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Woodland Hills Business Law Blog

Thursday, March 13, 2014

Protecting Your Business with the Right Insurance

Protecting Your Business with the Right Insurance

Starting a business is the dream of a lifetime for many Americans. While most entrepreneurs prefer to focus on the aspects of the business that will result in profit, it’s equally important to consider what will happen in the event of an emergency, injury or even sudden death. In preparing for the “worst case scenario”, insurance coverage must be carefully considered. Selecting insurance policies can be challenging; there are dozens of options and the necessity of some will depend largely on the type of business, the number of employees (if any) and the physical location(s).

To help you get started with your planning, we’ve compiled a quick checklist of different types of insurance that all business owners should consider:

General Liability Insurance – Regardless of the type of business or where it is located (even if it is in your home office), all owners should purchase this type of insurance which provides protection if you or your employees cause bodily harm or property damage to a third party. This type of insurance can protect against a customer who brings legal action after taking a sip of hot tea that you served in the reception area or even a vendor who was injured when an item from a closet shelf fell on him during a delivery to your office.

Commercial Property Insurance – If you own an office building, or have valuable business property such as equipment, inventory or tools, you should carefully consider this option which protects your company from any damage or loss which might occur as a result of fire, theft, vandalism, etc. In assessing which policy you need, also take time to consider whether you need business interruption insurance which may protect your business from a loss of earning when you are unable to operate; this may be helpful in the aftermath of a natural disaster where your building is without power for several days.

Product Liability Insurance – If your company manufactures, distributes or retails products to consumers, you might consider purchasing this insurance which protects against financial loss suffered as a result of a product defect that causes injury to the user.

Business Owners Policy (BOP) – This type of package is essentially a bundle offering of all of the required policies that a business owner would need. This will often include property, liability, vehicle, business interruption, etc. These policies often save business owners more money than if they were to purchase each one separately.

Professional Liability Insurance – If you provide a professional service to consumers, you may consider carrying this type of coverage which provides defense and damages for improperly rendering professional services, or failure to deliver them at all. Depending on your industry, this insurance may be mandated by your state. Professional liability insurance has become quite standard among healthcare professionals, attorneys, veterinarians, pharmacists and architects.

Commercial Auto Insurance – If you have a single vehicle, or an entire fleet, that is used to carry employees, equipment or products, you should consider purchasing commercial auto insurance which protects from damages and collisions. If your employees use their own vehicles, you may have the option to purchase non-owned auto liability, which protects your business in the event that an employee has an accident but does not have sufficient coverage to pay for the damages.

Data Breach Insurance – Also known as cyber insurance, this type of policy protects against any damages incurred as a result of a hacking attack or loss of sensitive client date. Due in large part to recent high-profile data breaches where customers’ credit card numbers were compromised, one in three U.S. companies now carries this type of coverage.

Directors and Officers Liability Insurance – This type of insurance protects your board of directors and officers from any legal action resulting from their performance of duties as it relates to your company. Many investors and potential board members will require this type of policy to ensure their personal assets are not jeopardized.

Life Insurance – In a company where there are multiple shareholders, it’s not uncommon to find life insurance policies in the mix. Generally, the policy is structured in such a way that upon the passing of one of the shareholders, the remaining shareholders or the company will receive compensation so they can buy out the shares of the deceased. This can help to protect the business and ensure continuity despite the loss of one of its leaders. In small businesses, a partner may purchase a life insurance policy on a fellow partner or key employee who is crucial to the business. The reasoning behind this coverage is that in the absence of this individual, the company would suffer severely and could even lead to its closing.

If your business has employees, there are a number of other policies which you will want to consider. These include:

Workers Compensation Insurance – As the name explains, this insurance simply provides wage replacement and covers medical expenses for employees who are injured on the job. All states require this type of coverage if you have any W2 employees.

Disability Insurance – This type of employer-sponsored insurance provides income replacement to disabled employees who are unable to work and receive their regular wages. This type of coverage is only required by law in five states: California, Hawaii, New Jersey, New York, and Rhode Island.

Unemployment Insurance Tax – While you don’t have to purchase an unemployment insurance policy, any company with employees must pay unemployment insurance taxes as determined by the state. This program is designed to provide benefits to unemployed workers who have been terminated by no fault of their own (e.g. think of a company that has major cut backs and “lays off” an employee). It’s important that you consult with your state’s workforce agency for up to date information and to learn what’s required of you.

In some cases, your state may require certain insurance coverage based on your industry and the services or product provided. To ensure compliance and make sure you properly protect your business and your own personal assets, it’s important that you consult a knowledgeable business law attorney who can advise you on the best course of action.


Friday, March 7, 2014

Terminating a Franchise Agreement

Terminating a Franchise Agreement

Buying a franchise can be a great opportunity for an entrepreneur to start a business using a successful operational structure of a proven model. Despite all the resources that a franchise provides, not all are successful. Unfortunately, with most franchises, you can’t just shut your doors and cut your losses; getting out of a franchise agreement can be difficult, leaving a once hopeful entrepreneur stuck in a business that may not be profitable or enjoyable to operate.

If you are looking for a way out of a franchise agreement, it’s absolutely imperative that you contact an attorney who has experience with franchise law and understands the many complexities of the franchisor-franchisee relationship. In determining whether you can terminate the agreement, you will need to carefully review the contract which should clearly outline the circumstances which must be met for either party to terminate it. If the franchisor has not met all of its duties, such as failing to send you the marketing plan and materials for the spring line, you will likely have a much stronger case for ending the relationship. Be sure to document any shortcomings or errors made by your franchisor and keep records of any correspondence which have expressed these concerns.

Even if you are able to close shop and terminate the franchise agreement without any substantial fees or legal ramifications, you may still be adversely affected by non-compete and/or confidentiality clauses contained within the agreement. Very often, franchise agreements prohibit franchisees from starting a similar business within a certain period of time and within a certain number of miles from the franchise location. Also, they may prohibit you from contacting any customers from your former franchise, severing long-time business relationships and limiting your ability to be successful with a new venture.

An experienced attorney can help you understand your rights, serve as your advocate in discussions with the franchisor and protect your best interests so you can confidently move on with your entrepreneurial aspirations.


Thursday, February 27, 2014

Issues Business Partners Should Consider

11 Important Issues Business Partners Should Consider

Many people decide to start their own businesses because they’re intrigued by the idea of being their own boss.  All decisions, risks, and rewards are yours and yours alone.  This equation changes, however, when you decide to start and run a business in partnership with another person.  Many of the freedoms, risks and rewards are similar – but there are unique questions that business partners should ask each other to help ensure the relationship starts and continues smoothly.

Before and during the process of developing a business partnership, it is crucial to ask and answer the questions below.  

  1. What goals do I have for this business?  What goals does my partner have?  What if one partner wants to create a business that will provide income for his family for several years or decades and the other partner wants to build a company that will grow quickly and sell well?  These are not necessarily incompatible goals, but it is important to get these goals onto the table to discuss how to start and run a business that might meet both partners’ goals.
     
  2. What is each partner’s level of commitment in terms of time?  You can prevent a major source of partner conflict by being explicit about how much time each of you expects to spend working on running and developing the business.  Will either of you work full-time for your business at the beginning?  Will either of you have other work commitments?  If so, are there any situations in which that partner will close out other work or business commitments to focus more energy on this endeavor?
     
  3. How will cash invested by partners be treated?  Will cash investment be treated as debt to be repaid?  Will cash investment buy a higher level of company shares?  Will the debt be convertible?  These questions and answers also have tax implications, so it may be wise to consult a certified public accountant along with a qualified business law attorney during your start-up phase.
     
  4. How comfortable are we with change?  Change is the only constant in any business environment, and the most successful businesses are those that are highly adaptable to change – in the market, in the economy, in the personnel, etc.  That said, business partners should have a conversation about their “sticking points” – those aspects of the business that one or another partner does not want to change.  One partner may be fully committed to the specific product being produced, whereas another partner may be unwaveringly dedicated to a certain market segment.  Learn each other’s “sticking points” now to minimize conflict during the inevitable periods of change and adjustment as the business ages and grows.
     
  5. How much will we pay ourselves?  Who has the authority to change compensation amounts in the future?  This issue is related to the question of who is investing how much cash into the business during the start-up phase.  Compensation can be a volatile issue.  Regardless of how difficult the conversation may be, partners must thoroughly discuss pay structure at the very beginning of a business relationship to minimize conflict down the road.
     
  6. Who will own what percentage of the company?  In other words, how will we divide the shares?  The answer to this question often depends on whether one or both partners provided cash for start-up costs, as well as the time commitment each partner plans to make.
     
  7. Who has what kinds of decision-making authority?  The answer to this question often is related to the division of shares between the partners, but this is not a requirement.  You can designate shares as voting shares or non-voting shares, and you can also choose to set up a board of directors.  The partners will have to decide which areas, if any, they each have individual authority over, which areas they must agree on, and which areas the board of directors will control.  Common areas of decision making authority include human resources (hiring and firing), capitalization, issuance of shares, and mergers and acquisitions.
     
  8. Will we sign contractual terms with the company in addition to the shareholder agreement and partnership agreement?  Two common examples of additional contractual terms are the non-compete agreement and the confidentiality or non-disclosure agreement.  If founding partners are going to sign such contracts, what will the terms of each agreement be?
     
  9. What if one or both of us wants to leave the company?  It is better to define exit procedures in the early stages of the business start-up.  If no guidelines are in place, one partner’s desire to depart can cause high conflict as formerly aligned partners try to come to agreements about ending their relationship.
     
  10. Can either of us be fired?  If so, what are the grounds for termination and who has the authority to make that decision?  What is the procedure?  Discuss and commit to writing your strategy for terminating the operational role of a co-founder if necessary.
     
  11. What is our business succession plan?  While it is not necessary to have a fully developed and executed business succession plan before starting a business endeavor, it should at least be a topic for discussion in the early stages.  Partners may have different ideas about how control over the business will pass to others in the future, and a conversation about succession planning can reveal these differences and give each partner food for thought as a plan is developed.

Have several conversations about these topics, and you will find yourself well prepared when it comes time to put your partnership agreement into writing.
 


Thursday, February 13, 2014

Soliciting Investors

More Opportunities for Businesses to Solicit Investors but What Are the Legal Challenges and Risks?

Since the 1930s, businesses wishing to secure investment dollars have faced regulations banning them from appealing directly to the public via advertising. Instead, businesses have only been allowed to pursue investment funds via prescribed channels and from wealthy individuals. The reasoning behind the ban was that if the general public were subjected to direct appeals for investment by hedge funds, venture capitalists, start-ups and others, the rate of financial fraud would increase.

The investment advertising ban has long been considered an obstacle to entrepreneurship; it has been identified as a drag on growth, employment and businesses’ ability to raise funds, as well as an impediment to everyday investors’ awareness of legitimate and promising investment opportunities.

In the summer of 2013, the investment advertising ban was lifted and changed the way in which business owners may solicit and secure financing from investors. On July 10th, the Securities and Exchange Commission voted four to one to lift the advertising ban as part of the Jobs Act. The fear of fraud remains, but it is believed by many, including a majority in congress, that the lifting of the ban will allow companies to experience greater growth, raise money and hire workers.

Although there are a multitude of benefits expected from the revocation of investment advertising restrictions, there are a number of increased risks and challenges that both business owners and investors must be cognizant of. These include:

  • The new rules will allow organizations seeking investors to advertise to anyone. Only “accredited” investors, though, will be allowed to actually invest. Accreditation will be determined by individuals’ net worth and/or income, but will not take into account individuals’ home values and other factors.

  • Some states are adopting their own rules to protect investors. (North Carolina, for example, is working to pass a law that requires investors to sign an affidavit stating that they are aware that investing is high-risk and that they may lose their investment.) What may be legal in one state may not be legal in another.

  • Organizations that are associated with “bad actors” such as felons will not be allowed to advertise for investment. There is confusion, however, regarding the exact meaning of “associated with” and “bad actors”. Until these terms are fully defined, unintentional illegal activity could occur.

  • An increase in investment activity will likely lead to an increase in fraud.

To minimize the risk of illegal activity and fraud, consult a business law attorney prior to advertising or accepting investments under the new laws. An attorney can work to ensure that your organization follows all applicable laws when advertising and accepting investment dollars. An attorney can also assist investors by ensuring that organizations seeking investments have provided accurate information regarding finances and business plans.


Saturday, February 1, 2014

Buying Out a Partner

Buying Out a Partner When There Is No Shareholders’ Agreement in Place

Like most relationships, business partnerships frequently experience highs and lows, with periods of both prosperity and turmoil. When ongoing disagreements cannot be resolved, or one partner decides to leave the business, the remaining partner(s) often seeks to buy out the shares of the departing party. If there is no shareholders’ agreement in place, and the partners are in agreement, the dissolution of the partnership can usually be accomplished with the help of a qualified business law attorney and a CPA.

If the business is a corporation, the purchase would likely be structured as a stock sale. In essence, one party would purchase the exiting partner’s shares of stock in the corporation, in exchange for the purchase price. The purchase price could either be paid up front at the closing, or some, or even all, could be paid to him over a period of time. If any of the purchase price is to be paid over a period of time there normally would be a promissory note that the remaining partner(s) would sign documenting that the departing partner is owed the money, and providing for payment terms. These payment terms would include the interest rate, number of payments, and frequency of payments. Typically the remaining partner(s) stock in the company would be pledged as security for the repayment on the note. If the business is not a corporation the steps would be similar but slightly different.

Prior to the dissolution of the partnership, all parties must consider whether the business has any debt. If it does, all partners will need to carefully review the loan documents to make certain that the partner’s departure from the business does not trigger some type of acceleration of the debt. In a small business it is normal for a lender to require the business owners to personally guarantee the debt. So, if this is the case, the business may need to negotiate with the lenders to get the exiting partner released from the debt.

Another item to consider, which should be explored with the guidance of a qualified tax advisor, is whether the partner’s sale of the business to the remaining partner(s) will trigger any taxes. This may be more so from the departing partner’s standpoint but there may be some capital gains taxes that will have to be paid and all parties should get appropriate advice.

Finally, if there is real estate involved that is used by the business, there may be steps that have to be taken to address that. Perhaps the business leases office space from someone else. The business will need to make certain that the change in ownership does not somehow violate the lease and if it does, the partners should seek the landlord’s consent. If the departing partner has personally guaranteed the lease, the remaining partner(s) may need to negotiate with the landlord to release the exiting party.

The bottom line is there are many factors that come into play when dissolving a business partnership. An attorney should be contacted before any decisions are made to ensure all of the necessary details and consequences are considered in the preparation of a purchase agreement.

 


Saturday, January 25, 2014

Purchasing a Business

Should You Consider Buying Assets as Opposed to Shares?

Of the two common methods used when buying a business, the purchase of shares and the purchase of assets – the asset-purchase option is perhaps the least understood but in many cases the most advantageous. They offer the following benefits:  

  • In some states, the sale of all or most of a business’s assets requires the majority vote of the business’s shareholders, but the transaction is not subject to the appraisal rights of shareholders who did not vote in favor of the sale.
  • When buying a business’s assets, a buyer can elect to purchase only selected assets. In doing so, he or she avoids exposure to liabilities and minimizes risk.
  • When a buyer purchases a business’s assets he or she can allocate the purchase price among the assets to reflect the fair market value of each asset. This legal right offers two opportunities: 1) a step-up of the tax basis, 2) higher depreciation and amortization deductions, both of which lead to future tax savings.
  • The avoidance of double taxation in the event the target business is an S-corporation, LLC or partnership.

The above advantages are significant but must be balanced against potential disadvantages. These include:

  • Asset sales can be complex in that they typically require the consent of third parties regarding, for example, office space leasing, contract assignments and permit transfers. Since third parties may use the transaction to renegotiate contracts, delays and cost increases are often experienced.
  • When buying a business or a percentage of a business, it’s often not necessary to delineate exactly what you are buying. This isn’t usually the case when purchasing a portion of assets. Instead, the buyer will likely need to define the specific assets he or she wishes to acquire. If the buyer is acquiring a subsidiary or a division, he or she typically acquires the assets that are used exclusively or primarily by that business unit. However, “shared assets” can cause legal confusion, and it’s usually necessary to negotiate their cost and transfer and/or licensure.
  • If the target business is a C-corporation, it is subject to double taxation in the event of an asset sale.
  • If there are any disclosed or undisclosed liabilities that the buyer is not including in the purchase, there is a risk that the transaction will violate fraudulent conveyance laws on the part of the target business, which may ultimately impact the purchaser who might be compelled to reverse the transaction.

Perhaps it’s because of these serious disadvantages that less than a fifth of all acquisitions are structured as asset purchases. Nonetheless, it makes sense to consider all options when deciding how best to structure any acquisition.       


Friday, January 10, 2014

Does My Business Need a Registered Agent?

Does My Business Need a Registered Agent?

A registered agent is someone that you as a business owner designate to accept legal papers if your company is sued or named in any type of administrative agency case. If your business is legally established within a state in which you don’t maintain a physical presence, you are often required to appoint a registered agent that is physically located within its borders

A registered agent can be an individual or a corporation. Many small businesses simply list one of the owners as the registered agent, if any of them reside in the state in which the business is formed. In situations where none of the owners are residents of the state in which the business is formed, there are a number of options. Some attorneys are willing to serve as the registered agent for their clients’ businesses and may do so for no additional fee, provided that the attorney herself is a resident. There are also companies that will serve as the registered agent for an annual fee. Generally, you must name your company’s registered agent when you file your articles of formation with the appropriate government agency (in most states, the Department of State).

There are generally two situations where you are required to maintain a registered agent:

  1. When your business is formed in a state in which you don’t maintain a physical presence, such as your company headquarters.
  2. When your business conducts intrastate commerce within a particular state. For example, if you register your business in Delaware, but you operate a few stores in Virginia. This is an intrastate transaction because your products are being sold directly to consumers within Virginia. Note that selling products through an online store and shipping the products to Virginia would not be considered intrastate commerce. Nor would sales through distributors of your products.

The registered agent must be an individual that lives in that state, or a business that has offices in that state. So, if you live in Delaware you could serve as agent for your company in Delaware. However, if your company also does intrastate business in Virginia, you will have to appoint someone else who lives in Virginia, or a company with offices in Virginia, to serve as your registered agent.

Even if you do reside in the state where you need to designate a registered agent, there are advantages in designating a third party, such as maintaining privacy or preventing a litigant from serving you with a lawsuit in front of your customers and employees. A business law attorney can help you sort through the key considerations and take steps to make sure you comply with all local statutes.


Sunday, January 5, 2014

When is the Best Time for a Business to Consult with a Lawyer?

Start-up Business: When is the Best Time to Consult with a Lawyer?

If you are starting a new business venture, it is vital that you assemble your team of advisors immediately. Many entrepreneurs are short on cash during the start-up phase and forego hiring of legal counsel or other professional advisors in order to preserve capital for other aspects of the business venture. But this approach is usually penny-wise and pound-foolish. Especially since many small business start-up lawyers are a lot more affordable than you think.

Your attorney can be an invaluable member of your team of advisors. Business attorneys have seen first-hand the mistakes entrepreneurs make and know how to structure transactions to avoid them. It is best to consult with an attorney early on in the process, before you formally organize the company because the foundational issues are critical to the long-term success of your new venture.

There are many issues to be considered; and the earlier you do so, the better. You’ll want to ensure you choose the most advantageous business structure. From C-Corporations to S-Corporations to Limited Liability Companies and other hybrid entities, you have many options. They must all be carefully considered, in light of your particular situation. How many owners and who they are, liability issues, licensing restrictions, and anticipated profits all play a role in determining what type of entity affords you the most asset protection, and costs you the least in taxes.

During this foundational process, your legal advisors can also help you determine equity splits, which can save you headaches down the road. For example, it is generally advisable to avoid dividing business ownership according to percentages. Doing so can create problems later if additional investors need to be brought in. However, if the appropriate number of shares are authorized at the outset, and issued according to a plan for long-term company growth, you ensure your company can access capital in the future.

Vesting schedules can also be established before stock is issued to the company founders, enabling the initial shareholders to obtain full ownership rights to their shares over a period of time. However, this may not be advantageous in every situation, and must be carefully considered.

Even after your initial formation is complete, there are still a number of legal issues that require your attention. There are agreements to negotiate which may include leases, employment contracts, independent contractor agreements, customer purchase or service agreements and many more.

Steps should be taken early on to protect your intellectual property. Depending on the nature of your business, you may need to obtain and enforce patents and copyrights. If your company has a “brand” you will likely want to obtain a federal or state trademark to protect it for your own exclusive use.

The federal and state employment regulations can be onerous. From verboten interview questions to potential allegations of discriminatory hiring practices, a start-up lawyer can help you avoid the pitfalls and ensure you have a happy, productive work force.

Finally, your attorney can help you identify and secure other professionals and services, such as accountants, recruiters, bankers and even start-up friendly print shops and website development and hosting services.


Sunday, December 29, 2013

Protect Your New Business with Preventative Legal Planning

Most Legal Issues Can Be Resolved Before They Even Arise. Here’s How.

Most people are familiar with the idea of “preventative” legal action. The term refers to anticipating legal issues and conflicts and working to prevent them, rather than solving them or “winning” them once they occur. Companies can benefit from implementing preventative legal strategies as this approach is often less expensive than litigation, mediation, arbitration, and local, state and federal fines.

By working with an attorney early on in the creation of your new business, you can build a sound foundation for your company while likely saving money down the road. The following steps can serve as a great starting point for sound legal planning:

  1. Establish a relationship with an attorney who can assist you with the legal issues your new business will face early on in the start-up process. When an attorney is familiar with your firm from the onset, he or she can more effectively anticipate and address legal challenges and provide solutions. Also, many business law attorneys will allow for a flat-fee relationship that enables you to address legal issues as they arise without incurring any additional expenses.
     
  2. Determine what you want, negotiate it and memorialize it in proper legal documents. Businesses encounter disagreements with vendors, landlords, employees, partners and others. To minimize the number of conflicts, it’s important to establish written contracts for all important agreements, arrangements and accommodations.

    A business law attorney can help you identify all key concerns regarding employee compensation and benefits, property usage and maintenance, relationships with suppliers and responsibility and profit sharing with partners. An attorney can ensure that, when a question, disagreement or conflict arises, your interests are written down, clearly stated and legally protected by a mutual agreement with the party in question.
     
  3. There are many exciting steps in starting a new business venture; selecting the type of legal entity the business will be is rarely one of them. Yet, it’s important to select a business structure early. Corporations offer numerous advantages but also require officers, boards, articles of incorporation and other formalities. Partnerships and sole proprietorships are simpler than most other business structures but open owners to potentially costly liability. Limited liability companies offer a middle ground for many, providing a liability shield and comparative simplicity. A business attorney can help you determine which business structure will work best for you by taking into account tax planning, location and other key considerations.

Even with preventative legal planning, a lawsuit may arise. If it does, it’s important to approach it from a business, not a personal standpoint. This strategy can help you make decisions that are best for your company’s future, keep your focus on the day-to-day needs of your business and avoid unnecessarily disclosing information. For legal advice and hands-on assistance during the formation and continued operation of your business, contact a qualified business attorney.


Tuesday, December 17, 2013

Where to Incorporate Your Small Business

Should you incorporate your business in your home state? What about Delaware or Nevada, long known as havens for corporate entities? This decision should not be taken lightly because incorporating your business in a particular state will determine, to a significant extent, the laws that will apply to your business.

Often times, the best choice for corporate jurisdiction is the home state where your business is located.  There are several reasons for this. First, filing in a different state will not absolve you of the obligation to pay corporate taxes and comply with filing requirements in the state where your corporation has its operations. For example, if the corporation is located in California it will be subject to California fees and taxes, either as a domestic California Corporationor as a “foreign corporation” doing business in California. Additionally, if you are incorporated in a state other than where you are physically located, you will likely incur another set of filing fees and expenses for a registered agent who is physically located in the state of incorporation.

Many companies opt to incorporate in the State of Delaware, even though very few of them are actually based there. Approximately 60% of Fortune 500 companies are incorporated in Delaware. These major companies do so because Delaware’s corporate laws are generally favorable to business and management.  Delaware also has a special Court of Chancery that hears only business law cases. These courts afford companies a degree of consistency and predictability in rulings, which may or may not be found in other states.

Many entrepreneurs also consider the State of Nevada. Many companies are attracted to Nevada’s pro-business laws and favorable tax policy. Nevada also has a special business court, similar to Delaware’s Court of Chancery, although it is not as well established and lacks the breadth of case law that Delaware has.

If your company is engaged in risky or litigious business, then Delaware,Nevada or Wyoming may provide some additional liability protection.  For businesses that are essentially holding companies or otherwise lack operations as a traditional business would, forming a company in these states can also make a lot of sense since the business would not be subject to the laws of multiple states.
 


Friday, December 6, 2013

Business Legal Mistakes

Legal Mistakes That Cost Entrepreneurs Time, Money and Headaches…And How to Avoid Them

Entrepreneurs must navigate through a maze of legal issues and decisions when launching a new business. At the outset, you may think some seem inconsequential – but, tragically, that would likely be your first of many mistakes. The choices you make today will have lasting effects on the viability and profitability of your new business venture. Below are some of the most common mistakes made by first-time entrepreneurs, and what you can do to avoid making them yourself.

Choosing the Wrong Business Structure

The type of business entity you select will affect your liability exposure, income tax obligations and opportunities to raise capital throughout the duration of your venture. Sole proprietorships, C-corporations, S-corporations and limited liability companies (LLC) all have their advantages and drawbacks. Sole proprietorships are simple to start up, but leave your personal assets vulnerable and offer few tax advantages. C-corporations and S-corporations shield your personal assets, and each afford different tax advantages and disadvantages. Additionally, maintaining the protection afforded by the corporate business structure requires a certain amount of record-keeping and forms which must be filed with governmental agencies. LLCs offer you liability protection, but may not be the best choice depending on various factors, including taxes, ownership structure and, in some states, professional licensure. Often, the corporate structure is the most advantageous, but this decision really should be made in consultation with a business or tax attorney.

The “Gentlemen’s Agreement” – A Handshake and Your Word

Your word may be your honor, but a written contract is the only way to be sure all parties share a mutual understanding regarding their obligations. Whether it is your best client, that independent contractor you’ve been courting, or vendors you have known for years, do not assume everything will go according to plan. Putting your agreement in writing not only ensures that everyone’s expectations are clear, it is also valuable evidence in the courtroom, should things not proceed according to plan. Bottom line – get it in writing!

Adding Partners Without a Written Agreement

It’s easy to sweep this one aside when you are passionately focused on the work of getting your business off the ground. And those new partners likely share your same passion. However, until a detailed written Partnership Agreement is drafted and signed, you may be unclear about each other’s expectations in the short term, or, if your business is wildly successful, tied up in protracted, long-term litigation, to establish who owns what (Facebook comes to mind). Redirect some of that passion, and benefit from the goodwill it creates, to negotiate a Partnership Agreement early on that covers responsibilities, ownership structure, provisions for transferring ownership, and what happens when there’s a disagreement about the direction of the company.

Sharing Ownership 50/50

Establishing equal percentages of ownership in the company sounds like a fair and reasonable arrangement. However, this type of situation makes it difficult to bring on investors, and can bring the company to a standstill if the partners cannot agree on a decision. Instead, issue shares in the company in such a manner that investors can be added later; and make sure those shares are distributed to the founders with at least a 51/49 split, giving the majority shareholder the authority to make executive decisions even if there is a stalemate.


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