspicion that the law is being violated, or even just because it wants to assure itself that it is not.

 

United States v. Morton Salt Co., 338 U.S. 632, 642-43 (1950).  Administrative subpoenas differ from discovery, so the cases that WU cites that do not involve administrative subpoenas, such as Northwest Memorial Hosp. v. Ashcroft, 362 F.3d 923 (7th Cir. 2004) (applying Fed.R.Civ.P. 45(c)) and Dart Industries Co. v. Westwood Chemical Co., 649 F.2d 646 (9th Cir. 1980) (cited for a proposition it does not support), do not apply here.

To qualify as “racketeering,” and thereby meet that element of A.R.S. § 13-2315, conduct must “chargeable or indictable” in Arizona and described in § 13-2301(D)(4) (defining “racketeering” and listing qualifying conduct).   The list includes money laundering (A.R.S. § 13-2301(D)(4)(b)(xxvi), illegal drug trafficking, (id. (xi)), and human smuggling, (id. (xxx)).  This definition specifically includes preparatory offenses such as conspiracy.  A.R.S. § 13-2301(D)(4) (“Racketeering” means any act, including any preparatory or completed offense  . . .”).

Conduct is chargeable or indictable in Arizona if it meets the requirements of A.R.S. § 13-108, which provides, in pertinent part:

This state has territorial jurisdiction over an offense that a person commits by his own conduct or the conduct of another for which such person is legally accountable if:

  1. Conduct constituting any element of the offense or a result of such conduct occurs within this state; or
  2. The conduct outside this state constitutes an attempt or conspiracy to commit an offense within this state and an act in furtherance of the attempt or conspiracy occurs within this state;

 

Pursuant to A.R.S. § 13-108, a conspiracy to engage in money laundering, drug or human smuggling, or a conspiracy to conduct a criminal enterprise, that includes acts in furtherance of that conspiracy in Arizona may be charged or indicted in Arizona, including acts in furtherance of the conspiracy that occurred in Sonora.  State v. Willoughby, 181 Ariz. 530, 541, 892 P.2d 1319, 1330 (1995); State v. Chan, 188 Ariz. 272, 274-75, 935 P.2d 850, 853-53 (App. 1996).  Thus, the Attorney General has authority to investigate conspiracies to engage in money laundering in furtherance of human and drug smuggling or to conduct a criminal enterprise through those crimes in which one or more acts in furtherance of the conspiracy occur in Arizona.

AVVO’s Client’s Choice Award 2012

October 24, 2012

I was rated by a number of former clients and due to the positive feedback I have been awarded AVVO’s Client’s Choice Award for 2012.  If you would like to see the reviews, additional information about me and my practice, or otherwise view this award please visit the link below:

<img alt=”Avvo – Rate your Lawyer. Get Free Legal Advice.” src=”http://assets1.iavvo.com/aae6a1f/images/microbadge.png?aae6a1f” />

 

 

 

Buying a Business: What You Need to Know

August 9, 2011

Thinking about purchasing an existing business? Here are some things you should know before you take the plunge.

For some people, buying an existing business is a better option than starting one from scratch. Why? Because someone else has done much of the legwork for you, such as establishing a customer base, hiring employees, and negotiating a lease. Still, you’ll need to do some thorough research to make sure that what you see is what you’ll get.

What Type of Business Should You Buy?

Look for a business that has some connection to types of work you’ve done in the past, classes you’ve taken, or perhaps skills you’ve developed through a hobby. It’s almost always a mistake to buy a business you know little about, no matter how good it looks. For one thing, your lack of knowledge about the industry might cause you to overpay. And if you do buy the business, you’ll have to struggle up a steep learning curve afterward.

But do try to choose a business that you’re excited by. It’s easier to succeed in business when you enjoy the work you’re doing.

Finding a Business to Buy

As you begin your hunt for the perfect company, consider starting close to home. For instance, if you’re currently employed by a small business you like, find out whether the present owner would consider selling. Or, ask business associates and friends for leads on similar businesses that may be on the market. Many of the best business opportunities surface by word of mouth — and are snapped up before their owners ever list them for sale.

Other avenues to explore include newspaper ads, trade associations, real estate brokers, and business suppliers. Finally, there are business brokers — people who earn a commission from business owners who need help finding buyers. It’s fine to use a broker to help locate a business opportunity, but it’s foolish to rely on a broker — who doesn’t make a commission until a sale is made — for advice about the quality of a business or the fairness of its selling price.

Research the Business’s History and Finances

Before you seriously consider buying a particular business, find out as much as you can about it. Thoroughly review copies of the business’s certified financial records, including cash flow statements, balance sheets, accounts payable and receivable, employee files, including benefits and any employee contracts, and major contracts and leases, as well as any past lawsuits and other relevant information.

This review (lawyers call it “due diligence”) will not only help you understand how the company ticks, but will alert you to potential problems. For instance, if a major contract like a lease prohibits you from taking it over without the landlord or other party’s permission, you won’t want to finalize the deal without getting that permission. Don’t be shy about asking for information about the business, and if the seller refuses to supply any information, or if you find any misinformation, this may be a sign that you should look elsewhere. For an extensive list of questions you’ll want answered before committing to a purchase, seeThe Complete Guide to Buying a Business, by attorney Fred S. Steingold (Nolo).

Closing the Deal

If you’ve thoroughly investigated a company and wish to go ahead with a purchase, there are a few more steps you’ll have to take. First, you and the owner will have to agree on a fair purchase price. A good way to do this is to hire an experienced appraiser. Next, you and the business owner will agree on which assets you’ll buy and the terms of payment — most often, businesses are purchased on an installment plan with a sizable down payment.

After you have outlined the terms on which you and the seller agree, you’ll need to create a written sales agreement and possibly have a lawyer review it before you sign on the dotted line. One good resource is The Complete Guide to Buying a Business, by attorney Fred S. Steingold (Nolo), which contains a fill-in-the-blank sales agreement.

This blog is meant to be informative and does not constitute legal advice, and while I do encourage others to post and discuss this topic, I can not and will not respond to any questions as it can create a conflict of interest and possible ethical violations.

 

Contracts 101: Make a Legally Valid Contract

August 9, 2011

All you need is a clear agreement and mutual promises to exchange things of value.

Lots of contracts are filled with mind-bending legal gibberish, but there’s no reason why this has to be true. For most contracts, legalese is not essential or even helpful. On the contrary, the agreements you’ll want to put into a written contract are best expressed in simple, everyday English.

Most contracts only need to contain two elements to be legally valid:

  • All parties must be in agreement (after an offer has been made by one party and accepted by the other).
  • Something of value must be exchanged — such as cash, services, or goods (or a promise to exchange such an item) — for something else of value.

Does a contract have to be in writing? In a few situations, contracts must be in writing to be valid. State laws often require written contracts for real estate transactions or agreements that will last for more than one year. You’ll need to check your state’s laws to determine exactly which contracts must be in writing. But even if it’s not legally required, it’s always a good idea to put business agreements in writing, because oral contracts can be difficult or impossible to prove.

Let’s take a closer look at the two required contract elements: agreement between the parties, and exchange of things of value.

Agreement Between the Parties

Although it may seem like stating the obvious, an essential element of a valid contract is that all parties must agree on all major issues. In real life, there are plenty of situations that blur the line between a full agreement and a preliminary discussion about the possibility of making an agreement. To help clarify these borderline cases, the law has developed some rules defining when an agreement legally exists.

Offer and Acceptance

The most basic rule of contract law is that a legal contract exists when one party makes an offer and the other party accepts it. For most types of contracts, this can be done either orally or in writing.

Let’s say, for instance, you’re shopping around for a print shop to produce brochures for your business. One printer says (or faxes, or emails) that he’ll print 5,000 of your two-color flyers for $300. This constitutes his offer.

If you tell the printer to go ahead with the job, you’ve accepted his offer. In the eyes of the law, when you tell the printer to go ahead you create a contract, which means you’re liable for your side of the bargain (in this case, the payment of $300). But if you tell the printer you’re not sure and want to continue shopping around (or don’t even respond, for that matter), you haven’t accepted the offer, and no agreement has been reached.

But if you tell the printer the offer sounds great except that you want the printer to use three colors instead of two, no contract has been made. This is because you have not accepted all of the important terms of the offer. You have actually changed one term of the offer. (Depending on your wording, you have probably made a counteroffer, which is discussed below.)

When Acceptance Occurs

In day-to-day business, the seemingly simple steps of offer and acceptance can become quite convoluted. For instance, sometimes an offer isn’t quickly and unequivocally accepted; the other party may want to think about it for a while, or try to get a better deal. And before the other party accepts your offer, you might change your mind and want to withdraw or amend it. Delaying acceptance of an offer and revoking an offer, as well as making a counteroffer, are common situations that may lead to confusion and conflict. To minimize the potential for a dispute, here are some general rules you should understand and follow.

How Long an Offer Stays Open

Unless an offer includes a stated expiration date, it remains open for a “reasonable” time. What’s reasonable, of course, is open to interpretation and will vary depending on the type of business and the particular fact situation.

To leave no room for doubt as to when the other party must make a decision, the best way to make an offer is to include an expiration date.

If you want to accept someone else’s offer, the best approach is to do it as soon as possible, while there’s no doubt that the offer is still open. Keep in mind that until you accept, the person or company who made the offer — called the offeror — may revoke the offer.

Revoking an Offer

Whoever makes an offer can revoke it as long as it hasn’t yet been accepted. This means that if you make an offer and the other party wants some time to think it through, or makes a counteroffer with changed terms, you can revoke your original offer. Once the other party accepts, however, you’ll have a binding agreement. Revocation must happen before acceptance.

An exception to this rule occurs if the parties agree that the offer will remain open for a stated period of time.

Offers With Expiration Dates

An offer with an expiration date is called an option, and it usually doesn’t come for free. Say someone offers to sell you a forklift for $10,000, and you want to think the offer over without worrying that the seller will withdraw the offer or sell to someone else. You and the seller could agree that the offer will stay open for a certain period of time — say, 30 days. Often, however, the seller will ask you to pay for this 30-day option — which is understandable, because during the 30-day option period, the seller can’t sell to anyone else.

Payment or no payment, when an option agreement exists, the offeror cannot revoke the offer until the time period ends.

Counteroffers

Often, when an offer is made, the response will be to start bargaining. Of course, haggling over price is the most common type of negotiating that occurs in business situations. When one party responds to an offer by proposing something different, this proposal is called a “counteroffer.” When a counteroffer is made, the legal responsibility to accept, decline or make another counteroffer shifts to the original offeror.

For instance, suppose your printer (here, the original offeror) offers to print 5,000 brochures for $300, and you respond by saying you’ll pay $250 for the job. You have not accepted his offer (no contract has been formed) but instead have made a counteroffer. If your printer then agrees to do the job exactly as you have specified, for $250, he’s accepted your counteroffer, and a legal agreement has been reached.

Even though a contract is formed only if the accepting party agrees to all substantial terms of an offer, this doesn’t mean you can rely on inconsequential differences to void a contract later. For example, if you offer to buy 100 chicken sandwiches on one-inch-thick sourdough bread, there is no contract if the other party replies that she will provide 100 emu filets on rye bread. But if the other party agrees to provide the chicken sandwiches on one-inch-thick sourdough bread, a valid contract exists, and you can’t later refuse to pay if the bread turns out to be a hair thicker or thinner than one inch.

Exchange of Things of Value

In addition to both parties’ agreement to the terms, a contract isn’t valid unless both parties exchange something of value in anticipation of the completion of the contract.

Consideration Defined

The “thing of value” being exchanged — which every law student who ever lived has been taught to call “consideration” — is most often a promise to do something in the future, such as a promise to perform a certain job, or a promise to pay a fee for a job. For instance, let’s return to the example of the print job. Once you and the printer agree on terms, there is an exchange of things of value (consideration): The printer has promised to print the 5,000 brochures, and you have promised to pay $250 for them.

Gifts vs. Contracts

The main importance of requiring things of value to be exchanged is to differentiate a contract from a generous statement or a one-sided promise, neither of which are enforceable by law.

If a friend offers you a gift without asking anything in return — for instance, offering to stop by to help you move a pile of rocks — the arrangement wouldn’t count as a contract because you didn’t give or promise your friend anything of value. If your friend never followed through with her gift, you would not be able to enforce her promise.

However, if you promise your friend you’ll help her weed her vegetable garden on Sunday in exchange for her helping you move rocks on Saturday, a contract exists.

Promises vs. Action

Although the exchange-of-value requirement is met in most business transactions by an exchange of promises (“I’ll promise to pay money if you promise to paint my building next month”), actually doing the work can also satisfy the rule.

If, for instance, you leave your printer a voicemail message that you’ll pay an extra $100 if your brochures are cut and stapled when you pick them up, the printer can create a binding contract by actually doing the cutting and stapling. And once he does so, you can’t weasel out of the deal by claiming you changed your mind.

For over 140 contracts, forms, and worksheets that you’ll use in starting and running your business, get Nolo’s Quicken® Legal Business Pro. It also brings five Nolo best-selling business books together in one easy-to-use software package.

This blog is meant to be informative and does not constitute legal advice, and while I do encourage others to post and discuss this topic, I can not and will not respond to any questions as it can create a conflict of interest and possible ethical violations.

 

The LLC Operating Agreement

July 5, 2011

Create an operating agreement to limit your liability and more.

An LLC (limited liability company) operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your business. In your operating agreement, you and your co-owners establish each owner’s percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of you leaves.

For general information on limited liability companies (LLCs), see LLC Basics.

Why You Need an Operating Agreement

While many states do not legally require your LLC to have an operating agreement, it’s foolish to run an LLC without one, even if you’re the sole owner of your company.

An operating agreement will help you guard your limited liability status, head off financial and management misunderstandings, and make sure your business is governed by your own rules — not default rules created by your state.

Protecting Your Limited Liability Status

The main reason to make an operating agreement is to help ensure that courts will respect your limited personal liability. This is particularly key in a one-person LLC where, without the formality of an agreement, the LLC will look a lot like a sole proprietorship. Having a formal written operating agreement will lend credibility to your LLC’s separate existence.

Defining Financial and Management Structure

Co-owned LLCs need to document their profit-sharing and decision-making protocols as well as their procedures for handling the departure and addition of members. Without an operating agreement, you and your co-owners will be ill-equipped to settle misunderstandings over finances and management. What’s more, your LLC will be subject to the default operating rules created by your state law.

Overriding State Default Rules

Each state has laws that set out basic operating rules for LLCs, some of which will govern your business unless your operating agreement says otherwise. (These are called “default rules.”)

Many states, for example, have a default rule that requires owners to divide up LLC profits and losses equally, regardless of each member’s investment in the business. If you and your co-owners did not invest equal amounts in the LLC, you probably don’t want to allocate profits equally. To avoid this, your operating agreement must spell out how you and your co-owners will split profits and losses.

By writing an operating agreement, you can choose the rules that will govern your LLC’s inner workings, rather than having to follow default rules that may or may not be right for your LLC.

What to Include in Your Operating Agreement

There’s a host of issues you must cover in your LLC operating agreement, some of which will depend on your business’s particular situation and needs. Most operating agreements include the following:

  • the members’ percentage interests in the LLC
  • the members’ rights and responsibilities
  • the members’ voting powers
  • how profits and losses will be allocated
  • how the LLC will be managed
  • rules for holding meetings and taking votes, and
  • buyout, or buy-sell, provisions, which determine what happens when a member wants to sell his or her interest, dies, or becomes disabled.

While these items may seem fairly straightforward, each requires you to make some important decisions, which you should spell out in your operating agreement.

Percentages of Ownership

The owners of an LLC ordinarily make financial contributions of cash, property, or services to the business to get it started. In return, each LLC member gets a percentage of ownership in the assets of the LLC. Members usually receive ownership percentages in proportion to their contributions of capital, but LLC members are free to divide up ownership in any way they wish. These contributions and percentage interests are an important part of your operating agreement.

Distributive Shares

In addition to receiving ownership interests in exchange for their contributions of capital, LLC owners also receive shares of the LLC’s profits and losses, called “distributive shares.”

Most often, operating agreements provide that each owner’s distributive share corresponds to his or her percentage of ownership in the LLC. For example, because Tony owns only 35% of his LLC, he receives just 35% of its profits and losses. Najate, on the other hand, is entitled to 65% of the LLC’s profits and losses because she owns 65% of the business.

(If your LLC wants to assign distributive shares that aren’t in proportion to the owners’ percentage interests in the LLC, you’ll have to follow rules for “special allocations.” For more information, see Making Special Allocations.)

Distributions of Profits and Losses

In addition to defining each owner’s distributive share, your operating agreement should answer these questions:

  • How much — if any — of the LLC’s allocated profits (the members’ distributive shares) must be distributed to LLC members each year?
  • Can members expect the LLC to pay them at least enough to cover the income taxes they’ll owe on each year’s allocation of LLC profits? (An LLC owner, like a partner in a partnership, has to pay income taxes on the full amount of profits that are “allocated” to him or her, not just on profits that are actually paid out. When profits are plowed back into the business instead of being paid out, they are still treated as taxable income to the owners, in the proportions allocated.)
  • Will distributions of profits be made regularly or are the owners entitled to draw at will from the profits of the business?

Because you and your co-owners may have different financial needs and marginal tax rates (tax brackets), the allocation of profits and losses is an area to which you should pay particular attention. You may want to run the allocation part of your operating agreement by a tax professional, to make sure it achieves the overall results you had in mind.

Voting Rights

While most LLC management decisions are made informally, sometimes a decision is so important or controversial that a formal vote is necessary. There are two ways to split voting power among LLC members:

  • each member’s voting power corresponds to his or her percentage interest in the business, or
  • each member gets one vote — called “per capita” voting.

Most LLCs mete out votes in proportion to the members’ ownership interests. Whichever method you choose, make sure your operating agreement specifies how much voting power each member has, as well as whether a majority of the votes or a unanimous decision will be required to resolve an issue.

Ownership Transitions

Many new business owners neglect to think about what will happen if one owner retires, dies, or decides to sell the owner’s interest in the company. Operating agreements should include a buyout scheme — rules for what will happen when a member leaves the LLC for any reason.

How to Create an Operating Agreement

Obviously, you’ll need help beyond this article to make your own operating agreement. There are many sources for blank or sample LLC operating agreements, but you must be sure that your operating agreement is drafted to suit the needs of your business and the laws of your state.

Use a lawyer. You can pay a business lawyer for assistance — often recommended for LLCs with more than five owners and those that will be run by a special manager or management group rather than all owners. Although using a lawyer can get pricey, the peace of mind you’ll gain from knowing that your LLC is protected — and has adopted operating rules that will best serve its interests — may well be worth the cost.

This blog is meant to be informative and does not constitute legal advice, and while I do encourage others to post and discuss this topic, I can not and will not respond to any questions as it can create a conflict of interest and possible ethical violations.

 

How to Form a Corporation

June 7, 2011

To form your own corporation, you must take these essential steps.

If you’ve sorted through the many types of business structures and decided to create a corporation, you’re facing a list of important — but manageable — tasks. Here’s what you must do:

  1. Choose an available business name that complies with your state’s corporation rules.
  2. Appoint the initial directors of your corporation.
  3. File formal paperwork, usually called “articles of incorporation,” and pay a filing fee that ranges from $100 to $800, depending on the state where you incorporate.
  4. Create corporate “bylaws,” which lay out the operating rules for your corporation.
  5. Hold the first meeting of the board of directors.
  6. Issue stock certificates to the initial owners (shareholders) of the corporation.
  7. Obtain any licenses and permits that are required for your business.

Choosing a Corporate Name

The name of your corporation must comply with the rules of your state’s corporation division. You should contact your state’s office for specific rules, but the following guidelines usually apply:

  • The name cannot be the same as the name of another corporation on file with the corporations office.
  • The name must end with a corporate designator, such as “Corporation,” “Incorporated,” “Limited,” or an abbreviation of one of these words (Corp., Inc., or Ltd.).
  • The name cannot contain certain words that suggest an association with the federal government or restricted type of business, such as Bank, Cooperative, Federal, National, United States, or Reserve.

Your state’s corporations office can tell you how to find out whether your proposed name is available for your use. Often, for a small fee, you can reserve your corporate name for a short period of time until you file your articles of incorporation.

Besides following your state’s corporate naming rules, you must make sure your name won’t violate another company’s trademark.

Once you’ve found a legal and available name, you usually don’t need to file the name of your business with your state. When you file your articles of incorporation, your business name will be automatically registered.

However, if you will sell your products or services under a different name, you must file a “fictitious” or “assumed” name statement with the state or county where your business is headquartered.

Appointing Directors

Directors make major policy and financial decisions for the corporation. For example, the directors authorize the issuance of stock, appoint the corporate officers and set their salaries, and approve loans to and from the corporation. Directors are typically appointed by the initial owners (shareholders) of the corporation before the business opens. Often, the owners simply appoint themselves to be the directors, but directors do not have to be owners.

Most states permit a corporation to have just one director, regardless of the number of owners. In other states, a corporation may have one director only if it has one owner; a corporation with two owners must have at least two directors, and a corporation with three or more owners must have three or more directors.

Filing Articles of Incorporation

After you’ve chosen a name for your business and appointed your directors, you must prepare and file “articles of incorporation” with your state’s corporate filing office. Typically, this is the department or secretary of state’s office, located in your state’s capital city. While most states use the term “articles of incorporation” to refer to the basic document creating the corporation, some states use other terms, such as “certificate of incorporation” or “charter.”

No state requires a corporation to have more than one owner. For single-owner corporations, the sole owner simply prepares, signs, and files the articles of incorporation himself. For co-owned corporations, the owners may either all sign the articles or appoint just one person to sign them. Whoever signs the articles is called the “incorporator” or “promoter.”

Articles of incorporation don’t have to be lengthy or complex. In fact, you can usually prepare articles of incorporation in just a few minutes by filling out a form provided by your state’s corporate filing office. Typically, the articles of incorporation must specify just a few basic details about your corporation, such as its name, principal office address, and sometimes the names of its directors.

You will probably also have to list the name and address of one person — usually one of your directors — who will act as your corporation’s “registered agent” or “agent for service of process.” This person is on file so that members of the public know how to contact the corporation — for example, if they want to sue or otherwise involve the corporation in a lawsuit.

Drafting Corporate Bylaws

Bylaws are the internal rules that govern the day-to-day operations of a corporation, such as when and where the corporation will hold directors’ and shareholders’ meetings and what the shareholders’ and directors’ voting requirements are. To create bylaws, you can either follow the instructions in a self-help resource or hire a lawyer in your state to draft them for you. Typically, the bylaws are adopted by the corporation’s directors at their first board meeting.

Plan for Ownership Changes With a Shareholders’ Agreement
A shareholders’ agreement helps owners of a small corporation decide and plan for what will happen when one owner retires, dies, becomes disabled, or leaves the corporation to pursue other interests.

Holding a First Meeting of the Board of Directors

After the owners appoint directors, file articles of incorporation, and create bylaws, the directors must hold an initial board meeting to handle a few corporate formalities and make some important decisions. At this meeting, directors usually:

  • set the corporation’s fiscal or accounting year
  • appoint corporate officers
  • adopt the corporate bylaws
  • authorize the issuance of shares of stock, and
  • adopt an official stock certificate form and corporate seal.

Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status.

Issuing Stock

You should not do business as a corporation until you have issued shares of stock. Issuing shares formally divides up ownership interests in the business. It is also a requirement of doing business as a corporation — and you must act like a corporation at all times to qualify for the legal protections offered by corporate status.

Securities Registration

Issuing stock can be complicated; it must be accomplished in accordance with securities laws. This means that large corporations must register their stock offerings with the federal Securities and Exchange Commission (SEC) and the state securities agency. Registration takes time and typically involves extra legal and accounting fees.

Exemptions to Securities Registration

Fortunately, most small corporations qualify for exemptions from securities registration. For example, SEC rules do not require a corporation to register a “private offering” — that is, a non-advertised sale to a limited number of people (generally 35 or fewer) or to those who can reasonably be expected to take care of themselves because of their net worth or income earning capacity. And most states have enacted their own versions of this SEC exemption. In short, if your corporation will issue shares to a small number of people (generally ten or less) who will actively participate in running the business, it will certainly qualify for exemptions to securities registration.

Passive Shareholder Rules
If you’re selling shares of stock to passive investors (people who won’t be involved in running the company), complying with state and federal securities laws gets complicated. Get help from a good small business lawyer.

For more information about federal securities laws and exemptions, visit the SEC website at www.sec.gov. For more information on your state’s exemption rules, go to your secretary of state’s website. (You can find links to every state’s site at the website of the National Association of Secretaries of State, www.nass.org.)

Issuing the Shares

When you’re ready to issue the actual shares, you’ll need to document the following:

  • the names of the initial shareholders
  • the number of shares each shareholder will buy, and
  • how each shareholder will pay for his or her shares.

Finally, you’ll prepare and issue the stock certificates. In some states you may also have to file a “notice of stock transaction” or similar form with your state corporations office.

Obtaining Licenses and Permits

After you’ve filed your articles, created your bylaws, held your first directors’ meeting, and issued stock, you’re almost ready to go. But you still need to obtain the required licenses and permits that anyone needs to start a new business, such as a business license (also known as a tax registration certificate). You may also have to obtain an employer identification number from the IRS, a seller’s permit from your state, or a zoning permit from your local planning board.

This blog is meant to be informative and does not constitute legal advice, and while I do encourage others to post and discuss this topic, I can not and will not respond to any questions as it can create a conflict of interest and possible ethical violations.

 

Creating a Partnership Agreement

May 25, 2011

Put the terms of your partnership in writing to protect your business.

If you and your partners don’t spell out your rights and responsibilities in a written partnership agreement, you’ll be ill-equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes. In addition, without a written agreement saying otherwise, your state’s laws will control many aspects of your business.

How a Partnership Agreement Helps Your Business

A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits (or losses) each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves, and other important guidelines.

The Uniform Partnership Act
Each state (with the exception of Louisiana) has its own laws governing partnerships, contained in what’s usually called “The Uniform Partnership Act” or “The Revised Uniform Partnership Act” (or the “UPA” or “Revised UPA”). These statutes establish the basic legal rules that apply to partnerships and will control many aspects of your partnership’s life unless you set out different rules in a written partnership agreement.

Don’t be tempted to leave the terms of your partnership up to these state laws. Because they were designed as one-size-fits-all fallback rules, they may not be helpful in your particular situation. It’s much better to have an agreement in which you and your partners state the rules that will apply to your business.

What to Include in Your Partnership Agreement

Here’s a list of the major areas that most partnership agreements cover. You and your partners-to-be should consider these issues before you put the terms in writing:

  • Name of the partnership. One of the first things you must do is agree on a name for your partnership. You can use your own last names, such as Smith & Wesson, or you can adopt and register a fictitious business name, such as Westside Home Repairs. If you choose a fictitious name, you must make sure that the name isn’t already in use and then file a fictitious business name statement with your county clerk.
  • Contributions to the partnership. It’s critical that you and your partners work out and record who’s going to contribute cash, property, or services to the business before it opens — and what ownership percentage each partner will have. Disagreements over contributions have doomed many promising businesses.
  • Allocation of profits, losses, and draws. Will profits and losses be allocated in proportion to a partner’s percentage interest in the business? Will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year? You and your partners may have different financial needs and different ideas about how the money should be divided up and distributed, so this is an area to which you should pay particular attention.
  • Partners’ authority. Without an agreement to the contrary, any partner can bind the partnership (to a contract or debt, for example) without the consent of the other partners. If you want one or all of the partners to obtain the others’ consent before obligating the partnership, you must make this clear in your partnership agreement.
  • Partnership decision making. Although there’s no magic formula or language for making decisions among partners, you’ll head off a lot of trouble if you try to work it out beforehand. You may, for example, want to require a unanimous vote of all the partners for every business decision. Or if that leaves you feeling fettered, you can require a unanimous vote for major decisions and allow individual partners to make minor decisions on their own. In that case, your partnership agreement will have to describe what constitutes a major or minor decision. You should carefully think through issues like these before you and your partners have to make important decisions.
  • Management duties. You might not want to make ironclad rules about every management detail, but you’d be wise to work out some guidelines in advance. For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers? Think through the management needs of your partnership and be sure you’ve got everything covered.
  • Admitting new partners. Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.
  • Withdrawal or death of a partner. At least as important as the rules for admitting new partners to the business are the rules for handling the departure of an owner. You should set up a reasonable buyout scheme in your partnership agreement.
  • Resolving disputes. If you and your partners become deadlocked on an issue, do you want to go straight to court? It might benefit everyone involved if your partnership agreement provides for alternative dispute resolution, such as mediation or arbitration.

As you can see, there are many issues to consider before you and your partners open for business — and you shouldn’t wait for a conflict to arise before hammering out some sound rules and procedures. A good self-help book, such as Form a Partnership: The Complete Legal Guide, by attorneys Denis Clifford and Ralph Warner (Nolo), can help you think through the details and put them in writing.

This blog is meant to be informative and does not constitute legal advice, and while I do encourage others to post and discuss this topic, I can not and will not respond to any questions as it can create a conflict of interest and possible ethical violations.

 

Choosing the Best Ownership Structure for Your Business

May 18, 2011

The right structure — corporation, LLC, partnership, or sole proprietorship — depends on who will own your business and what its activities will be.

When you start a business, you must decide whether it will be a sole proprietorship, partnership, corporation, or limited liability company (LLC).

Which of these forms is right for your business depends on the type of business you run, how many owners it has, and its financial situation. No one choice suits every business: Business owners have to pick the structure that best meets their needs. This article introduces several of the most important factors to consider, including:

  • the potential risks and liabilities of your business
  • the formalities and expenses involved in establishing and maintaining the various business structures
  • your income tax situation, and
  • your investment needs.

Risks and Liabilities

In large part, the best ownership structure for your business depends on the type of services or products it will provide. If your business will engage in risky activities — for example, trading stocks or repairing roofs — you’ll almost surely want to form a business entity that provides personal liability protection (“limited liability”), which shields your personal assets from business debts and claims. A corporation or a limited liability company (LLC) is probably the best choice for you.

Formalities and Expenses

Sole proprietorships and partnerships are easy to set up — you don’t have to file any special forms or pay any fees to start your business. Plus, you don’t have to follow any special operating rules.

LLCs and corporations, on the other hand, are almost always more expensive to create and more difficult to maintain. To form an LLC or corporation, you must file a document with the state and pay a fee, which ranges from about $40 to $800, depending on the state where you form your business. In addition, owners of corporations and LLCs must elect officers (usually, a president, vice president, and secretary) to run the company. They also have to keep records of important business decisions and follow other formalities.

If you’re starting your business on a shoestring, it might make the sense to form the simplest type of business — a sole proprietorship (for one-owner businesses) or a partnership (for businesses with more than one owner). Unless yours will be a particularly risky business, the limited personal liability provided by an LLC or a corporation may not be worth the cost and paperwork required to create and run one.

Income Taxes

Owners of sole proprietorships, partnerships, and LLCs all pay taxes on business profits in the same way. These three business types are “pass-through” tax entities, which means that all of the profits and losses pass through the business to the owners, who report their share of the profits (or deduct their share of the losses) on their personal income tax returns. Therefore, sole proprietors, partners, and LLC owners can count on about the same amount of tax complexity, paperwork, and costs.

Owners of these unincorporated businesses must pay income taxes on all net profits of the business, regardless of how much they actually take out of the business each year. Even if all of the profits are kept in the business checking account to meet upcoming business expenses, the owners must report their share of these profits as income on their tax returns.

In contrast, the owners of a corporation do not report their shares of corporate profits on their personal tax returns. The owners pay taxes only on profits they actually receive in the form of salaries, bonuses, and dividends.

The corporation itself pays taxes, at special corporate tax rates, on any profits that are left in the company from year to year (called “retained earnings”). Corporations also have to pay profits on dividends paid out to shareholders, but this rarely affects small corporations, which seldom pay dividends.

This separate level of taxation adds a layer of complexity to filing and paying taxes, but it can be a benefit to some businesses. Owners of a corporation don’t have to pay personal income taxes on profits they don’t receive. And, because corporations enjoy a lower tax rate than most individuals for the first $50,000 to $75,000 of corporate income, a corporation and its owners may actual have a lower combined tax bill than the owners of an unincorporated business that earns the same amount of profit.

Investment Needs

Unlike other business forms, the corporate structure allows a business to sell ownership shares in the company through its stock offerings. This makes it easier to attract investment capital and to hire and retain key employees by issuing employee stock options.

But for businesses that don’t need to issue stock options and will never “go public,” forming a corporation probably isn’t worth the added expense. If it’s limited liability that you want, an LLC provides the same protection as a corporation, but the simplicity and flexibility of LLCs offer a clear advantage over corporations. For more help on choosing between a corporation and an LLC, read the article Corporations vs. LLCs.

Next Steps
Nolo’s book LLC or Corporation? How to Choose the Right Form for Your Business, by attorney Anthony Mancuso, provides lots of real-world scenarios that demonstrate how these options work for different types of companies.

After learning the basics of each business structure and considering the factors discussed above, you may still find that you need help deciding which structure is best for your business. A good small business or tax lawyer can help you choose the right one, given your tax picture and the possible risks of your particular situation.

Changing Your Mind

Your initial choice of a business structure isn’t set in stone. You can start out as sole proprietorship or partnership and later, if your business grows or the risk of personal liability increases, you can convert your business to an LLC or a corporation.

 


%d bloggers like this: