Having a business can be as rewarding as it is stressful. You get to be your own boss, set your own hours, and enjoy the fruits of your hard work. At the same time, the responsibility for success falls squarely on you. This means not only keeping the business profitable, but also complying with rules and regulations, handling employment disputes, and responding to litigation if necessary.
Fortunately, with the right planning, you can set your business up to succeed from the beginning. This helps prevent bumps in the road before they happen, and if they do happen, you're in a much better position to respond.
Starting or Buying a Business
You've done your research, written a comprehensive business plan, and obtained financing. Now what? Your next goal should be to lay a proper foundation for your business by putting the right structure in place.
Forming the proper business entity is a crucial first step in laying the foundation for your business. But you may be thinking, “What type of business entity should I form?” You have multiple options:
- Corporation: Incorporating your business provides the benefit of limited liability and also makes it easier to secure investment capital when you are starting out. There are different types of corporations from which to choose (C Corp, S Corp, statutory close corporation, etc.)
- Professional Corporation: This is a specific kind of corporation available only to certain types of professionals, such as lawyers, doctors, and accountants.
- Partnership: A partnership is essentially an agreement between 2 or more people (or entities) to do business together. The structural and management flexibility, as well as the tax advantages, make it appealing to some. Several different types of partnerships exist, including a general partnership (GP), limited partnership (LP), and limited liability partnership (LLP).
- Limited Liability Company (LLC): A LLC is a hybrid entity that combines the limited liability of the corporation with the tax advantages and flexibility of the partnership. This is often a popular entity type for startup companies.
- Non-profit corporation: If your goal is to form an entity for some purpose other than profit (i.e., a religious or charitable organization), a non-profit corporation (usually a 501(c)(3) entity) offers federal and state tax advantages.
- Sole proprietorship: This is the simplest way to start a business if there is only one owner. No separate entity is created, and you are personally liable for the obligations of your company.
Combinations of the above entities are possible as well. For instance, you and your business partner might each form a separate business entity and then form a partnership between the 2 entities. Each business is a little different, so the structure you choose will depend on your needs and business goals. The key is to make sure you choose the right type of entity for your business. Choosing the wrong type can have disastrous consequences.
Setting up the right business entity and making sure your business is kept separate from your personal life can help provide asset protection in both areas. If litigation arises in your personal life, it will not contaminate your business. Likewise, proper asset protection planning can help protect your personal assets from a business dispute that might otherwise spill over.
Written business agreement
Drafting a solid partnership or operating agreement is another important step in starting a business. Defining everyone's rights, responsibilities, and profit share at the outset can help prevent disagreements and litigation down the road.
Compliance with business laws and regulations
Depending on the type and location of your business, you may have to comply with federal, state, or local laws. This includes obtaining all necessary permits and licenses specific to your industry (and keeping them up to date). Additionally, as rules often change, you need to stay up to date with legal developments. You don't want to get shut down for violating a law you didn't even know existed.
Business real estate
Getting the best location for your business requires knowledge of both business and real estate law, as well as good negotiating skills. If you rent, the terms of your commercial lease can mean the difference between success and failure for your business. Don't take this part of the negotiation lightly or assume the landlord will look out for your best interests. Commercial leases generally last for several years, so if you get a bad deal, you'll be locked in for a long time.
Additionally, whether you rent or purchase property for your business location, it should comply with all zoning and building code regulations, development issues are addressed, and disability access is up to date.
Buying a business
When buying a business, you have many of the same considerations discussed above, as well as issues that are unique to purchases. From finding a good business and negotiating the best deal, to drafting the purchase agreement and other legal documents, to following through to closing, buying a business is a complicated process.
A thorough investigation of the business and its books is vital to a good business deal. If you don't take the time to do this, you could miss hidden tax issues, problems with profitability, or actual or potential liability claims against the business.
Running a Business
Now that the foundation has been laid, and your business is up and running, it's time to switch gears. Now your focus should be making sure things run smoothly, so you can concentrate on increasing profits and growing your business. This involves doing what you can to prevent conflicts, and being able to quickly address and manage them if they arise.
Business disputes and litigation
It doesn't take much for someone to start a lawsuit these days, and a business environment provides ample opportunity. Disputes can arise between businesses, between a business and its customers, or even between the business and its own applicants or employees.
Sometimes businesses are specifically targeted for lawsuits for being out of compliance with certain regulations. The same lawyer and plaintiff may team up over and over again, suing multiple businesses for similar minor infractions.
Of course, the best way to deal with business lawsuits is to prevent them before they occur. However, no matter how careful you are, it's still possible to get sued. If your business is served with a complaint, you need to seek legal counsel as soon as possible. The goal of a good business lawyer will be to rectify the situation, minimize the damages, seek a settlement that works for both parties, and if necessary, litigate the case in court.
Employment law considerations
If your business has employees, there are several relevant laws of which you need to be aware. Staying in compliance with these laws, and being mindful of changes, is a good way to avoid disputes. Here are some of the major areas where employers get into trouble:
- Proper classification of workers (i.e., employee vs. independent contractor)
- Wage and hour laws (i.e., overtime pay)
- Sexual harassment in the workplace
- Workers' compensation
- Wrongful termination
- Vacation and family/medical leave
If you neglect these issues, you are opening yourself up to a potential lawsuit, either by present or former employees. Having well written employment contracts and employee handbooks can go a long way toward preventing disputes.
Americans with Disabilities Act (ADA) compliance
The ADA places numerous requirements on businesses and employers for accommodating people with disabilities. Businesses that are “covered entities” under the ADA are forbidden from discriminating against a person with a disability at any stage in the employment process, and must make reasonable accommodations to allow the person to work.
The ADA also requires businesses to remove barriers to access, such as by building a wheelchair access ramp, and that new construction be in accordance with ADA guidelines.
Failure to follow ADA requirements regarding either employees or customers opens up your business to litigation, as well as unwanted attention and damage to your business reputation.
Trademarks are phrases, logos, designs, or other marks that distinguish your business' product or service from others. It's in your interest to take all steps necessary to protect that mark from use by others, including having it registered with the U.S. Patent and Trademark Office (USPTO).
If you produce creative works such as paintings or a book, you should consider copyright registration with the Copyright Office. Like trademark registration, it provides many benefits against those that would infringe on your copyright.
Selling, Transferring, or Closing a Business
Selling or transferring your business to someone else can be a bittersweet moment. On the one hand, you're giving up something you've worked hard to build. On the other, you know your customers are in good hands and your legacy will live on with the new owners.
Selling your business
When it's time to sell your business, you should be in the best negotiating position possible to get a good deal and to minimize taxes. The sooner you start preparing your business for sale, the better off you'll be.
If you know you will eventually sell your business, you should determine what type of entity will be best for the sale, and consider choosing that type of entity (or converting if it's already set up). Also be aware of any restrictions on selling your business contained in your commercial lease. You may have to re-negotiate the terms well in advance.
Other things a potential buyer will look at is that you've kept thorough and accurate records, the business' reputation in the community, its earnings over time, and any potential liability issues or pending litigation. A thorough valuation of business assets, including intangibles such as trademarks, can be performed by industry-specific experts.
Transferring your business to another family member
Keeping a business in the family is important for many business owners. With a proper plan in place for a smooth transition, you can transfer the family business to the next generation gradually over time, maintaining control until your loved ones are ready to take over.
One way to do this is with a Family Limited Partnership (FLP). A limited partnership is a form of partnership with 2 classes of partners: general and limited (the term “family” in the title merely indicates that it is being used amongst family members). The general partners are responsible for management duties of the partnership and for partnership liabilities. Limited partners do not participate in management, and are not personally liable regardless of their ownership interest.
The idea is you, as owner of the business, would own all shares (or they could be held in a trust), both general and limited. Gradually, over time, you would transfer limited shares to your family members (usually your children). You retain the general shares (and thus control of the business), even while you transfer majority ownership to them. If done properly, it is an efficient way to transfer the business to the next generation with a lower tax burden on the transfers.
Closing your business
Although it's an unfortunate conclusion to the life of your business, sometimes the best option is to close the business down altogether. This involves complying with all legal formalities, paying off business debts and wrapping up loose ends, and if feasible, selling the remaining assets. The steps involved include the following:
- Inventory your remaining business assets
- Choose the best type of asset sale
- Comply with the Bulk Sales Law and other relevant California laws
- Pay company debts as necessary
- Know the tax implications of the sale
- If dissolving a business entity, make sure to comply with final filing requirements with the state and the IRS
If you have to close your business, you can at least take the steps necessary to put yourself in the best position to start fresh. The proceeds from an asset sale can help provide necessary funds for retirement or even for a new business venture.
Helix Law Firm can help with all business issues, including litigation
No matter what stage your business is in, Helix Law Firm is ready to assist you. We can help with entity formation, provide ongoing legal counsel, and handle all aspects of a business purchase or sale. We also stand ready to help guide you and your business through any disputes or litigation you might encounter.