Archive for the ‘Legal’ Category

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/

Commercial Leases: Negotiate the Best Terms

May 13, 2011

Save money by knowing where landlords are willing to make concessions.

When you get serious about an available business space, chances are you’ll be presented with a typed or printed commercial lease prepared by the landlord or the landlord’s lawyer. As you read the lease, keep these points in mind:

  • Rule 1: The terms almost always favor the landlord.
  • Rule 2: With a little effort you can almost always negotiate significant improvements to the terms.

In theory, all terms of a lease are negotiable. But your negotiating power depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area’s rental market is tight or you are chasing a unique space, you’ll have considerably less leverage.

Length of the Lease

One area of the lease you should always focus on is its length — also called its “term.” A short-term lease is almost always to your benefit. Shorter leases give you more flexibility if the needs of your business change — for example, you want more space or decide that a different location would be better. There is a trade-off here, of course. A long-term lease ensures that you’ll have an affordable business space for a predictable period of time. And landlords are often willing to make more concessions on longer-term leases.

If your business isn’t particularly location-sensitive (a mail-order business or software testing lab, for example) and plenty of commercial space is available in your area, then a short-term lease makes sense. Even if the landlord doesn’t renew your lease, finding comparable space won’t be a problem.

On the other hand, if you have found an especially favorable location for a retail shop, restaurant or other business where location is key, deciding on the best lease term is more problematic. If your business does well, you’ll want the right to stay on for an extended period. On the other hand, you’ll probably be nervous about signing a four-year lease in case your business goes kaput.

A good solution is to bargain for a short initial lease with one or more options to renew — perhaps a one- or two-year lease with an option to renew for two or three more years. Typically, an option to renew gives you the right to exercise your option to stay by notifying your landlord in writing a certain number of days or months before the initial lease period expires.

If you ask for an option, expect the landlord to want a higher rent for the renewal period. If the property is particularly desirable, the owner may also want an extra fee in exchange for giving you the option of staying or leaving after your initial term is up. This is a common arrangement, and if the space is important to the success of your business, seriously consider paying it.

Rent and Rent Increases

Another primary issue to consider when leasing space is how much rent you’ll pay. It’s sensible to check out rates for comparable spaces. If the rent seems unjustifiably high, try asking for a reduction. Many landlords, however, usually won’t consider lowering the rent (except in poor economic times or areas), but you may be able to get a few months of reduced rent to compensate for moving costs.

Landlords will usually include an annual increase to your rent in your lease terms. If the landlord insists on keeping the clause, try to get a cap on the amount of each year’s increase, and try to exclude a rent increase for the first year.

When you’re shopping around, look carefully at whether the landlord will pay utilities, repairs, taxes and insurance. With a “gross lease,” your rent includes these costs. By contrast, with a ” net lease” you pay for them separately — potentially a large sum. In fact, the best approach may be to offer to pay a higher amount for rent in exchange for eliminating these extras.

Tenant Improvements

If you’ll need lots of improvements to the space, you may want to use the lion’s share of your bargaining power to have the landlord provide them at no cost to you. If you’re willing to sign a long-term lease, the landlord will be more willing to pay for improvements to the property.

Subleases and Assignments

Ask for the right to sublease or assign your space. That way, if you need to move out, you’ll be able to have another tenant take your space and pay the rent, without having to break the lease. Or, if you rent enough space to grow into, you can sublease some of the space until you’re ready to use it.

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/

The Commercial Lease: What You Should Know

May 9, 2011

Know what you’re getting yourself into when you rent space for your business.

Renting commercial space is a big responsibility — the success or failure of your business may ride on certain terms of the lease. Before you approach a landlord, you should understand how commercial leases differ from the more common residential variety, and before you sign anything, make sure you understand and agree with the basic terms of the lease, such as the amount of rent, the length of the lease and the configuration of the physical space.

How Commercial Leases Differ From Residential Leases

It’s crucial to understand from the get-go that, practically and legally speaking, commercial leases and residential leases are quite different. Here are the main distinctions between them:

  • Fewer consumer protection laws. Commercial leases are not subject to most consumer protection laws that govern residential leases — for example, there are no caps on security deposits or rules protecting a tenant’s privacy.
  • No standard forms. Many commercial leases are not based on a standard form or agreement; each commercial lease is customized to the landlord’s needs. As a result, you need to carefully examine every commercial lease agreement offered to you.
  • Long-term and binding. You cannot easily break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.
  • Negotiability and flexibility. Commercial leases are generally subject to much more negotiation between the business owners and the landlord, since businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers.

Making Sure the Lease Will Fit Your Business

Before you sign a lease agreement, you should carefully investigate its terms to make sure the lease meets your business’s needs.

First, consider the amount of rent — make sure you can afford it — and the length of the lease. You probably don’t want to tie yourself to a five- or ten-year lease if you can help it; your business may grow faster than you expect or the location might not work out for you. A short-term lease with renewal options is usually safer.

Also think about the physical space. If your business requires modifications to the existing space — for example, adding cubicles, raising a loading dock, or rewiring for better communications — make sure that you (or the landlord) will be able to make the necessary changes.

Other, less conspicuous items spelled out in the lease may be just as crucial to your business’s success. For instance, if you expect your camera repair business to depend largely on walk-in customers, be sure that your lease gives you the right to put up a sign that’s visible from the street. Or, if you are counting on being the only sandwich shop inside a new commercial complex, make sure your lease prevents the landlord from leasing space to a competitor.

Critical Lease Terms
The following list includes many items that are often addressed in commercial leases. Pay attention to terms regarding:

  • the length of lease (also called the lease term), when it begins and whether there are renewal options
  • rent, including allowable increases (also called escalations) and how they will be computed
  • whether the rent you pay includes insurance, property taxes, and maintenance costs (called a gross lease); or whether you will be charged for these items separately (called a net lease)
  • the security deposit and conditions for its return
  • exactly what space you are renting (including common areas such as hallways, rest rooms, and elevators) and how the landlord measures the space (some measurement practices include the thickness of the walls)
  • whether there will be improvements, modifications (called build outs when new space is being finished to your specifications), or fixtures added to the space; who will pay for them, and who will own them after the lease ends (generally, the landlord does)
  • specifications for signs, including where you may put them
  • who will maintain and repair the premises, including the heating and air conditioning systems
  • whether the lease may be assigned or subleased to another tenant
  • whether there’s an option to renew the lease or expand the space you are renting
  • if and how the lease may be terminated, including notice requirements, and whether there are penalties for early termination, and
  • whether disputes must be mediated or arbitrated as an alternative to court.

The Americans with Disabilities Act. The Americans with Disabilities Act (ADA) requires all businesses that are open to the public or that employ more than 15 people to have premises that are accessible to disabled people. Make sure that you and your landlord are in agreement about who will pay for any needed modifications, such as adding a ramp or widening doorways to accommodate wheelchairs.

Basics of Commercial Leases

April 26, 2011

Choose and rent the best space for your business at the best price.

You may need more office space, or want to move to a different kind of business space. Perhaps your home business is bursting out of the garage and needs its own location. Whatever your reason for seeking to rent a space for your business, it’s important to understand as much as possible about commercial leases to get the best space for the best price.

As you enter into the process of searching for and renting office space, the following pointers will help you.

Determining Your Needs and Setting Priorities

What kind of space do you need? Commercial space comes in a multitude of sizes and configurations, from the to-be-built building to a plain-vanilla office suite to a quirky older building. If you know what you’re looking for, you can efficiently go after it.

Where do you want to be located? Being in one part of town may be important; but if it’s not, you will have more to choose from.

Is appearance important to you? If you’re dealing with the public, the outward show of the building will no doubt matter.

Do you want to be located near other businesses that complement yours? Sometimes it’s a plus to be among your own (such as in the “high tech district”).

What kinds of services do you want near your place of business? You may conclude that you and your customers or clients will benefit from certain close neighbors — a dentist, for example, may want to be within walking distance of a special X-ray lab.

Finding and Evaluating Space

Can you find a space on your own? In markets that are hot or sophisticated, you may need the help of a broker, who may have contacts that tenants won’t know about. It’s best to work with a broker who represents mainly tenants. Think very carefully before working with a broker who also represents the landlord — such dual representation will rarely be to your benefit.

How does the landlord measure square feet? Believe it or not, it’s perfectly acceptable to include the thickness of the exterior walls, and even the interior walls, stairwells, and elevator shafts, in square foot measurements. Make sure you know how your landlord computes your rented space.

Does the place require percentage rent? In a percentage rent situation, you pay for the size of the rental, plus a portion of your profits once they exceed a certain amount. In essence, you are sharing your income with the landlord when you reach that point of profitability. Large retail operations are typically the only tenants who pay percentage rent.

Is there expansion/purchase potential? Looking down the line, you may be thinking about the possibility of buying your own building. Be on the look-out for locations that offer a lease with an option to buy.

Developing a Negotiating Strategy

How much clout do you have? Your ability to secure a favorable lease depends on the state of the market. If there are lots of vacancies in your area, you’ll stand a better chance of landing the rental on advantageous terms than if space like this is scarce.

Should you sign a letter of intent? Sometimes when landlords and tenants are in the midst of serious negotiations, they want to put their understandings down on paper — but they usually don’t expect that their writings will be the equivalent of a lease. A letter of intent is just that — a communication indicating what the landlord and tenant would like to see happen in a lease. If the landlord asks you to sign a letter of intent, you should sign it to show you’re serious about the space. But take care to make it clearly nonbinding, or else it can end up obligating you.

Are you aware that there is no such thing as a “standard” business lease? Unlike many other aspects of business, there are surprisingly few legal constraints on what tenants and landlords agree to do. Commercial leases can and should reflect the give-and-take between the landlord and tenant — one size simply doesn’t fit all. Even if the landlord starts with a form that’s accepted by other tenants who lease from this landlord or printed and distributed by a big real estate management firm, it can always be modified.

Negotiating the Lease

Is the landlord asking for a “gross” or a “net” lease? In a gross lease, tenants pay a set amount per month, much like a residential lease. Depending on whether a whole building or part of one is being rented, the tenant will also pay all or a portion of the utilities. In a net lease, tenants pay for their square footage, plus a portion of the landlord’s operating expenses, including the building insurance and taxes, plus utilities.

How long do you want your lease to last? Commercial leases typically last from two or three years to ten or fifteen. Only well-established businesses should commit to very long lease terms.

Do you need a lawyer to review your lease? Paying for a few hours of a lawyer’s time is usually a very wise move. The lawyer may spot potential problems that you may not have thought about. Look for someone who has represented you (or someone you know) successfully in the past, or ask other businesspeople whom you respect for recommendations.

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/

State Start-Up Requirements for Small Businesses

April 12, 2011

Learn about state requirements for business owners.

If you are starting a business, the state where the business will be located will require you to get a slew of licenses, permits, tax registrations, and other requirements. These may range from filing organizational papers and getting a license for your occupation to tax registration and environmental compliance.

Licenses — Professions and Products

Professional licenses. States give licenses to people practicing the traditional professions, such as lawyers, doctors, accountants, teachers, architects, and engineers. States also license people in a broad range of trades, from auto mechanics and barbers to real estate agents and tax preparers.

Sometimes licenses are issued to the business, while other licenses are taken out by the individual. You can’t guess which occupation needs a license, so you’ll just have to ask. Your state website or trade association is a good place to start.

Licensing procedures. The licensing procedures will vary, but you’ll probably have to show evidence of training in the field, and you may have to pass a written exam. Sometimes you have to practice your trade or profession under the supervision of a more experienced person for a while before you become fully licensed. Some licenses are good for a limited period before there is retesting. Others require proof of continuing education in the field.

Licenses for products. The state may also want you to get a license if you make or sell certain products, such as liquor, food, lottery tickets, gasoline, or firearms.

Tax Registration

If you engage in retail sales, you probably need to register for or get a sales tax license or seller’s permit. This lets you collect sales taxes from your customers, which you’ll pay to the state. You need this permit even if you’re also selling goods that are exempt from your state’s sales tax. When the time comes, you’ll owe tax only on the taxable sales.

If your business both sells products and performs services, it will be important to keep your labor sales separate from sales of goods, because sales of services aren’t usually taxed (only in some states).

Five states do not impose general sales taxes. In Alaska, Delaware, Montana, New Hampshire, and Oregon, you may not be required to get a state sales permit. However, cities and counties in those states may issue sellers’ permits and charge sales taxes. Further, some transactions may be subject to something similar to a sales tax, although it has a different name. Your state tax agency can give you the specifics.

You’ll probably have to register with your state’s treasury department or department of revenue, except in the few states that still assess no taxes on income. You may also have to register for other business taxes.

Business Entity Filings

If you’ve chosen to start out your business as a corporation, limited liability company (LLC), or limited partnership, you’ll need to file organizational documents with your state’s Secretary of State, Department of Corporations, or similar office. Most states have sample or form documents online.

warning If you share ownership of your business with investors or other owners who do not help you run the business, you may need to comply with state (and federal) securities laws.

If you’re starting off with a partner (a partnership) or by yourself (a sole proprietorship), you may not have any state filing to do. An ordinary partnership is created automatically when you agree to go into business with someone, so you don’t legally have to write anything down. However, a written partnership agreement is generally a good idea, as a record of the terms of your agreement.

Register Your Fictitious Business Name

Sometimes your business name doesn’t contain your legal name as the owner (for a sole proprietorship or general partnership) or doesn’t match the company name that’s on file with the state (for a corporation, limited partnership, or LLC). That’s variously called a fictitious business name (FBN), assumed name, DBA (“doing business as”), or trade name, and you must register it.

Depending on your state, sometimes you register directly with the state, although you usually register with the county clerk in the county where your business is located. (This registration may also be called a certification or filing.) The name will go on a state FBN list.

Employer Responsibilities

Unemployment and worker’s comp. If you have employees, you may have to register with your state department of labor or with the agencies that administer the laws on unemployment compensation and workers’ compensation.

Health and safety requirements. If your state has a version of the federal Occupational Safety and Health Act (OSHA), your business may need to meet certain mandated health and safety requirements.

Tax requirements for employers. A business with employees or independent contractors has a number of tax requirements. You will have to:

  • get an employer ID from state (and federal) tax authorities
  • withhold income taxes and employment taxes (Social Security/Medicare or “FICA”) from the paychecks of employees
  • possibly withhold other items, such as payments for disability insurance
  • report these figures (to the employee, the state, and the IRS), and
  • pay the withheld taxes to the tax authorities.

If you hire independent contractors, you need to report contract payments annually on a Form 1099, which goes to the contractor and to the government.

warning Don’t forget to pay the taxes you withhold. Many small businesses get into big trouble by failing to pay the employment taxes after their cash flow hits a dry spell.

Environmental Regulations

Many small businesses need to think about what they must do to avoid contaminating the environment. You may need a special permit (and do more record keeping) if any of the following apply to your business:

  • Your equipment vents emissions into the air.
  • You need to discharge or store waste water.
  • Your business involves or produces hazardous wastes.

Environmental regulation isn’t limited to manufacturers. Small businesses, such as stained glass makers, dry cleaners, and photo processors, need to know how to dispose of the dangerous metals or chemicals used in their work.

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.

Dwane Cates Law Group PLC

1747 E. Morten Ave, Suite 205

Phoenix, AZ 85020

602-296-3434

http://www.azattorney4u.com/