Starting a Business
Prior to starting a business, the entrepreneur or a member of the management team should identify the requirements and procedures necessary to build a business on a solid foundation. This may be accomplished by seeking the advice of an attorney specializing in business law and/or a government sponsored agency commissioned to help small businesses, such as the Small Business Administration (SBA). Beginning Spring 2009, Chang Law Group PC, Bellevue is launching a "Ground Up" Business Start-Up Bootcamp program which will provide a new business owner access to an attorney, a certified public accountant, a certified financial planner, as well as a business/web site development advisor. The following are selected issues a new business owner should consider prior to proceeding with a business plan:
Formation and Choice of a Business Entity
A business owner should consider whether the business will be organized and operated as a sole proprietorship, partnership, corporation, limited liability company, or other form of business entity. The form chosen may have a substantial effect on ownership, control, taxation, and liability of both the company and its owner(s).
Operating a business as a separate entity such as a corporation or limited liability company may provide a corporate shield to protect the business owner's personal assets from the risks and creditors of the business if the proper guidelines are followed in the creation and operation of the business entity.
For Example: Joe Smith begins on his own to market his friend's new creation, the Ultimate Potato Peeler, as a sole proprietor (without a separate entity). The peeler is later found by a court of law to be negligently designed and dangerous to consumers resulting in lawsuits amounting to millions of dollars. Joe is now personally liable for the debts of his business. Joe's house, car, bank accounts, and all other assets owned by Joe can be attached and garnished by creditors unless other arrangements are made in a bankruptcy court. However, if Joe Smith had formed a corporation or limited liability company to market and sell the Ultimate Potato Peeler, such as Peeler Systems, Inc., only the business assets of Peeler Systems, Inc. will be liable for judgments. Joe Smith's personal assets would be safe from a judgment against Peeler Systems, Inc. if the company were legitimate and maintained all the requirements of an entity.
There are a number of different entities which are available for a business owner or a group of owners to consider such as a corporation, S corporation, general partnership, limited partnership, or an limited liability company. State law also provides certain default partnership creations even if an organization is not officially organized. Under general partnership laws, one partner may be responsible for the liabilities created by the other partner and termination of a partnership which is not properly and clearly defined may increase the risks of one or more of the business owners. A well defined partnership agreement or operating agreement may minimize certain risks along with the incorporation of a formal entity. Each business and its owners have various needs and requirements based on the type of business and agreement between the owners. Such facts should be discussed with a business attorney to determine which entity, if any, would best suit the business and the owners of the business.
Registering Your Business
Creating your business entity is only the initial step. The State of Washington, like most other states, requires that every business be "registered" with the Department of Licensing, Department of Labor & Industries, Department of Revenue, as well as the Employment Security Department. Filing a Master Application with the Department of Licensing begins the process by informing all the state departments of the type of business to be operated and providing other information about the business. Certain types of businesses are also required to be "specially licensed" by the designated agencies in addition to registration.
On a local level, the business must verify with each city where an office is located whether it requires that business to obtain a City Business License. Last but not least, the Federal Government requires that a business entity must obtain an Employer Identification Number, which is the equivalent of a social security number for a business, for purposes of filing a business tax return and payment of taxes. Financial Institutions will also require this identification number prior to opening a business bank account.
Corporate Financing/Securities Laws
Entrepreneurs often discuss with their friends or relatives their dreams of success and the possibility of becoming "investors" or "partners." The receipt of money or other valuable commodity in exchange for interests in a business will likely constitute an offer and sale of "securities" which is regulated by the Securities Exchange Commission and the Washington State Securities Division.
The offer and the sale of securities will likely trigger the federal and state securities laws which require the registration of securities unless there is an applicable exemption. An illegal sale of securities in violation the of applicable securities laws may result in civil and criminal liabilities for fraud, sale of the unregistered securities, as well as enforcement actions by the state and federal securities divisions against the individual owners of a business and other individuals involved in the selling regardless of the business entity.
A business owner, prior to offering ownership interests or other collateral interests of business (through instruments such as promissory notes and other financing arrangements) should seek the opinion of a securities attorney or otherwise confirm that the interests do not constitute a "security" or that the transaction fits into an applicable exemption.
Employment Laws
If the business hires employees, even family members, employment regulations must be followed. The Department of Labor & Industries regulates employees and employers stringently. A business must not attempt to circumvent the Department by only hiring independent contractors as they will be deemed employees. Penalties for such actions can be very high, including but not limited to the suspension of all business licenses, and specialty licenses for the individual business owner(s) regardless of the entity.
Business owners should also be up to date on the requirements of federal and state laws regarding the hiring and management of employees such as the Occupational Safety and Health Act (OSHA), Washington Industrial Safety & Health Act (WISHA), Americans with Disabilities Act (ADA), and the Fair Labors Standard Act (FSLA).
The type of employee/employer relationship will affect the responsibility of the employer for the work or actions of the employee. Under the legal theory respondeat superior, an employer is fully responsible for the actions of the employees performed within the scope of employment. A different theory will apply if a person is hired as an independent contractor of the employer.
Furthermore, if the business involves a highly competitive industry with trade secrets, employee non-compete and confidentiality agreements are recommended to discourage employees from using materials and information received during their course of employment, if the employees later become or are hired by a competitor. The documents are designed to prevent competition by employees, but truly only provide a remedy to the business if an employee breaches the agreement.
Patent/Trademark/Tradename Registrations
If the business creates a uniquely designed or engineered product that the owner wants to protect from competition, the business owner must act diligently to maintain the right to a patent. Patent laws will not protect an item or concept that has been commercially marketed or used for longer than one year. It is imperative that the business owner consult a patent attorney at the earliest date since incidental use can trigger the onset of the one year limitation.
If the business is conducted under a tradename, which is anything but the name of the corporate entity or the sole proprietor, the state requires that name to be registered as a tradename. In addition, registration of the name, design, or logo used in association with the company's goods or services gives the owner a presumption of ownership and exclusive rights in the name, design, or logo.
These issues should be discussed and considered prior to the pursuit of the business to ensure compliance and to prevent the loss of certain rights which could later be valuable to the business and should be claimed by business owners.
Copyright Vivien K. Chang, Attorney at Law, Chang Law Group PC. For additional information about this article, legal services, or if you are interested to participate at a "Ground-UP" Bootcamp to help you start a business, please contact Chang Law Group PC @ 425-605-1234 or via email info@changlawgroup.com. More information is available about Chang Law Group PC and the "Ground-UP" program at www.changlawgroup.com