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Tuesday, May 17, 2016

Terminating a Franchise Agreement -


Buying a franchise can be a great opportunity for an entrepreneur to start a business using a successful operational structure of a proven model. Despite all the resources that a franchise provides, not all are successful. Unfortunately, with most franchises, you can’t just shut your doors and cut your losses; getting out of a franchise agreement can be difficult, leaving a once hopeful entrepreneur stuck in a business that may not be profitable or enjoyable to operate.

If you are looking for a way out of a franchise agreement, it’s absolutely imperative that you contact an attorney who has experience with franchise law and understands the many complexities of the franchisor-franchisee relationship. In determining whether you can terminate the agreement, you will need to carefully review the contract which should clearly outline the circumstances which must be met for either party to terminate it.
Read more . . .


Tuesday, May 3, 2016

Why Are Settlements Confidential? -

Every plaintiff and every defendant in a lawsuit will be faced with the decision of whether to settle before trial and if so, under what terms. Maintaining or fighting a suit is expensive and the pressure to settle is hard to resist. If the parties agree to settle, the attorneys must reduce the agreement to a writing.

The settlement agreement is an enforceable contract that almost always contains a clause that the terms of the settlement will remain confidential, barring the plaintiff and his or her attorneys from publicly discussing the facts of the case or terms of the settlement. In exchange for keeping their “mouths shut”, plaintiffs often benefit by obtaining higher compensation.  In many circumstances, the plaintiffs also have a preference for maintaining their own privacy.

Why do the defendants’ attorneys routinely insist on confidentiality clauses in their settlement agreements? Typically, defendants – and their attorneys – want to prevent evidence, such as witnesses or documents, from being accessible to future plaintiffs. In the grand scheme of things, this makes the defendant less accountable for its conduct.

Arguably, our legal system and the overall population would benefit from an outright rejection of confidential settlement agreements. Yet, most plaintiffs’ lawyers quickly capitulate; a settlement in hand is a sure thing, prevents future expenses necessary to bring a case to trial, and avoids the uncertainty regarding how much a jury might award in damages. Plaintiffs typically agree to maintain secrecy, as well. For example, seriously injured victims and their family members may be struggling financially and emotionally, and have a strong desire to put the matter behind them. It is understandable that they focus on their own needs and recovery, rather than how it may impact future plaintiffs’ or the public’s access to information and evidence.

Some attorneys and ethicists believe that lawyers’ rules of professional conduct provide them with sufficient grounds to reject secrecy clauses. Most states’ ethical rules favor enabling the public to have a realistic understanding of which attorneys have expertise in cases involving certain circumstances or against particular defendants. On the other hand, those same rules of professional conduct also require attorneys to act in the best interests of the client – which often means agreeing to a speedy or generous settlement offer.

Some legal ethicists suggest addressing confidentiality upfront, at the beginning of settlement negotiations. However, this approach may reduce the amount of a future settlement offer, or cause the defendant to take settlement off the table entirely. This risk, too, must be discussed with and agreed to by the client.

Furthermore, in this type of situation, the risk is borne by the plaintiff but the benefits are only realized by the general public, as mentioned above, or the lawyer who later enjoys “bragging rights” when he would otherwise be muzzled. It can be a tough sell, and one fraught with its own ethical implications. In the end, only the client can decide what is best for his or her situation. Some will agree to the risk “for the greater good” while others must do what is best for them and their families.

The message here is that you, whether you are the plaintiff or the defendant in a lawsuit, should discuss the issue of confidentiality BEFORE agreeing to settle the case. Your attorney should explain to you why or why not a confidentiality clause is warranted and what you may gain or lose by not agreeing to confidentiality. Only with this information can you make an informed decision regarding settling your lawsuit.
 


Monday, April 25, 2016

Are You Bound by the Terms of a Real Property Letter of Intent? -

Complex commercial real estate transactions typically involve a back-and-forth negotiation of numerous terms of the agreement, a process which does not occur overnight. Accordingly, parties to a real estate purchase or lease transaction generally first execute a letter of intent (LOI), which documents the parties’ intent to proceed with the negotiation of a full contract. The LOI includes the essential terms of the agreement, such as closing date and purchase price, or lease term and rate. However, detailed terms and conditions are reserved for the final, formal lease agreement or purchase contract.

The LOI, with its brief description of only the most basic, essential terms, is not intended to be a binding contract.  However, if it is not properly drafted, the parties could find themselves locked into a binding LOI. For example, the existence of elements required in an enforceable contract, such as property description, price, closing date and payment terms, without expressly declaring parties’ intent that it be non-binding, could constitute it as a valid contract.

While parties who enter into an LOI generally intend to consummate the transaction, if the LOI is deemed enforceable as a stand-alone contract, both parties may be subject to undesirable consequences. For example, the LOI lacks essential contract terms such as indemnity clauses, warranties, financing arrangements, or any other detailed terms necessary to protect one or both parties. To ensure the LOI serves its intended purpose, it must contain a specific provision that states the LOI is intended to be non-binding until such time a final agreement is executed by the parties.

What if you want parts of the LOI to be binding, regardless of whether the deal is finalized? Perhaps buyers and tenants want an enforceable provision stating that the seller or landlord will not offer to sell or lease the property to others while the parties are in negotiations. A hybrid LOI can be drafted to ensure the negotiations and final terms are kept confidential until a final agreement is executed. Just as with the provisions stating the LOI is intended to be non-binding, the provisions that are intended to be binding must be carefully drafted to ensure they are enforceable and do not pose unintended consequences for other provisions within the document. A hybrid letter of intent can be a very effective tool in facilitating the purchase or lease of commercial real estate, but care must be taken to ensure it is drafted so that it serves its intended purpose.  

The ​Law Office of Randall P. Brett​ can provide you with the advice and counsel you need to enter into a LOI that achieves your objectives while protecting your interests.


Tuesday, April 19, 2016

What Does "Goodwill" Mean When Buying or Selling a Business? -

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 concrete assets, such as property, buildings, machinery or inventory. Goodwill is the essence of the company's value to its customers, clients, and employees and, as such, is invaluable to any buyer. It is easier, as many people intending to purchase a business will tell you, to maintain goodwill than to establish it, since, 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
  • Patents or proprietary technology
  • General reputation
  • Future sales projection

Goodwill is a saleable 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 necessary quantity of high quality customer supplies
  • 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
  • Keeping up an appropriate location

How Is Goodwill Evaluated?

There is no set price for goodwill, though it very definitely features in sales negotiations. Generally speaking, goodwill is reflected in the amount in excess of the firm's total value of assets and liabilities. In well-established businesses, goodwill may be reflected in a price several times higher than the firm's physical assets alone would be reasonably worth.

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.  The Law Office of Randall P. Brett can assist you in determining the best value to place on goodwill, whether you are the seller or the buyer.


Wednesday, April 13, 2016

11 Important Issues Business Partners Should Consider -

Many people decide to start their own businesses because they’re intrigued by the idea of being their own boss.  All decisions, risks, and rewards are yours and yours alone.  This equation changes, however, when you decide to start and run a business in partnership with another person.  Many of the freedoms, risks and rewards are similar – but there are unique questions that business partners should ask each other to help ensure the relationship starts and continues smoothly.

Before and during the process of developing a business partnership, it is crucial to ask and answer the questions below.  

  1. What goals do I have for this business?  What goals does my partner have?  What if one partner wants to create a business that will provide income for his family for several years or decades and the other partner wants to build a company that will grow quickly and sell well?  These are not necessarily incompatible goals, but it is important to get these goals onto the table to discuss how to start and run a business that might meet both partners’ goals.
     
  2. What is each partner’s level of commitment in terms of time?  You can prevent a major source of partner conflict by being explicit about how much time each of you expects to spend working on running and developing the business.  Will either of you work full-time for your business at the beginning?  Will either of you have other work commitments?  If so, are there any situations in which that partner will close out other work or business commitments to focus more energy on this endeavor?
     
  3. How will cash invested by partners be treated?  Will cash investment be treated as debt to be repaid?  Will cash investment buy a higher level of company shares?  Will the debt be convertible?  These questions and answers also have tax implications, so it may be wise to consult a certified public accountant along with a qualified business law attorney during your start-up phase.
     
  4. How comfortable are we with change?  Change is the only constant in any business environment, and the most successful businesses are those that are highly adaptable to change – in the market, in the economy, in the personnel, etc.  That said, business partners should have a conversation about their “sticking points” – those aspects of the business that one or another partner does not want to change.  One partner may be fully committed to the specific product being produced, whereas another partner may be unwaveringly dedicated to a certain market segment.  Learn each other’s “sticking points” now to minimize conflict during the inevitable periods of change and adjustment as the business ages and grows.
     
  5. How much will we pay ourselves?  Who has the authority to change compensation amounts in the future?  This issue is related to the question of who is investing how much cash into the business during the start-up phase.  Compensation can be a volatile issue.  Regardless of how difficult the conversation may be, partners must thoroughly discuss pay structure at the very beginning of a business relationship to minimize conflict down the road.
     
  6. Who will own what percentage of the company?  In other words, how will we divide the shares?  The answer to this question often depends on whether one or both partners provided cash for start-up costs, as well as the time commitment each partner plans to make.
     
  7. Who has what kinds of decision-making authority?  The answer to this question often is related to the division of shares between the partners, but this is not a requirement.  You can designate shares as voting shares or non-voting shares, and you can also choose to set up a board of directors.  The partners will have to decide which areas, if any, they each have individual authority over, which areas they must agree on, and which areas the board of directors will control.  Common areas of decision making authority include human resources (hiring and firing), capitalization, issuance of shares, and mergers and acquisitions.
     
  8. Will we sign contractual terms with the company in addition to the shareholder agreement and partnership agreement?  Two common examples of additional contractual terms are the non-compete agreement and the confidentiality or non-disclosure agreement.  If founding partners are going to sign such contracts, what will the terms of each agreement be?
     
  9. What if one or both of us wants to leave the company?  It is better to define exit procedures in the early stages of the business start-up.  If no guidelines are in place, one partner’s desire to depart can cause high conflict as formerly aligned partners try to come to agreements about ending their relationship.
     
  10. Can either of us be fired?  If so, what are the grounds for termination and who has the authority to make that decision?  What is the procedure?  Discuss and commit to writing your strategy for terminating the operational role of a co-founder if necessary.
     
  11. What is our business succession plan?  While it is not necessary to have a fully developed and executed business succession plan before starting a business endeavor, it should at least be a topic for discussion in the early stages.  Partners may have different ideas about how control over the business will pass to others in the future, and a conversation about succession planning can reveal these differences and give each partner food for thought as a plan is developed.

Have several conversations about these topics, and you will find yourself well prepared when it comes time to put your partnership agreement into writing. As always, an attorney knowledgeable in business law can be an invaluable advisor and resource to your company.
 


Monday, November 16, 2015

Legal Tips from the Shark Tank --

Lawyers (even me) are often mocked in pop culture as “sharks,” but a quick flip through the TV guide tells you the real sharks out there are in the business world. The ABC reality show “Shark Tank” has become a cultural phenomenon, inspiring tons of people to start their own businesses and invent new products.

If you are part of the wave of Shark Tank inspired entrepreneurs, here are some legal tips for you.

Don’t go into the Shark Tank, or into business, without a plan. On the show, the entrepreneurs that do the best are the ones that are the best prepared to answer all of the sharks’ questions. In the everyday business world the same is true. It’s just that it’s not sharks asking the questions - it’s investors, employees, and the other companies you are doing business with. 

Be prepared to take risks, but preferably not legal ones. Starting a business is a gamble, but it can be downright dangerous if you don’t fully comprehend the legal risks you are taking on. Several entrepreneurs have had their dreams crushed by the sharks because their business is just too big of a legal risk to invest in. In order to be successful in business you need to know what risks you face so you can plan around them.

Be prepared to negotiate. The sharks rarely buy into a business on the first terms offered to them by the entrepreneurs. In and outside the tank, the successful business owners and inventors are the ones prepared to negotiate to get a deal that is good for both parties. This often means giving up more equity than originally planned or revaluing assets to reflect market realities.

Patents are shark bait. The old saying “you’ve got to spend money to make money” is absolutely true in the innovation world. The sharks’ eyes light up when an inventor mentions that they have a patent on the idea or product they are pitching. That’s because patents are hard assets that you can buy, sell, license or build a business around. If you have a great idea, spend the money to patent it. 

Going head to head with the sharks is something only a few businesses do. But feeling like you have been thrown to the sharks is something all business owners and inventors can identify with. If you are looking for someone to help you navigate the legal issues your business is facing - from starting up, to scaling up, to selling out - consider contacting an experienced business law attorney today.


Monday, November 9, 2015

An Overview of the Family Medical Leave Act (FMLA) --

Frequently, I receive questions from my clients regarding whether an employee is permitted to take time off for a medical condition, for the birth of a child, or to care for a family member.  I would like to give a definitive answer but, like most areas in the law, it all depends on the facts. Specifically, whether an employee is entitled to leave, how much, and must the employer pay for the leave time and hold the employee's job open for his or her return, depends on whether the employee is qualified for, and the employer covered by, a specific federal or state law. This piece will attempt to provide some information but as I have stated in previous postings, you should consult with your own attorney for guidance in your own situation.

The Family Medical Leave Act is a federal law that allows employees to take significant time off from work to take care of a loved one with an illness, medical problem or condition. The law does not require an employer to pay the employee for the time missed, but allows the employer to substitute accrued paid vacation/sick time for unpaid leave taken during the FMLA, meaning that the employee’s leave cannot be extended beyond the statutory period by using his or her vacation time. The FMLA prohibits employers from enforcing any negative consequences against the employee for exercising his or her rights under the FMLA. These would include termination, cutting back on hours, reducing pay, or diminishing the employee’s title or responsibilities.

The FMLA applies to businesses with more than 50 employees. To qualify, an employee must have worked for the employer for at least one year and must have worked at least 1250 hours in that year. The law allows the employee to take up to 12 non-consecutive weeks of unpaid leave a year to care for a spouse, parent or child who has a serious medical condition. There is special consideration given to family members caring for ill military service members. The parents, spouses, and children of these individuals are permitted to take up to 26 weeks off each year to care for their loved one. 

The most common use of the law is to allow an employee to take time off work after a child is born, even though most would not call pregnancy a “serious medical condition.” This is commonly referred to as maternity leave. Although it is not customarily exercised, fathers have an equal right to take time off to bond with their children after birth. The FMLA also allows new parents to take time off work immediately after an adoption. Some people use the Family Medical Leave Act to care for family members dealing with mental health issues, including dementia, addiction, or schizophrenia. The law covers any medical condition which require an overnight stay in the hospital, chronic conditions that require treatment at least twice a year, and conditions that incapacitate the affected person for more than three consecutive days. 

Many states (New Jersey is one example) have their own versions of the FMLA. Some cover the same categories of leave as the FMLA but others do not. For example, New Jersey's Family Leave Act (FLA) does not cover leave for one's own illness or medical condition. However, a qualified employee working for a covered employer is entitled to take the greater of the benefits granted either by the FMLA or their state law. In some instances, the employee can enjoy the benefits of BOTH leaves, which would give the employee additional time off than would be permitted by either the FMLA or the state law by itself.


Sunday, November 1, 2015

A Stitch in Time … Strategies to Prevent Business Litigation ---

A lawsuit can damage more than just the bottom line of your business.  In addition to costing money that could be put to better use, a lawsuit is also an unwelcome distraction for the owner, managers and employees.  It can also do irreparable damage to business relationships and reputation.

It may not be possible to avoid any and all legal conflict during the life of your business, but by considering the following advice, you should be able to minimize the resources you have to devote to litigation – which means more time and money available for your business operations and investments.

  1. Don’t rely on a handshake.  Reduce all business agreements to writing, even if they are with your oldest and dearest friend.  Be clear about terms and expectations.
  2. Keep a written record of all communications.
  3. Keep the lines of communication open, especially when a business relationship starts to sour.  Aggressive communication may be able to cure the damage before a lawsuit becomes necessary.
  4. Don’t put your head in the sand.  If a threat appears that could lead to litigation, respond quickly, thoughtfully and thoroughly.
  5. Check your compliance with relevant government regulations.  Import/export? Check the laws.  Using hazardous materials? Check the regulations. Don’t allow shortcuts.
  6. Create a business culture that rewards employees for reporting violations of any laws or government regulations.  Your employees on the ground can be your best resource for uncovering potential hazards that could lead to litigation.
  7. Put cure provisions and mediation provisions into your contracts with vendors.
  8. Complete a business succession plan to minimize or eliminate disputes over exit strategies.
  9. Conduct regular safety checks of the physical premises, including vehicles used for company business.
  10. Conduct criminal background checks on prospective employees that comply with the law.
  11. Provide regular health and safety training for employees.
  12. Provide ongoing training for human resources personnel.
  13. Review whether your employees are properly classified as hourly or salaried workers to comply with the Fair Labor Standards Act.
  14. Review whether any independent contractors should be reclassified as employees to comply with the Fair Labor Standards Act.
  15. Respond promptly and thoroughly to complaints from employees, customers or vendors.
  16. Use email, the internet, your company website and social networking media with caution.  Assume that any information shared via these platforms will be publicly accessible until the end of time.
  17. Seek outside advice when necessary.  Don’t let your ego be your downfall.  If you don’t understand your legal obligations and rights in a particular circumstance, consult a qualified commercial law attorney.


 


Tuesday, October 13, 2015

Legal Mistakes That Cost Entrepreneurs Time, Money and Headaches…

The economy is improving and it is a good time to consider going into business for yourself. However, entrepreneurs must navigate through a maze of legal issues and decisions when launching a new business. At the outset, you may think some seem inconsequential – but, tragically, that would likely be your first of many mistakes. The choices you make today will have lasting effects on the viability and profitability of your new business venture. Below are some of the most common mistakes made by first-time entrepreneurs, and what you can do to avoid making them yourself.

 

Choosing the Wrong Business Structure

The type of business entity you select will affect your liability exposure, income tax obligations and opportunities to raise capital throughout the duration of your venture. Sole proprietorships, C-corporations, S-corporations and limited liability companies (LLC) all have their advantages and drawbacks. Sole proprietorships are simple to start up, but leave your personal assets vulnerable and offer few tax advantages. C-corporations and S-corporations shield your personal assets, and each afford different tax advantages and disadvantages. Additionally, maintaining the protection afforded by the corporate business structure requires a certain amount of record-keeping and forms which must be filed with governmental agencies. LLCs offer you liability protection, but may not be the best choice depending on various factors, including taxes, ownership structure and, in some states, professional licensure. Often, the corporate structure is the most advantageous, but this decision really should be made in consultation with a business or tax attorney.


The “Gentlemen’s Agreement” – A Handshake and Your Word

Your word may be your honor, but a written contract is the only way to be sure all parties share a mutual understanding regarding their obligations. Whether it is your best client, that independent contractor you’ve been courting, or vendors you have known for years, do not assume everything will go according to plan. Putting your agreement in writing not only ensures that everyone’s expectations are clear, it is also valuable evidence in the courtroom, should things not proceed according to plan. Bottom line – get it in writing!

 

Adding Partners Without a Written Agreement

It’s easy to sweep this one aside when you are passionately focused on the work of getting your business off the ground. And those new partners likely share your same passion. However, until a detailed written Partnership Agreement is drafted and signed, you may be unclear about each other’s expectations in the short term, or, if your business is wildly successful, tied up in protracted, long-term litigation, to establish who owns what (Facebook comes to mind). Redirect some of that passion, and benefit from the goodwill it creates, to negotiate a Partnership Agreement early on that covers responsibilities, ownership structure, provisions for transferring ownership, and what happens when there’s a disagreement about the direction of the company.

 

Sharing Ownership 50/50

Establishing equal percentages of ownership in the company sounds like a fair and reasonable arrangement. However, this type of situation makes it difficult to bring on investors, and can bring the company to a standstill if the partners cannot agree on a decision. Instead, issue shares in the company in such a manner that investors can be added later; and make sure those shares are distributed to the founders with at least a 51/49 split, giving the majority shareholder the authority to make executive decisions even if there is a stalemate.

 

Doing It By Yourself

The internet contains a wealth of information on business formation; some good but most bad or inaccurate. In order to save some precious start-up capital, many entrepreneurs rely on pre-printed forms, general information, or "one size fits all" packages they find on-line. However, starting a business without the benefit of sound legal and accounting advice is like trying to do dentistry on yourself. The gain is definitely not worth the pain! A good business attorney, a business insurance expert, and professional accountant can save money in the long run by forming the company correctly, accounting for risk, and working to minimize legal and financial exposure and tax consequences. Many experts in business formation state that a successful business is like a sturdy piece of furniture: a solid idea supported by legs made of a sound business plan, competent legal advice, focused accounting, and realistic insurance coverage.

 

 


Tuesday, September 29, 2015

Bankruptcy and Your Small Business -

Recently, I was contacted by a former client and small business owner to help him reorganize his business to reduce his debt. After reviewing his financial statements and talking with his accountant, I had to give my client some bad news; that in my opinion, it would be very difficult to keep this business going. Unfortunately, even when the economic climate is good, a business can go bad.

Financial hardship is difficult for any individual but for business owners, it can be particularly stressful as the line between personal and business finances may become blurred.  You may have racked up a lot of personal credit card debt and may be considering filing for personal bankruptcy, but you are concerned about how bankruptcy will affect your small business. Or, your business could be struggling and you may wonder how a business bankruptcy will impact your personal finances.

First, you need to know about the three most common types of bankruptcy: Chapter 7, Chapter 11 and Chapter 13. Under a Chapter 7 bankruptcy, which is a liquidation, assets are used to pay debts, and any remaining debts are “wiped out”.  A Chapter 7 filing can be utilized for both individuals and businesses. A Chapter 11 or 13, which are also available for individuals and businesses, commonly referred to as reorganization, allows debtors with a regular income to set up a new timetable for paying off creditors, while keeping their assets.

The second thing to consider is how your business is set up. If you are a sole proprietorship, and are simply operating the business in your own name, then there is no way to separate your personal assets and liabilities from those of your business. Therefore, any business assets (in excess of the exemption you are allowed) could be surrendered as a part of the bankruptcy. Also, any receivables of the business or other potentially valuable business property could be claimed by creditors in a bankruptcy.

If your business is operated under a separate entity, such as an LLC (limited liability company), an LLP (limited liability partnership), or a corporation, the shares of your business that you own are assets. If partners are involved in the business, the bankruptcy trustee who represents the interest of the creditors could become a de facto substitute partner and force a liquidation of the business.

If your business is struggling, but you are personally doing fine financially, you may consider a business bankruptcy. If you aren’t interested in keeping your business open, you may consider filing a Chapter 7, which will simply liquidate the business. A Chapter 7 is probably best if the business is not going anywhere, does not have significant assets, or if the debts are so completely overwhelming that it’s not possible to restructure them. Keep in mind that vendors and other creditors may have obtained a personal guarantee from you, in which case, you may be personally on the hook for your business’s liabilities, even if you do file bankruptcy for your company.  Personal guarantee clauses are common on many credit applications and commercial leases.

If your business is fundamentally sound, but because of excessive debt, bad contracts, or other unfortunate circumstances faces significant liquidity issues, a Chapter 11 may be appropriate.  A corporate reorganization can be complex and requires a significant time investment from the owners and managers who have to work with creditors and attorneys. It can also be expensive. Unfortunately, most reorganizations ultimately fail.

If you are considering business or personal bankruptcy, it’s important to carefully assess your individual circumstance and consult with a business or bankruptcy attorney who can advise you of all your options and help you navigate the process.   


Wednesday, August 12, 2015

Where to Incorporate Your Small Business.

Should you incorporate your business in your home state? What about Delaware or Nevada, long known as havens for corporate entities? This decision should not be taken lightly because incorporating your business in a particular state will determine, to a significant extent, the laws that will apply to your business. It will also have tax implications.

Often times, the best choice for corporate jurisdiction is the home state where your business is located.  There are several reasons for this. First, filing in a different state will not absolve you of the obligation to pay corporate taxes and comply with filing requirements in the state where your corporation has its operations. For example, if the corporation is located in New Jersey, it will be subject to New Jersey fees and taxes, either as a domestic New Jersey Corporation or as a “foreign corporation” doing business in New Jersey. Additionally, if you are incorporated in a state other than where you are physically located, you will likely incur another set of filing fees and expenses for a registered agent who is physically located in the state of incorporation. For example, if you are incorporated in Delaware but are physically located in New Jersey, you will be subject to the fees and taxes of both states.

Many companies opt to incorporate in the State of Delaware, even though very few of them are actually based there. Approximately 60% of Fortune 500 companies are incorporated in Delaware. These major companies do so because Delaware’s corporate laws are generally favorable to business and management.  Delaware also has a special Court of Chancery that hears only business law cases. These courts afford companies a degree of consistency and predictability in rulings, which may or may not be found in other states.

Many entrepreneurs also consider the State of Nevada. Many companies are attracted to Nevada’s pro-business laws and favorable tax policy. Nevada also has a special business court, similar to Delaware’s Court of Chancery, although it is not as well established and lacks the breadth of case law that Delaware has.

If your company is engaged in risky or litigious business, then Delaware, Nevada or Wyoming may provide some additional liability protection.  For businesses that are essentially holding companies or otherwise lack operations as a traditional business would, forming a company in these states can also make a lot of sense since the business would not be subject to the laws of multiple states. As in all business-related matters, you should spend some quality time with your attorney and accountant before you decide where to incorporate your small business.

This will be the last blog posting for the summer as I give my keyboard a rest for a few weeks. Have a great rest of the summer and see you in September.
 


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