Table Of Content

“[An] excellent resource…” WALL STREET JOURNAL OVER 250,000 15th Edition SOLD Legal Guide for Small STARTING & RUNNING A Business Attorney Fred S. Steingold, author of The Employer’s Legal Handbook Free Legal Updates at Nolo.com 15th Edition Legal Guide for Starting & Running a Small Business Attorney Fred S. Steingold LAW for ALL FIFTEENTH EDITION APRIL 2017 Editor MARCIA STEWART Cover Design SUSAN PUTNEY Book Design TERRI HEARSH Proofreader ROBERT WELLS Index ELLEN SHERRON Printing BANG PRINTING ISSN: 2163-0321 (print) ISSN: 2325-3975 (online) ISBN: 978-1-4133-2407-5 (pbk) ISBN: 978-1-4133-2408-2 (epub ebook) This book covers only United States law, unless it specifically states otherwise. Copyright © 1992, 1995, 1997, 1998, 1999, 2001, 2003, 2005, 2006, 2008, 2009, 2011, 2013, 2015, and 2017 by Fred Steingold. All rights reserved. The NOLO trademark is registered in the U.S. Patent and Trademark Office. Printed in the U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, California 94710. Please note We believe accurate, plain-English legal information should help you solve many of your own legal problems. But this text is not a substitute for personalized advice from a knowledgeable lawyer. If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state. Acknowledgments Special thanks to Nolo publisher Jake Warner—the cheerful perfectionist whose ideas infuse every page of this book—and to Nolo editor Mary Randolph, who deftly whipped the early manuscripts into final shape. Thanks, too, to the rest of the remarkable Nolo family for their invaluable contributions— especially Steve Elias, Robin Leonard, Barbara Hodovan, Jackie Mancuso, Tony Mancuso, Barbara Kate Repa, Beth Laurence, Ilona Bray, Catherine Caputo, Betsy Simmons, JinAh Lee, and Marcia Stewart. I am indebted to Attorney David Steingold for bringing this edition up to date. In addition to the folks at Nolo, these other professionals generously shared their expertise to make this book possible: • Attorneys Charles Borgsdorf, Douglas Ellmann, Larry Ferguson, Sandra Hazlett, Peter Long, Michael Malley, Robert Stevenson, Nancy Welber, and Warren Widmayer. • Certified public accountants Mark Hartley and Lonnie Loy. • Insurance specialists James Libs, Mike Mansel, and Dave Tiedgen. Finally, thanks to my small business clients, who are a constant source of knowledge and i nspiration. About the Author Fred S. Steingold practices law in Ann Arbor, Michigan. His main practice areas are business law and real estate law. Fred is the author of several Nolo books, including Legal Guide for Starting & Running a Small Business, Legal Forms for Starting & Running a Small Business, The Employer’s Legal Handbook, Negotiate the Best Lease for Your Business, The Complete Guide to Buying a Business, and The Complete Guide to Selling a Business. Table of Contents Your Legal Companion for Starting and Running a Small Business ...................1 1 Which Legal Form Is Best for Your Business? ...........................................................................3 Sole Proprietorships .....................................................................................................................................................6 Partnerships.....................................................................................................................................................................9 Corporations .................................................................................................................................................................12 Limited Liability Companies ..................................................................................................................................22 Choosing Between a Corporation and an LLC ..............................................................................................24 Special Structures for Special Situations ..........................................................................................................27 The Benefit Corporation..........................................................................................................................................31 2 Structuring a Partnership Agreement .........................................................................................35 Why You Need a Written Agreement ..............................................................................................................36 An Overview of Your Partnership Agreement ..............................................................................................37 Changes in Your Partnership ................................................................................................................................46 3 Creating a Corporation ..............................................................................................................................47 The Structure of a Corporation ............................................................................................................................50 Financing Your Corporation ..................................................................................................................................52 Compensating Yourself ............................................................................................................................................53 Do You Need a Lawyer to Incorporate? ...........................................................................................................54 Overview of Incorporation Procedures ...........................................................................................................54 Eleven Basic Steps to Incorporate .......................................................................................................................55 After You Incorporate ..............................................................................................................................................62 Safe Business Practices for Your Corporation ................................................................................................63 4 Creating a Limited Liability Company .........................................................................................69 Number of Members Required.............................................................................................................................70 Management of an LLC ............................................................................................................................................71 Financing an LLC .........................................................................................................................................................71 Compensating Members .........................................................................................................................................73 Choosing a Name ........................................................................................................................................................74 Paperwork for Setting Up an LLC ........................................................................................................................75 After You Form Your LLC ........................................................................................................................................78 Safe Business Practices for Your LLC ..................................................................................................................79 5 Preparing for Ownership Changes With a Buyout Agreement ...........................85 Major Benefits of Adopting a Buyout Agreement .......................................................................................87 Where to Put Your Buyout Provisions ..............................................................................................................90 When to Create a Buyout Agreement ...............................................................................................................92 6 Naming Your Business and Products ............................................................................................93 Business Names: An Overview ..............................................................................................................................95 Mandatory Name Procedures ..............................................................................................................................96 Trademarks and Service Marks ..........................................................................................................................100 Strong and Weak Trademarks ............................................................................................................................101 Before the Trademark: Name Searches ..........................................................................................................102 How to Use and Protect Your Trademark ....................................................................................................104 7 Licenses and Permits ...................................................................................................................................105 Federal Registrations and Licenses ...................................................................................................................107 State Requirements .................................................................................................................................................108 Regional Requirements .........................................................................................................................................110 Local Requirements ................................................................................................................................................110 How to Deal With Local Building and Zoning Officials ..........................................................................112 8 Tax Basics for the Small Business ....................................................................................................115 Employer Identification Number ......................................................................................................................116 Becoming an S Corporation ................................................................................................................................119 Business Taxes in General .....................................................................................................................................120 Business Deductions ...............................................................................................................................................126 Tax Audits ...................................................................................................................................................................131 9 Raising Money for Your Business ....................................................................................................135 Consider Writing a Business Plan......................................................................................................................136 Two Types of Outside Financing .......................................................................................................................139 Thirteen Common Sources of Money ............................................................................................................144 Document All of the Money You Receive ....................................................................................................150 10 Buying a Business ............................................................................................................................................155 Finding a Business to Buy .....................................................................................................................................157 What’s the Structure of the Business You Want to Buy? .......................................................................158 Gathering Information About a Business .....................................................................................................162 Valuing the Business ...............................................................................................................................................163 Other Items to Investigate ...................................................................................................................................165 Letter of Intent to Purchase ................................................................................................................................168 The Sales Agreement ..............................................................................................................................................170 The Closing .................................................................................................................................................................178 Selling a Business ......................................................................................................................................................179 11 Franchises: How Not to Get Burned ............................................................................................183 What Is a Franchise? ................................................................................................................................................185 The Downsides of Franchise Ownership .......................................................................................................186 Investigating a Franchise .......................................................................................................................................189 The Franchise Disclosure Document ..............................................................................................................190 The Franchise Agreement ....................................................................................................................................196 Resolving Disputes With Your Franchisor ....................................................................................................200 12 Insuring Your Business ...............................................................................................................................201 Working With an Insurance Agent ..................................................................................................................202 Property Coverage...................................................................................................................................................204 Liability Insurance ....................................................................................................................................................208 Other Insurance to Consider ..............................................................................................................................211 Saving Money on Insurance ................................................................................................................................213 Making a Claim .........................................................................................................................................................215 13 Negotiating a Favorable Lease ...........................................................................................................217 Finding a Place ...........................................................................................................................................................219 Leases and Rental Agreements: An Overview ............................................................................................219 Short-Term Leases (Month-to-Month Rentals) ..........................................................................................220 Written Long-Term Leases ...................................................................................................................................221 Additional Clauses to Consider .........................................................................................................................233 Shopping Center Leases ........................................................................................................................................234 How to Modify a Lease..........................................................................................................................................235 Landlord-Tenant Disputes ....................................................................................................................................235 Getting Out of a Lease...........................................................................................................................................237 When You Need Professional Help ..................................................................................................................237 14 Home-Based Business ...............................................................................................................................239 Zoning Laws ...............................................................................................................................................................240 Private Land Use Restrictions .............................................................................................................................244 Insurance .....................................................................................................................................................................246 Deducting Expenses for the Business Use of Your Home ......................................................................247 15 Employees and Independent Contractors .............................................................................253 Hiring Employees .....................................................................................................................................................255 Job Descriptions .......................................................................................................................................................258 Job Advertisements.................................................................................................................................................259 Job Applications .......................................................................................................................................................259 Interviews ....................................................................................................................................................................260 Testing ...........................................................................................................................................................................260 Background Checks ................................................................................................................................................264 Immigration Law Requirements........................................................................................................................273 Personnel Practices .................................................................................................................................................274 Illegal Discrimination .............................................................................................................................................275 Wages and Hours .....................................................................................................................................................277 Occupational Safety and Health .......................................................................................................................280 Workers’ Compensation .......................................................................................................................................281 Termination of Employment ..............................................................................................................................282 Unemployment Compensation ........................................................................................................................284 Independent Contractors ....................................................................................................................................285 Employers’ Health Care Insurance Requirements Under Obamacare .............................................293 16 The Importance of Excellent Customer Relations ........................................................295 Developing Your Customer Satisfaction Policy .........................................................................................297 Telling Customers About Your Policies ..........................................................................................................299 17 Legal Requirements for Dealing With Customers .........................................................301 Advertising ..................................................................................................................................................................302 Retail Pricing and Return Practices ..................................................................................................................305 Warranties ...................................................................................................................................................................308 Consumer Protection Statutes ..........................................................................................................................313 Dealing With Customers Online .......................................................................................................................314 18 Cash, Credit Cards, and Checks........................................................................................................317 Cash ...............................................................................................................................................................................318 Credit and Debit Cards .........................................................................................................................................318 Checks ...........................................................................................................................................................................320 19 Extending Credit and Getting Paid ...............................................................................................325 The Practical Side of Extending Credit ...........................................................................................................326 Laws That Regulate Consumer Credit ............................................................................................................332 Becoming a Secured Creditor .............................................................................................................................333 Collection Problems ...............................................................................................................................................334 Collection Options ..................................................................................................................................................337 20 Put It in Writing: Small Business Contracts ..........................................................................339 What Makes a Valid Contract ............................................................................................................................341 Unfair or Illegal Contracts ....................................................................................................................................343 Misrepresentation, Duress, or Mistake ..........................................................................................................343 Must a Contract Be in Writing? .........................................................................................................................344 Writing Business-to-Business Contracts........................................................................................................347 Signing Your Contracts .........................................................................................................................................350 Electronic Contracting ..........................................................................................................................................353 Enforcing Contracts in Court .............................................................................................................................354 What Can You Sue For? .........................................................................................................................................355 21 The Financially Troubled Business .................................................................................................359 Thinking Ahead to Protect Your Personal Assets .....................................................................................360 Managing the Financially Troubled Business ...............................................................................................363 Seeking an Objective Analysis ............................................................................................................................366 Workouts .....................................................................................................................................................................367 Selling the Business .................................................................................................................................................370 Closing the Business ...............................................................................................................................................371 Understanding Bankruptcy .................................................................................................................................372 22 Resolving Legal Disputes .........................................................................................................................381 Negotiating a Settlement .....................................................................................................................................382 Understanding Mediation ...................................................................................................................................383 Arbitration ..................................................................................................................................................................385 Going to Court ..........................................................................................................................................................387 23 Representing Yourself in Small Claims Court .....................................................................393 Deciding Whether to Represent Yourself .....................................................................................................394 Learning the Rules ...................................................................................................................................................396 Meeting the Jurisdictional Limits .....................................................................................................................396 Before You File Your Lawsuit ..............................................................................................................................396 Figuring Out Whom to Sue .................................................................................................................................399 Handling Your Small Claims Court Lawsuit .................................................................................................399 Representing Yourself If You’re the Defendant ..........................................................................................402 Appealing Small Claims Decisions ....................................................................................................................402 Collecting Your Judgment ...................................................................................................................................402 24 Lawyers and Legal Research ................................................................................................................405 How to Find the Right Lawyer ...........................................................................................................................406 Fees and Bills ..............................................................................................................................................................408 Problems With Your Lawyer ...............................................................................................................................410 Do-It-Yourself Legal Research .............................................................................................................................410 Appendix Checklist for Starting a Small Business ......................................................................................415 Index ....................................................................................................................................................................................421