Do You Mingle or Co-Mingle?

No, it doesn’t “all come from the same place anyway”!

The biggest legal implication when it comes to managing business finances is co-mingling. When a business entity is formed (LLC or corporation), it comes with a liability shield that protects your personal assets from business liabilities. To keep it in place, you must treat the business entity as separate from yourself. That’s why co-mingling is so dangerous – if you co-mingle business and personal funds or expenses, the business entity is not being treated separately from you personally.

What is Co-Mingling?

Co-mingling is evidence used to “pierce the corporate veil” – in other words, it’s used to show that you should be personally liable for your business debts and obligations.

How can co-mingling happen? Here are just some of the ways:

• You use a business check or credit card to directly pay for personal expenses.
• You use a personal check or credit card to directly pay for business expenses (more on this below.)
• You deposit client or customer checks into your personal bank account.
• You don’t document transfers between a business account and a personal account (i.e. for distributions, loan repayments, etc.).

The General Rule

The general rule to follow is: Always use business funds for business expenses and personal funds for personal expenses – and business deposits always go into the business account.

Yes, I know that some business funds need to make their way into your personal account (so you can get paid!) and, at times, some personal funds need to be used to keep the business going.

When you are paying yourself (compensation, distributions or repayments), the preferable method is to write yourself a check from the business bank account. Be sure to document the payments so that they show up accurately in your bookkeeping.

Same goes for those times when you put personal money into the business – deposit a personal check into your business bank account. And document it very carefully!

Do not get caught up in the idea of “Oh, I’ll just pay this business bill with personal money – it all comes from the same place anyway.” NO IT DOESN’T! That is the point. You and your business are not the same. You are different and separate – and you need to keep it that way.

It’s very important that you have good business bookkeeping and records. I suggest that you create protocols for yourself to follow when paying business expenses and making business deposits. The more organized you are, the healthier your business will be – and you’ll be better able to track your business progress using financial metrics (more on that in a later blog post).

The Start-Up Exception

Clients who are starting a business often ask me how to handle the funds needed for start-up costs. This is an exception to the rule above – but it’s a limited and managed exception. You can’t get a business bank account until the business entity is officially formed. In the meantime, you have expenses to pay to get the business going, so you are going to have to use your personal funds. In this situation, you need to meticulously document each expenditure so that it can be captured in the bookkeeping once the business gets going.

I recently had the pleasure of interviewing Brent Ross, CPA from Ross Hughes & Associates for our new podcast series called Elevate Your Business (launching soon!). During my interview with Brent, he had two great tips for making this easier:

#1 – Set up a new bank account (it will be a personal account) and deposit some funds (make a guess as to what you’ll need – you can always replenish). Use this bank account to pay for all start-up costs. Even though they are personal funds, they are separated from your mainstream personal funds. Then the account records can help you to reconcile your bookkeeping once you have your business set up. This is an easy way to create a record trail for your start-up costs – instead of the time consuming task of combing through all your personal bank account statements.

#2 – In addition to or instead of a separate personal bank account, you can get a separate personal credit card to use for start-up costs. It would work the same way – you pay for all start-up costs with this one credit card. The records are all there for you to capture later in your bookkeeping.

Not only does this system help you with record-keeping, but it also gets you in the habit of using a separate source of funds for business expenses. These two tips are great – and Brent had many more so you’ll need to listen to the recording!

The Rare Exception

Even after saying that you can’t co-mingle your personal funds with your business funds, I know there are rare times when you have to pay a business expense with personal funds. For whatever reason, this does happen. You just need to make sure that it is RARE and when you do it, you fully document it. It needs to appear in your business bookkeeping in one way or another – as a reimbursable expense or as a capital contribution.

Do not set up business procedures to regularly pay business expenses with a personal account (bank or credit). This is a sure way to get caught up with co-mingling. If you need to pay with a credit card, get a business credit card for those types of purchases.

Bottom Line = Do business mingling all you want, but NEVER co-mingle!

About Elevate: Small Business + Technology Law
At Elevate, we are dedicated to bringing quality information to small business owners. In the Elevate Your Business Podcast series, we interview business advisors from different industries and record their most important tips for small business owners.

This blog post is offered for informational purposes only and is specific to Florida law. For specific advice, please contact a business attorney and discuss your particular needs.

THE CASE OF DISAPPEARING SHIELDS

A quick check on Sunbiz.org will show you that small business owners are allowing their limited liability shields to disappear.  Are you one of them?

Do you file your annual reports on time and correctly? Do you have annual minutes for each year of business? Do you take the other steps necessary to keep your entity’s liability shield in place?

If you aren’t, why did you go to all the trouble of creating a business entity in the first place if you aren’t going to keep it legally healthy?

Maybe you did not realize you had to or maybe you have it on your list but never get to it.  Either way, we need to have this conversation.  Whether you are a business that is one year old, or you’ve been around for decades, this is important!

It all boils down to whether you treat your business entity as “separate” from you personally.  I often tell my clients to think of the business entity as another person that is sitting in a chair at the table with you.  You each have your own chair and separate space.  You cannot “sit on the lap” of the business entity because the law will not see the business entity underneath you. You must allow the business entity to stand (or sit) on its own beside you.

How do you do that?  Here are some of the requirements that you must keep up with and why they should be important to you:

Annual Reports – Every year a business entity must file an annual report with the State of Florida.  If you do not, your business will be administratively dissolved and you will become personally responsible for the debts, obligations and liability of the business.  It always surprises me how many small businesses are administratively dissolved every year.

Updating Information – You are responsible for keeping the information with the State current.  If officers, directors, managers or members change, you must update that information.  Your contact information must also be current.  If you mislead anyone with incorrect or outdated information, you could be held responsible for the outcome.

Internal Documents – Certain internal documents are required for corporations and LLC’s.  Periodic meetings (at least annually) should be held to document the major actions of the entity and their approval.  Without these records, internal inconsistencies and disagreements are bound to arise. We’ve seen many cases where the ownership of the business was in dispute because there were no internal documents showing who owned the company! (Not to mention all the tax problems that are involved with that.)

Taking these actions isn’t hard.  But it is time consuming and unfamiliar.  That is why many small business owners ignore them, only to find out later why they are so important.  Unfortunately, sometimes they find out too late to fix it and personal liability becomes a real issue for them.

We’ve also seen business opportunities disappear because potential partners, investors and/or lenders are not interested in taking a chance on a messy business that doesn’t have a strong liability shield. It can be very embarrassing for small business owners to admit that they do not have these basic requirements in place.

There are many other problems we’ve seen that are created by the failure to keep up with these basic requirements. The way to avoid all the hassle is to take care of these tasks each year.

Be honest and realistic with yourself.  Are you going to take responsibility for making sure these tasks get done?  If you are, that’s great.  If you don’t want to do it yourself, get help from your small business attorney.  Many of us offer programs to handle these matters on an ongoing basis.  The most important thing is that they all get done – each and every year that you’re in business.  Just do it!

 

About Elevate: Small Business + Technology Law

Small business owners are busy and they have a million things going on all at once.  Our job at Elevate is to make difficult issues (the law) as simple as possible.  We love to see our small business clients grow and “elevate” themselves in the marketplace.

This blog post is offered for informational purposes only and is specific to Florida law.  For specific advice, please contact a business attorney and discuss your particular needs.

 

The Break-Up: How to Keep it Simple

What happens if your business partner comes to you and says he wants out of the business?  What if he demands that you buy his interest in the company?  What can you do if he’s demanding an exorbitant amount and you can’t pay it?

These types of situations (and more) are handled in what we call “Buy-Sell” provisions.  These types of provisions can be in a stand-alone Buy-Sell Agreement or more commonly, they are part of an Operating Agreement (for an LLC) or a Shareholders’ Agreement (for a corporation).  The title “Buy-Sell” describes its purpose – to provide for those situations where an owner can buy interest or sell interest in the business.  The goal is to have a straight-forward plan already in place so that there is minimal disturbance in the business if one of these situations occurs.

If you have an agreement with Buy-Sell provisions and your business partner says she wants to be bought out, it’s a simple process of following the steps in the agreement.  Here are some of the more common steps we see in Buy-Sell provisions:

  1. If a business partner wants to leave the business, she must give notice to all of the other owners.
  2. The other owners have a certain time period to decide whether they want to buy the leaving partner’s interest in the business.
  3. The purchase price for the leaving partner’s interest is already determined in the Buy-Sell provisions.
  4. The payment terms are also already determined in the Buy-Sell provisions – and they can include payments of the purchase price over time.
  5. If the other owners decide not to buy the leaving partner’s interest in the business, then the leaving partner is free to sell her interest to someone outside of the business.
  6. If the leaving partner cannot find someone outside of the business to buy her interest, then the leaving partner remains as an owner of the business.

The purchase price can be set in the Buy-Sell provisions as a set price, or it can be determined using a defined formula (such as a multiple of EBIDTA), or it can be required to be determined by a certified business appraiser.  In any event, the purchase price is provided for in the Buy-Sell provisions and there does not have to be any negotiations.

Same is true for the payment terms.  If an owner wants to pay the purchase price and buy the leaving partner’s interest in the business, then the payment terms are pre-determined.  Usually, the terms provide that a certain amount is paid up front and the remainder is paid over time.  A promissory note is required to document the unpaid balance.  Of course, the full amount of the purchase price can be paid at any time.

The result is that the leaving partner walks away from the business and receives the purchase price, either in full or in payments over time.  The remaining owners stay in the business and carry on without the leaving partner.  The goal of the Buy-Sell provisions is to have as minimal impact on the business as possible by providing a clear path forward.

It’s very good business practice to have Buy-Sell provisions in place long before you think you’ll need them.  Once a business partner starts having thoughts of leaving the business, it is too late to put these provisions in place.  Most business owners want to maximize the purchase price of their interest and therefore tend to overestimate the value of the business, demanding a sum so large that the remaining owners can’t afford to buy it.  Usually, the owners are emotionally involved and have a hard time being objective and pragmatic in these situations.  Having Buy-Sell provisions already in place avoids the difficulty of negotiating all of the terms during a period when emotions are likely running high.

Buy-Sell provisions also usually cover situations involving the:

  • Death of an owner,
  • Divorce of an owner (a spouse may have some rights to the business),
  • Personal bankruptcy of an owner,
  • Disability of an owner who provides services to the business,
  • Retirement of an owner, and
  • Termination of an owner as an employee.

In these situations, the ownership of that owner’s interest in the business may need to be transferred.  The Buy-Sell provisions again step in to provide the straight-forward steps to deal with it.

Having Buy-Sell provisions in place is important – for new businesses and existing businesses.  Ideally, it’s put in place when the business is started, but it is not too late for existing businesses to get an agreement in place.  Business owners should consider it one of those proactive steps that can help to eliminate potential problems in the future.

About Elevate Business + Technology Law

At Elevate Business + Technology Law, we help small business owners get the support and guidance that is so critical to successful businesses.  We offer a transparent and practical approach to providing legal services.

This blog post is offered for informational purposes only and is specific to Florida law.  For specific advice, please contact a business attorney and discuss your particular needs.

 

 

5 Steps to Buying a Small Business

Buying a business is both exciting and scary. It’s exciting because of all of the potential that you see and you’ve probably got several ideas on how to improve the business. It’s usually scary, too, because you may not have ever bought a business before and you don’t know what to expect. Knowing the buying process and having a road map will help you be more confident in your decisions. Here’s an explanation of the 5 steps to buying a small business:

Stage 1 – Gather Information and Structure the Deal. During this stage, you should be consulting with your small business attorney and explaining to him or her what you’ve negotiated so far. In order to put the structure of the deal together, your small business attorney may recommend that you gather more information from the seller, or he or she may recommend that you do some independent investigation. After you’ve got the necessary information together to structure the deal, your small business attorney may create a Letter of Intent for you and the seller to sign. You don’t want to incur the costs of preparing agreements and documents if the seller isn’t on board with the basic terms. A Letter of Intent outlines the basic deal terms and even though it is usually not binding, it gives you reassurance so that you can confidently move into Stage 2.

Stage 2 – Preparation of Agreements and Documents. During this stage, your small business attorney prepares all of the documents needed for you to buy the business. While you may think that the transfer should be “simple” – and we love to keep things simple! – the reality is that the law isn’t simple. There are complex rules that we must keep in mind and be sure to follow, which means that even the most simple small business transfer needs to have the right agreements and legal documents in place. NOTE: If you are dealing with a business broker, they usually have prepared forms for at least one of these agreements. Since a prepared form does not fit all circumstances, it’s best to have a small business attorney take a look at it before you sign.

Stage 3 – Due Diligence Period. During this stage, you really dig in and get to know the business. Most sellers won’t release their confidential information unless a Purchase and Sale Agreement has been signed (or a Non-Disclosure Agreement has been signed). That means that the due diligence period usually comes after the deal has been negotiated and all of the terms have been agreed upon – but it doesn’t have to. Sometimes this stage overlaps and happens at the same time as another stage. Due diligence is your chance to see if the business meets your expectations. You look at all of the financials, all of the obligations, all of the relationships and all of the little details that matter. Not only does this give you the chance to make sure that the business is what you think it is – but it allows you to start getting to know the business and make plans for the transition.

Stage 4 – Negotiations and Finalization of the Agreements. Sometimes this stage comes right after the preparation of all of the agreements and documents – and sometimes it happens after due diligence – but in most cases it happens at both times. Here’s what usually happens: your small business attorney prepares the agreements and documents. The seller’s attorney reviews them and they may want to negotiate some of the terms. Once the agreements and documents are negotiated to both parties’ satisfaction, they are signed. If due diligence happens afterwards, then the agreements and documents may be renegotiated if there is information that is discovered in due diligence that needs to be addressed. For example, you may need to make arrangements for certain accounts receivable or accounts payable.

Stage 5 – Closing the Transaction. This stage is where the ownership of the business actually changes hands. The transfer documents are signed and the purchase price is paid. This can happen at a meeting where all parties are together in person or it could happen electronically. When you get up from the table (or your computer) you will be the new owner of the business. Congratulations!

While these five stages are separate phases of the process, sometimes they can occur out of order and even occur simultaneously with another stage. The important part is that you understand the purpose of each stage and how to buy a business. We want you to be confident and make great decisions!

About Elevate Business + Technology Law
The business attorneys at Elevate Business + Technology Law are dedicated to providing helpful and practical legal advice to small business owners. They offer support and guidance through the process of buying a business as well as on-going advice for small business owners.

This blog post is offered for informational purposes only and is specific to Florida law. For legal advice, please contact a business attorney and discuss your particular needs.

I Learned My Lesson: Not Every Hat Looks Good On Me

Here’s the thing about business owners (myself included): we just need to get things done. We will dig in, figure things out and knock those to-do’s off of our lists. Most of the time, we’re on our own. Sure, we have family and friends to talk to – sometimes business partners and employees even. But when it comes to our business decisions and plans, we tend to think that we’re on our own. Because we’re decisive and motivated, we charge ahead and get it done.

Running a small business, things move fast. I know for myself, sometimes I think that I don’t have time to stop and ask questions. But here’s what I’ve learned in the 14 months that I have been a small business owner: I need to find the right people to help me. Tapping into other people’s knowledge and experience can help me faster than I can figure it out myself. That was a huge eye-opening revelation for me because I am a do-it-yourselfer (I like to know how to do things).

But it doesn’t make sense when you’re trying to run and grow a small business – you can’t figure everything out on your own and still keep the pace you want to have. Not to mention, some things are just too complicated to figure out on our own. We don’t have the information we need. While I have a lot of knowledge about business law, there are many things about running a business that I don’t know.

As a small business owner, I need to find the right people to help me. I need to create an “external” team of resources that I can call on to provide the right information and guidance when I need it. I don’t have time to find someone every time I have a question. I need to already have the right person on speed-dial.

I’ve learned that lesson. Now I’m putting together my super-advisory team so that I can keep up with my rapidly growing business. It’s ironic that I am one of those advisors that my clients have on speed-dial and yet it has taken me a little over a year to learn the lesson that as a small business owner myself, I also need to have advisors on speed-dial. But I’m willing to admit my mistake – my DIY determination has not served me well.

In case there are other small business owners out there who are learning this same lesson – that you can’t grow your business without help – I’m sharing the list of positions on my super-advisory team. These are the people that are on speed-dial:

1. Website Guru (updates & changes, fixes problems, creates new features)
2. Marketing Helper (advises on how to reach the right people with the right message)
3. Bookkeeper (tracks expenditures, creates reports)
4. Accountant (prepares tax filings, advises on tax planning)
5. HR Consultant (advises on employee issues)
6. Lawyer (guides direction, navigates around pitfalls, reduces risk) *Of course, I play this role on my team!

There are others, I’m sure, that I will add to this team over the next several years. For now, at least I’ve stopped trying to do everything myself. I know that while I am capable of figuring it out, I really shouldn’t. As a small business owner, there are better uses of my time.

Do Co-Founders Need an Engagement Ring?

I was recently asked about a founder’s agreement for a new business before they incorporated so I thought this would be a good topic for this month’s blog post. It is possible to have a contract among founders who intend to form a corporation or an LLC but have not yet done so. These are sometimes called Pre-Incorporation Agreements or Pre-Formation Agreements. While they can be beneficial, there are also serious drawbacks to using one.  This post will discuss what they are, why they are sometimes used and what risks are associated with them.

What are Pre-Incorporation Agreements?
Pre-Incorporation Agreements (for corporations) and Pre-Formation Agreements (for LLC’s) – I’m just going to call them both Pre-Incorporation Agreements for purposes of this post – are agreements between people who want to start a business and form a company. They haven’t formed it yet, but they want to get certain terms set out and agreed upon before they move any further along – like an engagement ring for getting married.

Pre-Incorporation Agreements should not be confused with Post-Incorporation Agreements – which are called Shareholders’ Agreements (for corporations) and Operating Agreements (for LLC’s). These kinds of agreements are made after the company is officially formed and the Articles have been filed with the state. Post-Incorporation Agreements are a lot more detailed and cover more topics than Pre-Incorporation Agreements.

Why would someone have it?
First, it makes people focus on the most basic and essential issues for creating a business – up front before any money is spent getting it formed. How much will each person own? Who will be responsible for what? What will their titles be? How much money will each person put in? Will there be any sweat equity required – if so, how much? Will there be any property contributed – tangible or intangible? These are all issues that should be ironed out as much as possible at the beginning. Even though it may change before it’s all said and done, and even though they may not have all of the answers yet, going through the process of a Pre-Incorporation Agreement forces the attention and discussion on these most basic issues. So that’s a good thing.

Second, it sets accountability for that time period between getting the idea put together and actually getting the company formed. This time period may be short or it may be long. Either way, a Pre-Incorporation Agreement can deal with the responsibilities, promises, expectations and goals that should be met during this time period.

What to Watch Out For:

You may think that a Pre-Incorporation Agreement would be more beneficial if there’s a long period of time between idea and formation – but that’s not the case. If there’s an “official” agreement in place, it’s easy for people to think that they can go ahead and start conducting business – which is a very bad idea. Doing business before the business entity is actually formed creates personal liability for the business’ activities and obligations. Planning is one thing, but actually conducting business is quite another.

As a business develops, it naturally acquires and creates assets – both tangible and intangible. But if the business entity is not yet formed, there is no business to “own” these assets and most of the time they will belong to the people individually. For example, in starting a business there are a lot of intangible assets developed – websites, marketing materials, product/service development, etc. Normally, each person who creates these intangible assets has an ownership interest in them – which can cause problems if those ownership interests do not get transferred to the business entity once it’s formed – for whatever reason (lack of documentation, person leaves the group and never joins business, disagreements, additional demands, etc.). If that happens, there’s now a “business” asset that’s sitting outside the business.

Other issues and downsides to consider: How will the taxes be handled? What if the Pre-Incorporation Agreement technically formed a partnership and that’s not what was intended? What if the equity splits aren’t quite ready to be set in stone yet?

Bottom Line = Pre-Incorporation Agreements are beneficial in certain circumstances, but there are significant pitfalls involved so it’s a good idea to speak to an experienced business attorney before you decide.

Are You Keeping Your Business Legally Healthy?

It’s the start of a fresh, brand new year! This is the time to do a general assessment of your business progress and set goals for the next twelve months. It’s also a time to do some housekeeping – business housekeeping, that is.  So let’s talk about what you need to do to keep your business legally healthy.

First of all, you need to understand the importance of this housekeeping – what we call “keeping the formalities”. The formalities are mostly made up of paperwork that you need to do or maintain each year. Having these formalities helps you to keep the limited liability shield in place – which is one of the benefits of having a separate business entity. So these formalities are really important.

If you have a corporation or an LLC, here’s a brief list of some of the formalities you should be doing:

  • File an Annual Report with the State of Florida (your entity will be administratively dissolved if you don’t!). The deadline is May 1st.
  • Prepare Annual Meeting minutes – for Directors and for Shareholders.
    * NOTE: For LLC’s, this is not required but it’s good business practice to do it for Managers and/or Members of the LLC.
  • Keep all books and records of your business separate from your personal books and records.
  • Do not co-mingle personal funds with business funds. Business funds should pay for business expenses and personal funds should pay for personal expenses. Separate bank accounts are a must!

Here are a few other business-related items that you should do each January. These aren’t necessarily considered “formalities” but you still need to do them:

  • Review the status of any Fictitious Name registration. These need to be renewed every 5 years.
  • Check any licenses and permits to see if they need to be renewed.
  • Check the status of any trademarks, patents and copyrights. You will need to make filings at various time intervals, so keep track of these on your yearly calendars.
  • Take a look at your lease if you have one. Does it expire this year? If so, when do you need to notify your landlord of a renewal? Calendar this date now so you don’t forget.
  • Review your insurance policies. Have any changes occurred in your business that you need to account for in your policies? Calendar the dates of their renewals this year.
  • Pay your taxes!

TIP: Make yourself a checklist of these items and print it out every January. This will keep you on track and keep your business healthy!

One last note – the smaller your business, the more important the formalities.  This is because smaller businesses do not have many owners and there are less intrinsic motivations to keep things separated. It is easy to let these tasks slip by and ignore them – but that will leave you with a sloppy business and could expose you to personal liability.  So buckle down, knock these things off your list and start off your new year with a legally healthy business!

Understanding the Costs of Commercial Leases

When a small business owner is considering renting a commercial property (whether it’s an office, retail space or a warehouse), it’s important to know the kinds of payments that will be required. A commercial lease is a long-term commitment with significant financial responsibilities. Often times, a landlord requires a personal guaranty on the lease which creates personal liability on the business owner(s). If the business tenant does not pay rent (or other sums due) then the landlord can collect from the business owner(s) personally. This creates a significant financial risk and smart business owners pay close attention to the language in the lease agreement.

Here’s a rundown of some of the financial commitments that are often found in commercial leases:

Base Rent – Base rent can be set out in the lease as a specific sum every month or it can be set out as a specific sum per square foot of the leased premises. If it’s set out per square foot, to find the monthly payment, you multiply the square footage of the premises by the amount per square foot and that is the annual rental amount. You then divide the annual amount by twelve months to find the base rent per month. Sometimes, a commercial lease will set out the base rent amount per year of the lease term and other times it will only set out the base rent for the first year and provide for an annual increase by a certain percentage. For example, a lease could have a base rent at $16.00 per square foot with a 3% increase every year during the lease term.

Additional Rent – Additional Rent is a term that will be defined in the lease. Depending on the type of lease, it could include property taxes, insurance and common area maintenance fees (“CAM”), all of which are described below.

Percentage Rent – Percentage rent is not as common in today’s market, but we sometimes see this type of rent at high traffic locations. Percentage rent is in addition to the base rent and it is based on revenues of the business. Financial statements must be provided to the landlord and the amount of percentage rent is calculated monthly and sometimes quarterly.

Taxes
Sales Tax – In Florida, sales tax is charged on commercial rent payments so a business tenant will pay sales tax on the amount of rent each month. Depending on how the lease is worded, sales tax may also be charged on the insurance and CAM payments.

Property Tax – In addition to sales tax, the lease may require the payment of property taxes for the location. The landlord normally will calculate estimated property taxes and charge a prorated amount each month. At the end of the taxable period, if there is a shortage the landlord will charge the difference. If there is an overage, the landlord usually applies that amount to the next payment.

Insurance – Most leases require a business tenant to have a certain amount of insurance coverage. These policies would be in the business tenant’s name and the premiums would be paid directly to the insurance company. (It’s always a good idea to get the insurance quotes before the lease is signed. Insurance premiums can be more than anticipated.) In addition to the business tenant’s own policies, some leases require the business tenant to pay the premiums for the landlord’s policies on the property (or a pro-rated portion).

CAM – CAM or Common Area Maintenance Fees are sometimes charged in shopping centers or multi-tenant properties. These are the operating costs that the landlord incurs in maintaining and repairing the areas that all tenants can access. Some, but not all, of these areas could include the sidewalks, parking lots, courtyards, elevators, stairwells, and landscaping. The lease should define what is included in CAM and what is not included (such as capital improvements). The amount of CAM a business tenant pays each month is based on an estimate by the landlord and it is reconciled at the end of each year. Often, small business owners underestimate the effect that CAM has on the total amount of rent they pay.

Repair & Maintenance – Depending on the type of lease, business tenants may be required to pay for maintenance and repairs to the leased premises. Some of the most expensive repairs can include repairs to utility pipes, electrical systems and HVAC systems. Knowing the condition of these particular parts of the leased premises before the lease is signed is critical. If possible, it is wise to set limits on the cost of repairs, especially for HVAC systems. In commercial properties, it is the luck of the draw as to the tenant who has to deal with a run-down or broken HVAC unit.

Our Practical Tip:  Before a lease is signed, create a spreadsheet of all of the definite and potential costs of renting the space. Include the above if they are required in the lease, but also include any additional obligations, such as trash collection, required service contracts, signage costs and costs of improvements and renovations. Once all of the costs and potential costs are listed, it is easier to compare different spaces and to determine the best location that fits into the business budget.

The Law Affects Every Business in 8 Key Areas

The law is the backbone of every business.  Most small business owners don’t think of the law in this way.  They usually think of the law only when they are facing a lawsuit.

 

But in reality, the law sets out the structure for how businesses interact with each other, with their customers and with their employees.  After reading the list below, it may surprise you to see how much the law interacts with every day business.

 

While there is great latitude for businesses to grow and develop in different ways, there are 8 Key Areas Where the Law Affects Every Business:

 

#1        Entity Structure & Ownership

The law defines certain entity types for businesses and each type has its own set of rules.  The most common types are corporations, LLC’s, sole proprietorships and partnerships.  Within each of these types of businesses, there are rules governing operation, ownership, documentation and taxation.

 

#2        Employees

The law affects how a business hires employees, the terms of employment, the use of independent contractors, the policies dealing with behavior and treatment, and many other issues such as non-compete agreements and non-disclosure agreements.

 

#3        Physical Location

The law interacts with the physical location of a business, such as the terms of a commercial lease, the safety of customers and employees, signage, and the zoning and land uses permitted in an area.

 

#4        Customer Relations

The law weighs in on how customer contracts are interpreted, the warranties that are provided with services and products, the disclosures and disclaimers that accompany any product or service and the rules governing transactions (especially those involving the sale of goods).

 

#5        Market Identity

The law determines how a business markets its products and services through the use of tradenames, trademarks, service marks and website content.

 

#6        Intellectual Property & Technology

The law governs the ownership of intellectual property – the creations people make and use in their business – such as copyrights and patents.  It also includes the use of technology, and the licensing of that technology, as well as cloud storage and data protection.

 

#7        Credentials & Compliance

The law sets out rules for particular industries regarding licensing and registrations.  There are also regulations that must be followed for certain business transactions and interactions.

 

#8        Service Providers & Vendors

The law is involved in how businesses interact with other businesses in terms of contract interpretation, confidentiality and non-compete obligations, data protection, payment and delivery terms and liability limitations.

 

 

 

The Importance of Being Written: The Operating Agreement

One thing I’ve drafted consistently throughout my years in practice has been Operating Agreements. I love them. They are so important to the health of an LLC and it feels good to be creating solid “bones” for a company. An Operating Agreement is a contract that almost every owner of an LLC needs to have in place. So what is it exactly? And when do you need to have one drafted?

An Operating Agreement is the governing contract for a limited liability company (“LLC”). It sets out the structure of ownership and how the company will be managed. It is THE document for an LLC. This one document controls a lot! Just so you can get an idea, here are some of the topics covered in an Operating Agreement:

Membership:
Who owns the company?
How much of the company does each member own?
What does each member have to contribute to the company to capitalize it?
When can a member receive profit distributions?
How are profits and losses allocated among the members?
When can a member sell his or her ownership interest in the company?
Who can own membership?
How can a new member be admitted?
Are there any rights of first refusal or options to purchase ownership interest in the company?
Can a member withdraw from the company?
What happens if a member dies or becomes disabled?
What happens if a member is involved in bankruptcy or gets a divorce?
How is the company to be taxed?

Management:
Who manages the company?
Is the company member-managed or manager-managed?
What types of decisions require a vote of the members?
When and how are meetings called?
What limitations are there on managerial authority?
How can management be changed?

It is important for every LLC to have an Operating Agreement, but it is critical for a multi-owner LLC to have one – in writing. Florida’s new Revised Limited Liability Company Act (“FRLLCA”) states that an Operating Agreement does not have to be in writing. This makes it even more important to have one in writing.

Without an “official” written Operating Agreement, one could be pieced together from emails, napkins and conversations. But what if those don’t accurately reflect the most recent agreement among the owners? Or what if they were only ideas that you eventually rejected for something else? You can see how this piecing-together approach can easily create disagreements and conflict among the owners. And it can create uncertainty that is not good for business.

One more thing – the FRLLCA provides for default rules – those situations that are not addressed in an Operating Agreement will be governed by the rules in the FRLLCA. If owners want to choose the rules that govern their company, they need to have a written Operating Agreement. Otherwise, they are stuck with the rules in the FRLLCA.

Bottom Line: It’s good business to have a written Operating Agreement in place. It’s especially critical for those LLC’s with more than one owner. Having a solid business structure in place creates stability for the company and a strong foundation for growth. For companies that do not currently have a written Operating Agreement, it’s not too late. Getting one in place before a question or conflict arises can help to avoid wasting time and money when a situation does arise. As business owners know, that time and money can be better spent growing their business.