1.2 Partnership

If there are two or more owners (other than husband and wife as community property), a partnership or corporation is generally necessary.  A partnership is an agreement of two or more people to operate a business jointly.  It is important to get the partnership agreement in writing.  Compatibility is not enough.  When the honeymoon ends, it will be very difficult to enter into a partnership agreement because of disputes over exactly what was verbally agreed.

Advantage: Very low start-up cost.

Disadvantage: Each partner is personally liable for all business debts and liabilities.

1.3 Corporation

A corporation is a separate entity, responsible for its own debts and liabilities and for the acts of its employees.  If the corporation is maintained properly, owners of the business (stockholders) are not personally liable for the corporation's debts and liabilities. However, stockholders (as well as the corporation) are responsible for their own acts, even though they are employed by the corporation.  Therefore, a corporation should be considered a necessity when the owner has significant assets to protect that are not part of the business and the business has employees.

Advantage: Maximum protection against liability for the acts of others.  Easy to transfer all or part of the business to the owner's family, estate or trust.

Disadvantage: Higher cost of formation and maintenance.

2. Where to Incorporate

There is a common myth (probably stated by someone in Nevada) that a California business should be incorporated in Nevada because it is cheaper and because Nevada law better serves the founder's privacy interest.  First, it is not cheaper if the corporation will do business in California.  A non-California corporation doing business in California must apply for authorization to do business in California.  It is not a coincidence that the state fee to become authorized to do business in California is the same as the fee to incorporate in California in the first place.  Don't be tempted to do business in California without authorization.  Keeping that violation secret would lead to other violations, in areas such as unemployment insurance, workers comp, sales tax, state income tax.  If the business is sued or sues someone in California courts, the business will have to quickly become qualified in order to sue or defend.  Then all past violations will be revealed and the costs, including penalties, will make you wish you had not tried to save $800 per year.

Second, it is not necessary in California to reveal the identity of the stockholders of a privately held corporation.  If it is important to keep the names of the directors and officers a secret, that can be done by appointing your attorney and/or your CPA and/or whoever as the directors and officers, as long as no fraud is involved.

So, where to incorporate?  The answer for a small, privately held corporation is simple.  If you will be doing most of your business in California it is best to incorporate in California.  That saves formation money and administrative expense, such as maintaining an agent for service of process in the state of incorporation.  If you will not be doing any business in California, it is best to incorporate somewhere else, because California has a minimum corporate income tax of $800 per year.  If you will be doing business in several states, chose a state with no minimum corporate income tax and in which you will be doing substantial business.

For a publicly traded company, or a privately held company with a lot of shareholders, or a company large enough that $800 per year is irrelevant, the answer is not so simple.  Call me and we will discuss the various objectives and solutions.

3. Limited Liability Company.

LLC's are becoming increasingly popular.  An LLC is a company that has limited liability like a corporation but is treated like a partnership for tax purposes.  Even though I can achieve all of the advantages of the LLC in most situations by using a Subchapter S corporation, the LLC is extraordinarily flexible and should be used when more flexibility is needed than the corporate form provides. The corporate form has the advantage of being well known and therefore more predictable legally.  The Corporate form should be used unless there is some particular reason to use an LLC. 

4. Business Start-Up Tips.

4.1 Community Development/Reinvestment Laws

There are existing and proposed laws requiring banks to insure that set percentages of their loans are made for local redevelopment purposes and to small businesses.  Almost all banks are advertising small business loans.  The days when no bank would consider a start up or a small business expansion loan are gone.  Before giving up a percentage of ownership in exchange for start-up capital, consult your banker.

4.2 Business Plan Outline

There are plenty of books, PC programs and consultants to help write business plans.  You should use any of those resources that are available to you.  But don't delegate responsibility for the drafting.  Lenders and investors need to know that you personally understand the business and have the management skills necessary to prepare the plan yourself.  Use the resources to make a presentable plan, but make sure that every decision in it is yours.  There is no magic format.  A format that reflects your personality and enthusiasm for the business will get just as much attention as a plan created by a master.  Here is one possible list of the sections:

Business Description.  Narrative description of the business, its objectives and advantages.  Detailed description of the product or service.  Include you analysis of the market, description of the competition, reasons for customers to buy.  Don't be bashful about enthusiasm and big dreams.  Save conservatism for the financial section.  If this section does not sell, the remainder probably will not be read.

Management, Operations, Personnel.  How will the business be organized?  Who will do what?  What facilities, machines and people are needed?  In this section you prove that you have the expertise to make the business succeed.  Concepts are more important than details.  Include sources of help in accounting, marketing, administration, or any area in which you are not an expert.  Include resumes, functions and time commitments.  Prove that you have thought of everything.

Financial Data.  Projected income statement and cash flow plan.  Be conservative.  This section proves that the loan will be paid back on time or that the investment will pay off as scheduled.  Use a computer spreadsheet. Include a description of investments in the business by you and anyone other than the lender or investor that the plan is directed to.  Include a description of any collateral.  It is generally necessary to include your personal financial information.

5. Legal Issues in Business Operation. (How to avoid needing me later).

5.1 Employees/Independent Contractor.

Don't try to be tricky.  If a person meets the definition of an employee, that relationship cannot be changed to an independent contractor simply by an agreement, or by use of a Form 1099 rather than withholding taxes.  If you don't withhold income taxes from employee wages, there are penalties involved that are much more important than any savings in characterizing them as independent contractors.

5.2 Record Keeping. (Corporations)

Corporations must have stockholders meeting and board of directors meetings, with minutes.  Minutes will help prove that the corporation is a separate person, responsible for its own liabilities, because the minutes prove that the board of directors is managing the business, not the owner.  When some plaintiff claims that the corporation is a sham and he ought to be allowed to attach personal assets, I will need lots of minutes, showing that the board managed the business, not the owner (even if that's the same person).

5.3 Accounts. (Proprietorships, Partnerships, Corporations)

Keep business accounts and assets strictly separate.  IRS acceptance of deductions depends on it.  Sale of the business will be easier.  Converting a proprietorship to a partnership or corporation will be easier.  Business loans will be easier to obtain.

5.4 Licenses and Regulations

Comply strictly with the licensing laws and regulations. (Contractors, plumbers, electricians, roofers, employment agents, real estate brokers, barbers, etc.) Inattention to the regs will cost much more time than learning and following them.  Failure to follow the regs often means that you don't get paid, and may cost you the license, or fines.  You must become an expert in the licensing and other regulations governing your business.  I could tell you stories . . .

6. Management Tips For Start-Ups. (From a non-expert observer)

6.1 Do the Paperwork

Even if you have administrative help, you must understand everything that the administrative person is doing.

6.2 Don't Do Too Much Paperwork

If your role is operations and you have help (or a partner) for paperwork and administration, don't hang around the office doing the administrative stuff.  Make sure you understand it, and that it is being done properly, but concentrate on operations and marketing.

6.3 Be Stingy.

I have seen a lot of businesses succeed and fail.  There are many reasons for both.  There is one consistent thread that ties them all together.  As a gross generality, businesses that succeed have a directing boss that is stingy, and businesses that fail have a directing boss that is a big spender. Of course, this cannot be the primary reason for success or failure, or even an important one. But it is a consistent characteristic.  If an employee (probably the sales manager) says "You have to spend money to make money", don't fall for it.  Your response should be, "Maximize profit on every dollar spent.  We can't make any profit after running out of cash."  Drive employees and partners crazy with your stinginess. Make them look at the ceiling and shake their heads when you say, "Use the back of the paper; Buy the cheapest computer that will do; Why do we need a carpet?"

6.4 Network Marketing

Go to all business networking functions, like Chamber of Commerce mixers.  Don't be embarrassed.  Everyone is there for the same reason; to talk business, exchange cards, meet potential customers and suppliers.  When one of the people who attended decides they need your product or service, you hope they immediately think of you.  How can that happen if you didn't introduce yourself?

6.5 Drag Your Banker Into The Business

Bankers are a good source of free advice to small businesses. Their help is not limited to finance and accounting.  They have experience with many businesses and sometimes know a surprising amount about operations, marketing.  Many small business owners avoid involving their banker because the banker will see the mistakes and sloppy procedures and become nervous about the loan.  Don't worry about it.  They know you make mistakes and don't have perfect procedures.  Wake them up, drag them to your shop.  Use them to advise on how to correct the mistakes and clean up sloppy procedures.  Its all free.

 

ATTORNEY REFERRAL SERVICES

If you know someone who needs an attorney in Southern California for any reason, call me.  I have a network of friends who cover most fields of law.  If I can't help, one good way to find someone in any jurisdiction is to call the local bar association and ask for the number of their referral service.  Ask the service for the names and numbers of attorneys who have signed up for referrals in the field you need.

Los Angeles County Bar Association Referral Service:
(213) 622-6700

Southeast District Bar Association Referral Service:
(562) 868-6787

Orange County Bar Association Referral Service:
(949) 440-6747

Here is a link to a list of referral services in every California county:
http://www.careerconfidence.com/newpage2.htm