Law Offices of Eric S. Hartman » Business Law Services, Choice of Entity, Business Sales, Business Start-Ups

BUSINESS-RELATED SERVICES

Following is a description of some of the services offered by Mr. Hartman to business clients. The list is not intended to be exhaustive, or exclusive, but provides examples of some of the types of legal services provided in the past to business clients.

BUSINESS START-UPS

Consultations regarding what is involved in starting a new business, with attention to the best type of business entity (sole proprietorship, partnership, limited liability company or corporation) to use, requirements and procedures for setting up the business, other key services with whom relationships should be established, agreements (such as leases) that might be needed, etc. For information on choice of entity, see the separate article below.

BUSINESS CONVERSIONS

Converting one form of business to another type of entity. Most often, this involves converting an existing sole proprietorship or partnership business to a corporation or LLC due to asset protection concerns, addition of owners, or for other reasons.

BUSINESS PURCHASES AND SALES

Mr. Hartman has represented both buyers and sellers of businesses, from small Amom and pop@ businesses to multi-million dollar transactions. It is important that the asset sale or stock sale agreement be carefully crafted with attention to due diligence issues and various checklists to be sure all of the details are attended to. Often the process begins with a Memorandum of Understanding or Letter of Intent to be sure that the parties are in agreement on the general concepts and key points before a definitive agreement is drafted. The process is on-going until close of the sale escrow.

AGREEMENTS

All businesses encounter needs to draft, review or revise agreements. These can be commercial leases, property purchase agreements, equipment leases, employment agreements for key personnel, independent contractor agreements, non-disclosure agreements, licensing agreements, consulting agreements, product sales and security agreements, and promissory notes, to name a few. With respect to the formation of new businesses, agreements can include shareholders= agreements, operating agreements (for LLC=s), and buy-sell agreements. You need experienced counsel who has drafted and reviewed such agreements in the past for other clients.

CORPORATE MAINTENANCE AND ON-GOING SERVICES

While it may seem obvious, it bears stating that corporations need to act like corporations if the limited liability protection the shareholders expect, is to be realized. This means that the corporate minute book should show that meetings of shareholders and directors occur periodically (we recommend at least annually), and if there is only one shareholder or director, that there be written actions of shareholder and director in the minute book, all of which memorialize important decisions and actions taken by the shareholders and the directors during the period of time covered by the minutes or written action. Mr. Hartman assists his corporate clients with this process by sending them a detailed questionnaire once a year, which they can fill out and return, so that meaningful actions or minutes can be prepared. Of course, during the year, minutes of special meetings can be prepared at any time when advisable. Further, the corporation should not appear to be merely the alter ego of the individual owner, with cash, for example, passing back and forth between the shareholder and the corporation as needs arise, without adequate documentation as salary, loans, etc.

Mr. Hartman acts as outside corporate counsel for many corporations that are not large enough to support a full-time corporate legal department. Typically, a corporate legal department would manage all litigation involving the corporation, including locating out-of-state counsel for any court actions pending in other states, complete all periodic corporate filings in timely manner, maintain board and committee minutes and records, conduct due diligence on behalf of the corporation whenever necessary, draft and review contracts to which the corporation is a party, negotiate and review leases, consult with respect to employment issues and contracts, maintain calendars of relevant deadlines and expiration dates, including those applicable to trademarks, patents, domain names, and security interests.

We are s litigious society in this country, and even with the best procedures and contracts, one of the expectations of business owners should be that at some time in the history of the business, it will be sued by someone or will need to sue someone. Some lawsuits may be defended by an insurance carrier for the business, such as a worker=s compensation claim or a claim arising out of an auto accident that occurs in connection with business use of a vehicle. Other claims, such as breach of contract, including breach of warranty, and intentional torts, probably won=t be covered by any form of insurance. At such times, you need a business attorney familiar with the kinds of issues involved in the litigation, and you need to see him as soon as possible after being served with a complaint, if you or your business is the defendant. Often these matters can be settled or may later result in settlement through mediation, but at times they must proceed through the trial or arbitration process.

The following is a very brief summary of the typical choices of entity or format for conducting business in California. The best way for a client to get his/her specific questions answered regarding which form is best for the client=s existing or new business, is to schedule an appointment at which the characteristics of each entity, and the pros and cons as they relate to the client=s business, can be discussed. The conference fee can be applied to the fee otherwise applicable for formation of a corporation, LLC or partnership.

Corporations

Corporations have a long, established history in California as being the entity of choice for asset protection of the owners, assuming the corporation is adequately capitalized and its business is properly conducted as a corporation. From a legal perspective, there are two types of California corporations, a regular corporation and a statutory close corporation. At an initial office conference, the characteristics of each can be discussed and a decision made as to which is best suited to the client=s needs. After formation, either type of corporation can make an election to be taxed as a Subchapter S corporation, if that determination seems to be in the best interests of the shareholders. One of the functions of the attorney is to explain the advantages and disadvantages of the corporate format and the various options within that format, the formalities that need to be observed once the corporation has been formed, and to provide information and guidance to the client in making numerous initial decisions on behalf of the new corporate entity.

Limited Liability Companies (LLC=S)

Limited Liability Companies do not have the long history in California, as recognized entities, that corporations have. There are some restrictions on the types of businesses that can be operated in the LLC format. Unlike corporations, LLC=s must have an operating agreement among the Amembers@ (owners) of the LLC. LLCs (taxed as partnerships) must pay both a gross receipts fee and an annual tax. An LLC that elects to be taxed as a corporation follows corporation rules with respect to taxes.

Every LLC organized, registered or doing business in Calif is subject to an annual minimum franchise tax of $800. R&TC 17941. Tax is payable on the 15^th day following the 4^th month after the LLC is formed. The LLC will also be subject to a gross receipts tax, a graduated tax depending on the gross receipts of the business.

Partnerships (General and Limited)

A general partnership is defined, in the Uniform Partnership Act of 1994, as Aan association of two or more persons to carry on as coowners a business for profit.@ Therefore, this is a permissible choice of entity only if there are to be multiple owners of the business.

While statutes provide general guidelines for the conduct of a partnership business, there should be a partnership agreement drafted for the specific partnership business, and addressing the needs and desires of the participating partners. The partnership agreement will address such subjects as the nature of the partnership business, the location of the business, the respective capital contributions each partner will make to the partnership, how profits and losses will be allocated, the respective duties and responsibilities of the partners, amount of time each partner is to devote to the business, authority of each partner to act for, or bind, the partnership, salaries or draws of the partners, procedure by which new partners may be admitted to the partnership, method for a partner to withdraw from the partnership and whether or not there will be restrictions on competition in such an event, etc.

One of the main drawbacks of this form of entity is that each general partner has unlimited personal liability for the debts and obligations of the partnership. There is no Aasset protection@ feature, as contrasted with corporations or limited liability companies. While a partner may have a right of indemnity against another partner if the second partner has exceeded his authority or engaged in wrongdoing, this right is only useful if the second partner has the means to indemnify the injured partner, and is not binding on third parties dealing with the partnership.

Limited partnerships are formed under a separate set of state statutes, and must have at least one general partner, who will have unlimited liability for the debts and obligations of the partnership. The limited partners can be viewed as investors, with no right of participation in management and control of the day to day business of the limited partnership, and in exchange for their limited rights and participation, their liability of partnership debts and obligations is normally limited to their investment in the partnership.

While initially the least expensive form in which to start and conduct a business, this form provides no asset protection to the business owner, who has unlimited liability for the debts and obligations of the business, including claims by injured parties for compensatory and punitive damages.

If the business is to be conducted under any name other than the name of the owner, it is necessary to file and publish a fictitious business name statement. There is no state-wide index of fictitious business names, so the name selected may be the same or confusingly similar to a name used by someone else in the State, and if the business grows and does business outside the county in which it began, this may later cause problems.

With a sole proprietorship, there is also a greater likelihood of co-mingling business and personal expenses, as accounting systems tend to be less formal than would be the case if the business were conducted as a separate entity, filing its own tax returns.

All applicable licenses must be obtained, such as business licenses and any licenses or permits required for the particular type of business to be engaged in.