Legal Guide for Starting & Running a Small Business ppt

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Legal Guide

for Starting

& Running a

Small Business

by Attorney Fred S. Steingold

edited by Ilona Bray

Seventh edition

iv

SEVENTH EDITION FEBRUARY 2003

Editor ILONA BRAY

Illustration MARI STEIN

Book Design TERRI HEARSH

Cover Design TONI IHARA

Production SARAH HINMAN

Proofreading ROBERT WELLS

Index JEAN MANN

Printing ARVATO SERVICES, INC.

Steingold, Fred.

Legal guide for starting & running a small business / by Fred S. Steingold — 7th ed.

p. cm.

Includes index.

ISBN 0-87337-910-1

1. Small business—Law and legislation—United States—Popular works. 2. Business

enterprises—Law and legislation—United States—Popular works. I. Title: Legal guide for

starting and running a small business II. Title

KF1659.Z9S76 2003

346.73’0652—dc21

2002045235

Copyright © 1992, 1995, 1997, 1998, 1999, 2001 and 2003 by Fred Steingold

All rights reserved. Printed in 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 the

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v

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 and Ilona Bray.

In addition to the folks at Nolo, these other professionals generously shared their expertise to make this

book possible:

• Attorneys Charles Borgsdorf, 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 inspiration.

vi

INTRODUCTION

CHAPTER 1

Which Legal Form Is Best for Your Business?

A. Sole Proprietorships....................................................................................... 1/4

B. Partnerships ................................................................................................. 1/7

C. Corporations.............................................................................................. 1/11

D. Limited Liability Companies........................................................................... 1/21

E. Choosing Between a Corporation and an LLC ................................................. 1/23

F. Special Structures for Special Situations .......................................................... 1/26

CHAPTER 2

Structuring a Partnership Agreement

A. Why You Need a Written Agreement .............................................................. 2/2

B. An Overview of Your Partnership Agreement...................................................... 2/3

C. Changes in Your Partnership ......................................................................... 2/13

CHAPTER 3

Creating a Corporation

A. The Structure of a Corporation ........................................................................ 3/2

B. Financing Your Corporation ............................................................................ 3/5

C. Compensating Yourself .................................................................................. 3/6

D. Do You Need a Lawyer to Incorporate? ........................................................... 3/7

E. Overview of Incorporation Procedures .............................................................. 3/8

Table of Contents

vii

F. Twelve Basic Steps to Incorporate.................................................................... 3/8

G. After You Incorporate .................................................................................. 3/17

H. Safe Business Practices for Your Corporation ................................................... 3/17

CHAPTER 4

Creating a Limited Liability Company

A. Number of Members Required ........................................................................ 4/2

B. Management of an LLC ................................................................................. 4/3

C. Financing an LLC .......................................................................................... 4/3

D. Compensating Members ................................................................................ 4/5

E. Choosing a Name........................................................................................ 4/6

F. Paperwork for Setting Up an LLC ..................................................................... 4/7

G. After You Form Your LLC............................................................................... 4/11

H. Safe Business Practices for Your LLC ............................................................... 4/13

CHAPTER 5

Developing a Buy-Sell Agreement

A. Major Benefits of Adopting a Buy-Sell Agreement ............................................... 5/3

B. Where to Put Your Buy-Sell Provisions ............................................................... 5/7

C. When to Create a Buy-Sell Agreement ............................................................. 5/8

CHAPTER 6

Naming Your Business and Products

A. Business Names: An Overview ....................................................................... 6/4

B. Mandatory Name Procedures ......................................................................... 6/7

C. Trademarks and Service Marks ..................................................................... 6/10

D. Strong and Weak Trademarks ...................................................................... 6/11

viii

E. How to Protect Your Trademark ..................................................................... 6/12

F. Name Searches ......................................................................................... 6/13

CHAPTER 7

Licenses and Permits

A. Federal Registrations and Licenses ................................................................... 7/3

B. State Requirements ........................................................................................ 7/4

C. Regional Requirements................................................................................... 7/6

D. Local Requirements........................................................................................ 7/7

E. How to Deal With Local Building and Zoning Officials ....................................... 7/9

CHAPTER 8

Tax Basics for the Small Business

A. Employer Identification Number....................................................................... 8/2

B. Becoming an S Corporation ........................................................................... 8/6

C. Business Taxes in General .............................................................................. 8/7

D. Business Deductions .................................................................................... 8/14

E. Tax Audits ................................................................................................. 8/19

CHAPTER 9

Raising Money for Your Business

A. Two Types of Outside Financing...................................................................... 9/3

B. Thirteen Common Sources of Money ................................................................ 9/8

C. Document All Money You Receive ................................................................. 9/15

ix

CHAPTER 10

Buying a Business

A. Finding a Business to Buy ............................................................................. 10/2

B. What’s the Structure of the Business You Want to Buy? ..................................... 10/3

C. Gathering Information About a Business.......................................................... 10/7

D. Valuing the Business .................................................................................... 10/8

E. Other Items to Investigate ........................................................................... 10/11

F. Letter of Intent to Purchase .......................................................................... 10/13

G. The Sales Agreement................................................................................. 10/15

H. The Closing ............................................................................................. 10/24

I. Selling a Business ..................................................................................... 10/24

CHAPTER 11

Franchises: How Not to Get Burned

A. What Is a Franchise? .................................................................................. 11/2

B. The Downsides of Franchise Ownership.......................................................... 11/3

C. Investigating a Franchise .............................................................................. 11/7

D. The Uniform Franchise Offering Circular.......................................................... 11/8

E. The Franchise Agreement ........................................................................... 11/14

F. Resolving Disputes With Your Franchisor ....................................................... 11/18

CHAPTER 12

Insuring Your Business

A. Working With an Insurance Agent................................................................. 12/2

B. Property Coverage ...................................................................................... 12/4

C. Liability Insurance........................................................................................ 12/8

D. Other Insurance to Consider ....................................................................... 12/12

E. Saving Money on Insurance ....................................................................... 12/14

F. Making a Claim ....................................................................................... 12/17

x

CHAPTER 13

Negotiating a Favorable Lease

A. Finding a Place .......................................................................................... 13/2

B. Leases and Rental Agreements: An Overview................................................... 13/2

C. Short-Term Leases (Month-to-Month Rentals) ...................................................... 13/3

D. Written Long-Term Leases ............................................................................. 13/4

E. Additional Clauses to Consider ................................................................... 13/16

F. Shopping Center Leases ............................................................................ 13/17

G. How to Modify a Lease ............................................................................. 13/18

H. Landlord-Tenant Disputes ............................................................................ 13/18

I. Getting Out of a Lease .............................................................................. 13/20

J. When You Need Professional Help ............................................................. 13/21

CHAPTER 14

Home-Based Business

A. Zoning Laws .............................................................................................. 14/2

B. Private Land Use Restrictions ......................................................................... 14/7

C. Insurance .................................................................................................. 14/8

D. Deducting Expenses for Business Use of Your Home ........................................ 14/10

CHAPTER 15

Employees and Independent Contractors

A. Hiring Employees ....................................................................................... 15/2

B. Job Descriptions.......................................................................................... 15/5

C. Job Advertisements ...................................................................................... 15/6

D. Job Applications ......................................................................................... 15/6

E. Interviews ................................................................................................ 15/10

F. Testing .................................................................................................... 15/10

xi

G. Investigating Job Application Information ....................................................... 15/20

H. Immigration Law Requirements..................................................................... 15/22

I. Personnel Practices.................................................................................... 15/22

J. Illegal Discrimination ................................................................................. 15/23

K. Wages and Hours .................................................................................... 15/26

L. Occupational Safety and Health ................................................................. 15/29

M. Workers’ Compensation ........................................................................... 15/30

N. Termination............................................................................................. 15/31

O. Unemployment Compensation ..................................................................... 15/33

P. Independent Contractors ............................................................................ 15/34

CHAPTER 16

The Importance of Excellent Customer Relations

A. Developing Your Customer Satisfaction Policy .................................................. 16/3

B. Telling Customers About Your Policies............................................................. 16/5

CHAPTER 17

Legal Requirements for Dealing With Customers

A. Advertising ................................................................................................ 17/2

B. Retail Pricing and Return Practices .................................................................. 17/5

C. Warranties ................................................................................................ 17/9

D. Consumer Protection Statutes ...................................................................... 17/15

E. Dealing With Customers Online .................................................................. 17/16

CHAPTER 18

Cash, Credit Cards and Checks

A. Cash ........................................................................................................ 18/2

B. Credit Cards.............................................................................................. 18/2

C. Checks ..................................................................................................... 18/3

xii

CHAPTER 19

Extending Credit and Getting Paid

A. The Practical Side of Extending Credit ............................................................ 19/2

B. Laws That Regulate Consumer Credit.............................................................. 19/8

C. Becoming a Secured Creditor ....................................................................... 19/9

D. Collection Problems .................................................................................. 19/10

E. Collection Options .................................................................................... 19/14

CHAPTER 20

Put It in Writing: Small Business Contracts

A. What Makes a Valid Contract ...................................................................... 20/2

B. Unfair or Illegal Contracts............................................................................. 20/4

C. Misrepresentation, Duress or Mistake ............................................................. 20/5

D. Must a Contract Be in Writing? ..................................................................... 20/6

E. Writing Business-to-Business Contracts ............................................................ 20/9

F. The Formalities of Getting a Contract Signed ................................................. 20/13

G. Enforcing Contracts in Court ....................................................................... 20/17

H. What Can You Sue For? ............................................................................ 20/18

CHAPTER 21

The Financially Troubled Business

A. Thinking Ahead to Protect Your Personal Assets ................................................ 21/2

B. Managing the Financially Troubled Business .................................................... 21/5

C. Seeking an Objective Analysis ...................................................................... 21/8

D. Workouts ................................................................................................ 21/10

E. Selling or Closing the Business .................................................................... 21/13

F. Understanding Bankruptcy .......................................................................... 21/15

xiii

CHAPTER 22

Resolving Legal Disputes

A. Negotiating a Settlement.............................................................................. 22/2

B. Understanding Mediation ............................................................................. 22/3

C. Arbitration ................................................................................................. 22/5

D. Going to Court........................................................................................... 22/8

CHAPTER 23

Representing Yourself in Small Claims Court

A. Deciding Whether to Represent Yourself ......................................................... 23/2

B. Learning the Rules ....................................................................................... 23/4

C. Meeting the Jurisdictional Limits ..................................................................... 23/4

D. Before You File Your Lawsuit ......................................................................... 23/6

E. Figuring Out Whom to Sue .......................................................................... 23/8

F. Handling Your Small Claims Court Lawsuit ...................................................... 23/8

G. Representing Yourself If You’re the Defendant ................................................. 23/11

H. Appealing Small Claims Decisions............................................................... 23/12

I. Collecting Your Judgment ........................................................................... 23/12

CHAPTER 24

Lawyers and Legal Research

A. How to Find the Right Lawyer ....................................................................... 24/3

B. Fees and Bills............................................................................................. 24/5

C. Problems With Your Lawyer .......................................................................... 24/6

D. Do-It-Yourself Legal Research ......................................................................... 24/7