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.



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


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.


Business Plan Basics

April 7, 2011

All business plans must show two things: a winning idea and a clear shot at a profit.

A good business plan has two goals: It should describe the fundamentals of your business idea and provide financial data to show that you will make good money. Beyond that, the content of your business plan depends on whether it’s for potential investors or a financial projection just for yourself.

How Will You Use Your Business Plan?

Depending on whether you’re trying to attract investors or are creating a blueprint for your own use, a business plan can take somewhat different forms.

Attracting Investors

If you will use your business plan to borrow money or interest investors, you should carefully design your plan so that it sells your vision to skeptical people. Normally this means your business plan should include:

  • a persuasive introduction and request for funds
  • a statement of the purpose of your business
  • a detailed description of how the business will work (including what your product or service will be, whether you’ll have employees, who will supply your goods, and where you will be located)
  • an analysis of your market (who your customers are)
  • an evaluation of your main competitors
  • a description of your marketing strategy (how your business will reach plenty of customers and fend off your competitors)
  • a résumé setting forth your business accomplishments, and
  • detailed financial information, including your best estimates of start-up costs, revenues and expenses, and your ability to make a profit.

Together, all the parts of your plan should reveal the beauty of your business idea. You want to show potential lenders, investors, or people you want to work with that you’ve hit upon a product or service that customers really want. In addition, you should prove that you are exactly the right person to make your fine idea a roaring success.

Get Help If You Need It
Because your business plan will be submitted to people you don’t know well, the writing should be polished and the format clean and professional. Your numbers must also be accurate and clearly presented. However, not all business people are great writers or mathematicians. Consider paying a freelance writer with small business savvy to help you polish your plan. Similarly, if you are challenged by numbers, find a bookkeeper or accountant to provide needed help.

Funding the Venture Yourself

If you’re not looking for outside money, your financial projections will be the most important part of your business plan. These projections will tell you the cost of your products or services, the amount of sales revenue and profit you can anticipate, and, perhaps most importantly, how much you’ll have to invest or borrow to get your business off the ground.

Because you won’t use your plan to ask for money, you can create an informal business plan that omits some of the elements listed above. For example, you don’t need to worry so much about making a sales pitch or a slick presentation, and you may decide to skip the résumé of your own business accomplishments, but think twice before leaving out too much. Any new business will need to introduce itself to people — for example, suppliers, contractors, employees, and key customers — and showing them part or all of your business plan can be a great way to do it.

Financial Projections

Forecasting the finances of your business may seem intimidating or difficult, but in reality it’s not so bad. Good planning consists of making educated guesses as to how much money you’ll take in and how much you’ll need to spend — and then using these estimates to calculate whether your business will be profitable. Here are the financial projections you should make:

  • A break-even analysis. Here you’ll use income and expense estimates to determine whether, in theory at least, your business will bring in enough money to meet its costs.
  • A profit-and-loss forecast. Next, you’ll refine the sales and expense estimates that you used for your break-even analysis into a formal, month-by-month projection of your business’s profit for the first year of operations.
  • A cash flow projection. Even if your profit-and-loss forecast tells you that your business will have higher revenues than expenses — in other words, that it will be profitable — those numbers won’t tell you if you’ll have enough cash on hand from month to month to pay your rent or buy more inventory. A cash-flow projection shows how much money you’ll have — or how much you’ll be short — each month. This lets you know if you’ll need a credit line or other arrangement to cover periodic shortfalls.
  • A start-up cost estimate. This is simply the total of all the expenses you’ll incur before your business opens. If you need to pay off these costs during the first year or two of business, they should be included in your month-to-month cash-flow projection.

Again, no matter who your audience is, you should be as thorough as possible when calculating your break-even analysis and profit-and-loss forecast. The last thing you want is to experience the very real misery of starting a business that never had a chance to make a solid profit.

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.


Mistakes Made by New Businesses: The Top Ten

March 28, 2011

Learn about the most common mistakes that new business owners make and how to avoid them.

Most small businesses fail within the first five years, often from a lack of planning at the outset. There are a number of financial pitfalls that new businesses must avoid in order to survive. You can improve your new business’ chance of succeeding by learning about, and taking steps to avoid, the top ten mistakes new business owners make.

1) Starting Your Business With a Large Loan

Many small business owners make the mistake of borrowing large amounts — either from banks, credit card companies, home equity loans, or friends and family — to start their businesses. Because these business owners start off owing so much money, they feel pressured to make a profit immediately — and they may have to make high monthly payments on the loans. A wiser approach is to save a good amount of money and to rely mostly on those savings when you begin your business.

2) Planning on Making a Profit Right Away

Most small businesses are not profitable within their first year or two. You should have a reliable source of income from something other than your new business to sustain yourself during your start-up period.

3) Spending Too Much Money at the Beginning

Many small businesses spend too much money “setting up shop,” buying equipment and furniture, and investing in business cards and brochures. Plan to start on a shoestring. And remember, if you spend a lot of money, that’s more money you can lose if the business fails.

4) Hiring Employees You Don’t Need

Hiring employees subjects you to registration and record keeping requirements and can be very expensive. You’ll have to pay unemployment taxes, withhold state and federal income taxes (as well as Medicare and Social Security taxes), pay for workers’ compensation insurance, and comply with safety regulations to avoid injury to your workers.

You may face severe penalties — and may even be found to be personally liable — if you don’t comply with all of these requirements. If you need help with your business, consider hiring an independent contractor or a worker from a temp agency rather than a permanent employee.

5) Renting Space You Don’t Need

Renting space is usually not necessary when you’re just starting out. Often times, you can work from home. Running your business from home can save you tax dollars too.

Renting commercial space is expensive, and if you need to make modifications to the space, can be even more so.  If your business doesn’t work out or you can’t afford to rent and have to move, you’ll probably owe the landlord rent until your lease runs out. You will most likely be personally liable for these payments because most landlords require small business owners to sign personal guarantees, even if the business is officially an LLC or a corporation.

6) Not Developing a Business Plan

Even if you’re not soliciting money from investors, business plans are useful. Come up with a financial forecast to see if your business can make money and will have money year-round. Among other things, consider:

  • what your initial financing needs are
  • what challenges your business will face (in terms of competition and marketing), and
  • how your business will survive and grow past the initial start-up period.

Your business plan should include a break-even analysis, profit-and-loss forecast, and a cash flow analysis.

7) Not Knowing How to Collect Bills

One of biggest problems new small businesses face is collecting bills. You should be aware that some clients may not pay their invoices on time. So plan to spend some time collecting what is owed to you — you might need to re-bill clients or to contact them personally when they are late in paying you.

8) Not Planning for Cash Flow Problems

There may be times when your business runs low on cash, either because business is slow or because your clients or customers are late in paying you.  You should either apply for a credit line with a bank or develop some other emergency plan for how you are going to pay your bills when you don’t have enough cash to do so.

9) Not Planning to Protect Personal Assets

You don’t want your business debts to endanger your personal assets, such as your home or your savings account. Some options for protecting your personal assets include purchasing liability insurance for your business, and structuring your business as a corporation or an LLC.

10) Choosing the Wrong Ownership Structure

Choosing an ownership structure is one of the most important decisions you’ll make for your new business.

Consider your specific needs. The following factors can help in making your decision:

  • What are the potential risks and liabilities of your business? (For instance, building houses, making edible goods, fixing cars, and selling alcohol carry inherent risks.)
  • How willing are you to spend the money it takes to set up and maintain the records for a separate business structure (such as an LLC or a corporation)?
  • What are your expected profits or losses in the first couple of years? Unincorporated business structures let you deduct business losses from your other income, but corporations do not.
  • What are your plans for seeking investors? Sophisticated investors often prefer the stock structure of a corporation.

Consider your potential liability. Here is a summary of the amount of liability you may face depending on how you structure your business:

  • Sole proprietors. Because sole proprietors are personally liable for all business debts, you could potentially lose everything you own if your business debts are not paid.
  • Partnerships. Because your partners can make commitments that bind the entire business, your liability may be even greater than in a sole proprietorship. Make sure you can trust your partners to protect your interests.
  • Limited Liability Companies (LLCs). LLCs are often subject to annual taxes or annual reporting fees. The amounts vary by state, but can be as high as $500-$800 per year, whether or not you turn a profit.
  • Corporations. Corporations are required to keep many different records, including recording every major decision and holding annual formal meetings. If you fail to do so and are sued, a judge can find that the corporation was a sham (this is often called “piercing the corporate veil”). Investors can also sue you if they think you’re not operating the business in their best interests.

Consider what most people do. For most people starting a one-person business, operating as a sole proprietor at the outset makes sense. But, if your business is especially likely to be sued, is funded by outside investors, or might be profitable right from the start, consider forming an LLC instead.

For most people starting a business with more than one owner, an LLC is preferable to a partnership — you get limited liability but need to do less record-keeping than a corporation, and the same taxation as a partnership.

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.


Start Your Own Business: 50 Things You’ll Need to Do

March 21, 2011

From insurance to accounting to taxes, here’s what you need to do to start a business.

Thinking about starting a business? You’re not alone. Every year, thousands of Americans catch the entrepreneurial spirit, launching small businesses to sell their products or services. Some businesses thrive; many fail. The more you know about starting a business, the more power you have to form an organization that develops into a lasting source of income and satisfaction. For help with the beginning stages of operating a business, the following checklist is a great place to start.

Evaluate and Develop Your Business Idea

1. Determine if the type of business suits you.

2. Use a break-even analysis to determine if your idea can make money.

3. Write a business plan, including a profit/loss forecast and a cash flow analysis.

4. Find sources of start-up financing.

5. Set up a basic marketing plan.

Decide on a Legal Structure for Your Business

6. Identify the number of owners of your business.

7. Decide how much protection from personal liability you’ll need, which depends on your business’s risks.

8. Decide how you’d like the business to be taxed.

9. Consider whether your business would benefit from being able to sell stock.

10. Research the various types of ownership structures:

  • Sole proprietorship
  • Partnership
  • LLC
  • C Corporation
  • S Corporation

11. Get more in-depth information from a self-help resource or a lawyer, if necessary, before you settle on a structure.

Choose a Name for Your Business

12. Think of several business names that might suit your company and its products or services.

13. If you will do business online, check if your proposed business names are available as domain names.

14. Check with your county clerk’s office to see whether your proposed names are on the list of fictitious or assumed business names in your county.

15. For corporations and LLCs: check the availability of your proposed names with the Secretary of State or other corporate filing office.

16. Do a federal or state trademark search of the proposed names still on your list. If a proposed name is being used as a trademark, eliminate it if your use of the name would confuse customers or if the name is already famous.

17. Choose between the proposed names that are still on your list.

Register Your Business Name

18. Register your business name with your county clerk as a fictitious or assumed business name, if necessary.

19. Register your business name as a federal or state trademark if you’ll do business regionally or nationally and will use your business name to identify a product or service.

20. Register your business name as a domain name if you’ll use the name as a Web address too.

Prepare Organizational Paperwork

21. Partnership:

  • Partnership agreement
  • Buyout agreement (also known as a buy-sell agreement)

22. LLC:

  • Articles of organization
  • Operating agreement
  • Buyout agreement (also known as a buy-sell agreement)

23. C Corporations:

  • Pre-incorporation agreement
  • Articles of incorporation
  • Corporate bylaws
  • Buyout agreement (also known as a buy-sell agreement or stock agreement)

24. S Corporations:

  • Articles of incorporation
  • Corporate bylaws
  • Buyout agreement (also known as a buy-sell agreement or stock agreement)
  • File IRS Form 2553, Election by a Small Business Corporation

Find a Business Location

25. Identify the features and fixtures your business will need.

26. Determine how much rent you can afford.

27. Decide what neighborhood would be best for your business and find out what the average rents are in those neighborhoods.

28. Make sure any space you’re considering is or can be properly zoned for your business. (If working from home, make sure your business activities won’t violate any zoning restrictions on home offices.)

29. Before signing a commercial lease, examine it carefully and negotiate the best deal.

File for Licenses and Permits

30. Obtain a federal employment identification number by filing IRS Form SS-4 (unless you are a sole proprietorship or single-member limited liability company without employees).

31. Obtain a seller’s permit from your state if you will sell retail goods.

32. Obtain state licenses, such as specialized vocation-related licenses or environmental permits, if necessary.

33. Obtain a local tax registration certificate, a.k.a. business license.

34. Obtain local permits, if required, such as a conditional use permit or zoning variance.

Obtain Insurance

35. Determine what business property requires coverage.

36. Contact an insurance agent or broker to answer questions and give you policy quotes.

37. Obtain liability insurance on vehicles used in your business, including personal cars of employees used for business.

38. Obtain liability insurance for your premises if customers or clients will be visiting.

39. Obtain product liability insurance if you will manufacture hazardous products.

40. If you will be working from your home, make sure your homeowner’s insurance covers damage to or theft of your business assets as well as liability for business-related injuries.

41. Consider health & disability insurance for yourself and your employees.

Set Up Your Books

42. Decide whether to use the cash or accrual system of accounting.

43. Choose a fiscal year if your natural business cycle does not follow the calendar year (if your business qualifies).

44. Set up a recordkeeping system for all payments to and from your business.

45. Consider hiring a bookkeeper or accountant to help you get set up.

46. Purchase Quicken Home and Business (Intuit), QuickBooks (Intuit) or similar small business accounting software.

Set Up Tax Reporting

47. Familiarize yourself with the general tax scheme for your business structure. (See Tax Savvy for Small Business, by attorney Frederick Daily.)

48. Familiarize yourself with common business deductions and depreciation. (See Deduct It! Lower Your Small Business Taxes, by attorney Stephen Fishman.)

49. Obtain IRS Publications 334, Tax Guide for Small Business, and 583, Taxpayers Starting a Business.

50. Obtain the IRS’s Tax Calendar for Small Businesses.

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.


Use Written Service Contracts for Your Clients

March 14, 2011

Independent contractors can avoid trouble by putting client agreements in writing.

When you agree to perform services for a client, you are entering into a legal contract — you promise to do the work, and the client promises to pay you for it. Many independent contractors rely on handshake agreements with their clients. But if something goes awry with the deal, you may have trouble enforcing the agreement. To protect yourself, get the agreement in writing.

Why You Need a Written Service Agreement

If a client refuses to pay, insists that you agreed to perform more or different work, says that you agreed to charge less than your usual rate, or otherwise won’t live up to his or her end of the bargain, you’re in a bind. You could try to convince a court that your version of the contract is correct but, without a written contract, it will be your word against the client’s, and there’s no telling whom a judge or jury will believe.

Fortunately, there’s an easy way to avoid these problems: Always get your agreements in writing. Using written contracts will help you prevent misunderstandings, clearly define the expectations you and the client have about the job, and prove your case in court, should it come to that.

What’s more, a written client agreement can help you establish that you are an independent contractor, not the client’s employee — which will be very useful if the IRS or another government agency questions your status.

What to Include in the Service Contract

A written client agreement should cover at least these topics:

  • the services you will perform
  • how much you will be paid
  • how and when you will be paid (for example, whether you will receive a set fee or an hourly rate; whether you will be paid up front, at completion, or in installments; whether the client will have to pay a fee for late payments; and so on)
  • who will be responsible for paying expenses (most ICs pay their own)
  • who will provide materials, equipment, and office space (again, most ICs provide their own, but there are exceptions)
  • how long the agreement will last
  • the circumstances under which you or the client have the right to terminate the agreement, and
  • information relating to your independent contractor status — that is, that you are an independent contractor, that you have all of the necessary permits and licenses to do the work, that you will pay your own state and federal taxes, and that you have your own liability insurance.

There are also a few standard legal provisions you should include, such as a statement that you and the client are not partners in business and that you and the client have no outside agreements about the deal except what’s been included in the contract.

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.


Get Clients to Pay Up

February 28, 2011

What to do if a client won’t pay.

You completed your latest project on time, sent an invoice to your demanding client, and are eagerly awaiting payment… and waiting … and waiting … and waiting. Does this scenario sound all too familiar?

The sad fact is that even the most seasoned independent contractors (ICs) can have difficulty getting paid. Some clients feel free to pay late; others never pay at all. There is no government agency that will help you get your money. It’s entirely up to you to take whatever steps are appropriate and necessary to get your clients to pay up.

What’s worse, many clients are aware of these hard facts of life and will take advantage, knowing that many self-employed people don’t have the will or know-how to collect what they’re owed. You don’t have to accept this type of unethical behavior. There are many legal methods available to get deadbeat clients to pay.

How to Demand Payment

Your first step in collecting an unpaid bill should be to send a statement or a collection letter requesting payment of the invoice. (Nolo’s Quicken Legal Business Pro software provides 30-day, 60-day, and 90-day collection letters for this purpose.) Some firms routinely wait 60 or 90 days to pay bills because of cash flow problems of their own. If your clients follow this practice, sending a routine collection letter might prompt them to put the check in the mail.

Get Personal

If letters don’t work, it’s time to get personal. It’s a lot harder to withhold payment from someone you know than from a stranger. For this reason, you shouldn’t rely solely on successive collection letters. Instead, telephone the client. If you’re dealing with a large company, you may have to first contact someone in the accounts payable or purchasing department. But if that person isn’t helpful, don’t hesitate to call higher-ups, including the president of the company.

Explain that cash flow is important to your business and that you can’t afford to carry this unpaid receivable any longer. If phone calls don’t work, make an appointment to personally visit whomever is in charge of paying you.

Be Persistent

When it comes to collecting debts, the squeaky wheel usually gets paid first. A client who is struggling financially and has only enough money to pay one creditor will likely pay the one who makes the most fuss. However, don’t lose your temper, make threats, or otherwise harass the client. This kind of behavior can get you into legal trouble.

If letters, phone calls, and personal meetings don’t get you what you’re owed, you have a few options.

Formal Methods of Getting Money From Your Client

If you know the client has the money to pay you, or you think the client will have the money some time in the future, don’t give up. There are a number of legal means available to collect debts.

Sue the Client in Small Claims Court

If the debt is not too large, the first option you should consider is suing the client in small claims court. All states have courts called small claims courts that are set up to resolve disputes involving relatively modest amounts of money. The limit is normally between $2,000 and $7,500, depending on your state. If you’re owed more than the limit, you can still sue in small claims court and waive (that is, give up your right to collect) the amount that exceeds the limit.

Small claims court is particularly well suited to collecting small debts because it’s inexpensive and fairly quick. In fact, debt collection cases are by far the most common type of cases heard in small claims court. And you don’t need a lawyer to bring your case. Indeed, a few states — including California and Michigan — don’t allow anyone to be represented by a lawyer in small claims court.

If you file a suit in small claims court and your client doesn’t show up when he or she is supposed to, you’ll win by default. A substantial percentage of clients don’t contest claims for unpaid fees in court because they know that they owe the money and can’t win.


Sue the Client in Superior Court

If the client owes you substantially more than the small claims court limit for your state, you may wish to sue in a formal state trial court, usually called the municipal court or superior court. Debt collection cases are often very simple, so you can probably handle them yourself or hire a lawyer for the limited purpose of giving you advice on legal points or helping with strategy. In truth, few collection cases ever go to trial. Usually, the defendant either agrees to settle before trial or fails to show up in court (which gives you a default judgment for the amount owed).

Take the Client to Arbitration

Before you sue the client in court, be sure to look at your client agreement to see whether it contains an arbitration clause. This type of provision — usually entitled “arbitration” or “dispute resolution” — requires you to submit any disputes with the client to arbitration, rather than going to court.

If your contract has such a clause, you’ll be barred from suing the client in small claims court or any other court. This is not necessarily a bad thing. Arbitration is similar to small claims court in that it’s intended to be speedy, inexpensive, and informal. The main difference is that an arbitrator, not a judge, rules on the case. An arbitrator’s judgment can be entered with a court and enforced just like a regular court judgment. (To learn more about arbitration, see Arbitration Basics.)

When to Give Up

If the client has gone out of business or vanished from the face of the earth, or you know that he or she will likely never be able to pay you anything (either now or in the future), your best option may be to write off the debt. As the old sayings go, you can’t get blood out of a turnip — and you shouldn’t throw good money after bad.

Unfortunately, if your business provides only services, you can’t take a tax write-off for the bad debt. The rationale behind this rule is that it would be too easy for independent contractors to inflate bills and claim large deductions for bad debts that were never really incurred. (If any part of the bad debt is for goods, however, you can deduct the cost of goods that the client received but never paid for.)

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.


Demand Letters

June 3, 2010

In the legal world, a demand letter is commonplace.  Attorneys often send a demand letter on behalf of a client to a person who has either damaged the client in some way or is continuing to act in a certain manner which is damaging to the client.  Demand letters in of themselves have no legal authority.  What a demand letter represents is an offer to resolve the situation prior involving the courts and pursuing litigation.  Demand letters do not necessarily mean that a lawsuit will be filed in the event that the person does not comply, only that a lawsuit is being considered.  In the event that you receive a demand letter, you are legally entitled to ignore the request made by the attorney.  However, there are reasons that a demand letter should not be ignored.

First, a person should only completely ignore a demand letter if they believe they have not engaged in the conduct or caused the damages complained of.  But even if you do not believe that you engaged in any such behavior, one should consult an attorney to see if they may have some liability stemming from the conduct complained of or pursuant to some legal authority unknown to the average person.

However, if a person believes that they may have done some of the acts complained of or otherwise may be subject to liability, it is in their best interest to contact an attorney to discuss their liability and the reasonableness of any offer.  Moreover, it may be in the persons interest to contact the attorney who sent the demand letter, either personally or through an attorney.  The reason that it may be in a person’s interest to contact the attorney that sent the letter is due to the fact that legal proceedings have not been commenced,  and therefore the complaining party has not yet incurred court costs and legal fees.  Due to this fact, the complaining party may be more willing to take pennies on the dollar.  What would be recommended in such a case is to make an offer which may be less than is owed or which is less than requested.  This may allow the person to get this issued resolved early and for less than what they might owe.  Additionally, the person is not paying legal fees and court costs associated with litigation, if it comes to that, and thus saving their own time and money.

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.


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