Category Archives: Business Law

Should my Business be a Sole Proprietorship?

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Business Formation

Choosing The Correct Business Type

The advantages and disadvantages of being a sole proprietor

According to the U.S. Census Bureau, more than 70% of businesses in the United States are set up as sole proprietorships.  A sole proprietorship is a business entity that is owned by one individual and does not have any distinction between the owner of the business and the business.

Sole proprietorships do have advantages.  The biggest advantage is that there are no formal steps to set up the business.  When an individual starts doing business, the business is a sole proprietorship unless another business entity has been created.  Other advantages of a sole proprietorship include reduced cost of business, fewer regulations, and more control over the business.  With all of these advantages, the question then becomes:  Should I set up my business as a sole proprietorship?  The answer is almost always no.

The answer is no for a couple of reasons.  First, although a sole proprietorship has certain advantages, it also a major disadvantage.  In a sole proprietorship, the business owner has unlimited liability —that is, the business owner will be personally responsible for all business liabilities.

There are many different types of business entities, and it can be difficult to find the one that best fits your business needs.  Every business and business owner’s situation is unique.  If your business is currently set up as a sole proprietorship, you can meet with an experienced Arizona business attorney, such as the ones at Gunderson, Denton & Peterson, PC, who can talk with you and help you create a new business entity that will give you and your business a greater chance for success.

When can the Corporate Veil be Pierced?

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The Legal Defenses Of Businesses

How to make sure your corporation gives you liability protection

Piercing The Corporate Veil

One of the advantages of a corporation is that the owners have limited liability. A corporation is a distinct legal entity, separate from its owners. The separation between the owners and the corporation is sometimes called the “corporate veil.” Because of the corporate veil, owners in the corporation are not personally liable for the financial obligations of the corporation, and the most that an owner can lose is the money that was invested in the corporation.

However, corporation owners must be careful. If not, there may be times when the corporate veil can be “pierced,” causing the owner of a corporation to become personally liable for corporate liabilities. For example, if owners do not follow corporate formalities, there is a greater chance that the corporate veil will be pierced and the owners will be exposed to personal liability for corporate obligations. Corporate formalities that must be followed include Board of Director meetings, votes on major issues, keeping of corporate minutes, and filing annual reports. Commingling corporate and personal funds will also put the corporate veil at risk. Consulting a good Mesa Arizona business attorney will reveal that if money flows back and forth between the owner and the corporation, those cash flows must be documented and justifiable. Using the corporate account to pay personal bills, for example, is a dangerous action that could be seen as a sign that the corporation and owner are one. If the corporation and the owner are found to be one, the owner can be liable for corporate liabilities.

There are additional ways in which the corporate veil can be pierced. Owners of a corporation should take precautions to ensure that they are not personally at risk for the liabilities of the corporation. For business owners, an experienced business attorney can be consulted to assess the potential risks and determine what steps need to be taken to guarantee that the corporate veil is not pierced. For those who are contracting with a business, or are owed money by a defunct business, an experienced business attorney can advise on strategies for possibly piercing the corporate veil and reaching the owner’s assets.

How Can I Make Sure My Arizona Business Gets Paid?

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Getting Your Arizona Business Paid

Making Sure Your Corporation Is Legally Protected

Using promissory notes and security agreements to turn your receivables into cash

Cash is king.  A business will not survive if it is not able to turn its account receivables or loans into cash.  There are certain actions that businesses should take to increase the chances of collecting on a loan or receivable.  One of these actions is to use a well-written promissory note.

A promissory note is a written contract in which one party makes an unconditional promise to pay another party a specified amount of money.  A promissory note should be used in any transaction that results in another party owing your business money.  A party’s refusal to agree to a promissory note should be cause for concern and usually is a sign of future collection problems.  Some basics that should be included in the note are the amount of the loan, the date by which it should be paid back, and the interest rate.

To further increase the chances of being paid, a promissory note can be secured with some form of collateral.  Under a security agreement, if a party fails to repay the loan, ownership of the collateral is transferred to your business to mitigate the damages of the failed payment.  This transfer process can be complicated, so security agreements should be carefully drafted to ensure that they have the desired effect.

You should use an experienced Arizona attorney specializing in business law to identify the needs of your business and advise you as to whether a promissory note or security agreement is appropriate in your situation.  An attorney can also create a promissory note and/or security agreement that has the essential elements and is enforceable in Arizona.

How do I Dissolve my Business?

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Dissolving A Business

When A Corporation Ceases To Operate

Taking the steps necessary to dissolve your company and avoid future liability

One of the advantages of an LLC or corporation is that it can exist in perpetuity.  However, this can result in a situation in which even after all business activity ends, the business entity still exists unless it is properly dissolved.  Failure to dissolve the business entity when business operations come to an end can expose the business or its owners to unnecessary future liability.  When the decision is made to close a business, specific steps should be taken so that the business entity is legally dissolved.

The decision to dissolve the business needs to be made by the appropriate business owners in consultation with a business law lawyer.  The bylaws of a corporation or the operating agreement of an LLC will dictate the internal procedures needed to begin the process and will specify who is required to make the decision to dissolve the business.  Once the ownership has approved dissolution, there is paperwork to be prepared and filed with the necessary government offices.  Additionally, all debts will need to be satisfied with company creditors and any ongoing litigation will need to be settled or resolved.  After all of the liabilities are taken care of, the company’s assets should be liquidated and distributed according to the bylaws or operating agreement.  Under some circumstances, a company will be considered to exist—even if it has been dissolved—for purposes of wrapping up its affairs and paying its debts.  Just dissolving a company will not make its debts go away, and may in fact worsen the situation by imposing liability on the owners.

The above items are some of the basic tasks that need to be completed to dissolve a business.  The dissolution of each business will have unique circumstances.  However, going through the proper process will minimize future liabilities.

Buying a New Business – How to Make Sure You Make a Wise Business Purchase

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Buying A Business

Buying An Existing Business

Determining The Value Of The Business You Wish To Buy

Buying an existing business can be compared to buying a used car.  Think about it.  Businesses for sale are like used cars—there are plenty of good ones out there, but there are plenty of bad ones too.  Although there are lemons out there, if you have the know-how to buy a business, buying an existing business can be a great opportunity to get into the business arena without having to go through the long and time consuming process of starting from scratch. 

If you buy a turnkey operation (a concept that is complete and ready to go), you can skip the start-up phase completely and begin operations as soon as the sale is complete. If you are considering buying a turnkey operation, this will assure that everything is all set up and ready to go from the start.  Keep in mind that buying an already established business and making it even more successful will only happen if you take the time to fully investigate the business that you’re thinking of buying. 

It is incredibly important that you do your homework when considering buying a business.  Exercising due diligence in this type of transaction is key.  Relevant areas of concern in the due diligence process can include the financial, legal, labor, tax, information technology (or IT), environment, and market or commercial situation of the business.  It may also concern intellectual property, real and personal property, insurance and liability coverage, debt review, employee benefits, labor matters, and immigration.  Using the language we’d use when thinking about buying a used car, let’s take a look at the major steps you need to follow when buying an existing business:

1.) Find out if it’s ever been in an accident.

            In other words, before you buy a business, find out why it’s for sale.  Don’t just take the seller’s word for it, either.  Sure, people do retire, or become ill, but the real reason that it’s being sold may be anything from a large, national retailer moving into town, to the business location being rezoned.  Make sure you discover the true reason or reasons that the business is for sale by talking to people who are familiar with the history of the business you’re thinking of buying, such as local realtors, other business owners in the area, and suppliers.

2.) Find out exactly what’s included in the asking price.

            Find out exactly what is for sale!  Also ask what method of business valuation is being used.  If you buy this business, what assets are you actually getting?  Many people selling businesses have a spec sheet prepared that will list the assets involved and estimate their value.  Make sure that you ask for details if you find anything unclear.  Also make sure to find out if these assets are free and clear of debts and liens; you want to make sure that you are not buying someone else’s problems. A good business lawyer can review the contract to see what is missing that should be there.

3.) Look under the hood.

            Have you ever heard that old joke about the guy who bought the pristine sports car, only to find out that he couldn’t drive it away because it had no engine?  It’s only funny when it happens to someone else.  Before you buy a business, look at the business’s past performance.  Ask for and review the business’s last three years of financial statements.  If you don’t feel comfortable analyzing financial statements yourself, have a professional, such as an accountant, review them.  You will also want to find out who prepared the financial statements for the current business owner—were they prepared by the management of the business, for example, or by an accountant?  If they were prepared by an accountant, the financial statements should be accompanied by documents that will explain how deep the accountant’s review was.  For example, an Auditor’s Report will assure you that a full review of the business has been conducted.  A Review Engagement Report will present the findings of a limited review of the business.  A Notice to Reader will be given when the accountant has only considered information given by the business owner, and will state that the accountant did not conduct any further checks of the business.  Are you seeing things that you don’t like?  Or just not seeing enough information?  You have the option to ask the seller for permission to see the actual business records to have your own audit done.

4.) Find out what it’s actually worth.

            Do some research, and find out what you should be paying for the business.  When you’re buying a used car, this is a simple matter of comparison shopping, but business valuation is much more in depth.  It is common in business valuation to use several different methods of valuation to arrive at a price.  When the seller prepared their spec sheet of assets, they could have used any of the following:  Book Value (based on the company’s balance sheet), Modified Book Value (based on the current market value of the assets), Replacement Value (based on what it would cost to replace an asset), or Liquidation Value (based on what the asset would sell for if the business was liquidated).  Before you buy a business, you will want to know how the seller arrived at his estimate of the valuation for the business.  Remember, it is more than okay to ask questions.  Just because the seller claims that the business is worth a certain amount doesn’t mean it is. A good accountant and an Arizona Business Attorney can help you   The real value of a business depends on the income the business generates.  Taking a look at the business’s financial records should have given you a picture of the business’s revenues, costs, and profits.  You want to buy a business based on the return on your investment, so remember that what you are buying is actually the potential profit of the business.

5.) Get in, buckle up, and take it for a test drive.

            Before you buy a business, get an inside perspective by asking for the seller’s permission to sit in on the business for several days.  If the seller is agreeable, this can be a great way to find out how the business operates.  This can give you great insight into the way the business is doing, and can be a very helpful step in making your final decision to become a business owner.

6.) Look into different financing alternatives.

            Just the same as when you are buying a car, you need to see if you can truly afford the business you want to buy.  If you don’t have the cash in your pocket, this is the point in time to see who is interested in financing the business you are buying, and how much that financing will cost you.  The usual small business financing sources are friends, family, and traditional lending institutions, such as banks and credit unions.  You may find that the banks and credit unions are friendlier than usual, as financing an existing business is generally less risky than financing a start-up.  You may also want to consider asking the seller to finance part of your purchase of his business.  One common arrangement is for the seller to carry a promissory note for part of the business’s purchase price.

7.) Make an offer.

            Assuming that this process is still on track, and you still want to buy the business, it’s time to make your offer and start negotiations.  You make an offer, and the seller will, in turn, make a counter-offer.  The two of you will go through this process, hoping that eventually you will meet on middle ground.  Don’t be surprised if you are asked to accompany your offer with a non-refundable deposit; sellers are typically only interested in dealing with a serious buyer.  There are rules to be followed here as well.  Always be prepared to walk away, and don’t get so emotionally caught up in the process that you pay more than the price you were prepared to pay.

8.) Get a purchase/sale agreement drawn up.

            Once you and the seller have reached an agreement on terms, the details need to be specified in a contract.  Because of the complexities of this type of contract, it should be drawn up by an experienced business law attorney.  Do your research, and find an attorney that will draw up a contract that best fits your needs.

Buy a business the same way you’d buy a car:  CAREFULLY.