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What does the transition entail?

There are various ways you can restructure the legal framework of your company if you wish to add a partner to your sole proprietorship, though each option has different requirements. It’s possible to merely act as “partners” without any formal agreement, but that’s generally not a good idea. The smart choice is to create a business entity, such as a corporation or limited liability company.
Here are a few facts and considerations to keep in mind as you restructure your company from a sole proprietorship to another business entity.

Create a Corporation With Your New Partner

To do so you would first need to decide upon a name and then, assuming that name is not already taken in your state, file articles of incorporation with your secretary of state. You would next apply for a tax identification number with the IRS, and you may have to file other documents with your state’s department of revenue or other agencies. It’s best to seek the advice of a tax attorney and/or your CPA as to whether your corporation should elect to be taxed as what is known as an “S-Corporation.” If so, elect that option on the tax identification number application form. The company should have bylaws, initial minutes and a buy-sell agreement.

Form the Entity as a Limited Liability Company (LLC)

This is also done through your secretary of state and the steps are similar to what must be done for a corporation. You would still apply for a tax ID number in the same manner. The LLC will have options as to how it is to be taxed. It also could elect to be taxed the same as an S-Corporation, or it could elect to be taxed like a partnership. These are important factors and you should seek the advice of a tax attorney and/or CPA.

This is an important step in your business and taking on another owner carries with it a number of legal issues that must be addressed in order to proceed. Review the above information with your attorney so they may properly advise you on a course of action.

Changing Your Business Structure

What about a buy-sell agreement? Also known as a shareholders agreement, this is a contract between you and your partner that would address the right of one of you to buy out the other upon the happening of certain events. Those might include disability, death, divorce, and a number of other events. Keep in mind that you should transfer ownership of at least some assets from your sole proprietorship to one of the aforementioned entities when restructuring your business. 

In starting a business, entrepreneurs are inundated with paperwork, legal requirements and numerous planning meetings. While most of these activities seem burdensome, many business owners cite financial management and record-keeping as the most daunting task of daily operations. With some businesses having thousands of transactions each day, coupled with expenses and employee payroll, it should come as no surprise that business financials can be overwhelming. With so many documents and figures, it can be difficult to stay organized and leads many business owners to question what they are required to keep and what they can simply discard.

The Basics in Understanding Your Business’ Financial Health
While it may be tedious, maintaining organized and balanced financial records isn’t an option for businesses, it’s a requirement. Not only may you have to produce these records if you are audited by the IRS but it’s likely that creditors, your bank and future stockholders will want to see these records for insight into the health of your business. Having a solid record-keeping plan early on will save you a great deal of time and energy down the line when you are asked to produce financials for your company. As a general rule of thumb, business owners should produce, and regularly review, the following:

Balance Sheet – Simply defined, this statement summarizes your company’s assets, liabilities and shareholders’ equity at any given time. It is in essence a snapshot of your company’s financial health, showing the net worth of the business.

Profit and Loss Statement – This statement summarizes the revenues, costs and expenses incurred during a set period of time (most businesses do this on a quarterly basis but some even do a monthly report). It indicates how well the business is doing in terms of buying and selling inventory (or services) and ultimately showcases profitability.

Cash Flow Statement – This document reports the cash generated and used during a set time frame. Some business models are based upon cash flow and in these cases, this report may be paramount in understanding the well-being of the business.

Financial Record Retention
While certain types of business require that special records be kept, most are not required by law to maintain a definite set of documents. As a general rule of thumb, the IRS recommends that businesses keep the following records:

Gross Receipt Documentation

• Cash register tapes
• Bank deposit slips
• Receipt books
• Invoices
• Credit card charge slips
• Forms 1099-MISC

Purchase Documentation

• Canceled checks
• Cash register tape receipts
• Credit card sales slips
• Invoices

Expense Documentation

• Canceled checks
• Cash register tapes
• Account statements
• Credit card sales slips
• Invoices
• Petty cash slips for small cash payments

Travel, Transportation, Entertainment, and Gift Expenses (only if you plan to deduct these)

Asset Documentation

• A record of when and how you acquired the assets.
• Purchase price
• Cost of any improvements
• Section 179 deduction taken
• Deductions taken for depreciation
• Deductions taken for casualty losses, such as losses resulting from natural disasters
• Documentation on how the asset was used
• When and how you disposed of the asset
• Selling price
• Expen
  

Most business owners in the United States have heard of C-Corporations and S- Corporations but over the past few years, a new corporate form has emerged that is not yet well known – the benefit corporation (B-Corp). Unlike C and S Corporations which can be used across almost all industries for a wide range of small and large businesses, the benefit corporation was designed specifically for for-profit entities that want to benefit society by solving social or environmental problems while also benefitting the shareholders. To date, there are nearly 1000 benefit corporations around the world. A good example of a benefit corporation is Yellow Leaf Hammocks, a California-based company that sells high-quality hammocks that are hand woven by hill-tribe artisans in rural northern Thailand. While generating profit, the company also creates jobs, helping with economic development in an impoverished community.

The History of the B-Corporation

Corporate laws are largely based on one main principle: maximize shareholder value and profits. Under this model, corporate directors may actually be subject to lawsuits from shareholders should they decide to pursue social or environment goals, at the expense of increasing profits. With a shift in social consciousness towards environmental sustainability and community development initiatives, many states have passed benefit corporation legislation that seeks to establish a legal framework for companies who would like to pursue a social or environmental goal while still having a healthy bottom line.

Should You Consider a B-Corporation?

In determining the best corporate structure for your company, it’s important to note that benefit corporation legislation has not yet been passed in all fifty states. In understanding your options it’s best to consult with a business law attorney who can advise as to whether a B-Corp may be a good option for your company. While the regulations will vary state to state, all are based on a standard model and generally differ from any other for-profit corporation in three ways:

1. Benefit corporations must declare and continuously show their commitment to an independent, third-party cause.
2. The Board of Directors of a benefit corporation are expected (and protected) to make decisions based on their companies’ mission, not just for profit.
3. Benefit corporations may be held accountable if they abandon their commitment to the social or environmental cause on which they were founded.

While emerging companies may apply for benefit corporation status, an existing for-profit corporation can amend its certificate of incorporation with a super majority vote of the shareholders. Once a company has secured benefit corporation status, they must regularly have their activities assessed using an independent third party standard.

The Benefits of a Benefit Corporation

There are quite a few myths and misconceptions when it comes to the benefit corporation; one of these is the belief that these companies receive major tax breaks or don’t have to pay taxes at all. This is not the case; in fact, benefit corporations have no tax exemptions. Many argue that one of the key benefits in securing the status is the ability for a company to differentiate itself from competitors, highlighting its commitment to a social cause that might resonate with consumers.

Whenever handling issues of incorporation, the counsel of a qualified attorney is highly recommended. In the case of the benefit corporation which is a new type of entity, working with a lawyer well-versed in state law and experienced in corporation formation is even more critical.

Each year, approximately 30,000 new restaurants are opened in the United States. Most restaurateurs understand the great risk that comes with these ventures; in fact, some sources estimate as many as 18,000 of the 30,000 restaurants opened this year will fail within the first three years in business. Despite the risk, many chefs and hospitality professionals dive right in. If you’re a hopeful restaurateur, legal planning is an absolute necessity to ensure you don’t fall victim to many of the common mistakes that cause these businesses to fail. Consider the following:

Business Entity
All restaurant owners must carefully consider the best corporate structure for their businesses. Generally speaking, there are four types of structures: a sole proprietorship, a partnership, a limited liability company (LLC) or a corporation. In the case of a restaurant, most owners will want to limit liability, and protect personal assets, should there be a lawsuit filed by a customer or employee. An LLC or corporation is often recommended for restaurants since these limit personal liability. A qualified business law attorney can help you identify which structure is best for your new restaurant, and help you prepare and file all required documents.

Zoning
As any successful restaurateur will tell you, a good location is key to a profitable restaurant. In considering the location of your restaurant, you will want to take into account the local zoning laws. Some areas are restricted to residential dwellings while others may be zoned for commercial use. Do you want to have outdoor seating in the summer? That too may be subject to zoning restrictions. Be sure to carefully outline how you plan to use the space and then identify possible locations accordingly.

Leasing a Space
If you don’t have the capital to buy a space for your restaurant, you’ll likely have to rent one. In many cases, costly renovations are required (especially if the space was not previously used for a restaurant). When a significant amount of money is put into the space upfront, it’s absolutely essential that you take steps to protect your tenancy and ensure your business can afford to stay there for an undetermined amount of time. This might mean negotiating a favorable a long-term lease, and including specific clauses pertaining to rent increases. A lawyer with experience in the restaurant industry should be consulted early in the process to ensure your best interests are protected.

Licenses and Permits
Unlike many other types of businesses, restaurants often require a number of licenses and permits from local governing bodies. For instance, you might be required to obtain a license to handle food. If you want to have a bar, you will need a liquor license. Even if you plan to have patron dancing, you may be required to obtain a special permit. An attorney can help you identify exactly what you will need and help you complete all applicable paperwork.

Patron & Employee Safety
To ensure the safety of all patrons, your local governing agency may require your restaurant to undergo regular inspections from the health department. To ensure the well-being of all employees, you should also review all Occupational Safety and Health Administration policies.

Insurance
If you frequent restaurants, you’ve likely witnessed an accident or two – a server spills a hot cup of coffee all over a patron or a bartender slips on some water from the ice machine. With the risk of injury high, it’s absolutely critical that all restaurant owners select an insurance policy which protects the business against lawsuits. In selecting the best policy, speak with an insurance

While purchasing and establishing a new franchise unit may seem easier than starting from scratch with your own business model, it is still a time consuming and expensive undertaking. Franchisees must find a location, make needed renovations and secure various licenses or permits. Of course, even after the business opens its doors, it will take more time to acquire loyal customers and generate revenue. With big expenses and minimal revenue, it should come as no surprise that most new businesses operate in the red for the first year or two. If you are an aspiring entrepreneur who is looking to hit the ground running, it might be a good idea to avoid the laborious setup process and consider buying an existing franchise, often referred to as a “resale.”

As with any business venture, buying an existing franchise can be profitable and rewarding but it doesn’t come without risks. If you are contemplating the purchase of an existing unit, consider the following:

Get to Know the Franchisor
Although you will own the unit, you will have to continuously work with the franchisor. It’s important that you take time to understand the company’s approach to business, what type of resources they will provide to you and understand any requirements that might be set forth for the businesses that bear its name. Take time to speak with other franchisees to learn about their experiences as owners and carefully review the Uniform Franchise Offering Circular (UFOC).

In some cases, the franchisor may have a right of first refusal meaning that they ultimately have a say in whether you can join the franchise group as an owner. A business law attorney can help you sort through these issues and position you for success.

Identify the Real Reason the Existing Owner is Trying to Sell
There may be many reasons why a current franchisee is looking to sell his or her unit. In some cases, it may be because the owner is planning to retire or wants to relocate. In other situations, you may find that the business isn’t profitable and the owner wants to cut his losses and try his hand at something else. Understanding the reason for sale will help you to better understand whether it makes sense for you to buy the business. If it is a failing franchise unit, you have to reasonably ask yourself if you will be able to turn it around. On the other hand, a retiring owner may have amassed a loyal customer base which will help you to be immediately profitable.

Review the Current State of the Unit
During the discovery process, it’s imperative that you carefully review all of the financials for the resale unit. You will also want to look at things like employee turnover and speak to current employees to learn whether or not they are interested in continuing on with the business once ownership is transferred. If not, you may have the burden of hiring and training a new team very early on. Another thing you will want to examine is the state of the building and equipment – has everything been serviced regularly? A repair to a machine may seem minor but it could cost you a great deal.

The sale of an existing franchise unit can be complex. Not only do you have to understand the motives and terms of the seller, but you must also understand the role and requirements of the franchisor. Due to the complicated nature of these types of transactions, it’s absolutely imperative that you consult a business law attorney who can help you perform your due diligence and make sure all of the proper legal steps are taken during the transaction.

Corporate bylaws are a critical component in the foundation of any corporation, partnership or association. Generally speaking, the bylaws establish the rules for internal operations and governance.  While business owners have a large degree of control when it comes to the bylaws, they must be in compliance with state law. Some states have strict mandates on what information must be included, while others may not specify exactly what must be covered and there may not be a set format. However, there are certain things that are typically covered in a company’s bylaws.

Bylaws often set forth what officers the company is to have, what the responsibilities are for those officers, and how they are elected. It will also set forth the term of office such as a one, two, or three year term. Most companies also have a board of directors. The bylaws would also set forth how many board members are allowed or required and their term of office. Most of the time the shareholders will elect the board members, and then the board members will elect or appoint the officers of the company. So, the officers report to the board, and the board reports to the shareholders.

Other matters that are often found in the bylaws include the procedure for notifying the board of an upcoming meeting and the timeline for doing so. In addition, the bylaws can establish the number of board members that are required to be present at a meeting for there to be a “quorum” in order to do business and how many votes are needed for something to be approved. One thing that likely will not be in the bylaws but you might want to consider if there will be multiple owners of the business, is a buy-sell agreement. That agreement would outline rights and responsibilities for each owner and generally would provide the right or option to buy out a one of the co-owners’s shares.

It’s important to consult with a business law attorney to make certain that your bylaws are in compliance with all applicable state statutes. Your attorney may also help you identify potential pitfalls and minimize any future risks that might harm your company down the line.

There are a number of reasons to dissolve a general partnership.  Whether business is not going well, you can’t get along with your business associates or you are ready to retire, it might be time to end your partnership.  Before making the final decision, you should consider whether dissolving the partnership is the only option.  Is there any other way to alleviate the problem?  Could you buy out your partner or simply sell your share allowing the business to continue under different management?  Dissolution is generally not a simple process, and if it is your only option, it’s important that you be aware of some important issues that may be present.

Most partnerships operate pursuant to a partnership agreement.  Sometimes, these agreements include provisions for dissolution.  If this is the case in your partnership you should follow these provisions closely to avoid later disputes.  If there is no partnership agreement, you should try to formulate a dissolution strategy with your partner(s).  This might not be possible, especially if the dissolution is the result of a disagreement or personality clashes.  In this case, you have the option to pursue alternative dispute resolution such as arbitration or mediation, as well as the ability to litigate.  Litigation is expensive and time consuming and therefore might not be the best choice.

When preparing to dissolve a partnership you should try to collect all of the money owed to the business and pay any debts the partnership may have.  You should also inform the IRS and the state of the dissolution for tax purposes.  These tax agencies will give you the information you need with regard to taxes.  It is also a good idea to consult with an attorney regarding tax matters as they can result in penalties if not dealt with correctly.

You should also be concerned with making the dissolution formal.  In order to do this, you should apply for a Certificate of Dissolution with the state.  Each state has different requirements and it is therefore a good idea to speak with a qualified attorney regarding this matter.  The benefit of formally dissolving your partnership is that it will protect you from debts and contracts entered into after the dissolution is final.

Depending on the type of partnership you are involved in, different concerns may be present.  Partnership dissolution is not always as straight forward as it may seem.  In order to handle matters appropriately, you should talk to an experienced business attorney.

If you are a business owner, you will likely consider hiring an independent contractor to assist with one, or multiple projects.  Independent contractors can be beneficial is a variety of situations and should not be overlooked as assets to your business.  It is important for management to understand how these workers are classified and the legal implications that may result from working with them.

Independent contractors are those that provide services to an individual or business but that retain control over how those services are rendered.  In an employer-employee situation, the employer has control over what the employee does and how he does it.  When it comes to independent contractors, employers have much less control.  This level of control is one of the determining factors when it comes to classifying workers as employees or independent contractors.  Control comes in varying degrees and might refer to many different aspects of the employment; this may include scheduling, the methods and techniques that a worker uses, training, where the work is done and the frequency of the work.  There is no one test or bright line to determine if someone is an employee or an independent contractor and all factors have to be taken into consideration in each case.  Sometimes, the details of employment are agreed to in a contract.  If you’re considering hiring an independent contractor, you should enter into a formal contract with them up front in order to avoid confusion in the event of a conflict.

There are some benefits to working with independent contractors.  Generally, employers are not liable for the negligent conduct of an independent contractor.  This rule varies from state to state and is subject to many different exceptions.  Also, these workers are usually exempt from many of the employment laws that apply to regular employees, such as wage and overtime restrictions.  Business owners also have different tax liability when it comes to these workers, in that they are not responsible for deducting payroll taxes from their wages.

This is not to say that businesses should use these workers for every task.  In many situations, employees are preferable to independent contractors.  If you are interested in hiring an independent contractor or are in need of a contract relating to the use of this type of worker, you should contact a qualified attorney today.

Whether you are an owner considering whether or not you should sell your small business or an individual thinking about buying a business that is on the market, it is important to determine how much the business is worth.  This can be a daunting task.  Every business is different and for that reason no single method can be used in every case. Below are the most common methods used to determine the approximate value of a small business.

The assets a business holds can be used to determine its approximate value.  Generally, a business is worth at least as much as its holdings, so looking to tangible and intangible assets can provide a baseline amount.  If you choose to use this method, the business’ balance sheet should provide all of the information you need.  This method may be too simple to be used for all businesses, especially those that are doing well and generating a lot of profits.

Another way to determine a business’ worth is to look at its revenue.  Of course, revenue is not profit a business makes.  When using this method, a multiplier is applied to the revenue amount to determine the business value.  The multiplier used is dependent upon the industry in which the business is operating.  Another method is to apply a multiplier to the business’ earnings or profits, instead of total revenue.  This is usually a more accurate way of determining what the business value actually is.

When using these methods, it is important to understand that the market is constantly fluctuating.  The value of assets can go up or down depending on the day, and revenue and earnings can change drastically from year to year.  Also, when trying to determine what a business is worth, you might consider what the business may be worth if it had better management or more optimal business execution.  The current managers may not be taking advantage of various opportunities to make the business more profitable. 

Before entering into any purchase or sale agreements, it’s essential that you consult a qualified business law attorney and a business appraiser who can assist in the valuation of a small business and help you understand whether it makes sense to proceed with the transaction.

An employee handbook is an instrument that is widely used by employers to communicate their expectations and policies to employees.  There are many reasons to develop and distribute an employee handbook.  These written documents enable employers to clearly outline what is expected from employees and what employees can expect from the employer.  In the event of a dispute with an employee or when a claim is made with a government agency, the handbook can be invaluable in protecting employer’s position. 

When drafting an employee handbook, certain information should be included. This includes:

Wages, Salaries and Other Compensation

An employee handbook should cover how and when employees will be paid.  It should also note how time worked it to be recorded, what taxes will be taken out and explain overtime policies.

Schedules

This document should also cover daily schedules.  It should note hours to be worked, breaks, attendance, lateness, how to request time off and whether employees are entitled to paid time off and when.

Benefits

An employee handbook can also be used to give employees information about benefits. It should cover what benefits are offered and how employees can qualify for them.

Employee Conduct

This manual should also be used to let your employees know how they are expected to act while at work.  It should also detail the dress code, if one exists.  You might also want to include guidelines for behavior in common situations.

Disciplinary Matters

An employee handbook should always include a section on employee discipline in the event that an employee should violate company rules or guidelines.  This section should detail any disciplinary system that is in place, and, if one is not in place, explain that matters will be handled on a case by case basis.

Safety Concerns

Your employee handbook should also cover how to respond to any and all foreseeable safety concerns.  These might include safety issues relating to work conditions, employee disputes and inclement weather.

Employment Discrimination/ Sexual Harassment

Employment discrimination and sexual harassment in the workplace are real issues that can cost businesses a great deal of money.  By including your company’s firm stance on these matter and explaining that neither will be tolerated might help you avoid conflicts in the future. Employee handbooks differ greatly depending on business structure, size and even the industry in which it operates. Some manuals are just a few pages whereas others may be dozens.  In order to create a comprehensive employee handbook and ensure maximum protection for your business, you should consult with a business or employment law attorney to advise you on these matters.