Starting Your Own Business — Do You Need A Corporation,Partnership, Or Llc? What Else Do You Need To Know?
I. ISSUES TO BE CONSIDERED.
In starting your own business, some of the areas in which you will need to make decisions are as follows:
1. Choosing a business entity.
2. Establishing and organizing the business entity.
3. Establishing a start-up budget and initial operating budget.
4. Financing those budgets.
5. Setting up financial books and records for accounting and tax purposes.
6. Obtaining a location.
7. Obtaining insurance.
8. Buying your business versus starting it from scratch.
II. SELECTING A BUSINESS ORGANIZATION.
A. OBJECTIVES. The following three objectives are generally the most important factors in determining what type of entity will be chosen for a business. Since most organizations satisfy only one or two of the objectives, there are trade-offs.
1. Limited Liability. Owners of businesses need to attempt to limit their personal liability due to business affairs. Exposure to two types of liability should be limited. The first is what we will call “errors” liability for the wrongful acts, negligence, errors, omissions, or malpractice of employees and other owners of the business. The second is limiting liability for debts and contractual obligations of the business.
2. Tax Advantages. An entity should be selected that minimizes the amount of taxes a business owes, particularly with regard to federal income tax, while having the flexibility to pay income to the owners in the manners and amounts to which they agreed.
3. Transferability Of Ownership Interest. If the business to be established is going to commence large scale operations initially and requires a large amount of investment from numerous investors, an entity should be selected whose ownership interests are easily transferable.
B. GENERAL GROUPINGS OF ENTITIES. Business entities in Florida can be categorized generally into four groups:
1. Sole Proprietorships;
3. Corporations; and
4. “Hybrids,” such as Limited Liability Companies (“LLC’s”)
Generally, sole proprietorships and partnerships maximize tax advantages. Corporations maximize limitations on liability. One corporation, a “C” corporation and one partnership, a limited partnership, typically maximize the ease of transferability of ownership interests. Thus, large businesses with many investors typically are C corporations (such as General Motors and AT&T because of the ease of selling or purchasing corporate stock) or limited partnerships because of the ease of selling or transferring limited partnership interests. These large business entities are beyond the scope of this discussion, and since most small businesses need only to minimize their owners’ liability exposures and to maximize their owners’ tax advantages, this discussion will concentrate on those two objectives in selecting a proper business entity.
C. SOLE PROPRIETORSHIPS. Sole proprietorships are the simplest and probably the oldest form of business ownership. They are businesses owned by one natural person. An owner generally has all the tax advantages of other entities, but they have definite disadvantages in the areas of the owner’s liability exposure and their ability to raise capital. Because they have only one owner, they have only one investor, the sole owner. Thus, their growth can be limited since they only have the funds which the sole owner can afford to invest and reinvest in the business to create and grow it. Further, when the owner’s investment in the business, known as equity, is limited, then this in turn limits the amount of loans the business can attain for purposes of growth.
The owner of the sole proprietorship has extensive exposure to liability, both in the form of contractual liability and liability for “errors”. The owner is solely responsible for the business’ contracts and obligations to its suppliers, customers, employees, and lenders. The owner is responsible for not only his or her personal “errors” and the business’ dealings with its customers, employees and third parties who are personally injured or have their property damaged, but also any injuries or damages suffered by others as a result of the “errors” of the business’ other employees operating within the scope of their employment. If the business is sufficiently profitable to afford insurance sufficient in amount and coverage, insurance can provide the proper amount of protection from “errors” liability. However, no type of insurance exists which would provide coverage for the inability to meet contractual liabilities and obligations or for payment of debts, so the sole proprietor is completely exposed to contractual liability.
D. PARTNERSHIPS. When two or more persons and/or entities own and operate a business together without having formed another legal entity to own the business, they are a general partnership with each owner/operator being a general partner. Unless a partnership agreement exists which states otherwise, each general partner has equal power and authority with every other partner in operating the partnership and its business. Most properly formed general partnerships, however, have written partnership agreements that place restrictions and limitations on each general partner’s ability to act, generally in the form of a requirement that all or at least a majority of the partners must agree to an act or decision. These limitations and restrictions, however, are not binding upon parties outside the partnership which have no knowledge of the restrictions and limitations. Thus, if a general partner enters into a contract with a third party, which is within the normal course of business for the type of business in which the partnership engages, the partnership and all its general partners are bound by that contract, whether they authorized it or not.
Also, if a general partner commits an “error” within the course and scope of the partnership’s business, the partnership and the other general partners are each liable for this act or omission. Further, a general partner’s liability for the partnership’s contractual obligations and liabilities and those arising from negligence is for the whole obligation or liability, regardless of how small his or her percentage of ownership is in the general partnership. This is called “joint and several liability.” However, once a general partner has paid the liability, he has the legal right to seek reimbursement from every other partner for that partner’s share of liability based upon the partner’s ownership interest. Finally, the general partnership and each of its partners are jointly and severally liable for the “errors” of the partnership’s employees acting within the scope of their employment. Thus, general partners have all the exposure to contractual and “errors” liability that sole proprietorships do, but in addition, they are also liable for their partner’s acts and omissions. Again, proper amounts and types of insurance can lessen exposure or eliminate exposure to liability for negligence, but not for contractual liabilities and debts.
It is also difficult to raise investment capital in general partnerships, because typically all the general partners must agree to the admission of a new partner, together with the terms and amount of his or her ownership interest. Further, since each partner has a say in the operation of the general partnership, as more and more partners are added, the management and control of the partnership becomes unwieldy and the ability to make timely decisions diminishes. Also, would-be partners have to be worried about their personal liability for past and future contractual and “errors” liability in deciding whether to become a partner in a general partnership.
Thus, there are problems with partnerships. On the other hand, partnerships are probably the best entities for minimizing the owners’ income tax liabilities by virtue of their flexibility in distributing profit and loss in accordance with each of their partners’ tax needs and situations, often allowing variations in the allocations of such profits and losses relative to the distribution of the partnership’s cash flow. Because of the previously referenced limitations and disadvantages, various forms of partnerships are created to lessen or eliminate one or more of the deficiencies of general partnerships. Some of the different types of partnerships in Florida, other than general partnerships, are as follows:
1. Registered General Partnerships. These partnerships retain the relative simplicity of the traditional general partnership. However, their partners have registered with the Florida Department of State, and their registration with the Florida Department of State can authorize one or more partners to act alone making certain decisions for the partnership or, conversely, place restrictions on or identify the requirements for partner approval of certain partnership decisions. Delegations of authority in their registration allow for easier management and control of the partnership, while limitations or restrictions on authority give the partners more control over the contractual liabilities to which they become personally obligated by virtue of the action of another partner. These registrations also provide information to third parties which allows them to deal with confidence with the partnership because the registration has identified what is required and who may make decisions for the partnership. If the general partnership does not register with the Florida Department of State, they must publish and file a fictitious name notice.
2. Limited Liability Partnerships. These partnerships must also register with the Florida Department of State. Their registration can provide them with all the benefits of the registration of a general partnership, but, in addition, these types of partnerships limit the “errors” liability of the general partners to responsibility solely for their personal acts or omissions and for negligent supervision of their subordinates. This limitation of “errors” liability is a definite benefit, but each partner remains fully exposed to the partnership’s contractual liabilities (unless limited in the registration) to the same extent as a partner in a general partnership.
3. Limited Partnerships. Unlike other partnerships, limited partnerships have, not surprisingly, limited partners. Limited partners have excellent protection from both contractual liabilities and liabilities arising from “errors” in that their liability cannot exceed their investment in the limited partnership (what they paid for their limited partnership interest). Thus, they cannot lose more than what they invested in the partnership, regardless of the extent of the partnership’s contractual or “errors” liabilities. This liability protection stems from the fact that limited partners have little or no control over the management of the limited partnership. Each limited partnership must have at least one general partner, as in the general partnership, who manages and controls the limited partnership, but the general partner also has the unlimited exposure to contractual and “errors” liability which general partners in general partnerships have. [As we will see below, however, a corporation with its liability protection for its shareholders may be used and most often is used to protect against the contractual and “errors” liability exposure of general partner(s).] Limited partnerships with their combination of one or more general partners with a theoretically unlimited number of limited partners, minimizes contractual and “errors” liability for limited partners, typically consolidates management and control of the partnership in one or just a few general partners, and, because the restriction on transfers of limited partner interests and the sale of new limited partner interests can be reduced to little or no restrictions, limited partner interests can be easily bought or sold, therefore greatly increasing the limited partnership’s ability to obtain the investment capital necessary for the continued growth of its business. In addition, limited partnerships must register with the Florida Department of State and can take advantage of such registration like registered general partnerships and limited liability partnerships. Limited partnerships, which generally have corporations for general partners, are generally the most expensive of all the entities available in Florida in regards to creating and maintaining their active status with the Florida Department of State because one must create and maintain at least two entities, the limited partnership and a corporation as the general partner.
E. CORPORATIONS. Corporations offer more protection from both contractual and “errors” liability for both its owners (the shareholders) and its management (the directors and officers) than any other business entity. On the other hand, unless a corporation is entitled to file and files an “S election” with the Internal Revenue Service, it will be subject to much more income taxation then sole proprietorships or partnerships. These corporations (“C Corporations”) in Florida are subject to triple income taxation — twice at the corporate level when the corporation pays federal and state income taxes and once at the shareholder level, when the shareholder pays personal income taxes. If a corporation has 75 or fewer shareholders, consisting only of individuals (who are not nonresident aliens), estates, qualified trusts, and other S Corporations, it can file an S election and become an “S Corporation.” In Florida, S Corporations do not pay federal or state income taxes, but their shareholders pay federal income taxes on all their profits, whether distributed as dividends or not. Thus, an S Corporation has many of the tax advantages of sole proprietorships and partnerships in that only its owners, not itself, pay income taxes on its profits. In addition, the S Corporation has protection for its management and owners against contractual and “errors” liability, since the shareholders only risk what they paid for their stock in the corporation. On the other hand, corporations, even S Corporations, do not have the flexibility in the allocation of profits and losses and distribution of cash flow that partnerships have — corporate profits, losses, and cash flow must be distributed as dividends to the corporation’s shareholders in strict compliance to the percentage of stock of the corporation which each shareholder owns. Both types of corporations are generally excellent forms of organizations in regard to being able to streamline and centralize management and the ease with which ownership interests (stocks) can be sold, bought and transferred. However, since an S Corporation may have only 75 shareholders, most large corporations in Florida and the United States are C Corporations.
F. LIMITED LIABILITY COMPANIES. Limited liability companies (“LLC’s”) are relatively new legal business entities that were created to combine the best of both corporations and partnerships, i.e., incorporate the tax advantages and flexibility of partnerships with strong protections against contractual negligence liability which the owners and management of corporations enjoy. The owners of limited liability companies are known as “members” and the members either jointly manage the LLC as general partners of a partnership would or elect a manager or managers to operate an LLC much as a corporation will elect directors and officers. LLC’s in Florida provide limited liability protection to their members and managers and enjoy the federal and state income tax advantages and flexibility which partnerships do. LLC’s require more time and money to form than corporations or general partnerships and the owners must reach agreement on an Operating Agreement, but if these requisites can be met, the LLC is the business entity of choice — superior to all forms of corporations and partnerships. For small businesses, which are single owned, husband and wife owned, or do not otherwise require an agreement among the owners for operating the business, an S Corporation is often chosen over an LLC as the entity of choice because the S Corporation is quicker, cheaper and less complicated to form.
III. ESTABLISHING AND ORGANIZING YOUR BUSINESS ENTITY.
A. SOLE PROPRIETORSHIPS. Sole proprietorships require no legal documents to create, except, if the business’s tradename is a fictitious name, the fictitious name must be published in the newspaper and registered with the Florida Secretary of State as required by law.
B. CORPORATIONS. If your business is going to be a corporation, your attorney needs to prepare the following documents:
1. Articles of Incorporation. This document is filed with the Florida Department of State’s Division of Corporations, and, once accepted by the Division, it creates and establishes the corporation from a legal standpoint
2. Bylaws This document describes the rules and principles by which the corporation and its shareholders, directors and officers operate. Generally, this document recites and follows the Florida Statutes which regulate corporations.
3. Organizational Meeting. At the organizational meeting, the incorporators (who signed the Articles of Incorporation and therefore created the corporation) elect initial directors of the corporation who in turn elect the initial officers of the corporation — the President [generally holding the functional title of Chief Executive Officer (“CEO”) or Chief Operating Officer (“COO”)], Vice President(s), Secretary and Treasurer [generally holding the functional title of Chief Financial Officer (“CFO”)]. The directors also review and accept or reject offers to purchase stock in the corporation from those individuals or entities who propose to be the owners or shareholders of the corporation. Annually, after the organizational meeting, the shareholders elect the directors and the directors elect the officers. As stated before, the shareholders are the owners of the corporation, and the shareholder(s) owning a majority of the shares of stock of the corporation control it. However, they do not direct or manage the affairs of the corporation. The board of directors of the corporation establishes the goals and objectives of the corporation and the policies and procedures by which it operates. The officers, in turn, are charged with the responsibility of the actual management of the operation of the corporation, implementing the policies and procedures set by the board, and achieving the corporation’s goals and objectives set by the board. In small corporations, individuals are often simultaneously shareholders, directors and officers, and in fact, Florida law allows one person to be the sole shareholder and director and hold all the officer positions if he or she so desires.
4. Shareholder Agreement. If there is more than one shareholder (except, perhaps, in the case of spouses), there generally needs to be an agreement between shareholders which restricts the sale of stock of the corporation except through rights of first refusal and required or optional sales and purchases between shareholders upon certain events such as death, permanent disability or termination of employment. These optional required sales and purchases of stock between shareholders should provide formulas for the sale price, methods of financing, and the collateral for the financing. The primary purpose for a shareholder agreement is to ensure that stock in the corporation (which stock represents a proportional share of (a) control and (b) the right to profits of the corporation) is not sold to, or retained by, parties such as unrelated buyers or family members who are unacceptable to one or more of the remaining original shareholders, while assuring that shareholders and their families upon a death, permanent disability or termination of employment of a shareholder have the ability to resell their stock to the corporation or its remaining shareholders. This is important because a block of stock in a closely held corporation (a corporation whose stock is not traded on the stock market) might not otherwise be marketable, especially if the amount of stock is not a majority of the corporate shares and therefore does not control the corporation. Other purposes of the shareholder agreement and related employment agreements between shareholders are to document an agreement as to who the directors, officers, other managers of the corporation are to be, who of these will be employees of the corporation, what their salaries and time contributions are to be, and to document whether the shareholders are obligated to guarantee any future debt of the corporation or to provide future loans or additional capital to the corporation.
C. PARTNERSHIPS. Partnerships are created by partnership agreements, and for limited partnerships and limited liability partnerships, by registering them with the Florida Department of State. For all partnerships, partnership agreements define the partnership’s purpose, who the partners are, what their contributions to the partnership are, and how profits and cash flow from the partnership’s business are to be divided and distributed to the partners. Since a partnership by definition must have two or more partners (who are the owners of the partnership), the partnership agreement must also address all the issues described in the paragraph above regarding shareholder agreements, since partners face the same “relationship” issues described above that face the shareholder-owners of corporations.
D. LIMITED LIABILITY COMPANIES. The following documents are needed to organize a limited liability company:
1. Articles of Organization. This document is filed with the Division of Corporations of the Florida Department of State and creates a limited liability company. These Articles contain many of the provisions of the Articles of Incorporation of a corporation, the partnership agreement of a partnership and a corporation’s shareholder agreement and bylaws, which stands to reason since a limited liability company is basically a cross between a partnership and a corporation. If not contained in the Articles of Organization, the issues that are covered by a partnership agreement and a shareholder agreement and bylaws should be contained in a separate agreement called an Operating Agreement or Regulations between the owners of the limited liability company called “members”. The Articles of Organization name the managers of the limited liability company who manage and operate the limited liability company, or if the members are going to manage, the managing members. Thereafter, the members (owners) of the limited liability company elect the managers or managing members, as applicable.
2. Operating Agreement. As stated above, a limited liability company’s Operating Agreement or Regulations is much like a corporation’s bylaws and shareholders agreement combined or a partnership’s partnership agreement in that they contain provisions for the management and operation of the limited liability company and contain many provisions relating to limited liability companies found in the Florida Statutes.
IV. BUDGET, FINANCING, AND FINANCIAL BOOKS AND RECORDS.
A. BUDGET. When establishing a business, the owners should establish two budgets: one to pay the cost of setting up and opening the business and one to operate the business. Good budgets should be conservative: estimating costs and expenses on the moderately high side and estimating revenues on the moderately low side. Preparing good budgets allows one to determine how much of an initial investment and loans will be needed to set up the business and to operate it until it starts making a profit. Determining the amount of investment and loans necessary in turn allows the owners to determine the feasibility of successfully setting up and operating the business and indicates how much in investments and loans needs to be obtained from owners and lenders. Since receipt of revenues seldom coincides with the need to pay expenses and typically lags behind, the amount of money necessary to pay expenses while waiting on revenue is called working capital and needs to be part of the start-up budget. The operating budget should provide further for the setting aside of part of the business’ profits to establish reserves (a business’ equivalent of an individual’s savings) for unexpected or future costs and expenses which future revenues are not forecast to cover. Essential to the survival of a new business is the creation of realistic budgets and their owners’ adherence to these budgets.
B. ACCOUNTING RECORDS. An accountant or Certified Public Accountant should be retained by those preparing to establish a new business to set up an accounting system and help them with the budget. Accounting systems typically consist of accounting procedures and computers and computer software to keep track of assets, liabilities, revenues, expenses, taxes and capital outlays. The accounting system then generates financial statements (such as income statements and balance sheets), and financial data organized in ways convenient for preparing and filing tax returns, all of which are essential for a business. Further, the accounting system should be designed to generate reports for the managers of the business so that they may analyze financial results, detect trends in revenues or expenses, project future growth and the cost of such growth in order to determine ways of increasing revenues and decreasing or controlling costs.
C. TAX RECORDS. In addition to setting up an accounting system, the business, its attorney, or its accountant should prepare and file a Form SS-4 with the IRS to obtain a Federal Employer’s Identification Number, the equivalent of an individual’s social security number. If the business is to be established as an S Corporation, a Form 2553 must also be filed within weeks of the incorporation of the corporation to establish the corporation as an S Corporation. If the business is selling goods or services on which state sales tax will be owed, a Form DR-1 must be prepared and filed with the Florida Department of Revenue at or before the time the business commences its operation.
V. BUSINESS LOCATION.
A business’ location generally should be convenient to, and easily found by, its clientele, accessible to its suppliers, or, if its customers are located at long distances, the business should be situated so that it can deliver its goods to these customers easily, i.e., it needs to be near airports, interstates, seaports, and/or railroad lines. A good real estate agent can provide valuable assistance in this regard.
A. LEASING VS. BUYING. Once the location has been found, generally the business owner (referred to as the tenant) should lease the property from its owner (referred to as the landlord), rather than buy it, since buying the property adds a large cost to establishing the business which should probably be avoided in order that the funds can be otherwise used in establishing the business. Further, a better location may later be found or a larger location required in the future, and if the business is unsuccessful, there is less investment to be lost and less in loans to repay or default upon if the business’ location is leased rather than owned. The best of all worlds, however, would be for the business owner to negotiate with the landlord for an option in the lease to purchase the premises during or at the end of the lease.
B. LEASE ISSUES. In negotiating and reviewing a lease, consider the following:
1. Rent in commercial leases is generally expressed as an amount per square foot of space leased. To determine the amount of monthly rent, one must multiply the amount of square feet being leased by the rent amount per square foot and then divide by 12 months.
2. Most commercial leases are “Triple Net” leases. That is, in addition to paying its rent and utilities, the tenant is responsible for paying for: (a) the interior and exterior maintenance of, and repairs to, the premises, (b) the real estate and tangible personal property taxes, and (c) the liability and casualty insurance on the building.
3. If the premises are located within a shopping center, mall, or office building, the tenant can expect to deal with the following issues:
a. The tenant can often expect to pay, in addition to all the above expenses, a monthly or annual common area maintenance fee. The common area maintenance fee proportionately divides the cost of maintenance and repairs to the office building, shopping center or mall between the tenants based upon the amount of square footage which they are renting. Business tenants should ensure the lease requires that the landlord pay that proportion of the common area maintenance attributable to empty space in the office building, shopping center or mall, rather than saying that the common area maintenance expense will simply be proportionally divided among the existing tenants. Also, as with the calculation of square footage for purposes of calculating the rent, often landlords will attribute to the business tenant one half of the square footage of the corridor(s) adjacent to the premises for purposes of calculating the tenant’s common area maintenance fee and rent amount.
b. If the business is located in a shopping center or mall, a business tenant should ensure that it can afford the percentage rent which is likely to be charged in addition to the flat or base rent. Percentage rent requires that the business tenant pay a percentage of its gross revenues to a landlord above a certain amount of revenue, commonly called the “break-even point.” The business tenant should ensure that the break-even point is high enough so that the business tenant can pay at least all of its monthly expenses prior to paying the percentage rent.
c. Finally, if the premises is within a shopping center or mall, the business tenant should require that a provision be placed in the lease which prohibits the landlord from leasing space in the mall or shopping center to a business similar to the tenant’s business or which provides some or all of the same products and services.
4. If there is an oversupply of lease space in the area or within a particular office building, mall or shopping center in which a business desires to locate, the tenant should attempt to negotiate some landlord concessions such as a few months’ free or reduced rent or a written commitment from the landlord to pay for some of the tenant improvements for the premises. This is helpful to an owner of a new business or one in a new location because initial revenues are usually low and initial expenses high. Regarding tenant improvements, it is important to note that most leased commercial space is referred to as a “Vanilla Box,” because it is usually devoid of interior improvements, such as bathrooms, interior walls, carpeting, light fixtures and interior electrical and plumbing systems. Therefore, the business tenant often will need to budget for the cost of improving the premises to meet the needs of its business. Thus, a landlord’s contribution to these expenses is helpful and often only fair if the tenant’s improvements will be usable by the landlord and future tenants, because the lease will invariably state that the tenant improvements which are permanently affixed to the premises (known as fixtures), become the property of the landlord when the tenant leaves.
5. When a business becomes successful at a certain leased premises, remaining in those premises becomes very important and valuable to the business tenant simply because now its clientele know where to find the business. Therefore, although the initial lease term should be short so as to minimize the liability for rent if a business is unsuccessful, the lease should contain options to renew the lease for as long as possible and possibly options to expand in the future to adjoining premises or to purchase the premises.
A business should be protected as much as possible by insurance of various types as follows:
A. Business liability insurance to compensate others for injuries and loss of life and loss or damage to their property stemming from accidents caused by the owners of the business, employees, suppliers, agents, and conditions of the premises.
B. Casualty insurance to protect the business from loss of or damage to assets due to fire, wind, storm, or flood.
C. Life and disability insurance on business owners to provide proceeds to their families for loss of income due to death or disability and to provide proceeds to the business or its other owners to purchase the ownership interests of the deceased or disabled owner.
D. Business interruption insurance to replace profits lost by the business from casualties (fire, wind, storm or flood).
E. Health/medical insurance for owners and employees to pay medical expenses.
VII. BUYING YOUR OWN BUSINESS
A. BUSINESS ASSET V. ENTITY PURCHASE. There are two ways to purchase a business:
1. Buy all of the assets of the business.
2. Purchase ownership of the entity (e.g. a partnership, LLC, or corporation) which owns the business. Purchasing the entity that owns the business can be more risky because purchasing the entity means that you have purchased all the liabilities and debts, past and present, disclosed and undisclosed, of the business, instead of purchasing only the assets and then requiring the seller to use the proceeds for the purchase of the assets to pay all liabilities and debts. On the other hand, if certain leases, contracts, rights, privileges, or agreements are owned by the business entity and are not assignable, you may have to purchase the entity in order to obtain these often key elements of the business.
B. CONTRACT TO PURCHASE. Most smaller businesses are purchased by buying the assets and not the entity which owns them. An asset purchase contract should contain the following elements:
1. The purchase price.
a. Note that if the business has specific inventory or supplies, they should be purchased separately from the other assets and their purchase price should be determined by the number of inventory or supply items (limited to a maximum number to be paid for, lest the seller overstock or over-supply the business) multiplied by each item’s net invoice cost to seller.
b. In determining the purchase price, the fair market value of the business assets, the present value of the profits being earned, and the potential for growth in profits should be considered in determining the purchase price to be paid. However, revenues less the expenses of the business should yield enough profit to: (i) make the payments on the loan used to purchase the business, (ii) provide a reasonable salary to the owners for the amount of time and expertise which they provide to the business, and (iii) provide a yield of 10-20% on the money of the owners which is used to purchase the business. Otherwise, if the business cannot provide the owners a reasonable salary for their time, experience, and effort, together with a reasonable return on their personal monies invested, they would be better off to avoid the risk and stress involved in purchasing and operating a business, and simply find a job providing the same salary, while investing their personal funds in stocks, bonds, or other investments.
2. Whether the buyer’s obligation to purchase the business is contingent upon the buyer obtaining financing meeting the buyer’s requirements as to the interest rate, loan term, and loan costs, and/or whether the seller will finance all or part of the purchase price and the terms of this financing.
3. All the assets of the business should be listed in the contract, including the business’ books and records and intangibles such as the tradename and good will.
4. The buyer should be allowed a 30-180 day inspection period, depending upon the complexity of the business to inspect its books, records, financial statements, tax returns, inventory, equipment, and other assets. Also during the inspection period, searches of the county public records and state public records should be conducted to determine if there are any judgments, tax liens, security interests, or mortgages against the assets being purchased. Further, if land is being purchased, its title should be reviewed.
5. The seller should give certain guarantees (“warranties and representations”) and agree to reimburse (“indemnify”) the buyer if the guarantees prove incorrect.
6. Part of the purchase price should be set aside and escrowed for 30-180 days instead of being paid to the seller, so that if undisclosed debts or liabilities of the seller are discovered by the buyer or the buyer experiences losses or expenses due to one or more seller warranties or representations being incorrect, the buyer may seek reimbursement for these losses or expenses or payments for those debts or liabilities from the seller’s monies held in escrow prior to their release to seller.
7. The seller should agree not to compete against the buyer in the same business for a certain period of time after the sale of the business and within a certain geographic area surrounding the location of the business and not to hire away employees of the business. This provision is called a “covenant not to compete.”
For further information on what you need to know to start your own business, please contact BARNES WALKER, Chartered, 3119 Manatee Avenue West, Bradenton, Florida, 34205. Telephone: 941-741-8224. Facsimile: 941-741-8225. firstname.lastname@example.org
© 2000 Barnes Walker, Chartered. All rights reserved.