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When you buy a business, you purchase what is not known about the company.
- Has the business ever been involved in any lawsuits?
- Does the business from really have a good reputation or do they use unethical methods to obtain business?
- Is the business making a profit or are they cooking the books?
- How much inventory will you be purchasing?
- In what condition is the equipment?
- What are the state of any contracts?
There are dozens of questions and concerns that you need to be aware of. Investigation and research is vital before purchasing a new company.
If you plan on buying a business, it is critical that you hire an attorney and an accountant to perform due diligence. I would recommend looking back at least six years, because the statute of limitations of breach of contract in New York is that long. The idea here is to protect yourself from any type of liability and unnecessary litigation. My office checks all court databases to ascertain the status of any litigation. If you are purchasing intellectual property, make sure any trademarks are current.
In terms of accounting, if you buy of an existing business you may able to amortize things such as customer lists, goodwill and intellectual property. That is why I always recommend that you speak to an accountant.
Structuring the Purchase of the Agreement
Basically, there are two ways that you can buy a company:
- Asset Purchase;
- Stock Purchase.
In most cases, you will be better off purchasing the assets. There are three big benefits to buying the assets and not purchasing the stock:
- Tax benefits. With an asset purchase, you can give different purchase prices among the various pieces of the company. For example, certain equipment can be deducted immediately so you may want to assign a greater price for those assets.
- You can choose not to acquire liabilities of the business you wish to buy.Perhaps the company failed to pay a supplier for goods it ordered two years ago. The statute of limitations on a breach of contract lawsuit is six years, so you could be hit with a lawsuit four years after buying the company.
- You don’t have to buy every asset of the corporation. It could be in you best interest to buy only the profitable portions of the company.
Sometimes you are not given the choice of how a business sale could be structured. Many business that are for sale require purchase of stock only for a variety of reasons. For example, the seller may believe that there are tax advantages for selling all the stock. If you have to buy corporate stock, it is imperative to conduct a thorough investigation of the corporation’s books and otherfinancial dealings. You can insert warranties and indemnification clauses in the stock purchase agreement. You may also be able to purchase insurance.
The Law office of Frederic R. Abramson represents businesses in New York. If you have any questions regarding purchasing a business, feel free to call at 212-233-0666.
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When starting a business, you probably need to finance part of it. After looking at you own pocketbook, which usually includes any savings, raiding your retirement account or if you are lucky any inheritance money from Aunt Matilda you probably need more money. There are two sources of outside funding: equity investment and loans.
Loans: The Pro’s and Con’s.
You probably don’t need me to tell you what a loan is. If you want to open a lemonade stand, your parents lend you $10 with interest of 2% and you promise to pay them back with interest at a later date.
While your dad was able to simply open his wallet to provide you with an infusion of $10 when you were eight, he might not be able to lend you a more hefty sum now. One step is to contact a commercial lender. I have the name of a fantastic bank lender that could help you out. However, the bank needs to make sure that it will be paid back. This requires security, often in the form of a mortgage. Bank loans often require a personal guarantee, which means that you are responsible if the business fails.
The big plus of obtaining a loan as compared to selling an equity stake is that if your business becomes successful and your profit is larger than you interest payment, you keep everything in the future and do not have to share them with investors.
If you have equity investors, you do not have to repay the investment that your investors put into your company if your business fails. However, you can also be subject to a lawsuit by your investors if they think that you misinformed them. Since an equity investor is a shareholder in the company, they may also require a voice in the running of the business.
The Law Office of Frederic R. Abramson represents start-up businesses in New York. If you have a question regarding equity investments and loans feel free to contact me at 212-233-0666.
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How can I set internal rules within my company to help resolve disputes in the future? The answer is your next step in forming your corporation or start-up. After creating your articles of incorporation, you must now create bylaws. Bylaws are contained within a single written document and dictate the operating standards and procedures of your business entity. They are your way to set internal guidelines and procedures for your new company.
The standards set out in your bylaws will follow through the life of your business entity determining what it can do. You are not required to file bylaws with the Secretary of State in New York, but you must keep a copy of them at your principal place of business. Typical bylaws will contain the following:
- Documenting your identifying information, such as: the name of your organization and where your office(s) are located
- The number of corporate officers and directors: you should include the members of your organization including your board of directors and the range or specific number of those directors.
- The election of your board of directors and how they will function.
- Committees: the specific roles of any special committees including formation, how their appointed, and their duties.
- The shares and stock classes that the corporation can issue.
- Information concerning director and shareholder meeting protocol, the extent to the liability arising out of the performance of their duties, conflicts of interest, and corporate record keeping.
- Specific procedure in amending bylaws and articles of incorporation.
Bylaws cover far more specific topics than the Articles of Incorporation including the corporation’s organization and structure. They are what give your company direction. What difficulties are you finding when creating your LLC’s or corporation’s bylaws?
The Law Office of Frederic R. Abramson represents start-ups in New York. If you have any questions regarding bylaws feel free to contact our office 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
You have this great business idea and perhaps you are short on funds. You know that you should speak to a lawyer. So you decide to call my office looking for some advice. The first question that you will probably ask is if you should incorporate your business. My answer is nearly always yes. Here’s why:
- You own assets. Corporations are great because if play by the rules, your personal assets will be protected. If you decide to sell a Amigurumi Zombie Panda on Etsy and it turns out that your cute toy is defective, you can be personally sued if you fail to incorporate. The lawsuit itself could take five years and a judgement is good for 20 years. Even if you don’t have any assets now, if you have faith in your idea (you should) your For under a grand in legal fees, you could establish your company as a S Corporation in New York.
- You have a partner. If you have a business partner, you are absolutely crazy if you don’t incorporate. You are certifiable if you don’t have an operating agreement. There are millions of things that can go wrong. What happens if you are the one who has the great idea and your business partner is the money guy and you have a falling out? Who has ownership of the business?
- You want to borrow money. If you want an SBA loan, you are required to incorporate.
- You want to sell to the government or a large company. Many government contracts are only open to corporations. Due to the crackdown by the IRS on independent contractors, large companies rather hire a corporation rather than a sole proprietor.
- You want investors. Do you really think that an angel will be willing to invest your unincorporated business? How are they suppose to get a piece of the action?
For more reading: Top Ten Legal Mistakes Made by Entrepreneurs.
If you have a question regarding incorporating your business in New York, contact the Law Office of Frederic R. Abramson at 212-233-0666.