Category: Business & Corporate

Common Lawsuits Brought Against Small Businesses

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By Ted Schneider, Esq.

It is impossible to predict every lawsuit that a small business might possibly face. There is nothing to prevent angry vendors, entitled customers, or disgruntled employees from filing a lawsuit, even if there is no legitimate basis for it. The more a business owner delegates responsibilities to employees, the greater the risk that an employee makes a mistake and exposes the business to a lawsuit. Even the most vigilant, hands on business owner could make a mistake that can lead to a complaint filed against the business.

The most common lawsuits brought against businesses are brought by employees – typically discrimination, wrongful termination suits or claims for wage and hour violation. The impetus for such a suit can be anything from a fired employee feeling slighted to an employee being demoted or passed over for an advancement opportunity. If the employee or candidate believes that the action was taken for a reason related to race, gender, religion, sexual orientation, gender identity, or another protected classification, that employee might file a lawsuit. It is important to document any sort of negative or positive behaviors at work, so that if an employee does complain of discrimination, the court can see the employee’s work history and the real reason why he or she may have been terminated or passed over for a promotion. Disparaging remarks made about any of these protected classes have no business in a work place as they can create a hostile work environment and lead to lawsuits as well. In the event that an employer is faced with a lawsuit, or threat of a lawsuit by an employee or former employee, it is advisable that the employer seek counsel immediately from a knowledgeable attorney experienced in employment law and employment litigation.

Other common lawsuits brought against businesses concern overtime pay. Many employers deny their employees overtime pay in the interest of saving money, often through misclassifying the employee as “exempt” and paying the employee on a salary basis. This can be significantly more expensive in the long run because, if an employee sues, he or she may be entitled to back pay (potentially up to four years), penalties, and applicable attorneys’ fees. It is a good idea to discuss the new federal overtime rules with an experienced employment law attorney and to have contracts or offer letters clearly establishing the relationship between an employer and an employee to minimize confusion. Working with an experienced attorney is the best solution for drafting these agreements and avoiding these types of lawsuits.

It also makes sense to put agreements with vendors and customers in writing. The contracts should include a general description of the work to be performed, a list of any items to be delivered, a project schedule with deadlines, the fee, and the circumstances under which additional fees might be charged, warranties included with the work, indemnification, how long the contract lasts, how it can be terminated, and how disputes will be resolved.

Personal injury lawsuits against businesses are also common. In addition to keeping a place of business in safe condition, it is important that employees are properly classified as employees or independent contractors, and that the business carries the correct worker’s compensation insurance. Most states require employers to carry insurance in case of a workplace injury. Additionally, employees who are injured at work are usually precluded from suing their employer and are instead referred to worker’s compensation courts; however, an employer may be responsible for an injury and associated damages of an employee that has been misclassified as an independent contractor, and therefore no workers’ compensation insurance coverage was in place for the employee.

The attorneys at Schneiders & Associates L.L.P. are well versed in the areas of employment law, contracts, and litigation. For more information on any of the above, please contact us at www.rstlegal.com, info@rstlegal.com, or 805-764-6370.

Is My Business Worth More Than its Tangible Assets?

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Goodwill is an asset that is an intangible part of a business being purchased. In spite of its intangibility, goodwill may be worth more than physical assets, such as buildings, machinery or inventory. Goodwill is the essence of the company’s value to its customers, clients, and employees – its good name, if you will – and, as such, is a critical asset to any buyer. It is easier, as many people intending to purchase a business will tell you, to maintain goodwill than to establish it, because, among other things, goodwill takes time to build. Purchasing a business that already has established goodwill in the community can give the new owner a strong competitive edge. 

What Intangible Assets Compose Goodwill? 

Prospective buyers and sellers should be aware of the various aspects of goodwill. Not all will apply to every business, but aspects of goodwill include:

  • Brand name
  • Solid customer base
  • Good customer relations
  • Good employee relations
  • General reputation
  • Future sales projection
  • Going-concern element

Goodwill is a salable asset, presumed to generate sales revenue and customer continuity. Having been established over years of honest and efficient behavior by the previous owner, it is transferable to the buyer, assuming the buyer maintains the pre-established excellent business practices.

 How Is Goodwill Established?

As mentioned, goodwill can only be established over a period of years during which it is nourished and maintained. In business, it is assumed that expenditures have been involved in creating and preserving goodwill. Steps taken to do this include:

  • Healthy and continuous investment in promotion
  • Maintenance of high quality products or services
  • Support of excellent relationships with both customers and suppliers
  • Maintenance of efficient and respectful management and employees relationships
  • Establishment and maintenance of corporate identity and image
  • Maintaining appropriate business location and facilities

How Is Goodwill Evaluated?

There is no set price for goodwill, though it definitely features in sales negotiations. Generally, goodwill is reflected in the amount paid that exceeds the  total value of the Company’s tangible assets. The value can be reflected in the ability of the established business to earn a higher rate of return on an assembled collection of assets than would be expected if those assets had to be acquired separately – the synergies of the assets of the business. In well-established businesses, goodwill may result in a sales price much higher than the value of the company’s physical assets alone.

There are several complex methods by which business goodwill can be calculated, so it is essential to have a highly competent business attorney involved in the negotiation process. If you are considering the purchase or sale of a business, and need guidance on the value of the business’s intangible assets, or assistance negotiating the purchase and sale agreement and related transaction documents, please contact an expert business attorney at Schneiders & Associates, L.L.P. 

 

Why Should I Incorporate my Small Business?

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By: Roy Schneider, Esq.

Why Should I Incorporate my Small Business?

Not every small business needs to form an LLC or a corporation in order to function. A child selling lemonade by the side of the road has no use for a Tax ID number, nor does it seem practical to set up a new business entity to host a garage sale or a Tupperware party. As a venture starts to grow from a hobby to a full-time job, however, there are questions every business owner should ask to determine whether it is best to establish a legal entity to own and operate the business. Previously, we’ve talked about when in the process is the best time to consult with an attorney. If you’re thinking of starting a new business, purchasing an existing business, or have questions about how to best structure your organization, the experienced business attorneys at Schneiders & Associates, L.L.P. can be invaluable advisors. In the meantime, here are some important considerations when deciding whether to incorporate.

Do I need to protect my personal assets?

The greater the risk of being sued, the more necessary it becomes to file the necessary paperwork to form a legal entity, whether a corporation or an LLC. This will limit the owner’s financial liability to the assets invested in the business. This means that, if a business gets sued, the business owner’s personal assets, like his or her home, automobile, personal bank accounts, and belongings, may not be targeted by the lawsuit. Common lawsuits of concern are for the satisfaction of contracts and leases and personal injury claims for accidents on the premises. Similarly, a bank may not seek a business owner’s assets to repay a loan unless the business owner signs a personal guarantee. Banks often require such a guarantee for new businesses that have no credit history.  Also, the shield of a legal entity will not protect a person from his or her own tortious conduct, such as negligently driving an automobile.

Do I need flexibility in my obligation to pay income taxes?

Legal entities can be set up to provide tax savings and even shift income tax liability.  There are tax pros and cons among a C corporation, S corporation or LLC. The experienced business attorneys at Schneiders & Associates, L.L.P., working with your accountant will assist in the choosing of the best tax-advantaged form of business for you.

Do I need to protect my company name?

In California, legal entities register their names with the Secretary of State which helps ensure that only one business can operate under that name. This is important for branding and marketing purposes. Adding Inc. or LLC to the end of a company’s name can also add legitimacy to a new business, thus enhancing the brand.

Do I want to sell all or part of the business?

Ownership of an LLC or corporation can be shifted relatively easily compared to those of a sole proprietorship. Adding partners and selling the business can be difficult if there are no lines between where the business ends and the owner begins. Once a business is incorporated, it lasts until it is dissolved, meaning it continues to be an asset for a business owner’s estate after the individual passes on.

If you’re thinking of starting a business, or if you operate a sole proprietorship and are considering restructuring your organization, it is best to consult with legal counsel early in the process. An experienced business attorney at Schneiders & Associates, L.L.P. can advise about how to best structure your organization, and help you avoid common mistakes made by entrepreneurs.  Call our office at (805) 764-6370 or write us at info@rstlegal.com to schedule a consultation with one of our knowledgeable business attorneys today.

Seven Common Mistakes Employers Make

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By Ted J. Schneider, Esq.

American employers are subject to numerous federal, state and local laws, imposing various requirements, including wage and hour and anti-discrimination laws. Unfortunately, many employers – particularly small businesses – are unaware of their legal obligations, and often violate various worker protection laws, resulting in expensive lawsuits, civil settlements and fines. Here are some common, costly mistakes employers make, all of which are easily avoidable with proper guidance and advice:

Misclassifying Nonexempt Workers as Exempt

Unless a special rule applies, all workers in California must record hours worked, are entitled to overtime pay and meal and rest breaks. Some employees – typically executive, managerial or professional employees – are “exempt” from overtime and meal and rest break rules, and receive a flat salary. However, this exemption only applies in very specific situations outlined by law. The employer and the employee cannot agree to avoid these rules. The law narrowly defines which employees can be treated as exempt. Unfortunately, many employers improperly classify workers as “exempt” simply because the employees are paid a salary, in situations where these employees legally are entitled to overtime pay and meal and rest breaks.

Misclassifying Employees as Independent Contractors

Determining whether a worker is an employee or independent contractor depends on a multitude of factors, but primarily on the level of independence and control the worker has in completing his or her tasks; the less control exercised by the worker, the more likely he or she will be classified as an employee. Factors to consider include how the worker is compensated, whether the worker faces any risk of loss in the transaction, whether the company pays the worker’s business expenses, whether the company can withhold payment for non-performance, and whether your industry as a whole considers workers in similar positions as employees or independent contractors.

Failing to Train Supervisors Regarding Employment and Labor Laws

Employment laws prohibit employers from taking action against an employee for certain reasons, including discrimination on the basis of a protected characteristic such as race, religion, age, gender, sexual orientation and disability. Employees are also protected from retaliation for complaining about discrimination or illegal activity. It is vital that supervisors are trained to manage their employees in accordance with all applicable laws, properly investigate complaints, and not to retaliate against employees for voicing legally-protected concerns.

Failing to Use an Employee Handbook

An employee handbook informs employees about the employer’s values and policies, and facilitates compliance with employment and labor laws. A properly drafted, custom tailored and comprehensive employee handbook can serve as a strong shield for the employer against employee claims.

Failing to Properly Document Employee Job Performance

Proper documentation clearly establishes the employer’s expectations and where the employee failed to reach those expectations. Written job descriptions and employee evaluations serve as training tools, performance measures and critical evidence in the event you have to terminate an employee.

Failing to Accommodate Disabled Workers

The law not only prohibits employers from discriminating against those with disabilities, it also imposes a duty on employers to “reasonably accommodate” their disabled employees, so they can perform essential job functions. Accommodations may include assistive devices, a modified work schedule or a restructuring of job duties.

Failing to Comply with Wage Payment and Notification Requirements

California law requires employers to pay their employees in a certain manner, and provide employees with an itemized wage statement with each paycheck. Failure to comply with these detailed requirements can subject the company to penalties.

The above list highlights some of the more common – and costly – areas where employers make mistakes, but is by no means comprehensive.  If you have questions about your compliance in regards to any of the foregoing employment laws, please do not hesitate to contact an employment attorney at Schneiders & Associates, L.L.P. for advice and legal guidance.

 

 

Negotiating a Commercial Lease

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By Roy Schneider, Esq. 

Negotiating a Commercial Lease? Be Sure to Address These Issues

When it comes time for your business to move into a new commercial space, make sure you consider the terms of your lease agreement from both business and legal perspectives.  While there are some common terms and clauses in many commercial leases, many landlords and property managers incorporate complicated and sometimes unusual terms and conditions.   As you review your commercial lease, pay special attention to the following issues, which can greatly affect your legal rights and obligations.

The Lease Commencement Date

 

 

Commercial leases typically will provide a rent commencement date, which may be the same as the lease commencement date. Or not. If the landlord is performing improvements to ready the space for your arrival, a specific date for the commencement of rent payments could become a problem if that date arrives and you do not yet have possession of the premises because the landlord’s contractors are still working in your space. Nobody wants to be on the hook for rent payments for a space that cannot yet be occupied. A better approach is to avoid including in the lease a specific date for commencement, and instead state that the commencement date will be the date the landlord actually delivers possession of the premises to you. Alternatively, you can negotiate a provision that triggers penalties for the landlord or additional benefits for you, should the property not be available to you on the anticipated rent commencement date due to the fault of landlord’s contractors.

Lease Renewals

 

 

Your initial lease term will likely be a period of three to five years, or perhaps longer. Instead, you may be able to negotiate a shorter initial term, with the option to extend at a later date.  This will afford you the right, but not the obligation to continue with the lease for an additional period of years.   Be sure that any notice required to terminate the lease or exercise your option to extend at the end of the initial lease term is clear and not subject to an unfavorable interpretation. Carefully calendar the dates on which to exercise your option to extend the lease.

Subletting and Assignment

If you are locked into a long-term lease, you will likely want to preserve some flexibility in the event you outgrow the space or need to vacate the premises for other reasons. Be careful to review the limitations and procedures applicable to requesting the landlord’s permission to assign or sublet the space. Assigning or subletting your leased space without complying with the exact terms required by the lease often will result in an un-curable default of the lease and give the landlord the right to terminate the lease.

Subordination and Non-disturbance Rights

What if the landlord fails to comply with the terms of the lease? If a lender forecloses on your landlord, your commercial lease agreement could be at risk because the landlord’s mortgage agreement can supersede your lease. If the property you are negotiating to rent is subject to claims that will be superior to your lease agreement, consider negotiating a “non-disturbance agreement” stating that if a superior rights holder forecloses the property, your lease agreement will be recognized and honored as long as you fulfill your obligations according to the lease.

These represent just a few of the myriad provisions in a standard commercial lease that require special attention and care in review.  If you are considering leasing commercial space for your business, please contact one of the expert real estate attorneys at Schneiders & Associates, L.L.P. to review your lease, make you aware of potential costs and pitfalls, and assist you with negotiations.

Five Considerations for Starting a New Business

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By Roy Schneider, Esq.

1. Deciding on a Business Form

There are various business forms to choose from.  A sole proprietorship is the easiest to set up, manage, and maintain.  There is minimal paperwork necessary to set up a sole proprietorship since there is no distinction between the business and the proprietor.  Unfortunately, if a sole proprietorship faces a lawsuit, the owner’s personal assets are at stake.

This can be avoided by registering a Limited Liability Company (LLC) with the California Secretary of State.  An LLC limits an owner’s liability to the investment in the company, but it requires filing separate taxes every year and can affect the business’s profit margin. While an LLC is often an excellent vehicle for owning real property investments and equipment, there are tax and other negatives in operating a business as an LLC.  Other common ways of organizing a business include corporations, partnerships, and 501c(3) nonprofit organizations.  These organizations all have pluses and minuses.  It is wise to discuss this matter with a qualified business law attorney at Schneiders & Associates, L.L.P., who can lead you in the right direction when it comes to business form.

2. Deciding on an S Corp or a C Corp

If you decide that a corporation is the right form, it is important to understand the various types of corporations.  S- and C- corporate forms are available.  There are several differences between a C-Corp and an S-Corp.  The most significant is the way the two are treated for tax purposes.  A C-Corp pays taxes on its profits and the principals pay taxes on the money they have received from the company.  In an S-Corp, the business files a K-1 form and the profit from the business is included in the individual taxes of the principal.  An S-Corp is permitted to shift some of its income from one year to the next.  In addition, a C-Corp has more leeway in determining when its fiscal year starts and ends.

3. Securing an entity name and a tax ID number

Securing a tax ID number is a simple process, requiring only the filling out of forms either on the IRS website, by mail, by fax or by touchtone telephone.  No fee is necessary for the application. A tax ID number also referred to as an EIN (Employer Identification Number), is nine digits long.

4. Register with the Secretary of State

In order to ensure compliance with rules governing workers’ compensation, unemployment insurance, local taxes and access to other government resources, it is important to notify the Secretary of State in each jurisdiction where you are conducting your business operations.

5. Obtain necessary licenses and permits

Depending on the type of business you run, different permits may be required to operate.  For example, a restaurant not only requires approval by the board of health, but requires a liquor license in order to be legally permitted to serve alcohol.

The skilled business law attorneys at Schneiders & Associates, L.L.P. law can help you decide what is necessary to start your business off on the right foot.  Please call for an appointment.

Disaster DIY: Business Law Edition

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By Ted J. Schneider, Esq.

Have you ever watched the TV show Disaster DIY on HGTV?  The premise of the show is that many people, who have no idea what they are doing when it comes to home remodeling, try the “do it yourself” (DIY) approach anyway.  The host of the show then comes in to save the day, repairing what the DIYers have destroyed, and teaching them how to properly perform certain tasks.

Unfortunately, the DIY phenomenon has expanded beyond the home improvement sphere and sprouted up in the world of business law. It is tempting to try and find a DIY solution to legal issues.  Budgets are tight, and professional legal advice can seem like a luxury when you are a start-up business or struggling to meet quarterly goals, so many businesses adopt a DIY solution when what they really need is a good lawyer and sound legal advice.

The Internet encourages many business owners to DIY their legal issues, whether it’s access to legal information, contracts or DIY incorporation.  The problem is that advice on the Internet is rarely accurate – or thorough – particularly because business law varies from state to state.  California corporation law often contains nuances and requirements that are absent in Texas, for example.  Further, we don’t know what we don’t know.  And by trying a DIY solution, the business owner may not know the right questions to ask, or realize what other options he or she should consider in light of the business’ goals.

After pursuing the DIY route and disaster, inevitably, ensues, business owners are forced to call in the professionals to clean up the mess.  Unlike the TV show, where the show’s producers cover the remediation costs for the homeowners, the costs of fixing a legal DIY disaster rest solely on the business or the business owner.  And it often costs businesses significantly more to rework a legal framework that was not carefully or property drafted or thought through at the outset.  We have seen costly and consuming litigation arise between partners because they thought they could DIY their corporate structure.  There are two reasons for this increased cost.  First, proactive legal help is always going to be more cost effective than legal triage; it’s infinitely more costly to actively fight a pending lawsuit than to carefully draft and implement needed policies to avoid the dispute in the first place.  Second, the results that even the best attorney can salvage from an awful situation will not be as ideal, or as cheap, as it would have been to avoid the disaster altogether.

If you are considering starting a business, incorporating, or entering into a contract, please reach out to the professionals for assistance rather than relying on Internet services or advice.  The business attorneys at Schneiders & Associates, L.L.P. are skilled at crafting custom legal documents that are designed to avoid disputes and ensure that your legal structure is tailored to achieve your intended results.

Entrepreneurial Immigrants: Building the American Dream

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By Roy Schneider, Esq.

The American Dream of starting your own business and pulling yourself up by your bootstraps is alive and well. In fact, it is the creation and growth of small businesses that is instrumental in helping America recover from the Great Recession. What many do not realize is that a significant percentage of new business ventures in this country are started by immigrants.  Despite their business startup prowess, Immigrants face a multitude of legal issues as they start new ventures in the United States.

If you are an immigrant and are considering starting a business in your new homeland, there may be a number of obstacles ahead of you. At the top of that list is obviously obtaining legal status for yourself, your family, and your employees. America welcomes innovators and business creators, but obtaining legal status is never easy. Thankfully, there are several paths to legal status available to entrepreneurs. Working with an experienced immigration attorney is the best way to figure out which options will work for you.  We work with experienced immigration attorneys and will be pleased to make appropriate referrals.

Providing employment for family members and friends is one of the rewarding aspects of being a small business owner, but immigrants must strictly adhere to all laws governing the employment of non-citizens. If you are caught violating this law you could lose your business and put your legal status in jeopardy.

Immigrant entrepreneurs may also face discrimination. If you think that a lender, supplier, or other business-related contact has treated you unfairly because of your nationality, and your business suffered, you should contact an attorney. An attorney can help you seek compensation if appropriate, and can help you negotiate and enforce future contracts.

There are also unique opportunities in the business creation world for immigrants.  As newcomers to an area, immigrants have the ability to see gaps in the market that others may not notice. The business attorneys at Schneiders & Associates, L.L.P. can help you take your vision and make it a reality by helping you through the formation and permitting processes.  The government also has several special programs that are designed to help minority and woman-owned businesses flourish. Many immigrant business owners are able to take advantage of these programs.

Starting a business is challenging regardless of whether you are an immigrant.  The pride of owning your own business, seeing it succeed and living the American Dream more than makes up for the trials and tribulations that founders encounter. 

If you are interested in setting up your own business, whether an immigrant or not, you should explore your options with a knowledgeable business attorney.  The business attorneys at Schneiders & Associates, L.L.P., are here to help you.

Business Succession Planning Tips

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By Roy Schneider, Esq.

Business succession and exit strategy plans contemplate and instruct regarding any changes in future ownership and management of a business. Most business owners know they should think about succession planning and their exit strategy, but few actually end up doing so. It is hard to think about not being in charge of the business you have built up, but a proper succession plan can ensure that your business continues long after you are there to run it, providing an enduring legacy or at least a smooth exit which will provide income for retirement.  Here are a few tips to keep in mind when you begin to think about putting a succession plan into place for your business.

  • Proper plans take time – often years – to develop and implement because there are many steps involved. It is really never too early to start thinking about how you want to hand off control of your business.  Part of the planning requires a review of the current structure of the business, accounting practices, actual or potential claims from customers, vendors and employees
  • Succession plans are a waste of time unless they are more than a piece of paper. Involving attorneys, accountants and business advisors ensures that your plan is actually implemented.
  • There is no cookie-cutter succession plan that fits all businesses, and no one way to develop and implement a successful plan. Each business is unique, so each business needs a custom-made plan that fits the needs of all parties involved.
  • It may seem counterintuitive, but transferring a business between people who are familiar with the business – from one family member to another, or between business partners – is often more complicated than selling the business to a complete stranger. Emotional investments cannot be easily quantified, but their importance is real. Having a neutral party at the negotiating table can help everyone involved focus on what is best for the business and the people that are depending on it for their livelihood.
  • Once a succession plan has been established, it is critically important that the completed plan be continually reviewed and updated as circumstances change. This is one of the biggest reasons having an attorney on your succession planning team is important. Sound legal counsel can assist you in making periodic adjustments and maintaining an effective succession plan.

If you are ready to start thinking about succession planning and to develop an exit strategy contact one of the experienced business law attorneys at Schneiders & Associates, L.L.P. today.

Dissolving a General Partnership

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By Ted J. Schneider, Esq.

There are a number of reasons to dissolve a partnership.  Whether business is not going well, you can’t get along with your business associates or you are ready to retire, it might be time to end your partnership.  Before making the final decision, you should consider whether dissolving the partnership is the only option.  Is there any other way to alleviate the problem?  Could you buy out your partner, or simply sell your share allowing the business to continue under different management?  Dissolution generally is not a simple process, and if it is your only option, it’s important that you be aware of some important issues.

Most partnerships operate pursuant to a partnership agreement.  Sometimes, these agreements include provisions for dissolution.  If this is the case in your partnership you should follow these provisions closely to avoid later disputes.  If there is no partnership agreement, you should try to formulate a dissolution strategy with your partner(s), following the guidelines set forth by statute and California partnership law.  Formulating a strategy amicably might not be possible, especially if the dissolution is the result of a disagreement or personality clashes.  In that case, you have the option to pursue alternative dispute resolution such as arbitration or mediation, as well as the ability to litigate to force dissolution of the partnership.  Litigation is expensive and time consuming and therefore might not be the best choice.

When preparing to dissolve a partnership you should collect all of the money owed to the business and pay any debts the partnership may have in an effort to wind up the business.  You should discuss the dissolution with the partnership’s accountant, and also inform the IRS and the state of the dissolution for tax purposes.  It is also a good idea to consult with an attorney regarding dissolution paperwork and tax matters, as failure to file properly can result in penalties.

You should also ensure the dissolution is made formal to avoid any confusion in the future regarding your relationship with your partner(s).  In order to do this, you must file a Statement of Dissolution with the State of California.  Formally dissolving your partnership will protect you from debts and contracts entered into by your former partner(s) after the dissolution is final.

Depending on the type of partnership and business you are involved in, different or additional concerns may need to be considered.  Partnership dissolution is not as straight forward as it may seem, especially when there is animosity among or between the partners.  In order to handle matters appropriately, and to avoid costly litigation and potential liability down the road, you should talk to an experienced business attorney. 

Please feel free to contact the business attorneys at Schneiders & Associates, L.L.P. for assistance in planning for or executing a partnership dissolution or buyout.