Legal guide for starting & running a small business

450 Pages·2008·2.025 MB·English

by  Fred Steingold

Tenth edition
Legal Guide for
Starting & Running
a Small Business
by Attorney Fred S. Steingold
tenth edition april 2008
editor betsy simmons
Cover design susan putney
production margaret livingston
proofreader mark nigara
Cd-rom preparation ellen bitter
index bayside indexing serviCe
printing delta printing solutions, inC.
steingold, Fred
legal guide for starting & running a small business / by Fred steingold. --
10th ed.
p. cm.
includes index.
isbn-13: 978-1-4133-0853-2 (pbk.)
isbn-10: 1-4133-0853-8 (pbk.)
1. small business--law and legislation--united states--popular works. 2.
business enterprises--law and legisltation--united states--popular works. i. title.
ii. title: legal guide for starting and running a small business.
kF1659.Z9s76 2007
346.73'0652--dc22
2007047046
Copyright © 1992, 1995, 1997, 1998, 1999, 2001, 2003, 2005, 2006, and 2008 by Fred steingold.
all rights reserved. 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.
Quantity sales: For information on bulk purchases or corporate premium sales, please contact the special sales
department. For academic sales or textbook adoptions, ask for academic sales. Call 800-955-4775 or write to
nolo, 950 parker street, berkeley, Ca 94710.
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 ..............................................................................................23
Choosing Between a Corporation and an LLC ........................................................26
Special Structures for Special Situations .....................................................................28
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 ................................................................................................49
The Structure of a Corporation .......................................................................................50
Financing Your Corporation ..............................................................................................53
Compensating Yourself ........................................................................................................54
Do You Need a Lawyer to Incorporate? ......................................................................55
Overview of Incorporation Procedures .......................................................................56
Twelve Basic Steps to Incorporate ..................................................................................57
After You Incorporate ...........................................................................................................65
Safe Business Practices for Your Corporation ..........................................................65
4
Creating a Limited Liablity Company..................................................................71
Number of Members Required ........................................................................................72
Management of an LLC ........................................................................................................73
Financing an LLC ......................................................................................................................73
Compensating Members .....................................................................................................75
Choosing a Name ....................................................................................................................76
Paperwork for Setting Up an LLC ...................................................................................77
After You Form Your LLC ....................................................................................................81
Safe Business Practices for Your LLC .............................................................................82
5
Preparing for Ownership Changes With a Buyout Agreement ...........87
Major Benefits of Adopting a Buyout Agreement ................................................89
Where to Put Your Buyout Provisions .........................................................................93
When to Create a Buyout Agreement..........................................................................94
6
Naming Your Business and Products ...................................................................95
Business Names: An Overview .........................................................................................98
Mandatory Name Procedures ........................................................................................100
Trademarks and Service Marks ......................................................................................103
Strong and Weak Trademarks ........................................................................................104
How to Protect Your Trademark ...................................................................................105
Name Searches ........................................................................................................................106
7 Licenses and Permits ....................................................................................................111
Federal Registrations and Licenses ...............................................................................113
State Requirements ..............................................................................................................114
Regional Requirements ......................................................................................................116
Local Requirements ..............................................................................................................116
How to Deal With Local Building and Zoning Officials ...................................119
8
Tax Basics for the Small Business..........................................................................121
Employer Identification Number ..................................................................................122
Becoming an S Corporation ............................................................................................126
Business Taxes in General ..................................................................................................127
Business Deductions ............................................................................................................133
Tax Audits ..................................................................................................................................139
9 Raising Money for Your Business ..........................................................................143
Consider Writing a Business Plan ..................................................................................144
Two Types of Outside Financing ...................................................................................147
Thirteen Common Sources of Money .......................................................................153
Document All of the Money You Receive ...............................................................158
10 Buying a Business ...........................................................................................................163
Finding a Business to Buy ..................................................................................................165
What’s the Structure of the Business You Want to Buy? .................................166
Gathering Information About a Business ................................................................170
Valuing the Business ............................................................................................................172
Other Items to Investigate ................................................................................................174
Letter of Intent to Purchase .............................................................................................177
The Sales Agreement ...........................................................................................................179
The Closing ................................................................................................................................187
Selling a Business ....................................................................................................................188
11
Franchises: How Not to Get Burned ...................................................................193
What Is a Franchise? .............................................................................................................195
The Downsides of Franchise Ownership ..................................................................196
Investigating a Franchise ....................................................................................................200
The Uniform Franchise Offering Circular .................................................................201
The Franchise Agreement .................................................................................................207
Resolving Disputes With Your Franchisor ................................................................211
12
Insuring Your Business ................................................................................................213
Working With an Insurance Agent ..............................................................................214
Property Coverage ................................................................................................................216
Liability Insurance .................................................................................................................220
Other Insurance to Consider...........................................................................................224
Saving Money on Insurance .............................................................................................226
Making a Claim .......................................................................................................................228
13
Negotiating a Favorable Lease ...............................................................................231
Finding a Place .........................................................................................................................233
Leases and Rental Agreements: An Overview .......................................................233
Short-Term Leases (Month-to-Month Rentals) ....................................................234
Written Long-Term Leases ................................................................................................235
Additional Clauses to Consider .....................................................................................247
Shopping Center Leases .....................................................................................................248
How to Modify a Lease .......................................................................................................250
Landlord-Tenant Disputes ................................................................................................250
Getting Out of a Lease ........................................................................................................252
When You Need Professional Help ..............................................................................253
14
Home-Based Business ..................................................................................................255
Zoning Laws ..............................................................................................................................256
Private Land Use Restrictions .........................................................................................261
Insurance ....................................................................................................................................262
Deducting Expenses for the Business Use of Your Home ...............................264
15
Employees and Independent Contractors .....................................................269
Hiring Employees ...................................................................................................................271
Job Descriptions .....................................................................................................................274
Job Advertisements ..............................................................................................................275
Job Applications .....................................................................................................................275
Interviews ...................................................................................................................................276
Testing ..........................................................................................................................................279
Background Checks ..............................................................................................................288
Immigration Law Requirements ....................................................................................290
Personnel Practices ...............................................................................................................290
Illegal Discrimination...........................................................................................................291
Wages and Hours ...................................................................................................................293
Occupational Safety and Health ...................................................................................297
Workers’ Compensation ....................................................................................................297
Termination of Employment ...........................................................................................298
Unemployment Compensation ....................................................................................300
Independent Contractors .................................................................................................301
16
The Importance of Excellent Customer Relations .....................................311
Developing Your Customer Satisfaction Policy ....................................................313
Telling Customers About Your Policies .....................................................................315
17
Legal Requirements for Dealing With Customers .....................................317
Advertising ................................................................................................................................318
Retail Pricing and Return Practices ..............................................................................321
Warranties .................................................................................................................................325
Consumer Protection Statutes .......................................................................................330
Dealing With Customers Online ...................................................................................331
18
Cash, Credit Cards, and Checks ............................................................................335
Cash...............................................................................................................................................336
Credit Cards ..............................................................................................................................336
Checks .........................................................................................................................................338
19
Extending Credit and Getting Paid .....................................................................343
The Practical Side of Extending Credit ......................................................................344
Laws That Regulate Consumer Credit ........................................................................349
Becoming a Secured Creditor .........................................................................................350
Collection Problems .............................................................................................................351
Collection Options ...............................................................................................................355
20
Put It in Writing: Small Business Contracts ...................................................357
What Makes a Valid Contract ........................................................................................359
Unfair or Illegal Contracts ................................................................................................361
Misrepresentation, Duress, or Mistake ......................................................................361
Must a Contract Be in Writing? .....................................................................................362
Writing Business-to-Business Contracts ...................................................................366
Signing Your Contracts .......................................................................................................369
Enforcing Contracts in Court ..........................................................................................372
What Can You Sue For? ......................................................................................................374
21
The Financially Troubled Business .......................................................................377
Thinking Ahead to Protect Your Personal Assets ................................................378
Managing the Financially Troubled Business .........................................................381
Seeking an Objective Analysis ........................................................................................384
Workouts ...................................................................................................................................386
Selling or Closing the Business .......................................................................................389
Understanding Bankruptcy .............................................................................................391
22
Resolving Legal Disputes ...........................................................................................401
Negotiating a Settlement ..................................................................................................402
Understanding Mediation ................................................................................................403
Arbitration ................................................................................................................................405
Going to Court ........................................................................................................................408
23
Representing Yourself in Small Claims Court ...............................................413
Deciding Whether to Represent Yourself .................................................................414
Learning the Rules .................................................................................................................416
Meeting the Jurisdictional Limits..................................................................................416
Before You File Your Lawsuit ...........................................................................................416
Figuring Out Whom to Sue .............................................................................................419
Handling Your Small Claims Court Lawsuit ............................................................420
Representing Yourself If You’re the Defendant .....................................................422
Appealing Small Claims Decisions ...............................................................................423
Collecting Your Judgment ................................................................................................423
24
Lawyers and Legal Research ....................................................................................425
How to Find the Right Lawyer ........................................................................................426
Fees and Bills ............................................................................................................................429
Problems With Your Lawyer ............................................................................................430
Do-It-Yourself Legal Research..........................................................................................431
Appendixes
A Checklist for Starting a Small Business .............................................................435
B Federal Trade Commission Offices .....................................................................441
Index
Your Legal Companion for
Starting and Running a Small Business
S
tarting and running a small business in plain english, this book covers all those
can be both profitable and emotionally issues and lots of others—all the major legal
satisfying. being an entrepreneur offers issues that a small business is likely to face,
rewards of many sorts: the opportunity to in fact. you’ll learn about preliminary issues
spread your wings and use your natural talents, such as raising money, forming the business,
the freedom of being your own boss, the and choosing and protecting a name. There’s
possibility of huge financial success, and more. also lots of good information about how to get
and in an era when job security can seem the business up and running, including hiring
like a relic of a bygone era, owning a business employees, getting permits and insurance, and
means you will never be fired or outsourced at negotiating a lease. The book also covers the
someone else’s whim. maintenance of your business—paying taxes,
of course, nothing this exciting ever comes dealing with customers and problem employees,
without risk. demographic changes, recessions, and resolving legal disputes.
changing tastes and styles, new technologies— Legal Guide for Starting & Running a Small
any of these or a hundred other factors can Business will help you take key preventive
challenge even the most astute and experienced measures that will dramatically cut the number
businessperson. That’s why it’s so important to of expensive visits you’d otherwise make to a
increase your chances of success not only by lawyer’s office. you’ll know exactly where you
working hard and planning carefully but also may be vulnerable to lawsuits so you can wisely
by knowing how the law affects your business. take steps to reduce the risks. and you’ll know
it can help you avoid many costly risks. when it makes sense to call in a lawyer or a tax
every businessperson runs into legal questions. pro for special assistance before small problems
maybe you’re just looking to start (or buy) a turn into big ones. you’ll be able to spend your
small retail, service, or manufacturing business, time on what really counts: running a sound
alone or with others, and are wondering how and successful business.
to structure your ownership. maybe you’re Congratulations on taking the first steps
considering setting up a corpor ation or llC if toward owning and running your own enter-
doing so would be legally advantageous. you prise. you have a lot of hard work ahead of you,
might have questions about taxes or employees. and nolo is here to help you along the way.
so roll up your sleeves and dig in—the world
●
awaits your success. good luck!
C H A P T E R
1
Which Legal Form Is
Best for Your Business?
Sole Proprietorships ...................................................................................................................................6
Personal Liability .....................................................................................................................................6
Income Taxes ............................................................................................................................................7
Fringe Benefits .........................................................................................................................................8
Routine Business Expenses ...............................................................................................................9
Partnerships ....................................................................................................................................................9
Personal Liability ..................................................................................................................................10
Partners’ Rights and Responsibilities ........................................................................................11
Income Taxes .........................................................................................................................................12
Fringe Benefits and Business Expenses ....................................................................................12
Corporations ...............................................................................................................................................12
Limited Personal Liability................................................................................................................13
Income Taxes .........................................................................................................................................15
Attracting Investors ...........................................................................................................................21
Limited Liability Companies ...............................................................................................................23
Limited Personal Liability................................................................................................................23
Number of Owners ............................................................................................................................24
Tax Flexibility .........................................................................................................................................24
Flexible Management Structure .................................................................................................25
Flexible Distribution of Profits and Losses ............................................................................25
Choosing Between a Corporation and an LLC .........................................................................26
Special Structures for Special Situations ......................................................................................28
Limited Partnerships .........................................................................................................................28
Choices for Professionals .................................................................................................................30
Nonprofit Corporations ..................................................................................................................32
Cooperatives and Cooperative-Type Organizations ........................................................33