I meet a lot of SCORE clients who formed small business partnerships with friends, relatives, acquaintances, and have no idea of the risks they’ve taken on. They come to SCORE for help because something’s gone wrong, and it’s often too late to fix. So, I’ve started preaching in my workshops about the dangers of general partnerships for the average small business owner. Here’s an example I frequently use:
Let’s say you and your best friend Rose decide to form a catering business. Rose has been out of work for months and has no assets or savings, but she’s a great cook and willing to work hard. You have a house, a car, and about $20,000 in savings you’re willing to put into the business. You form a 50-50% general partnership thinking you’ll just decide everything together because you’re such good friends. You don’t have much money for ads, but you know how to use Twitter and Facebook, and through word-of-mouth you start to get some customers.
On the very first day of business, Rose is driving to a catering event in the company van. She’s late, she’s rushing, she’s distracted by a text message telling her she forgot to take the shrimp out of the cooler and in her distracted state she runs a stop sign, causing a terrible accident with an oncoming car. Rose is fine, but the driver of the other vehicle is badly injured. The good news is, you have auto liability insurance, but the bad news is it has a limit of $1 million. The other driver sues for $2 million and wins. Who pays the judgment, and how much does she pay? Read more
I periodically give a SCORE workshop called Legal Issues for Startups, where I get lots and lots of questions about what sort of business entity to form — Should I be incorporated? If so, where — Nevada or California or both? Should I be an LLC or an S-Corp? And what is an S-Corp anyway? How about just being in a partnership? Anything wrong with that?*
The answers to these questions boil down to two basic issues: liability and taxes. As a lawyer, I regularly advise my clients about the liability issues, but always recommend they check with a qualified accountant to get specific tax advice before making a final decision.**
Here’s how the liability issues work: A corporation (or LLC) is a separate legal entity that exists independently of its owners (who may buy and sell shares or otherwise change over time). The debts of the corporation belong to the corporation and, provided the owners are careful about maintaining corporate formalities, their personal assets are protected and cannot be used to satisfy corporate debts. In a sole proprietorship or partnership, on the other hand, the business debts are also personal debts, and there is no protection of personal assets when the business can’t pay.
Now, in practical terms, this may not matter too much if you are the sole owner of a small business where you have signed personal guarantees for credit and where there isn’t much risk of being sued (e.g., certain types of consulting services). In those situations, it may not be worth the cost and hassle of forming a corporation or LLC. I generally recommend those clients get good insurance instead — including professional liability insurance if possible.
But if you own your business with a partner — be careful!!! Read more
I’m doing a workshop on Legal Topics for Start-Ups, on Saturday, January 29, 2011 at National University in Costa Mesa, CA. Among the topics covered will be: choosing a business entity, comparing features of an S Corp vs. LLC, basic contract law, trademark and copyright issues, privacy law, and Internet marketing issues. The workshop is part of an all-day program put on by the Orange County Chapter of SCORE, called Business Start-Up Essentials, that covers additional topics such as basic accounting, finance, sales and marketing, human resources and insurance issues for small business :
“Business Start-up Essentials”
Where & When
Saturday January 29, 2011
8:30 AM to 4:30 PM
3390 Harbor Blvd.
Costa Mesa, CA 92626
$50 at the door
(cash or check only)
$40 if you pre-register online at www.SCORE114.org Read more
At SCORE I meet a lot of clients who want help filing a patent application or drafting an NDA (Non-disclosure Agreement). There’s a lot of fear out there about someone stealing a patentable idea. And with good reason. If you build a better mousetrap, odds are that somebody, somewhere (not naming any names here . . . (China)) will copy and sell it at a fraction of your price. So, how do you protect yourself? Applying for a patent and handing out Non-disclosure Agreements is one way, and I’m not knocking it (or trying to put my patent lawyer friends out of business). But remember: a patent is only as good as your willingness to sue to protect it. And such suits can be very, very time consuming and expensive. Read more