by Fred Abramson on September 8, 2011 · 0 comments
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Summertime has come and passed. It was a busy August in terms of news, with Hurricane Irene soaking the New York area, Steve Jobs relinquishing the CEO position at Apple and an ugly jobs report. Hopefully you escaped to a sunny destination or traveled to a far off land.
Since we are all back at work, now is an ideal time to look at what is really important for your business. If you are starting a new business you need to have goals. Goals are a vital to the success of any business. A goal is an outcome that you wish for that is measurable, actionable and specific.
If your goal is to have the best business in the world, you know that you need a first class product, great design and productive employees. A world class company also has their legal house in order. Do you?
- REVIEW YOUR INTELLECTUAL PROPERTY. Is the name of your company trademarked? If you created a YouTube video did you copyright it?
- REVIEW YOUR CONTRACTS. I have drafted many agreements for my clients that they use over and over again. Since laws change, your contracts may be outdated. If the services you have provided have changed, an inaccurate description in your agreement can cause headaches down the road.
- EMPLOYMENT LAW REVIEW. If you recently increased the hours of your tech consultant to over 30 hours, she may be considered an employee rather than an independent contractor. How about OSHA regulations, employment taxes?
- IS YOUR ADVERTISING IN COMPLIANCE WITH THE LAW? If you have an ongoing advertising campaign, be aware that there are rules you need to comply with. Under the FTC act
- Advertising must be truthful and non-deceptive;
- Advertisers must have evidence to back up their claims; and
- Advertisements cannot be unfair.
- BUSINESS SUCCESSION PLANS. Whether you run your business alone or have partners, you need to have a business succession plan in place. What happens to your business if you become incapacitated? If you have a business partner, what happens if she wants to leave the company?
This is an opportunity for you to make a difference in your entire life. You don’t need to be hit by a Honda Accord in order to focus on what is legally important for your business. Each time that you implement just one of the above legal goals, you will make a difference in your business.
The Law Office of Frederic R. Abramson represents businesses in New York. You can reach me at 212-233-0666
If you are looking to raise funds you are going to encounter a term sheet. A term sheet is a legal document prepared by venture capitalists that states the important terms of a proposed investment. If you receive one, don’t celebrate too hard by acting like a rock star by recklessly smashing your old Macbook pro. Its time to contact an experienced attorney (yes that is yours truly) and negotiate the terms.
There are a couple of points that you will have to negotiate with your investors before placing your John Hancock on the dotted line.
- VALUATION. When you receive the term sheet for the first time, you will likely focus on what the company is worth. You will see the terms pre-money and post-money valuations. As you can probably guess, pre-m0ney valuation is the price of the company before investment and post-money is after investment. If you are an entrepreneur, your goal is to have your pre-money and post-money valuations to be as close as possible. These means that you get to claim more of your company.
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- PREFERRED STOCK. When you start your company, the shares you create are called common or founders stock. Investors do not like common stock. They want preferred stock, which grants them a number of protections.
- LIQUIDATION PREFERENCES. If a liquidity event occurs you need to know how money will be shared. A liquidity event can include a variety of scenarios, including bankruptcy and a sale of the assets. Your goal as an entrepreneur is to limit any liquidation preferences.
- NO-SHOP PROVISIONS. Toward the end of the Term Sheet, there is usually a provision that will not allow you to obtain additional funding. You should limit this provision to 30 days.
- FOUNDER VESTING. Once you learn about this concept, you may jump out of your seat. You actually have to earn your shares. With reverse vesting a certain amount of shares are put aside and are earned over a period of time. Basically the founders want to ensure that you don’t leave the company.
- ANTI-DILUTION. This provision is used to protect the investment if the start-up obtains additional financing at a rate lower than the previous round. As Brad Field explains, there are two types: weighted average anti-dilution and ratchet based anti-dilution.
- OPTIONS. Usually, the term sheets will reserve some stock for stock options. This will be used to compensate employees. You may dicker with your investor whether the size of that pool is determined using the pre-money or post-money valuation.
Term sheets are complicated and this discussion is by no means complete. It is vital to understand the nuances of specific clauses within the term sheet as it could make a huge difference in the final sum that you earn when you cash out.
You made the first step and decided to start a new business. You have two business associates who are interested in taking the plunge. If you plan on setting up shop in New York, read on.
Starting a new business with partners could be risky. Before you do anything, you are going to need either a Membership agreement (applicable to LLC’s), a Shareholder agreement (for S or Corporations) or a Partnership Agreement drafted. This Agreement cover the duties and obligations of each partner. This document is vital.
To ease your pain, I have created a questionnaire that will help you focus on how you will be conducting business with one another. Since this questionnaire is part of series, make sure to check back in the coming days for more valuable information.
- What is the name of your company? Legally, your company must have a name. Beyond searching through Google, you should check the New York Corporation and Business Entity Database and the United States Patent and Trademark (USPTO) database. Be aware a search on the USPTO is not a substitute for a complete trademark search.
- Social Security numbers. When you apply for a tax identification number with the IRS, you need to provide the social security number of one of the managing owners.
- Address of the proposed company. New York State requires that the business have an address. The registered address could be different than the actual business address. You should also obtain the addresses of all of your partners.
- What type of business are you in? If you or your partners own different businesses, you may not want to compete with them.
- List all the professionals the business has hired. For example, it is really important to list the name of your accountant so that your lawyer can obtain tax records.
- Contracts. Has the business entered into any contracts? In the alternative, does the company expect to enter into any business relationships?
- Permits. Some businesses, such as restaurants, may need permits to operate.
- Intellectual Property. Does the company own any trademarks or copyrights? Does a trademark search need to be completed for the names of any products?
- Insurance. There are many types of insurance that a company can obtain. If you plan on hiring employees, you are going to need to purchase workers compensation insurance.
- Bank Account Information.
Coming next on my series of questions to ask before entering into a partnership: Management, Capitalization and Distributions.
The Law Office of Frederic R. Abramson represents start-up businesses in New York. If you have a question regarding New York Business Partnerships in New York, feel free to contact me at 212-233-0666.
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When you start a new business or start-up in New York, there are some major legal hurdles you’re going to encounter. It’s important to examine these issues carefully because they’re often confusing. Each issue should be discussed with an attorney because they can affect your business costs, tax structure, business organization, and liability. In forming a new business you need to choose a business entity type. There are four general types of business entities in New York: sole proprietorships, partnerships, S-corporations, and LLCs.
- Sole Proprietorship: This is a type of business where one person owns all the assets of that business. In a sole proprietorship those assets that belong to you as an individual and not a single shareholder or a corporate parent. With this type of business entity there are low start up costs, there’s less paperwork involved, and there are no corporate taxes. The big problem with sole proprietorships is that you are personally liable for all your debts. Creditors can go after your personal bank account or even your house to absolve your debts.
- Partnerships: A partnership is where two or more people jointly own and carry a business for profit. Under this type of entity, those entered in the partnership agree to share the business’s profits and/or losses. Unlike corporations, the company does not itself pay any tax, but the partners pay through their income or losses on their individual tax returns. In a partnership both partners are jointly and severely liable for business debts. Creditors can go after you for the debts of your partnership.
- S-Corporations must make sure there are no more than 100 stockholders, and each must have consent. S-corporations are taxed through the owner’s income without taxing the entity itself, much like in a partnership. All profits pass on to the owner without any tax from the shareholder to the owner, unlike in a corporation. The stockholders must be a U.S. citizen or a resident and can only have one class of stock. The owner of an S-Corporation can potentially use this structure to pay himself a smaller salary and pay less in taxes, however this can pose significant problems with the IRS. In a case in Iowa the head of an S-Corporation paid himself far less than his qualifications suggested. The IRS filed a case and succeeded in their suit.
- Limited Liability Corporations (LLC) are a hybrid business entity where its members are treated as shareholders of a corporation but for tax purposes the members are treated as if they’re in a partnership. In LLC’s the owners are not personally responsible for the debts as they are in sole proprietorships and partnerships. Under certain circumstances an individual may be liable: if a member personally guarantees a debt, if the personal funds are intertwined with the funds of the LLC, if there is little capitalization or insurance, or if it fails to pay taxes or violates a state law. A major issue with LLCs is their cost that include formation fees, filing fees, and annual state fees. There are, however, lower insurance costs.
The Law Office of Frederic R. Abramson represents start-up businesses in New York State. If you have any questions about choosing a business entity in New York, contact me at 212-233-0666
by Fred Abramson on April 5, 2011 · 1 comment
If you are starting a new business, everywhere you go you hear people tell you that you must incorporate in Delaware or Nevada. I have some news for you. They are probably wrong.
As a business law attorney, day in and day out, savvy, smart entrepreneurs like yourself actually speak into their shiny new iPhones 4 and proudly proclaim that they registered their business in Delaware. I’m thinking that the lawyer who defended Kato Kaelin’s housemate who now earns his living by hawking do it yourself legal services just earned another fast buck.
You probably think because all of your favorite big companies are incorporated in Delaware, you should too. But these large corporations have specific reasons why they should incorporate in two states. The primary reason why you should incorporate is because you can protect your personal assets. Incorporating in Delaware will not afford you any additional layer of protection. You may also incorrectly believe that you can save money in taxes.
Here are some more reasons why you shouldn’t incorporate in Delaware or Nevada:
- It’s Less Expensive Fallacy. True, it is less expensive to initially incorporate in Delaware. Nevertheless you have to register to do business in New York.
- Failure to Register Your Business in New York Could be Deadly. If you fail to register do business in New York and your business becomes subject to a lawsuit, your personal assets may become exposed.
- You Still Have to Pay Taxes. Simply because Delaware and Nevada do not have personal or corporate taxes doesn’t alleviate your duty to pay taxes in New York.
- The Less Litigation Fallacy. Some attorneys would argue that since most Delaware corporations do not end up litigating disputes because their professional advisers examine volumes published opinions and construct deals to avoid lawsuits. In New York the caselaw on corporations is voluminous.
- The No Jury Fallacy. In Delaware, your case would be tried by a judge, not a jury. But the simple fact is that 99 percent of the cases settle before trial. In my experience, it is very rare to hear of a runaway jury in New York County.
- Privacy. In the past, many people decided to incorporate their business in Delaware because they do not require director or officer names to be listed in the incorporation documents. However, the IRS have become aware of this and the rules governing privacy or much more strict. Since you need to register your business in New York, you are going to have to disclose your CEO anyway.
The Law Office of Frederic R. Abramson practices Business Law and Civil Litigation in New York. If you have any questions regarding Incorporation, feel free to contact me at 212-233-0666
