To sue or not to sue, that is the question.

As a business owner, before you sue someone, you need to figure out what you are trying to accomplish. For instance, is this a one-time situation that is unlikely to be repeated? Will your lawsuit discourage others from doing the same thing? Or is this a larger moral issue where your lawsuit will affect others and prevent further damage?

Knowing your goal is important because litigation is time-consuming, expensive and the outcome can be uncertain. The various steps include:
• Creating initial court papers
• Getting the answers from the defendant
• The discovery phase – investigation of each party’s evidence
• The deposition phase – pre-trial testimony
• Special pre-trial requests to make decisions about motions
• Numerous meetings and conference before the trial
• And finally, the trial

The process can take over a year, so is it really worth your time to proceed?

Let’s take a case in point. Someone has breached a contract with you that causes you a financial loss or damage of around $5,000. It was a one-time situation and won’t be repeated. The cost of litigation will be around $15,000. Is it really worth pursuing?

In another instance, someone has breached a contract and is causing on-going harm to your business, and possibly to other businesses. In this instance, you may have no choice but to sue, even if the cost is prohibitive.
There are really 10 steps you should follow when considering pursuing legal action:
• Good Case — do you have a genuine legal claim that the courts will support?
• Final demand — have you taken the time to make a final demand to allow the person or business at fault to make the situation right, rather than going to court?
• Compromise — try looking at the case from the other party’s point of view. Do they have a valid argument? Can you adjust your own position? Can you reduce the damages and reach a compromise?
• Collect Damages — can you actually collect a financial settlement from the party you are you going to sue. If the other party doesn’t have the financial wherewithal the pay damages, what is the point of a lawsuit.
• Finances — do you have the money to pay for an attorney and handle the expenses related to filing a law suit? It may be cheaper to settle.
• Time and Resources — Do you have the time and resources to pursue a lawsuit?
• Statute of Limitations — are you within the statute of limitations (time frame) to pursue a lawsuit?
• Location — if you are suing someone from a different state, which state will have jurisdiction over your case? Suing someone in another state under their jurisdiction will probably be more expensive for you.
• Small Claims Court — can you take your case to small claims court. Many states have small claims courts that will only hear disputes under a certain amount (generally $5,000 or less).
• Represent yourself — you may be able to represent yourself in small claims court (but not if you are a corporation). While you may save attorney’s fees, you still probably want to pay an attorney to coach you how to prepare for the case.

Some of these issues can be resolved by having good contracts that are specific to you in the first place. A good contract does not mean there will be no problems, but they can limit or control what the effect of a breach of contract is and what it will cost to pursue the other party.

Assuming you do not have a helpful clause in your contract the issue of whether to sue or not is balancing the risk of losing or spending the time, money and emotion on a case versus what you will gain if you go forward.

Finally, if you are pursuing “justice” in a civil case, you better have provable substantial damages because otherwise you are probably “tilting at windmills” (Cervantes’ Don Quixote”) and are unlikely to find what you are looking for.

10 Tips for Getting Your Business Ready for Sale

If you are thinking of selling your small business you’ve got some work ahead of you. A little hard work now, with the help of a small business lawyer, can save you from plenty of trouble later on.

Tip #1: Decide why you are selling
Buyers nearly always want to know why you are selling the business, so figure out what your motivation is … retirement, partnership disputes, illness or death, overworked, ready for a new challenge. Keep in mind that the Buyer is going to be suspicious of whatever reason you give so stick to a supportable claim.

Tip #2: Prepare for the sale
Smart business owners begin preparing for the sale of their business two years in advance and we suggest you do the same. Starting early can help you complete all the steps below — steps which will make your business as attractive as possible and ease the transition for the new buyer. More often the decision to sell is made because of external factors, e.g. health, turn of the economy, etc. which puts you in a disadvantaged position to get the best price.

Tip #3: Business valuation
Have an valuation done on your business to decide what it is worth. The document will bring credibility to the asking price and can serve as a gauge for your listing price. Yes, it can be costly, but not compared to the increase in value your will receive. It can also be used to identify weak spots in your company that you can address before going to market.

Tip #4: Sell by owner or broker
Decide whether you want to find a buyer on your own, or work with a broker. Selling the business by yourself may save you the broker’s commission, but it may mean a whole lot more work for you in an area you know nothing about. You’ll have to decide the best use of your time and money. There are some very good experienced business brokers out there. Interview several.

Tip #5: Sort out your property/space
If you have an interested buyer, one important thing to do is look at the lease on your property. Check the requirements regarding the assignment of the lease to a buyer of the business. Then check with your landlord to see what he or she requires in order to consent to an assignment of lease to your buyer.

Tip #6: Make it profitable
Some owners consider selling the business when it is not profitable, but this can make it harder if not impossible to attract buyers. Consider the business’s ability to sell, its readiness and your timing. There are many attributes that can make your business appear more attractive, including:
• Increasing profits
• Consistent income figures
• A strong customer base
• A major contract that spans several years

In addition, do a search to find out if you have any outstanding liens (on taxes or equipment, for example) and pay them or disclose them to the buyer.

Tip #7: Put your books in order and Review your ongoing contracts
Many small businesses do not a good job of keeping corporate and financial records in order. Before you list the business fix this because an educated Buyer is going to want to examine everything. Also, have your small business lawyer review any contracts you have with vendors, service providers and large customers to make sure nothing stands in the way of your sale. Lastly, if you have been keeping two sets of books, you are committing tax fraud and if a Buyer gets a wiff of that, no sale.

Tip #8: Review assets and tax consequences
Create a list of all your assets and review the list with your accountant and attorney — that way you will know what the tax consequences of the sale of your business will be. There is a tradeoff between income taxes and capital gains each of which can affect how much you will finally net from a sale. Prepare proper financial statements to present to your prospective buyer. You should also consult with a CPA to get advice on potential tax consequences.

Tip #9: House cleaning
Just as if you were putting your own home up for sale, your business needs to look its best. A lot of cleaning and some staging can go a long way to attracting a buyer. This also includes organizing your operations and procedures manuals and making sure everything is running smoothly day to day. Just like a home buyer is attracted to a turn-key home, so a potential buyer is attracted to a turn-key business.

Tip #10: Prepare yourself mentally
You’ve put a lot of blood, sweat and tears into the business, so get ready emotionally for the sale. If you are too attached, this is going to be a very difficult process. Instead, think hard about what you are trying to accomplish with the sale and what your plans will be after the sale. In short, think to the future and don’t dwell on the past.

Last but not least, it may take six months to two years to complete the sale of your business. There will be frustrations and anxiety. Prepare yourself ahead of time to be patient.

Forming a Business: LLC vs. S Corp

One of the first questions facing you as a small business owner is to decide what type of entity you want to create — stay as a sole proprietor or form an LLC or a corporation. Once you have done that the question is whether to file with the IRS as an S corp. For some businesses, particularly very small or low risk businesses it may be okay to stay as a solo. In most cases it is not.

An LLC (Limited Liability Company) is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. As a member of an LLC, the profit goes directly to you, you are not paying yourself a salary.

An S Corp is a corporation business structure that issues stock and is governed as a corporation. IT IS NOT AS MANY THINK AN ACTUAL TYPE OF CORPORATION. It is a tax election status. The owners are called shareholders and have the same protection from liability as shareholders of a C Corp. An LLC and a C Corporation can each file under S Corp tax election. However, like a sole proprietorship or partnership, an S Corp passes through most of its income and loss items to shareholders. Unlike a regular corporation, there is no double taxation (once at the corporate level and again at the individual shareholder level). Each shareholder is subject to his or her own individual tax rate on the income or losses passed through to him or her. A big plus of either entity is that if structured and operated properly you can protect your other assets from claims against the business.

So how do you know which entity is right for you? Let’s take a look at a few more differences between each of the entities.

  • Filing Cost — It is generally about the same cost to file to form an LLC and S Corp license.
  • Tax Consequences — Tax consequences depend upon the income of the business, of course, but in general, each business entity has about the same personal and business tax expenses.
  • Self-Employment Taxes — An S. Corp can provide savings on self-employment or Social Security and Medicare taxes. It also allows owners to offset non-business income with losses from the business.
  • Ownership Restrictions — An LLC has no restrictions on the number of owners the business can have. An S Corp can have no more than 100 owners and owners cannot be “non-resident aliens.” S Corps cannot be owned by C Corps, LLCs, and other S Corps or by some non-qualified trusts.
  • Business Losses — The S Corp allows business owners to use business losses on their personal tax returns.
  • Paperwork — an S Corp does require more upkeep in the form of annual paperwork and ongoing tax filing responsibilities than does an LLC.

For questions specific to your particular situation, it is best to seek the advice of an attorney and CPA to help you make the best decision for your business model.

6 Legal Blunders to Avoid in Business Agreements

A client recently called and asked to have a legal agreement reviewed before signing it. Excellent! However, the client confused “reading” an agreement with “understanding the legal effect” of the words in the agreement. The client stated he “did not see any red flags.” Well, they were there; the client just did not understand what they were. This particular client did not want to pay for a legal review – preferring to save pennies and risk dollars. I hope that all will go well.

Legal Blunder — Anyone can make a blunder in entering into legal agreement. Yes, even lawyers. If all goes well in a business relationship, the agreement becomes almost irrelevant. The trouble is that if something goes wrong, the first place everyone will look is to the agreement to see what their rights and remedies are. That is a very bad time to realize you blundered in signing the agreement. Here are some simple steps you can take to avoid those blunders.

Blunder #1 – Get it in Writing
The first and biggest blunder is not getting the agreement in writing. The Gentleman’s Code or Simple Handshake agreement can cause all kinds of trouble, especially since each party will most likely interpret the agreement to his or her own advantage.

Blunder #2 – Use Clear Language
Make sure the agreement is written in a clear understandable language. If you can’t understand it, then most likely the agreement has ambiguities that can lead to conflicts later on. Make sure all definitions are used correctly and consistently throughout the document.

Blunder #3 – Include all Crucial Elements
Make sure all the crucial elements are clearly spelled out in the contract — due dates, financial responsibility, buy/sell options, what happens upon the death of one party, etc. If there is a disagreement, how will the disagreement be settled? In a court of law? By arbitration? Try to think of anything that might happen to your agreement and provide for covering all possibilities.

Blunder #4 – Include a Governing Law Clause
If you are doing business out of state, you need to include a Governing Law Clause which state’s laws your agreement will be governed by. Even if you are both doing business in Arizona, it is still a good idea to write the Governing Law Clause into the agreement so you don’t end up in a court somewhere else.

Blunder #5 – Get a Properly Executed Copy of the Agreement
It is not uncommon for there to be only one original agreement. Either make sure that you are the one holding it or get a copy. If you don’t have one, it is very difficult to prove that you actually did create it. Make sure both parties’ signatures are included (and witnessed, if necessary). In addition, make sure any attachments, exhibits or amendments are included. Be especially cautious to make sure the parties in the agreement are properly identified.

Blunder # 5 – Read It!
How many contracts have you signed without reading them? People sign contracts without reading them all of the time. Often experienced business people don’t read their agreements. The law is that if you sign it, you will be held to not only have read it but to have understood it. After the fact complaints are meaningless. You should do this even if you hire a lawyer to review it. It is your agreement and you had better understand it.

Blunder #6 – Don’t Hire a Lawyer
You are the expert in your field. A lawyer could probably not do what you do. Are you trained in reading and understanding legal terms and their consequences? Probably not. Lawyers read and write agreements for a living. With your business and money at stake, take advantage of a lawyer’s years of experience and get them to review any business agreement for you. While good agreements are not insurance that nothing will go wrong, a good agreement is certainly better than one based on blunders.

If you have any questions, please feel free to schedule an initial call with Greg Poulos to discuss this and other business law concerns Schedule a Call.

This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

Employees or Independent Contactors: Are you in Compliance?

Businesses today use diverse workforces to accomplish their goals, including full- and part-time employees as well as independent contractors. The trouble is, many business misclassify employees as independent contractors and end up in trouble.

According to the American Business Bureau, “By some estimates, contingent or temporary workers could reach 30-50 percent of the U.S. workforce. A federal study contends that an estimated 3.4 million employees are classified as independent contractors when they should be reported as employees. A 2009 study by the treasury inspector general estimated that misclassification costs the United States $54 billion in underpayment of employment taxes and $15 billion in unpaid FICA and unemployment taxes.”

Employee vs. Independent contractor
Let’s start with a definition of that will help clear up the difference between and employee and an independent contractor. Some of the questions you might ask yourself to distinguish and employee versus a general contractor include:
• Can the person choose to work without fear of losing employment?
• Can he or she be discharged or dismissed at any time?
• Does the person supplies his or her own equipment, materials, tools or computer?
• Does the person control the hours they work?
• Do you or the person supply all materials needed to complete the job?
• Is the work temporary or permanent?

Here are a couple examples of independent contractors:
• A web maintenance person who works a few hours a month on your behalf on your website but has many other clients.
• A freelance bookkeeper who works a few hours a month to handle your billing and budgeting and who works on behalf of many other businesses.

Here are a couple of examples of employees:
• A full time sales person who hours that you set – 30 hours per week or more – selling goods or services on behalf of your business and does not work for other employers.
• An office manager who works more than 30 hours per week and does not provide these services to other employers.

Keep a few things in mind.
• There is no such thing as a 1099 employee.
• An employee who is given a W-2 must undergo screening under the Legal Arizona Workers Act and complete an I-9.
• Independent contractor status is difficult to prove these days.
• One of the greatest risks is that a contractor will be injured working for you and claim you as his or her employer.

The trouble with misclassifying workers is that employees are often denied access to critical benefits and protections they are legally entitled to, including minimum wage, overtime compensation, family and medical leave, unemployment insurance and safe workplaces. Here’s the really tricky part … it also means the IRS and State are receiving lower tax revenues, so they tend to look VERY closely at worker classifications. In fact, the federal government has increased the number of auditors working to weed out these misclassifications and penalties can be severe for businesses found to not be in compliance with the law.

Here are some the recent court cases that show just how severe penalties can be:
• Vizcaino v. Microsoft, which resulted in a settlement of $97 million
• Estrada v. FedEx, which brought a verdict for drivers, $5 million compensation and $13 million in attorneys’ fees

Once the federal government gets involved, cases of misclassification can take years to settle. For example, FedEx was under scrutiny for many years before a decision was reached… the IRS found the company misclassified employees, owed $319 million in back taxes and penalties for tax years 2004-2006. The decision was later rescinded but it resulted in plenty of time and money lost for the company.

If you are interested, you can read more about the issue at:
Fair Labor Standards Act “Suffer or Permit” Standard
IRS website

Keep in mind that these laws are set in stone, so if you have questions regarding the status of a worker, or are preparing to hire a new worker, talk to an HR professional or a business attorney like me before making any final classifications.

Asset Protection Basics

What is Asset Protection Anyway?

Asset protection planning is about protecting your assets in good times, so you can walk away with those assets if something goes wrong financially. The people who use asset protection plans most commonly are people likely to get sued, such as real estate developers and investors, physicians and business owners whose business involves liability or lawsuit risks. But even an average Joe or Jane can get caught up in a difficult situation, so if you have something to protect then asset protection should at least cross your mind.

Be Careful!

Many people are concerned about having their assets taken from them by creditors. This is about planning for future claims not current ones. If there are already existing claims against you it is too late. There is no strategy that will protect you against an existing creditor at that point. If you attempt to move assets to avoid paying a claim, you risk being liable for a “fraudulent conveyance” and that is a big no-no. Not only can the transfer be undone, in most states, including Arizona, it can be a misdemeanor or felony crime! Clients ask lawyers about transferring assets after they learn about a claim all of the time. The correct and appropriate advice is that you should do your best to defend and settle the claim. If you are being told to hide your assets, run away.

There is a trade-off The challenge in estate planning is that you cannot always have your cake and eat it, too. The more asset protection you get, the more it will cost you and less flexibility you will have. So the first question is determining what level of asset protection you need for you and your assets.

Not everyone has creditors lurking at their doorstep, but the potential is always there. Figure out whether you might face such creditors at some point as a starting point.

What Asset Protection is Not
If you ask people what they think asset protection is, most will say it is a way to shield all of your assets from creditors or some “off-shore” thing. While shielding your assets is the goal, the actuality is that asset protection planning is a way to minimize the extent that assets are available to creditors or to discourage them from pursuing a claim. Look at it this way: if no asset protection is in place then 100% of your assets are available to the creditor. So, while asset protection may not be a total shield, any legitimate efforts made to reduce the extent of claims against you assets is a victory. Any settlement of a claim for less than the claim is really the goal of asset protection planning.

Basic Asset protection steps
1. Liability Insurance. This is the first line of defense. Not only should you have basic coverage you should obtain an “umbrella” policy on your homeowners policy. It is relatively inexpensive for the coverage and is well worth it.
2. Business Liability coverage. If you own a business this is a must. Discuss with your agent what types of coverage you need for the risks involved in running your business. Even if a claim is made that has no merit, most policies will cover the cost of defense which is a huge benefit if you are sued.
3. Take advantage of the Homestead Exemption for your home. If you have cash (I know, not everyone does…) use it to make improvements on your home or to pay down the mortgage to the level of your homestead exemption.
4. Retirement Plans. If covered by Federal law and under some states laws, these accounts are exempt from creditors.
5. Life Insurance. Many states, including Arizona, have exemptions that protect life insurance and annuities from creditors.

Business Asset Protection
1. Create an LLC or other entity. Stop running your business as a sole proprietor because that puts all of your assets at risk, both business and personal.
2. Divide your business into multiple entities. It may be possible to split up your business into separate entities and protect them from claims against the other. For example, you might consider holding real estate in one entity and the operations of the business in another.
3. Caution: Using a business entity does not provide protection against personal guarantees or your own negligence or intentional misconduct. Also the protection of the entity is usually from a “charging order.” That is like a lien against the income and assets that cannot be used until there is a distribution. So, while your creditor cannot get the income or a distribution – neither can you.

More Complex Strategies
If you are in a profession or business where the exposure to risk is higher, then you may need to explore more complex asset protection strategies. The cost of developing and implementing these strategies is much higher and involve giving up some level of access or control of your assets. The theory of asset protection at this level is if you do not have access, then neither do your creditors. It is all about moving assets as far from you as is feasible.
1. Create Irrevocable Trusts for family members. As long as the transfer or gift to an irrevocable trust cannot be considered a fraudulent conveyance, this puts assets out of your hands although it may be subject to the claims against the beneficiary’s interests.
2. Keep all or some of the benefits of an irrevocable trust. If you transfer all of your interest in an asset to an irrevocable trust, it is not available to the creditors. There are other trusts that allow you to keep some interest in such a trust. Examples include a “qualified personal residence trust” (“QPRT”), charitable remainder trust (“CRT”), and a grantor-retained annuity trust (“GRAT”) or a Special Power of Appointment Trust (“SPAT”).
Domestic Asset Protection Trust. This type of trust is created for your own benefit. A handful of states allow protection even when the person who forms the trust is a beneficiary. The most common used states are Nevada and Delaware. Specific rules apply to these trusts. The law on these trusts for non-residents is still unsettled so creating carries the risk they just may not work. While most legal advisors believe there is good reason to believe the courts will honor these trusts, constitutional issues are implicated particularly when the person who creates the trust is not a residence of the state where the trust is formed. Again, the mere fact that such a trust is created may be enough to discourage all but the biggest and well-funded creditors.
4. Marital Agreements. If one spouse is in a profession or business that carries a high risk of liability, one option is to divide the assets between the spouses. The business assets to one spouse and the investment assets to the other. This has implications in community property states and creates potential divorce and income tax basis issues.
5. Foreign Trusts. If you are reading this blog, this probably is not a viable or reasonable option for you.

Conclusion
For most people, the basic steps of asset protection should be sufficient. If your level of risk is higher because of your business or profession, using a combination of trusts and business entities provides more protection. These steps require a detailed analysis of your particular situation and advice from your legal advisor.

For more information about Poulos Law Firm asset protection planning contact:
Gregory C. Poulos
Poulos Law Firm, PLLC
Work: 623-252-0292
Email: gpoulos@nullrjdcreative.com

Business Exit Strategy

Most business owners are so focused on short-term issues that they forget to make decisions and plans for how they will exit their business. But every business owner needs a business exit strategy.

Many assume that the decision to exit the business is voluntary. Most often, however, an owner is forced to leave the business because of incapacity or death. It is not enough to build your business and create value. You must have an exit strategy to get that value out of the business to benefit your retirement or your family when and how you want.

IF YOU ARE LIKE MOST BUSINESS OWNERS:

  • Your wealth is tied up in your business.
  • Your income is also dependent upon your business.
  • The business is dependent upon you for its continued success.

If this sounds familiar, there are strategies available that you can use to help you transfer and protect your business wealth. This type of planning, also commonly referred to as “business succession planning”

No matter what particular exit strategy you chose, the best exit strategy is one that is planned and the sooner an exit strategy is chosen, the better. An exit strategy can take years to execute successfully.

The Poulos Law firm can help you get started on your exit plan with strategies including buy-sell agreements, preparation and documentation for selling the business, key employee incentive agreements, and drafting your estate planning documents such as wills and trusts.

Business & Legal Risk Assessment

Why is Risk Management Necessary?

Risk is a part of everyday business life. You will encounter many types of risk in your small business. Every business encounters risks, some of which are predictable and under your control, and others which are unpredictable and uncontrollable. Some will have a minimal impact and you can manage them easily; others may threaten the very existence of your business.

A Business and Legal Risk Assessment involves identifying, analyzing, and taking steps to reduce or eliminate the exposures to loss faced by your business.

A Risk Assessment is vital for your small businesses, since some common types of losses such as property damage, liability claims, employee claims breach of contract claims and disputes with co-owners can destroy what may have taken you years to build. Such losses and liabilities can affect day-to-day operations, reduce profits, and cause financial hardship severe enough to cripple or bankrupt your small business.

Wouldn’t you prefer to minimize those things that may negatively affect your business and identify identifying those things that will help to achieve the goals and objectives of your business? A Risk Assessment will help you do that.

What Larger Businesses Do?

Larger businesses employ a full-time risk manager to identify risks and take the necessary steps to protect their company. You do not have that luxury. Instead, the responsibility for risk management falls on your shoulders. Your decision depends on whether you are you an ostrich or a businessperson.

Why you NEED a Risk Assessment – The Benefits

Your Small businesses can expect many benefits from applying risk management principles in a structured and systematic way. These include:
• Improved communication between you and your staff
• Improved relationships with your clients, employees, suppliers and contractors
• Stronger business planning and achievement of objectives and goals
• Reduced litigation potential
• Increased competitive advantage
• Enhanced quality of product or service
• Increased efficiency and productivity

Why you SHOULD – good business practices

There are many reasons why you should apply risk management and these include:
• Increased transparency in financial management
• Enhanced staff confidence in a secure and safe work environment
• Enhanced client confidence in the quality and integrity of a product or service
• Protection of assets and the longer-term viability of the business.

Why you HAVE TO – legal compliance

There are many legal regulatory requirements relating to risk management and these include:
• Employment Laws
• Contractual obligations
• Insurance requirements
• Financial reporting requirements

Where You Might be at Risk

• Structures, Agreements and Insurance
• Dealing with Co-Owners and Partners
• Employee Issues
• Business Operations
• Advertising and Intellectual Property

Structures, Agreements and Insurance

• Inappropriate business structures for asset protection and tax minimization
• Inadequate or unenforceable Business Succession Planning
• Inability to recover loans to businesses where the business becomes insolvent
• Rights and obligations pursuant to continuing agreements (e.g. Leases)
• Lack of adequate insurance or under insurance

Dealing with Co-owners and Partners

• Implications from the death, illness or disability of a key person or employee
• Unsuspected or early retirement of a co-owner
• Disputes between co-owners
• The sale of a co-owners shares or interest in a business without notice or consent

Employee Issues

• Disputes with employees
• Competition from former employees and loss of key customers or trade secrets
• Disclosure of confidential information

Business Operations

• Inadequate or lacking Standard Contract Terms & Conditions and contracting procedures
• Unlimited liability to third parties and customers
• Exposure to fraud and theft
• Financial stress due to bad debtors and inability to recover debt collection costs
• Liability in negligence and/or strict liability cases
• Compliance with industry specific legislation

Advertising and Intellectual Property

• False or misleading statements or warranties in advertising
• Difficulties in enforcing Intellectual Property rights where rights are not properly protected
• Unintentional infringement of Intellectual Property rights of third parties on websites.

The Poulos Law Firm offers a comprehensive Business Risk Assessment service resulting in a detailed report identifying the risks faced by your business and providing advice and recommendations for minimizing or avoiding those risks in future.

Starting-a-Business-Arizona

Starting a Business-Arizona Checklist

Business Checklist

Starting-a-Business-Arizona
Starting a business in Arizona isn’t complicated, but you don’t want to miss any of the steps. Follow this simple checklist to make sure you’ve thought your way through all the steps.

Write a Business Plan

Form goals and objectives for your new company. Start with a detailed outline of what you plan to accomplish. You don’t necessarily need a formal plan unless you will seek a business loan, but you must do something if you plan to succeed. Even a properly done One Page Business plan can help.

Choose A Name

When you decide on a name for the business entity and search it on the internet (Google it) to see if anyone else is using the name. Just because the Arizona Corporation Commission allows you to reserve a name does not protect you if the the name is already in use.

Purchase A Domain Name

If you will have a website that is the same as the entity name, you can purchase the domain name at this stage, or wait until after you’ve checked the name availability through the Arizona Corporation Commission owning a domain name does not give you any right to the name through the A.C.C. or through the Arizona Secretary of State. Domain names are completely separate from the A.C.C. and the Arizona Secretary of State. Having a website is essential in today’s business world of internet searches and social media. Register a URL that is memorable and relevant to your company and/or industry.

Funding

Whether you use your own savings or obtain loans, starting a business requires money. The lack of sufficient money is the number one reason businesses fail is lack of sufficient capital. Starting a business on a shoestring budget and hoping to bootstrap your way to success is bucking the odds. There are plenty of free counseling and training services available that can help you prepare a business plan, secure financing and more.

Choose a Location

Think about the people your business is designed to serve and then pick a location most convenient to them. Most successfully businesses are where there is the right traffic for that business. In retail businesses it is crucial – you are really in the real estate business when you own a store.

Determine Your Legal Structure

Are you creating a sole proprietorship, a partnership, a limited liability company (LLC), corporate, S corporation, nonprofit or cooperative? Note there is much confusion regarding some names. – “S” corp, “C” corp, and “501c3” corp are only federal tax designations. They do not indicate your legal structure , only how you pay your taxes. Arizona you would just form a corporation or a nonprofit corporation. LLC are popular entity structures for many small businesses. This can protect owners personal assets from business debts and liabilities if used properly. Incorporating can provide credibility and tax benefits

Get an Tax Identification Number (TIN)

A TIN is like a social security number for your business and you’ll need to obtain it from the IRS or your state revenue agency.

Choose a Tax Year

A calendar year runs consecutively from Jan. 1 – Dec. 31, a fiscal year is 12 consecutive months ending on the last day of any month except December.

Register to Pay State and Local Taxes

You might need to complete a transaction privilege tax application with the Arizona Department of Revenue. Check the ADOR website, www.azdor.gov, and the Arizona Commerce Authority Small Business Services website www.azcommerce.com for more information.

Insurance

You also may need to obtain insurance for your business. Coverage to consider includes general liability, umbrella coverage, workers’ compensation, unemployment and disability insurance. Don’t assume you do not need insurance if you are working from your home.

Obtain Business License and Permits

Arizona requires state and local licenses for many businesses.

Develop business collateral

Marketing material. Most buisnesses use customized letterhead, cards, and forms with their company name, logo and website for marketing and credibility. While there are many cheap printers on line, having a good relationship with a local printer could be a better idea for you.

Open a bank account and merchant account

To protect their corporate or LLC veil, businesses must maintain separate business and personal accounts and records. Establish a separate business bank account so your personal assets are not co-mingled with business funds. Banks may also require an Employer Identification Number (EIN) to open a business checking account. Your customers will want to pay you with no hassle. Depending on your expected volume of sales you may consider a merchant account. For lower transactions you might use PayPal or Square.

Hire Employees

Learn your legal obligations before you hire employees.

Identify where to get help

Know where and when to seek advice from other sources, such as attorneys and accountants, to assist you with specific questions about your business. Establish a board of advisors or mentors to help you along the way. This can be formal or informal. Getting guidance from a mentor or someone already successful is a smart way to go.

Follow government rules

Operating a business means satisfying ongoing government and legal requirements to maintain the company’s good standing

Poulos Law Firm has extensive experience helping businesses get started here in Arizona. We are happy to help with many of the steps in the process.

So You Just Want a Boiler Plate Contract?

Asking a lawyer to prepare a “boilerplate” contract is like fingers scratching the chalkboard. Lawyers hate this because it devalues their services. Clients only think they love them.

Why are you asking for that?

For some reason (actually I know the reason) lately I am being asked by clients to prepare a “boilerplate” contract for them. Why? Well I suspect the obvious – that they are looking to save money or control their costs. I suggest that working with your lawyer to avoid run away hourly fees is often a good thing, but doing that in exchange for a cookie cutter contract is short sighted.

What is boilerplate anyway?

Boilerplate clauses are contract provisions that do not bear any direct relationship to the subject matter of the contract. That is they do not speak to any specific needs of the parties to the transaction or their business goals. In theory these clauses could appear in any contract and not affect the terms of the transaction. They mostly affect the respective rights of the parties to the contract during the life of the contract and often afterward, particularly if there is a breach of the contract.

The basic idea is to use terms familiar to attorneys so that drafting the contract can take less time.

So What’s The Problem with Boilerplate?

Where should I start? First, as stated above, the boiler plate clauses mostly address legal rights not transactional one. In any contract you must make sure that the terms of your deal are being completely and fully addressed. No boilerplate contract is going to do that for you. Second, because they become so commonly used, boilerplate clauses are often overlooked and not scrutinized to make sure they apply to the particular deal or how you actually are doing business with the other side. Rest assured, if there is a problem, everyone is going to be looking at the boilerplate to determine their rights. That is a terrible time to find out mistakes were made or important points overlooked.

Sometimes the error can be as simple as a “cut and paste” error which results in mistaken names or irrelevant clauses. Other times, the error can be substantial and result in increased litigation over what the “boilerplate” even means! So much for standard language. These types of clauses really should only be used as a starting point to make sure that important issues are raised. Then the particulars have to be focused on.

If you have been lucky enough to avoid litigation over the terms of a contract, you are very fortunate. Most contract litigation involves just that – a dispute over the terms of the contract and whether they can avoid a breach, minimize damages or provide other remedies. It is an expensive way to find out what your “standard” contract really means.

Oh, and by the way, understand that in a hard case, the court may overlook or reinterpret the terms of your contract to fashion a relief for the party it feels should prevail. The more “boilerplate” your language looks, the more chance a court may find its own way to interpret it to find justice. Believe me, it happens.

So What are Some Boilerplate Clauses and What do they Mean?

Even with the potential problems it is good to know what some boilerplate clauses are, what they address and some potential concerns:

  • Costs and attorneys’ fees. In the event of a legal dispute, the party that loses must pay the prevailing party’s legal fees. Often clients think that this will result in an automatic award of fees if you win. Problem is that any particular judge or court has their own view of what “prevailing” means in the event of any less than a full victory or what it should have taken to obtain that.
  • Arbitration. Any disputes about the contract must be resolved through arbitration proceedings, not in a lawsuit. The common wisdom is that you can save legal fees through arbitration. This may be true, but arbitration is not necessarily inexpensive or likily to reach the right type of result. You need to consider the type of transaction you have.
  • Choice of law. In the event of a dispute, which State’s law will apply to your lawsuit. In a case with all parties in the same State this may not be an issue. The second an out of state party is involved this clause needs attention because states have different laws on contracts.
  • Jurisdiction. How would you like to fight a lawsuit in a different county or worse, in a different State. It can happen if this clause is overlooked.
  • Waiver. Sometimes a party gives the other party a break during the life of the contract. That party does not want this to become a permanent part of the contract. This clauses allows such temporary deviations.
  • Severability. If a court finds that one of your clauses is invalid, this clause will save the rest of the contract from being declared invalid. Otherwise the baby goes out with the bathwater…so to speak.
  • Integration. This clause prevents a party from claiming that there were other terms that you agreed to that were not in the written contract. It also usually provides that any changes have to be in writing. This is a good think unless you anticipate that you will be making may oral changes as you transact your business.
  • Notice. This is often overlooked or not specific enough. When the time comes to give the other party notice of a problem with the contract, you need to know how this can be done properly or risk the other side claiming that you failed to give prior notice. It also had to take into account that future notice locations may change.
  • Assignment. The last thing you want to find out is that the other party has transferred their rights under your contract to another party that you never dealt with.
  • force majeure (pronounced fors- mazhoor’; also referred to as “Acts of God”). This clause establishes that the agreement will be suspended in the event of unforeseen disasters (such as earthquakes, hurricanes, floods, and so on).
  • Headings. This is a silly clause that says that the headings of each paragraph are not to be given any meaning. No doubt, somewhere, litigation turned on this issue.
  • Jury trial waivers. The expense and time of a jury trial is huge. Most if not all commercial contracts contain this clause.
  • Limitations on damages. This is sometimes considered boilerplate, but experience shows that this will be a heavily negotiated clause if it inserted. No one really wants to leave any money on the table in the event of a dispute.
  • Warranties. If anyone thinks warranties are boilerplate, they are sorely mistaken. This is where a dispute is going to arise in many conflicts.
  • Indemnity. These clauses, too, are not boilerplate. This amounts to a potential guaranty of paying for certain costs in a dispute. Often insurance coverage concerns are relevant, but there is tremendous exposure here for the business owner
  • Applicable Law: Even if you end up litigating in a different jurisdiction, you may want your local law to apply. This clause will allow that.

So What is the Value of Boilerplate Clauses to You?

No question, the use of boilerplate clauses can reduce the drafting time of a contract. For any agreement that involves any significance to your business, thinking that you can use a boilerplate contract runs a tremendous risk that your contract may work against you in a big way. For most transactions other than the simplest ones, it will benefit you to understand what such clauses are for and what they address. Your contracts, however, should be constructed for you or your business specifically.

Legal Forms on the Web – Do you really need an attorney?

A weak maybe? There are, no doubt, situations where a simple form obtained free or at minimal cost on the web will suit your purposes. Caution is the watchword here. While there are many legal forms available on line, you have no assurance about the quality of these documents. They are often created to cover every conceivable situation and as a result, instead of being complete, leave many important issues unaddressed which can and, often do, come back to haunt you.

Having said that, reviewing these on line forms can save you money when you do meet with an attorney. If your situation calls for something other than a simple straightforward matter, maybe these simple forms will be sufficient. Before you use such a form, however, spend a little time considering any legal implications and potential liabilities if the form is inadequate. If you are thinking that you probably need to have an attorney review the documents, then you should be listening to your inner voice. The money you are saving now could be very costly

Saving Legal Fees with on line forms Using online forms can actually be a good way to reduce your legal fees when you do consult an attorney.

  • A good way to use on line forms is to use them to focus your attention on the issues that you should be discussing with the attorney. That way, you can give the attorney direction about what you want to accomplish.
  • Using an on line form can help you also think about answers to questions that the attorney might have which will result in an more efficient (and less costly) meeting.
  • If you have an outline or form that you think is appropriate and the attorney confirms that it is the correct form for your particular situation, you won’t have to pay the attorney to draft the agreement from whole cloth.

Do You Change Your Draw or Salary?

An article in the NY Times business section today poses an interesting cash flow question for small business.

Even if you are not having a collection problem there are times, especially in these times, that your cash flow will ebb and flow without reason. That can have a substantial impact on your sales targets and working capital.

At the same time, as the owner, you have probably set a salary or draw level based upon your revenue projections. If your sales are cyclical, this is also an issue about balancing what you are taking out of the business at any time as well.

The challenge is how to determine whether to continue to take that salary or draw when your business is experiencing the collection downward trends? This of course that you are monitoring your cash flows on a regular basis. Keeping an eye on accounts receivable and accounts payable is clearly something every business should be doing no matter how small.

The answer is probably different for everyone and there may not be a good answer at any particular time. Much of the answer may depend on whether you have confidence in your sales pipeline and can comfortably predict that cash flow will resume. This should require an analysis or projection by you of whether your orders are still coming in, whether you are still being asked for quotes or other indicia that your business is on track.

On the negative side, you may be experiencing issues that might reflect a different future for your business. You will have to address those issues right away.

Part of owning a small business is taking steps to navigate your financial ups and downs. Often, a variable that you can control is how much money you are taking out of the business at any given time. It would be an interesting discussion or thought process that many have probably already gone through

What About the Taxes on the Real Small Business Owners

Most small business owners do business as Sub S corporations or other pass through entities. Changing the corporate tax rate will not help them.

I know that most of my clients and business acquaintances do business in a form that passes net income through to their personal 1040’s where the tax is paid. But most of the political chatter we hear, view or read keeping talking about reducing corporate taxes. That will probably not have a significant effect on the small businesses whose tax structure is based upon their individual tax bracket. The two candidates position on this issues was recently raised in an AP article in the Washington Post http://wapo.st/JEeAq5. The article provides a quick analysis on the relative positions of Romney and Obama and how they will affect the actual taxes on small business owners with pass through income. The article concludes that under both candidates proposals, the big boys in C corps will get the biggest benefit.

It is pretty clear that despite the lip service, neither candidate is addressing the individual tax issues related to small business income. We all need to be alert, no matter what the election result, to review our business structure in the event of any tax changes. Assuming, of course, that Congress can ever agree on any.

10 Questions to Ask Before Family and Friends Become Business Partners | Entrepreneur.com

If there was a single piece of advice that I might give to clients who are considering going into business with friends or family it would be to seek out every other possibility. As an attorney who has spent a great deal of time in litigation unraveling the horrible consequences when these relationships fail. I cringe whenever potential clients think about doing this.

This excellent article poses a series of questions that, at a minimum, people should discuss with potential family or business partners BEFORE entering into the business relationships 10 Questions to Ask Before Family and Friends Become Business Partners | Entrepreneur.com.

The questions suggested by the article are challenging and sometimes difficult to raise, but their beauty lies in raising questions about the expectation of both sides. The excitement of a new small business and potential to make money with people you trust and maybe love can be overwhelming. As a result, decisions to go into business together are often made for the wrong reasons. Or, even worse, the reasons for going into the relationship are not the same for both parties.

When the stress of actually doing business enter the picture, and they will, the basis for the relationship is directly challenged. If the expectations were unspoken or misunderstood at the beginning, they will come out when things get hard. At that point, because of financial and relationship issues, things are going to go bad. And the shame is if this happens, the business is at risk and the relationship may lost forever.

So, as a final thought, look outside your friends and family if you can. If you cannot find someone else you can trust, treat the relationship as if you were entering into a relationship with an outsider. That perspective may save your business and your relationship someday.

Collecting your money – 5 Steps that can help cash flow

As a small business owner, collecting the money you are owed can be critical. In trying financial times like these, every dollar is important to maintaining your own credit and staying profitable. Because other businesses are also experiencing cash flow problems in this economy, many are managing by taking longer to pay their bills while they wait for their own income.

The consequences of even a few customers not paying can be dramatic for small business owners. You can take several steps at the beginning of a relationship with the customer that will increase the odds of being paid. Here are 5 steps that can help.

Step 1
At the beginning of any relationship with a new customer, you have the best opportunity to protect yourself. Before you offer any customer credit, it is a good idea to get a credit report done. If the customer will not consent (in writing, by the way) to your doing this then we suggest you make them a cash basis customer. While there may be some expense to you to get a report it is likely to be cheaper than extending credit that you never are paid back. If they balk or refuse – “cash only” is the only way to go.

Step 2
Make sure your forms provide protection for you in the event of nonpayment. Before you send out your first invoice you should have a completely filled out vendor form that provides you with details about the customer and most important – financial information including where they bank. A continuing personal guaranty for any corporate debt should be required as well. Your form should also make provisions for late charges and my favorite – attorney’s fees.

Step 3
Make a decision about when you will drop a customer if they are not paying. You should be tracking how many days late payments are. Your QuickBooks can age your receivables for you. When clients get to 30 days, contact them and talk about what is going on. If you think that the delay in paying is a temporary condition you probably want to continue to work with the customer, but keep them on a short leash. If you are sensing that the customer might be in a serious financial problem you have to consider making the difficult decision to cut them off. Communication is obviously important. When you make decisions about allowing the customer more time to pay, keep in mind that this decision will affect your profit margin not just your cash flow.

Step 4
“The check is in the mail” is a cliche that we all know to be meaningless. When confronted with this meet it head-on with an offer to accept a credit card payment or PayPal. You may also consider telling the client that you will send someone to pick up the check or cash.

Step 5
When in doubt…discount. While no one likes to reward clients for not paying, but sometimes having fewer dollars in your hand now is better than not being paid at all. Don’t be afraid to give a deep discount if your client is having problems. Giving up ten percent is a lot less than you will give up to a collection agent or law firm.