Buying a Business: What about Liability?

You want to buy a business?

At the core of every business purchase is the shifting of risk between the buyer and the seller. The parties must agree on the terms of the purchase and sale based on the unique facts presented. Below are a few key considerations related to this risk transfer. 

Liability for past actions taken by seller

Think of it this way. Every year that the seller owned the business, he or she had to file some form of tax return. He may have offered product warranties and/or entered into long term contracts. Each of these transactions contains some level of risk. As a buyer, you have a variety of options available to you to protect you from these potential risks. 

All Asset Purchase

Many people look at buying a business as though they are buying a fully furnished house. It comes with everything you see, and everything you don't. However, there is an option available to buyers that can help shield them from the risks they can't see. That option is known as an Assets only purchase.

In an all asset purchase, the seller remains saddled with any liabilities incurred up to the date of sale. In this case, the seller bears all of the "business risk" associated with his or her ownership of the company.  Typically, the previous owner will leave an account active to handle warranties, or other known and unknown liabilities of the business. The buyer then proceeds forward without having to worry about the potential unknown pitfalls.

Indemnification

When a buyer wants to purchase the entirety  of the business, the seller can "indemnify" the buyer. Put simply, the seller is willing to stand in the shoes of the buyer related to potential business losses associated with the previous owner's activities. This provides the buyer some level of protection against presently unknown risks, but it is not as strong as an all asset purchase, as the seller could be judgement proof. This language would be found in the official documents related to the purchase.

Indemnify - to protect (someone) by promising to pay for the cost of possible future damage, loss, or injury

Insurable Interests

As with many risks in life, there are insurance products designed to protect business owners from a variety of potential causes of action. If you plan to use insurance as your primary protection after having purchased all of the assets and liabilities of a company, be sure to properly understand what interests you are insuring. This involves having an in depth conversation with your insurance broker about the specific issues you would like to insure against. While most of the products listed below seem to be similar, each policy reflects a slightly different risk. A few interests would be:

• Products Liability
• Intellectual Property
• Property
• General Liability
• Professional Liability

Buying a business can be stressful. If you have questions about the process, or about this post, St. Augustine Law Group would be happy to help! Feel free to Contact Us with your questions, comments or concerns.

Forming a Business Part 3: The Corporation

The Corporation

Corporation - an association of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members. (http://dictionary.reference.com)

As the definition above so succinctly states, a Corporation is an entity existing independently of its owners or leaders. While owners and leaders can have limited liability for the actions of the corporation, cases like Citizens United v. FEC indicate that Corporations have 1st amendment constitutional rights not unlike the average citizen. With that being said, Corporations are citizens of the state they are formed. In other words, if you file your articles of incorporation in Florida, your Corporation is technically a citizen of Florida. It is allowed to do business in other states, or even in other countries. If it does, it must follow all of the local laws associated with a "foreign entity" doing business in that state or country. These rules can be very complicated.

What are the benefits of Incorporating?

There are a variety of benefits associated with incorporating your business. Perhaps the most important benefit is that all owners of the company have a liability shield. In other words, except under very specific circumstances, an owners personal assets could not be attached to law suits involving only the Corporation.Only those assets invested are at risk of loss. In addition, Corporations can have multiple classes of stock (Preferred, Common, Voting, Non-Voting). For this reason, Corporations can more easily "go public" or raise additional equity capital when the time comes.

What are the Drawbacks of Incorporating?

The first and foremost drawback to incorporating is the opportunity for double taxation. Double taxation means that the Corporation is taxed on its profitability, and then its shareholders are also taxed on the income they personally garner related to the Corporations success, usually in the form of a dividend. This can be easily avoided if the Corporation meets the qualifications for Sub chapter "S" status.  See our blog post on S-Corp's here.

Another drawback can be increased levels of regulation. While many Corporations operate as non-public companies, if and when a Corporation wishes to "go public", it will be subject to increased federal and state regulations designed to protect consumers and investors alike.

Is a Corporation the right entity for me?

Unfortunately, this isn't a simple answer. Often times, entrepreneurs must choose between a Corporation, and an L.L.C. Keep an eye out for our next blog dealing specifically with the L.L.C. While there are some distinct advantages to forming a Corporation over an L.L.C., those advantages do not always match up with the needs and wants of the entrepreneur. We would be happy to help you find the perfect business entity for your business. Contact Us for a Free Consultation!

Forming a Business Part 2: The Sole Proprietorship

The Sole Proprietorship

As mentioned in Part 1, the Sole Proprietorship (SP) is the easiest "Business Entity" to form. Many people that start their own business out of their home, or have a hobby that brings in a little cash, more than likely operate as a SP. The name explains it all! Sole = Solo or Single. Proprietorship = Business/Trader.  In short, SP's are tied directly to its single founder/owner. As the owner lives and dies, so does the SP. There is no legal distinction between the owner of the business, and the business itself. This has limited benefits and substantial drawbacks depending on the nature of the business.

Benefits

The primary benefit to starting a SP is that it is quick and easy. In some cases, the founder wouldn't even have to do anything at all. John Doe could go out and start transacting business right away! If he wanted to be John Does Widget Service, all he would have to do is register his fictitious name or DBA with the state of Florida for a small fee. If applicable, the SP can also register to pay sales tax with the appropriate DOR. Most SP's even open business bank accounts in order to keep accounting straight, but this step isn't a requirement.

Paying income taxes is relatively simple as well. The profits earned by the business are counted directly toward the taxable income of the founder. In a round about way, it is like giving yourself a 1099. Your accountant or tax preparation software should do a good job of helping you navigate this area. Keep in mind, most people don't take taxes out on their SP earned income. This may result in a relatively high tax bill at the end of the year!

Drawbacks

While they are easy to start, the SP isn't always the best choice for at least one major reason.

Unlimited Liability for Owner

This is the most important and often overlooked disadvantage. If you operate a Sole Proprietorship, as the owner of the business, all of your personal assets are subject to any business related lawsuit. That means, in the event someone sues you related to a business transaction you had with them, they will be able to come after your personal assets in order to fulfill a judgement against you.

if you are operating a business as a Sole Proprietor, this may leave you asking;

"How can I protect myself?"

The answer is relatively simple. 1) Form an LLC, Inc, or other relevant business entity that provides a liability shield, and/or 2) Explore insurance options. These two options cost marginally more money than starting and continuing to operate your Sole Proprietorship, but will provide you the peace of mind that your personal assets are protected. Contact us for a free consultation regarding whether or not an LLC or an Inc. is right for you!

Forming A Business Part 1: What is a business entity?

Visit St. Augustine Law Group at www.StAugustineLawGroup.com or call us at 904-325-9863 We can help you if you are starting a business, selling a business, and everything in between.

This is the first installment of blog posts that will deal directly with forming a business. What type of entity should you choose? What are the benefits and drawbacks? How can you adequately prepare for taxes? You will find many of those answers right here on the blog.

What is a Business Entity?

Fundamentally a business entity is a fictional being created under the laws of a specific state. Think of it as a person. It owns property, earns money, pays bills, is subject to law suits, etc. Business Entities live and die but not always at the mercy of its owner. In Delaware, at times there have been more "Business Entity" citizens than there are real people!

The most common types of business entities include, Corporations (Inc.), Limited Liability Companies (LLC), Partnerships, and Sole Proprietorships. Each of these entity types will be described in greater detail in future posts. There are a variety of reasons that an entrepreneur might choose one over another, and there are in fact a variety of other entities that aren't mentioned here. Each type has benefits and draw backs, and the individual needs of the business owner need to be carefully considered before jumping right in to doing business.

The most common reason for choosing a business entity is to limit personal liability of the owners. Not all entities are created equal in this regard. A sole proprietorship doesn't provide any liability protection, but it is the cheapest to form. On the flip side, a Corporation tends to provide excellent liability protection, but it isn't right for everyone, and if you're not careful, it may not provide liability protection either! Be sure to keep a close eye on future blogs to get an idea for what entity might be right for you and your business.

Are you starting a business today?

Do you have questions about what entity you should pick? We are happy to help! Please Contact Us to set up a free consultation! 

Non-Disclosure & Non-Compete Agreements

Introduction:

In general, any NDA/NCA is designed to protect the person or business requesting it, or in some cases (Mutual Agreements) both parties to the agreement. In theory, these agreements are a way to keep otherwise unprotected information out of the wrong hands. By "unprotected" I mean non-patented, non-trademarked, non-copyrighted, or otherwise legally protected processes, procedures and intellectual property. These agreements are commonly used at the beginnings of new ventures, between prospective business partners, during business acquisitions, and in virtually any circumstance that people want to protect their "Secrets".  These agreements can either be valid and useful, or invalid and useless.

The Invalid NC/NDA

Many people will tell you that a Non-Compete/Non-Disclosure agreement isn't worth the paper it is printed on. In many cases those people would be right. These types of agreements are rife with invalid restrictions/limitations on commerce that are unenforceable in any court in the United States. In practice, these types of agreements are used more as a scare tactic than an actual protective tool. For that reason, they can be litigated quite frequently, and often in favor of the "restricted" party. Should you find yourself needing to sign one of these agreements you should consult with a competent attorney in order to properly understand the enforceability of the agreement you are being asked to sign. We would be happy to help!

The Valid NC/NDA

The most important things to consider when drafting this type of agreement are:

1. Duration of the Restriction
2. Geographic Limitations
3. Be as specific as possible

Each state has its own manner of dealing with these types of agreements, and most states do not favor these types of agreements. For this reason, it is imperative that if you have something to protect, hire an attorney to help you draft an enforceable and otherwise valid agreement. While we can never guarantee an agreement will be bulletproof, we can ensure that the agreement is written to reflect the current state of Federal, State, and Local laws as applicable at the time.

Are you a business or entrepreneur looking to protect your sensitive information, or are you an employee being forced to sign an NDA/NC as part of your employment?

In either case, contact us to set up a free consultation, and know your rights!