The Elements Of Small Business: A Lay Person's Guide To The Financial Terms, Marketing Concepts and Legal Forms that Every Entrepreneur Needs

355 Pages·2005·1.02 MB·English

by  John Thaler

The Elements
of Small Business
A Lay Person’s Guide to the
Financial Terms, Marketing
Concepts and Legal Forms
that Every Entrepreneur Needs
John Thaler, Esq.
SILVER LAKE PUBLISHING
LOS ANGELES, CA ABERDEEN, WA
The Elements of Small Business
A Lay Person’s Guide to the Financial Terms, Marketing Con-
cepts and Legal Forms that Every Entrepreneur Needs
First edition
Copyright © 2005 by John Thaler
Silver Lake Publishing
P.O. Box 29460
Los Angeles, CA 90029
•
111 East Wishkah Street
Aberdeen, WA 98520
For a list of other publications or for more information, please call
1.360.532.5758.
All rights reserved. No part of this book may be reproduced, stored
in a retrieval system or transcribed in any form or by any means
(electronic, mechanical, photocopy, recording or otherwise) with-
out the prior written permission of the copyright owner.
Library of Congress Catalogue Number: pending
The Elements ofSmall Business
A Lay Person’s Guide to the Financial Terms, Marketing Concepts
and Legal Forms that Every Entrepreneur Needs
Includes index.
Pages: 354
ISBN: 1-56343-805-4
Acknowledgments,
Dedication &
Disclaimer
This book would not have been possible without the aid and support of
my research assistant, James Souvay, and my personal assistant, Alison
Bock. Their tireless dedication to checking facts, locating information,
searching out forms, and copyediting resulted in a reference guide that
everyone can use.
Also, this book would not have been started without the simple words of
Jeffrey Rose, accountant extraordinaire, who said, “John, I think you should
write a book.” Hey, Jeff, I finally took your advice. Don’t let it go to your
head.
This book is dedicated to my wife and best friend, Melinda, who put up
with the long hours of work. And it is dedicated to my son, Matthew
(a.k.a. “Mr. Matthew”), who continues to amaze me every day with his
accomplishments. Someday soon he will snatch the pebble from my hand.
And now a word from our lawyers...
THIS BOOK IS INTENDED TO OFFER GENERAL INFORMA-
TION ON MANY ISSUES PERTINENT TO SMALL BUSINESS
OWNERS. NEITHER SILVER LAKE PUBLLISHING NOR THE
AUTHOR IS ENGAGED IN OR ATTEMPTING TO RENDER LE-
GAL OR PROFESSIONAL ADVICE OR SERVICES. THOUGH
GREAT CARE HAS BEEN TAKEN TO ASSURE ACCURACY,
SOME MATERIAL MAY BE AFFECTED BY CHANGES IN LAWS
SINCE THIS BOOK WAS COMPLETED. IF LEGAL OR OTHER
EXPERT ADVICE IS NEEDED OR APPROPRIATE, YOU ARE
ADVISED AND ENCOURAGED TO OBTAIN THE SERVICES OF
A COMPETENT PROFESSIONAL.
THIS CLAUSE LIMITS OUR LIABILITY: THE PUBLISHER AND
AUTHOR HAVE USED THEIR BEST EFFORTS IN PREPARING
THIS BOOK. THE PUBLISHER AND AUTHOR MAKE NO
REPRESENTIONS OR WARRANTIES WITH RESPECT TO THE
ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS
BOOK AND SPECIFICALLY DISCLAIM ANY IMPLIED WAR-
RANTIES OF MERCHANTABILITY OR FITNESS FOR A PAR-
TICULAR PURPOSE. THERE WARRANTY MAY BE CREATED OR
EXTENDED BY SALES REPRESENTATIVES OR WRITTEN SALES
MATERIALS. THE ACCURACY AND COMPLETENESS OF ITS
CONTENTS ARE NOT GUARANTEED OR WARRANTED TO
PRODUCE A PARTICULAR RESULT FURTHER, THE ADVICE
AND INFORMATION CONTAINED HEREIN MAY NOT BE SUIT-
ABLE FOR EVERY INDIVIDUAL OR BE APPROPRIATE IN EV-
ERY CIRCUMSTANCE. NEITHER THE PUBLISHER NOR AU-
THOR SHALL BE LIABLE FOR ANY LOSSES OR ANY OTHER
DAMAGES WHETHER SPECIAL, INCIDENTAL OR CONSE-
QUENTIAL.
In other words, if you want the best advice for your situation, spend the
money to retain a good attorney or other competent professional. Come
on, it’s only a book.
—John Thaler
Table of Contents
Chapter 1: Welcome, Bienvenue, Shalom… 7
Chapter 2: Economics 101 19
Chapter 3: Business Formation 27
Chapter 4: Partnership Agreements 57
Chapter 5: Franchises 67
Chapter 6: Capital Formation 89
Chapter 7: Business Plans 103
Chapter 8: Marketing 119
Chapter 9: Leases, Landlords and You 141
Chapter 10: Insurance 165
Chapter 11: Business Equipment 179
Chapter 12: Accounting and Taxes 187
Chapter 13: Computers and E-Commerce 203
Chapter 14: Employees and Contractors 223
Chapter 15: Lawsuits and Lawyers 245
Chapter 16: Miscellaneous Issues 267
Chapter 17: Retirement Planning 277
Chapter 18: Marriage and Divorce 285
Chapter 19: Nonprofit Organizations 295
Chapter 20: Exit Strategies 317
Epilogue: Parting Glances 339
Appendix 341
Index 345
Chapter 1: Welcome, Bienvenue, Shalom…
Chapter 1
Welcome, Bienvenue, Shalom...
The two most engaging powers of an author
are to make new things familiar, familiar things
new.
—William Makepeace Thackeray
Running a business is never simple. But it can be simplified if you
invest the time to learn the basic elements. If you don’t, owning and oper-
ating your own business will likely become a complex nightmare of un-
foreseen and unresolved problems. I know. As an attorney who special-
izes in dealing with business problems, I have a lot of experience with
complexity. Let me start this chapter with one good example.
On a chilly November afternoon, a couple of guys sat in the office,
the location from which they operated several small businesses. The older
man rested comfortably in the black faux leather recliner. He leaned back
slightly as he looked at his younger partner who was seated across the
desk in a chair normally reserved for clients. They looked at each other
for a few seconds, neither uttering a word.
Then: “The deal looks good,” said the older man. “Make the call.”
The younger man nodded his agreement. At long last, they would
purchase the nightclub. These guys were not freshmen, they were not
7
The Elements of Small Business
beginners and they were not neophytes to the intricate details of operating
a small business. In fact, they owned other clubs and thought this one
would be a great addition. And they were certain that the purchase price
for the land, the improvement (a euphemism for the building) and the busi-
ness fell far below their true value.
After telephoning the seller and arranging a meeting, they hopped in
the car and drove to “escrow.” Once there, they met with the purported
owner. Actually, they met with the alleged sole shareholder of the corpo-
ration that owned the land, the building and the improvement. A nice enough
guy. He had operated the club for more than a decade under the auspices
of a corporation. During the course of the meeting, they agreed once again
on the price and then shared the information with the escrow agent.
Everything about the deal seemed simple: the corporation would be
sold in a stock share purchase. The buyers would pay partly in cash and
partly through financing. The deal would close in 30 days. During that time
the entertainment and dance permits along with the alcohol permit would
be revised to reflect the names of the new shareholders. What could go
wrong? Everything.
Remember: Escrow is not the place where agreements are
written. No, that special place is located in your attorney’s
office. Escrow is like that neutral corner where a boxer stands
when his opponent is being counted out. Most people asso-
ciate it with buying and selling their home. Escrow is nothing
more than trusted party ensuring that anything agreed to by
the parties is carried out to the letter. That’s all.
Do you know that in most states agreements for the purchase of real
property or agreements that include real property, such as a lease with an
option to buy, must be in writing? Neither the buyers nor the seller knew.
Do you know that the allocation of the total purchase price to the land, the
8
Chapter 1: Welcome, Bienvenue, Shalom…
improvement, and the business triggers different tax ramifications and li-
abilities? Neither the buyers nor the seller knew. Do you know that there
are different ramifications between an asset purchase versus a stock share
purchase? Do you know about a “UCC 6” bulk sales announcement,
when to use it, and how it removes potential creditor liabilities in an asset
purchase? Do you know what permits are required to operate a club
serving alcohol or to operate a club where dancing will take place.
We’re not done yet.
Do you know whether any zoning ordinances changed that might
result in the denial of a transfer of the permit? Do you know whether all
tax returns been filed, whether payroll taxes been paid, whether all sales
taxes been paid, especially in a stock share purchase? Do you know if a
workers’ compensation policy and liability policy (not to mention fire in-
surance policy) are in effect? Do you know how to get these policies?
How many employees are on the payroll? Are they doing a good
job? Will they remain under new management? If not, who will manage
the business? Are they trustworthy, especially in a business that sees a lot
of cash. Are more employees needed? Do you know if there are any liens
from lawsuits? Any community property issues?
Lots of Rude Surprises
Within a few weeks, the nightclub buyers discovered that the sole
shareholder had not filed any federal tax returns or state tax returns in
more than ten years—resulting in a suspension of the corporation many
years previous. So the buyers hired an accountant. They spent $88,000 in
back taxes and tax return preparation. The process took more than three
months. The suspension was lifted and so the sale continued…or not.
Then the buyers discovered that the shareholder had been married
and that, per the divorce judgment, the ex-wife held 50 percent interest in
the shares. They also discovered that per the terms of the divorce, she
had a right to review any purchase offers since she would be receiving one
half of the sale proceeds. She had a lawyer. And he wanted to review
everything. More delays.
9