You want to open up a new business.  Everyone tells you need a website.  You enter into an agreement with a website developer.  What legal issues should you be aware of?

A domain name is the address of your website.  It starts with “http” and ends in “.com” or “.net”.  The first question you should ask is who is getting your domain name – you or the website developer?  You want it to be you.  This is because you want to decide what domain name you will be getting and you want to make sure that after the website developer finishes your website (this is also assuming that everything connected to the creation of your website goes smoothly) that you can easily move your website to the host of your choice.  You also want to make sure that when the domain name is obtained that your business’ name is listed as the owner.

When choosing your domain name, you don’t want to select a name that is so similar to a name that is already taken that you may be guilty of a trademark violation.  This can open you up to expensive litigation before you have even really opened for business.

Once you have a domain name, you need to create the words and images that a website developer will use in creating your website.  Here, you need to make sure that your content and images are unique and that you are not copying someone else’s copyrighted work.  This means you can’t steal someone else’s words or images.  If you want to use them you need the author’s or image creator’s permission.

Finally, any agreement that you sign with a website developer must state very clearly that after the website is designed, you, the business owner, own everything having to do with the website.  Your agreement should state that the website developer is doing work for hire and has no ownership interest in the work that he/she is creating for you.  The contract should also state that the website developer is assigning all rights he/she has in the work (the HTML code, design features, and user interface) back to your business.  You don’t want the website developer to have any ability to interfere with your use of your website.

It’s almost time for the closing.  By this time, you will have either purchased another home or made arrangements for living in a rental.  Once your actual (and not the contract) closing date has been set, you can make the final arrangements with a moving company and pack up all of your belongings.

The typical contract reads that the seller will deliver the property in “broom clean” condition.  What does that mean?  It means that you remove everything that is not specifically included in the sale (according to the contract).  If you are thinking of leaving furniture or curtains or your playground set, you must get permission from the buyer.  If you were going to leave extra roof shingles or paint cans with extra paint for touch-ups, you must get permission from the buyer.  Most sellers throw out several years’ worth of old junk that has been sitting around in the basement for years.  They can’t leave it in the house and it’s too expensive to move or not neded anymore.  Expect that the de-cluttering and packing will take you a few weeks and start early.  The longer you have lived in your house, the longer it takes to decide what to pack and what to throw away.  After everything is loaded onto the moving truck, you must sweep the floors to make sure that there is no dirt left.  The appliances should be emptied and cleaned (especially the refrigerator) and the sinks scoured.  You do not have to shampoo carpets or hire professional cleaning services but the rooms must be clean.  You must also clean out the garage and the yard. 

After the moving truck has taken all of your furniture and belongings out of the house, you should walk through each room and check for the following:  are there any holes in the walls – if there are even tiny holes, they must be repaired, are there any issues with the flooring that may have been covered by a rug – either fix the problem or be prepared for the buyers, to ask for money at the closing to fix it themselves, and open all drawers, cabinets and appliances (including the washer and dryer) to make sure that you have not left anything behind.

If you have left your home “broom-clean” and made the repairs that you agreed to during the home inspection period, you should have an easy closing.

Your business is thriving and you’ve decided to move out of your house into a real business space.  You talk to a commercial real estate agent who shows you around several offices or retail spaces until you’ve finally found the space you think you want.  How do you deal with the lease?

First of all, it is common to negotiate the terms of the lease.  Your negotiating power is determined by your local commercial rental market (is there a lot of vacant space?) and how much space you are renting (you have more power when you are renting a lot of space).  I would recommend that you hire a lawyer who has experience in negotiating commercial leases to represent you since you know that the landlord is very likely to have a lawyer representing him. 

Make sure that you understand the amount of rent you will be paying.  Many leases have charges for “additional rent” which can be for real estate taxes, utilities, and operating expenses that the landlord has (insurance, garbage removal, snow removal, repairs).  You should also note whether the rent or additional rent increases during the lease term.  Some landlords of retail spaces also require “percentage rent” which is a percentage of your revenues.

You want to pay careful attention to the definition of the leased space.  Many leases are stated in terms of square footage of leased space and you want to be sure that the highest proportion of the space that you are leasing is actually usable space.  If the rented space includes hallways, restrooms, elevators, or maintenance areas, you are paying for a lot of space that is not really usable for your business.

How long is the lease term?  If business is doing well, you may want a longer term or a right of renewal at a favorable renewable rent.  If you are just starting up, you may want the shortest term the landlord will give you.

Is there a personal guarantee required?  Many landlords will want you to personally guarantee the lease, even if your business is owned by a corporation or LLC.  This gives the landlord two sources of rental payments.  If at all possible, negotiate the personal guarantee out of the lease – the ability to shield your personal assets from company debts is why you formed your business entity in the first place.

What are the terms of assignment or subletting?  Your business needs may change in a year or two, or the location does not work for you, and you may want to get out of your lease or rent out part of your space.  If your lease has lenient terms for subletting or assigning, that gives you more flexibility in deciding what your leasing needs are in the future.

There are many more details to be negotiated in a typical commercial lease.  This is not a do-it-yourself project.   Know what you want before you start looking, learn what the market rents are in the locations that you are looking, and work with a good real estate agent and lawyer.

 

You and a friend want to start a business but you don’t know if you want a partnership, a corporation, or a limited liability company (LLC).  Someone told me that if we create a business entity, we can protect ourselves from personal liability?  What does that even mean?

If you open a business and your business is sued, depending on how the business was created, you personally can be obligated to pay for any judgment that is awarded to a plaintiff.  This means that you and your friend can lose the money in the business’ accounts, plus your personal bank accounts, your car, even your home may be at risk.

Or, you may have hired employees and called them independent contractors so you wouldn’t have to withhold taxes or pay benefits.  A disgruntled ex-employee calls the Labor Department who investigates your business.  They determine that you misclassified the people who work for you and they are employees under the law.  Therefore, you owe back wages, back taxes and a large fine.  Your company must pay the back wages, back taxes, and the fine out of the company bank accounts but if there is a shortage, you and your partner may need to pay them out of your personal assets. 

This is why I counsel my clients to avoid general partnerships when starting a business.  There are no protections from personal liability with a general partnership.  Your personal assets are always at risk and you could lose all the wealth that you carefully saved and invested.

If you and your partner form a corporation or an LLC, even if the corporation or LLC does not have enough assets to pay a judgment or back taxes, or fines and penalties in full, no one can come looking at your personal assets for payment.  You must be careful to keep the business entity separate from you and your partner by signing documents as a representative of the entity, keeping personal assets and expenses separate from the entity assets and expenses, holding required meetings (for corporations), and keeping business entity filings up-to-date. 

If you behave illegally or act beyond the scope of the activities allowed by the business entity, you can still be personally sued.  But, for most legal problems, the business entity will shelter you from personal liability.

A board of directors is the people elected by the shareholders of a corporation.  The board makes the decisions that govern how a corporation is run.  A board of directors is mandatory if you own your small business as a corporation.  If you are the only shareholder, you can be the only member of the board of directors.  If there is more than one shareholder, the bylaws of your corporation will state how many directors will serve on the board.  If you have a board of directors, you must remember that all directors must act so that there are no conflicts of interests between the individual director and the corporation.  The directors must act in good faith.

What if your small business is a sole proprietorship or a limited liability company (LLC)?  Then, legally, you do not have a board of directors to govern the activities of your business.  But, you may want to have an informal board of directors to help you make decisions and to advise you how to grow your business.  Most business owners have some skills or a passion about the business they have created.  They may not have all the skills that an entrepreneur needs to have – marketing, selling, customer service, finance, human resources, and strategic planning.  If you know other persons, either family members, friends, or colleagues, who would want to help you grow your business, you should create an unofficial board of directors.  You can meet with them once a month or once a quarter to go over how the business is doing, what is not working well, and what your goals are for the next few months.  Your board members should be able to offer suggestions and strategies that they know will work.  Having an unofficial board gives you other perspectives and allows you to tap into the competencies and vision of others that you may not possess. 

As you get from one level of success to another, your board of directors may change.  Either the people who started on your board may not have the time or inclination to help you, or you may need different people with other experiences and skills to help you get to yet another level of success.  It’s perfectly acceptable to change out the members of your board as your business’ needs change.

I can’t advise you whether to buy a condominium or a single-family house, but I can tell you what the differences are and how they can impact your decision on which to buy.

We all know what a single-family home is – it’s part of the American dream.  Your own your own home with your own plot of land and you don’t share any common walls or land with anyone else.  You pay your own real estate taxes and all expenses required to keep the property in the condition you want it in.  If you can’t afford to fix a small maintenance item, you can wait until you have more money in the bank.  But there is no one else to share the costs of upkeep.

A condominium is an apartment in a high-rise building in a city, correct?  Not exactly.  It can be an apartment, or it can be a townhouse or a unit in a cluster of 2 or 3-story houses.  Condominiums come in different sizes and different shapes but they all have some things in common.  When you own a condominium, you own a portion of the total real estate on your own and a portion of the real estate in common with the other condominium owners.  Within your unit you can do whatever you like but you may have restrictions on what you can do with the real estate that you own in common with the other owners.  You will typically be required to pay monthly maintenance costs that cover common expenses, such as property and casualty insurance, salaries for any building employees or the property management company, snow and garbage removal, cable, outdoor lighting, repairs to commonly-owned property (such as roofs, driveways, parking garages or parking lots, swimming pools, tennis courts, and the exteriors of the units), and sometimes utilities.  Each unit owner pays the real estate taxes on his own unit only.  The condominium is governed by an association which sets rules for the unit owners which can be enforced.   The rules can dictate what colors you can paint your unit, whether you must keep your cars in your garage and not on the driveway, how many and what size pets you can have, or whether you need to buy windows that look a certain way.  If you can’t afford your monthly maintenance charges one month, you are in default and eventually, the condominium association can put a lien on your unit.  If a number of unit owners stop paying their maintenance charges, everyone’s maintenance charges goes up to cover the shortfall.

If you buy a single-family home, no one can tell you what to do with your land or your home, right?  Not quite.  A single-family home owner is still subject to zoning regulations and any other ordinances enacted by your town.  But, if you want to paint your front door blue and your shutters pink, you can.  If you want to keep your cars on your driveway, you can.  If your neighbor stops paying the costs of maintaining his home, it doesn’t affect you.

Condominiums usually cost less than a single-family house in the same neighborhood, but single-family homes typically go up in price at a higher percentage in good times than a condominium and will not drop as low as a condominium during a downturn in the real estate cycle.

Only you can decide whether a single-family home or a condominium is the right purchase for you.  Money-wise and legally, there are differences, but usually the money determines what your choice will be.

Most of us use credit cards in our personal lives.  As a business owner, do you have a business credit card?  Or do you use your personal credit card for business expenses?

Business credit cards are good for tracking your business expenses.  Remember, your income tax liability is influenced by how much income you make versus how many business expenses you can deduct.  When you use a business credit card for all of your business purchases, you have a way to track many of your business expenses.  This way, you can maximize your deductions.

Moreover, when you use a business credit card for your small business’ expenses and not your personal credit card, you are showing the world another way in which your corporation or LLC is a separate entity from you personally.  This can be important if your company is ever sued and the plaintiff tries to pierce the corporate veil and sue you personally.

In addition, when you use a business credit card for your small business, you can start to build a credit history for your business.  If you ever want to get a loan from a bank for the business or establish credit with a new vendor, you can show them your credit history and hopefully get the credit you are requesting at a better rate.

If you have employees, you can obtain credit cards for them with pre-set spending limits.  This allows them to charge their reimbursable business expenses to your business without them running up their personal expenses on your business’ card.  However, you may also choose to have them use their own credit cards for their business expenses and request reimbursement from you after their statements come in. 

Be aware that business credit cards do not carry the same protections as personal credit cards.  The Credit Card Act of 2009 protections do not apply to business credit cards.  Therefore, the interest rate on your business credit card can be increased without prior notice.    You can be charged big fees if you exceed your credit limit.  And the card issuer can raise the interest rate on its card if you are late in paying another issuer’s card.

Business credit cards have names like “Small Business” or “Professional” to distinguish them from personal credit cards.  If you use your business credit cards smartly, by charging only business expenses on them and paying them off in full each month, you can reap the benefits of using them without getting stuck with the disadvantages. 

 

Ok, you did your homework about buying a franchise business and found a franchise that you think you want to buy.  You’ve done some preliminary investigation into that franchise.  What is your last step?

You need to carefully review the Franchise Disclosure Document (the FDD).  An FDD is a legal document that must be given to all potential franchise buyers at least 14 days before you sign a franchise agreement or pay any fee to the franchisor. 

 It is a large document and should be thoroughly reviewed with your business lawyer and accountant.  This is some of the information you will find in the FDD: 

1. Information about the franchise company and its competitors;
2. The business experience of the franchisor’s management team (obviously, you don’t want a management team without lots of experience running this business and being a franchisor);
3. Whether there has been any litigation against the franchisor and/or its management company for fraud, any violations of law, or unfair or deceptive business practices (what were the outcomes of that litigation);
4. Whether the franchise or its management has ever filed for bankruptcy (any money issues with the company you should be aware of);
5. The amount of the franchise fee;
6. Other costs you will incur in purchasing the franchise.

There is a lot of other information in the FDD that you will need to review.  Do not skimp on your reading and verifying of the information in the FDD.  If it seems like a lot of work now, think about how you will feel after you pay the franchise fee and learn things about the franchise that you could have known before.

If you think that a buying a franchise is a good way to get into business for yourself, your next round of investigations should be which franchise is a good one to buy into.  All franchises are not the same.  Some have instant name recognition, some have lots of training and marketing support, and some have great reputations.  Others are very new and untried, require a great deal from you while offering not much from the franchisor, or allows competition in a too small geographic area.  What should you look for in choosing a franchise company?

Find out how long the franchise company has been in business.  You ideally want to be buying into an established name.  Although it is usually more expensive to buy into a more established company, you should be able to get more customers because they will also recognize the name. 

You also want to do some research into the reputation of the franchisor (the company selling the franchise opportunities) with both the public and with its franchisees (those buyers from the franchise company).  Do consumers think the franchise company offers good products or services?  Are there complaints filed with the Better Business Bureau of the Department of Consumer Affairs?  You should talk to consumers and find out whether they know what the franchise is and whether they have any opinion about it. 

Next, you should be talking to other franchisees to find out their opinion about their investment.  Would they make the same decision if they had to do it all over again?  Is the training that was promised actually given to them?  Is there sufficient support, especially for new franchisees?  Have they experienced any problems that the franchisor helped them with or did the franchisor ignore them?

Is the franchise company growing?  You want a balance of a franchise that is doing well but not growing so quickly that it cannot provide support to all of its new franchisees.

Another area of investigation should be how many other franchises of the same company exist in your area (or the area in which you want to buy).  Would your territory be large enough to attract enough customers to bring in a good income?  Does the franchisor allow new franchisees into your territory?  How close can they come in to your territory?

Finally, you want to learn about what kinds of controls the franchisor imposes on their franchisees.  Do you have any leeway to add new services or products?  How much do you have to buy from the franchisor?  Can you use certain marketing techniques or does the franchisor control how you can market?  Do you have to pay royalties even during bad months?  What do you need to pay if your franchise goes out of business?

You are still not finished with your due diligence.  My next blog post will highlight certain information you should be looking at when reading the Franchise Disclosure Document.

Going into business for yourself is such a big step.  You need an idea for your business, some business skills, and money to start the business.  Buying a franchise eliminates some of the risk – someone else had a good business idea, a franchisor (that’s the company from whom you are buying the franchise) will help you with the business skills by teaching you how to run a franchise and will support you while you are getting the business started.  Money?  You are always on your own to getting the money to start your business, although you can ask if the franchise company gives out loans to new franchisees (that would be you).

Before you take the big step of buying a franchise, you should do a lot of investigation about franchises in general and the franchise that you think you want to buy.

Let’s start with money.  How much money do you have to invest in the franchise?  Do you have business partners?  How much can you afford to lose?  Do you have a good credit score?  Depending on how much money you have to start with, you may not be able to afford certain franchises.  Your initial investigation will show you how much of an investment the franchisor requires.  The more well-known a franchise is, the more expensive it typically costs to buy a franchise.  You may need to lease space and decorate it in a certain style that is uniform to all the franchise locations.  That may cost you more money.  If you don’t have a good credit score, you will not be able to get a loan to buy your franchise.  Although buying a franchise seems to be a fool-proof method of starting a business, there are franchises that are not that well-known so the owners are struggling.  Or perhaps, certain owners are not doing well because of their locations (too many franchises sold in too small an area).  If you do not become successful in your business, how much money can you afford to lose?  It’s not just your franchise fee, it’s the money you needed to start the business and stay in business for a number of months until you determined that you were not doing well enough to continue.

Do you have the skills needed for the franchise you want to buy?  If you are buying a food franchise, have you ever worked in the food business?  Do you have handyman skills if you are looking to buy that type of franchise?  There are so many franchises now that you should be able to find one that matches your skill set.  If you want to try a totally different type of business, you should first work in that type of business and determine whether you like the industry and whether you can learn the skills that you need.

Also look around your town and the surrounding area for whether there is a particular need for a new business of the type that you are thinking of buying.  If there are too many sandwich shops or business sign shops or commercial cleaning businesses, there will not be enough demand for your franchise, no matter how well-known a name is behind you.  You must do the research to learn what competition you have and how the franchise you want to buy will be different from the competition.

This is only the first part of your investigations.  The second part comes when you decide which franchise you want to buy from.