How to decide whether to incorporate

StickyBusiness Formation, Business Law

Since our firm receives so many calls about the benefits of incorporation, we are starting a series on Business Formation. How to decide whether to incorporate is the first installment. A future article will address seven powerful reasons to incorporate.

The right business structure can save you money and protect your personal assets

How to decide whether to incorporateWhen you first started your business, all the decisions you needed to make must have seemed exciting and overwhelming – what services to provide, where to locate, whether to hire any employees, how to get customers and how much to charge them.

With so much on your mind, it was easy to overlook one of the most important business decisions an owner can make – deciding the legal form of your business. Choosing the proper business structure, such as a sole proprietorship, partnership, corporation, or limited liability company doesn’t always get decided in these early stages. But, through hard work, you have achieved some success and it is now time to think about how to protect what you have built up.

You have a choice of whether to remain a sole proprietorship (or partnership if there is more than one owner) or to incorporate your business. The decision depends on several factors, and understanding the advantages and disadvantages of each option will help you to decide which is the most appropriate for your business. If you have valuable personal assets, such as a home or car, you should protect them. One of the main reasons for incorporating a business is to protect your personal assets.

Incorporation could mean the difference between success and failure

Many entrepreneurs don’t realize that the business form they choose could be the difference between success and failure in today’s competitive marketplace. If you want to succeed, you need all the help you can get. At the top of the list of safe bets is the corporate form of business. That’s why most businesses elect to incorporate. Incorporation gives you one critical advantage: protection from liability. That means your house, car, spouse’s salary, and retirement fund are safe from creditors.

How does this work? A corporation is a separate legal entity from the person who owns it. The corporation, not the owner, enters into business deals, performs services, borrows money, and engages in other business activity. Since the corporation is involved in these business deals, you and your personal assets will, in most cases, be protected from liability if something goes wrong.

For businesses with more than one owner, incorporating can often protect you from the actions and misdeeds of your co-owners. This is unlike a partnership, where each partner is personally liable for the business-related actions of all the partners.

Advantages to incorporating

While perhaps not for everyone, incorporating offers several distinct and money-saving advantages over the other choices. Some of those advantages include tax Savings, asset protection, perpetuity, and increased credibility.

Tax Savings. Everyone is looking to save taxes. When you incorporate, there are numerous tax advantages at your disposal that are virtually impossible to accomplish with other business entities. You create a separate and distinct legal entity. Because of this, there are many transactions that you can structure between you and your corporation to save big money on taxes. For instance, if you own a building, you can rent space to your corporation and claim depreciation and other expenses. Your corporation can then deduct the rental expense. You are prohibited from doing this if you are a sole proprietor or a partner in a partnership.

Asset Protection. If you operate as a sole proprietor or partnership, there is almost unlimited personal liability for business debts or lawsuits. In other words, should you go out of business or be a defendant in a lawsuit, your personal assets such as home, vehicles, savings, etc. are at risk. This is generally NOT the case when you incorporate. When you incorporate, you are liable only up to your investment in the corporation. The limited liability feature of a corporation, while not a guarantee, is DEFINITELY one of the most attractive reasons for incorporating.

Perpetuity. When you incorporate, you create a new separate entity (the corporation). It continues despite what happens to the individual shareholders, directors, or officers. This is NOT the case with sole proprietorships, partnerships or even limited liability companies. For example, if an owner, partner, or member dies, the business AUTOMATICALLY ends or gets wrapped up in legal red tape. Corporations, on the other hand, have unlimited life.

Increased Credibility. Let’s face it. Most people feel more secure and confident dealing with a corporation as opposed to a sole proprietorship. Having INC. or CORP. after your company’s name adds a touch of professionalism and credibility to your business dealings.

Disadvantages to incorporating

There is work involved in incorporating. Since corporations are ruled by state law, documents need to be filed with the state, officers must be elected, meetings need to be held on occasion with minutes kept and copies retained. We show clients how to do all of this. Also, although a corporation can apply for a bank loan, banks sometimes require a personal guarantee from a major owner.

Sizing up the choices

No one knows better than you the circumstances of your individual business. By looking at your options carefully, you will be able to make an informed decision. Then, you can put your energy where it belongs — into running a successful business.

As always, be sure to consult with an attorney before making any important legal or financial decision. While there are many advantages and money-saving reasons to incorporate, as I’ve said before, it’s not for everybody. However, you do owe it to yourself to find out more.

There’s no question that hard work and a little luck is what it takes to BE successful. But a little knowledge, especially when it comes to setting up your business, will help you STAY successful.

Steve Katz is a Seattle business lawyer whose practice includes corporate, contract, real estate, restaurant law, and business transactions. He has business clients throughout Washington and Oregon. He can be reached at (206) 525-5500.

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Buying a restaurant: Should you purchase the stock or the assets?

StickyBusiness Law, Restaurant Law

Seattle Restaurant Lawyer Steve Katz offers advice about buying a restaurant or other business.Are you thinking about buying a restaurant or any other business? Your first major issue is to decide exactly what you are buying. Consider the following example.

“Tony” started a neighborhood Italian restaurant in Seattle over twenty years ago. His Seattle business lawyer helped him incorporate the business as “A Little Taste of Italy Inc.” Now, after some years of success, Tony wants to sell the business, retire, and move back to Italy.

You have been working for years as a Chef at several restaurants in Seattle. At your most recent job, your boss lives most of the year out of town and has left you in charge. You have experience in running every phase of a restaurant and dream of owning your own restaurant.

A common approach is to talk with Tony about how much he thinks the business is worth, how many years are remaining on the lease for the Seattle restaurant, and perhaps even discuss a price. However, at this stage, most buyers do not think about one of the most important issues: Will you buy Tony’s stock in A Little Taste of Italy Inc. or the assets of the business?

Does it make any difference to you as the buyer whether you purchase Tony’s stock or the assets of the business? The answer, most definitely, is YES.

Stock Purchase

If you purchase Tony’s stock in the corporation, here’s what you may receive, in addition to the assets of the business:

  • Any potential lawsuits and other types of claims which may be filed against A Little Taste of Italy, Inc. based on events occurring long before you bought it.
  • Duty to pay possible federal and state taxes which may result from an audit in the future, but relating to activity which happened prior to the sale.
  • Hidden claims for back wages, discrimination, creditor’s claims, and other disputes.

When you purchase the shares of “stock,” all of the history and prior decisions made by the corporation become yours. From the viewpoint of creditors, government agencies, and injured parties, A Little Taste of Italy, Inc. is continuing to operate the Seattle restaurant, regardless of who owns the shares, even if you change the name after you purchase the stock.

In general, as part of purchasing the stock of an incorporated business, you get all the assets and also all of the debts, some of which may be unknown at the time of sale.

Asset Purchase

Fortunately, there is a way to reduce the risk of being responsible for these hidden claims: an “asset purchase.”

  • When you purchase the assets of A Little Taste of Italy, Inc., you buy only the assets you select, and not any hidden or unknown claims.
  • In an asset purchase, you get only the items described in the Bill of Sale — furniture and fixtures, inventory, customer lists and the location secured under a valid lease.

Therefore, in most cases, when you only buy the assets of a business, you are free of hidden claims of creditors, former customers and employees, and government agencies.

If you need the assistance of an experienced Seattle business lawyer or Seattle restaurant lawyer, please call Stephen M. Katz at (206) 525-5500.

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Planning for the sale of a business

StickyBusiness Law

Planning for a business saleSelling your business and reaping the rewards of years of hard work is the dream of every business owner. You need the right team behind you. Selling a business is different than buying one. Sellers and Buyers look at the transaction in opposite terms. The documents you used when buying your business can be useless to you as a Seller – they don’t look after your best interests.

No matter the size of your business, at the minimum, you must obtain basic legal and accounting advice before and during the sale process. A misstep could not only wipe out all of the value that you have built up in your business but could even open you up personally to liability claims by the Buyer.

The timing of when to bring in an experienced attorney to work with you is important. Some owners involve an attorney early in the negotiations. In addition to the basic price and terms, there are many other issues to be negotiated during a business transaction. The status of accounts receivable, liability for debts, assignment of lease, and covenant not to compete are just a few important items. An attorney can offer advice on how to investigate the legal and financial qualifications of a possible Buyer and recommend the legal business structure of the sale.

Of course, the goal is to sell the business and get paid for it. Having the right documents which protect your position as a Seller will help you in many ways:

  • Protect You from Liability: After the two sides have finished negotiating the basic rights and responsibilities, you should ask your attorney to draft the Purchase and Sale Agreement. Each transaction is unique and this is no time to rely on standard boilerplate language. It is too important. For example, two of the most overlooked sections are the Seller’s warranties and representations to the Buyer and the Buyer’s indemnity protecting you in the future. The Agreement must carefully spell out what you represent to the Buyer as well as the Buyer’s duties to you after the sale.
  • Protect You in Case You Need to Take the Business Back: Many businesses are sold using seller financing. Even though you hope your Buyer has good business sense, he or she may not. They may not know how to run your business as well as you did. You may risk losing your payment. It is absolutely essential that a Seller has adequate security and the documents give you maximum protection.
  • Provide the Proper Disclosures to Protect You. Even after the deal is over, a Buyer could overturn it and get his money back if the Buyer claims successfully that the Seller failed to fully disclose what he knew about the business. Common claims by the Buyer allege misrepresentation of inventory value and deception of the potential value of future sales. The Purchase and Sale documents need to be drafted with this in mind.
  • Prevent Problems with the Closing Documents. If there is any difference between the closing documents and the Purchase and Sale Agreement, the closing documents will prevail. All the efforts to negotiate a favorable Purchase and Sale Agreement could be wasted. Instructing your attorney, who represents your interests, to prepare the business transfer legal documents is critical. Stock certificates, corporate resolutions, Bill of Sale, compliance with federal and state laws, assignment of lease, releases, and covenant not to compete are some of these documents.

As a Seattle business attorney for almost 20 years, I have worked with many owners who are selling and buying businesses. I believe that prevention of legal problems is just as important as coping with those which arise. Prevention is less expensive compared to the costs and heartache that you suffer when problems emerge afterward. Our emphasis is on highly personalized service.

While our business law offices are in Seattle, we have clients throughout the Puget Sound area. We do not charge for travel time. Call us at (206) 525-5500 for a free initial consultation.

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Estate planning: Top 5 advantages to having a will

StickyEstate Planning

Planning an estate is a very personal and individual matter. When you’re planning your will, you should think about the following issues:

  • Who should be named as personal representative of your will?
  • Who should receive property, and in what amounts? Are there any organizations, such as schools or charities, that you want to remember? Are there certain items of sentimental value that you want to leave to specific people?
  • Should a trust be created for your spouse, children or others, and if so, who should serve as trustee, and for how long should the trust last?

Here are five advantages to consider when you are drafting your will.

1. You can specifically name the people who will receive your property and in what amounts.

Attorney Steve Katz can help you draft your willThe most important advantage of having a will is that the decedent (the person who dies) is able to direct not only who should receive his or her property upon his or her death, but also in what proportions.

It is important to remember that if a person does not have a will, the laws which govern the way property is to be distributed when someone dies without a will often direct the distribution of property differently from how the decedent would have wanted that property to be distributed. This is particularly true when people have children or when a person has remarried and has children from a previous marriage.

2. You can specifically give certain things to certain people.

In preparing a will, you can direct that certain items of property go to specific people. For example, you can give your home to one child and all of your other property to another child. You can direct that an heirloom piece of jewelry go to a certain child. You can also give property to people who are not related and who would not otherwise receive anything. For example, you can give your neighbor the old rocking chair he always sits in when he comes to visit.

3. Your estate can be distributed the way you want.

Having a will allows the distribution of your property after your death to take place more smoothly and in accordance with the way you direct your property to be distributed. In preparing a will, you name the person you wish to act as personal representative. This is the person who will carry out your wishes in accordance with your will. You can, for example, direct the personal representative not to sell the family home unless all of your children are fully grown or unless your spouse is also dead.

4. Your estate can be distributed more quickly.

You can also direct that the personal representative have “nonintervention powers,” the power to distribute your estate without the need to go into court before handling actions like selling property or distributing shares of property to your heirs. By giving the personal representative nonintervention powers, the distribution of your property can take place more quickly than it would take place if you were to die without a will.

5. A “trust” can be set up.

You can also create a trust will. This is particularly useful for people who wish to leave assets to those who may need assistance in managing those assets. You can put all or some of your property into a “trust” for another’s benefit, naming a specific person who acts as trustee. The will can specify how the trustee is to distribute the trust estate to the beneficiary. You can “pour over” proceeds from assets like insurance and pension and retirement benefits from your employment into a trust established in a will.

Drafting a will is an important and sometimes complex legal matter which involves judgment and skills attained from professional training and experience. It requires special knowledge and informed decision-making, as well as coordination with other estate planning instruments. A lawyer should be able to assist you by analyzing your individual circumstances and preferences and drafting valid documents to carry out your wishes.

For experienced and personal care in drafting your will and other estate planning documents, contact Stephen Katz at (206) 525-5500.

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Estate planning: More than a will

StickyEstate Planning

Besides preparing a will, there are some other things that people find useful in planning their estates. An attorney can discuss and help implement these types of estate planning ideas with you.

1. Durable Power of Attorney

If you become disabled or incompetent, your family may need to go to court to have a guardian appointed to look after your affairs. The appointment of a guardian can be expensive and complicated. By preparing a Durable Power of Attorney while you are still competent, a lot of time and expense can be saved later on. You can also specifically name the person you wish to look after your affairs in the event you become disabled or incompetent.

2. Directive to Physician

Sometimes called a “Living Will,” this document provides that if there should ever come a time when a person is being kept alive only by artificial means, it is that person’s wish to die a natural death and end any life-sustaining measures. The language of a Directive to Physician must be precise and conform to specific Washington state laws.

3. Re-characterizing property

Some property can pass to others without the necessity of probate. With this in mind, some people choose to characterize bank accounts and real estate as joint tenancies with the right of survivorship. An attorney can help determine what can and cannot be so characterized and an attorney can help re-characterize property to be put under a joint tenancy with the right of survivorship.

4. Living Trust

Under certain circumstances, it is useful to give all or some of one’s property away before one dies by putting such property into what is called a “Living Trust.” Such devices are sometimes used to keep property in the hands of the family when it looks like a person might have to be placed in a nursing home.

For experienced and personal care in drafting your will and other estate planning documents, contact Stephen Katz at (206) 525-5500.

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Protect your business with a routine “legal checkup”

StickyBusiness Law, General Legal Issues

The importance of a legal checkupYou visit your doctor every year or two for a checkup, even if you are not sick. You bring your car to a repair shop for a tune-up or oil change, even if it is performing fine.

Preventive law means being proactive and contacting your attorney on a routine basis, every year or two, rather than waiting until something unexpected happens.

Prevention costs less than repair. Discovering a disease at an early stage is vital to increasing the likelihood of long-term health. So, too, paying your attorney for advice beforehand minimizes the risk of a much more costly problem later.

Larger companies have a full-time legal staff to examine its operations and develop a strategic plan to reduce risks. Smaller businesses use outside attorneys. It is important to have a reliable lawyer who knows your industry and specific business, its current status and long-term goals, and can anticipate legal problems before they occur.

Don’t wait until you have a problem to contact your attorney. Instead, it makes sense to conduct a legal audit to reveal issues and identify legal pitfalls. Then, in the future, your attorney can do periodic legal reviews to update and fine-tune the results.

In the beginning, we discuss with you and create a list of items to review. This helps you develop a set of standards and practices to use, based on your specific company.

While every business has different procedures, based on our experience as a Seattle business lawyer, we examine the following documents when applicable:

  • Business formation, such as incorporation articles, bylaws, and minutes, and partnership agreements;
  • Standard and customized business forms used on a routine basis;
  • Leases and rental agreements, both for real estate and business equipment;
  • Invoices, purchase orders and waiver of liability;
  • Supplier and customer agreements, collection letters;
  • Insurance policies;
  • Employment and independent contractor agreements, employee benefit handbooks, brochures, policies and regulations;
  • Licenses and permits required to do business and provide services;
  • Title to business assets and loan documents;
  • Patents, trademark, copyright registrations, confidentiality agreements, and non-compete covenants;
  • Communications to outside parties such as newsletters, seminar materials, business correspondence, signage, etc. which should conform with the business plan; and
  • Document retention policies in the event of any future needs.

Our goal is to assist our clients to build a strong foundation and avoid as many future problems as possible. It is important to remember that a business is run by people who live in the real world. Just as a visit to a doctor or car mechanic cannot guarantee that you or your car will never get sick, a legal audit cannot anticipate or solve every problem. Still, a preventive legal checkup and periodic maintenance can help reduce risk and establish a stable future for your business.

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