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Business Law – FAQs

Do I need an attorney for common business matters such as forming a business entity or signing a lease?

You should always retain a lawyer because business entity formation has many legal, business, and tax issues that may not be apparent and need careful consideration. For example, you may need to decide which State is best for your incorporation, what other legal entity forms may be available instead of a corporation, as well as what to include in the provisions of your company's bylaws, which will affect how you operate your company.

What some consider a "simple lease document" can actually contain very complex terms that are important for you to fully understand. A lawyer can assist you in negotiating some of those terms with your lessor which can save you significant amount of money. For example, we assisted a client in eliminating the personal guarantee on a lease document as well as changing the rent adjustment clause to 2% every two years from the standard consumer price index clause that would have increased the rent by approximately 3 % each year. These two changes saved our client thousands of dollars in future rent and eliminated the personal liability on the contract.

My business is with my brother/sister. I trust him/her. I don’t need to incorporate, do I?

Great! It is always a good idea to do business with people you trust, whether you are related or not. Business entities, like corporations and limited liability companies, give owners protection against those from outside the business, like clients or creditors suing the business. The right business entity may also create tax advantages for both of you. An attorney also creates an agreement between the owners that spells out how they make decisions together, what roles they play and other obligations, how they can sell or pass on their share, and other relevant components of the operation of the business. Creating this agreement will make the business run smoother and prevent future misunderstandings between the owners. Hence, even if you in business with family or people you implicitly trust, setting up the appropriate business entity will be very useful.

What is limited liability and why is it important?

If a business owner has "limited liability," it means that he or she is not personally responsible for business debts and obligations of the business entity they have an ownership interest in. If that business entity is sued, only the assets of the business entity are at risk. Only the owners’ investment in the business entity is at risk; not the owners' personal assets, such as their houses, cars, or financial assets. The business entity's owners must comply with certain legal formalities, keep up with paperwork requirements, and adequately fund ("capitalize") their business entity in order to maintain this limited liability privilege.

Limited liability is traditionally associated with corporations (both “C” and “S” corporations), but is now available in California to members of limited liability companies, partners of limited liability partnerships, and the limited partners in a limited partnership. By contrast, sole proprietors, partners in general partnerships, and general partners in a limited partnership are each liable for all the debts of the business (unlimited liability or personal liability).

Although an owner's liability for the business entity's actions is limited, the owners may still be liable for their own acts. For example, the owners of small companies are often required to give personal guarantees of the company's debts to those lending to the company. They will then be liable for those debts in the event that the company cannot pay.

What are the possible consequences of personal liability for business debts and obligations?

Being personal liability can devastate the accumulated wealth of a lifetime of work. This form of liability opens the individual to claims for a wide range of business obligations. Most people realize that personal liability may extend to business losses, but other obligations may also reach individuals, including:

  • Damage awards in lawsuits;
  • Tax deficiencies and penalties; and
  • Back wages and benefit payments.

Example: Chuck operates a construction company as a sole proprietor. One of his workers causes an accident that kills several people. If the company's insurance and assets are inadequate to cover the damages awarded in the wrongful death suit, the plaintiffs may enforce the judgment against Chuck's personal assets.

Limited liability offered by creating a corporation or limited liability company shelters business owners from personal liability. Certain types of insurance can also help cover business owners, directors, and officers. However, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for the legal status of the business entity, he or she may face personal liability despite the corporate shelter. This is called “piercing the corporate veil.”

What are the factors I need to consider in choosing the type of entity I form for my business?

Selecting the appropriate business entity requires a careful balancing of legal, business, and tax considerations.

California law allows for the formal creation of an array of different types of business entities including “C” and “S” Corporations, Limited Liability Companies (“LLCs”), Limited Partnerships (“LPs”), General Partnerships (“GPs”), Limited Liability Partnerships (“LLPs”). Variations exist within these basic categories. Some types of businesses are legally prohibited from using certain types of entities. Having foreign shareholders eliminates “S” corporations as a possibility. The size and complexity of the business is an important factor, as is the type of financing needs of the business. Different entities have different tax benefits and consequences. These and many other complex considerations are involved so that consulting an attorney well-versed in the legal, business, and tax issues is strongly advised.

What is a buy-sell agreement?

Buy-sell agreements are contracts between the shareholders of a corporation that provide for an orderly succession of stock ownership if one or more shareholders leaves the corporation or becomes unable to perform his or her duties. Corporations with two or more shareholders should consider entering into a buy-sell agreement, as a shareholder's termination, death, divorce, or unexpected disability can cause serious operability issues for the remaining shareholders and for the corporation as a whole. Similar buy-sell agreements should exist between the owners of other types of business entities such as LLCs. The Law Office of Johan Deprez can draft and implement effective buy-sell agreements as part of the business organization process.

Does California allow a covenant not to compete for businesses?

California does not allow non-compete agreements except in very limited circumstances. If you want to protect your trade secrets, you must rely on a nondisclosure agreement instead. A nondisclosure agreement prevents an employee from disclosing confidential information about your business after he or she leaves your company or is terminated. Nondisclosure agreements are also appropriate for independent contractors, consultants, and business partners. The Law Office of Johan Deprez can draft and implement effective nondisclosure agreements for your business.

What is the difference between mediation and arbitration?

If you are facing a business dispute, you should consult with a skilled attorney before taking legal action. Mediation and arbitration are alternative dispute resolution methods that can help a business settle a dispute without litigation. In mediation, a neutral third party or mediator helps the opposing parties come to a mutual agreement. Mediation is often favored because it is cost-effective and quick. Arbitration is similar to mediation in that a neutral third party (or arbitrator) is brought in to resolve the dispute. However, arbitration is more formal than mediation and the decision of the arbitrator is final. Also, arbitration meetings are usually conducted before a panel of three arbitrators.