Business Transactions

Should Your Next Business Be a Franchise?

Think McDonald's – the UPS Store – Super 8 Motel – and Dunkin Donuts.  All franchises.

Most of the value in purchasing a franchise business is the brand name and other intellectual property licensed by the franchisor to you, the franchisee. If you select the right franchise, the pros should include instant market recognition for your business as well as access to trade secrets and other training and support that will help you succeed in running the franchise.

The cons to owning a franchise include

• restrictions imposed by the franchisor on how you can operate and market your business
  
• the chunk of revenue you must pay in franchise royalties, and
  
• the “threat” of being forced out of your business if you don’t perform up to the standards set by your franchisor.

CNN money offered an interesting article on how well franchisees did with the ten most popular franchise businesses.

When You Move to a Different State, Should Your Business Move with You? Part Two.

In Part One of this two-part blog posting, I discussed whether you should change the state under which your business is organized when you move from one state to another. In this Part Two, I discuss how you can make such a business move if you decide to do so. The process varies by state. Some states streamline the process; other states require more effort.

Suppose you are a Maryland resident who operates an internet-based company organized as a Maryland LLC. You move to New York and decide to change your Maryland LLC into a New York LLC. Here are the steps involved:

Step One. Form a new New York LLC by filing Articles of Organization in New York. If the name of your company is not available in New York, you will need to choose a new name.

Step Two. Merge the existing Maryland LLC into the new New York LLC by filing Articles of Merger in New York under Section 1003 of the New York Limited Liability Company Law. The Articles of Merger should designate that the New York LLC is to be the surviving entity.

Step Three. File Articles of Merger with Maryland under Section 4A-701 of the Maryland Limited Liability Company Act. Indicating in your Articles of Merger that the New York LLC will be the surviving entity is sufficient for the Maryland LLC to be dissolved upon completion of the merger. You do not need to file Articles of Dissolution in Maryland.

When You Move to a Different State, Should Your Business Move with You? Part One.

There are many corporations and LLCs with only one or two owners. When the owners move their residences to another state (even if it is a neighboring state), should the business also move? For example, if you organized your company as a New Jersey LLC while you were a resident of New Jersey, should you change your company to a Pennsylvania LLC when you move to Pennsylvania?

The answer depends on your specific circumstances. By not packing up your LLC or corporation and moving it with you to your new state of residence, you may double your business organizational expenses without producing any corresponding business benefit:

Leaving your business behind means you must maintain a resident agent in your former state of residence. If you use a home or office address as the resident agent address and that home or office address will no longer be available to you after your move, you will need to pay for a resident agent service. Resident agent services start at $100 to $200 per year.

Even if you leave your business organized under the laws of your former state of residence, you may still be required to register your business in your new state if your business is deemed “to be transacting business” in your new state. In this case, you would be required to register your business as a foreign LLC or foreign corporation. See my blog posting “In Which States Are You Transacting Business?”

In Part Two of this blog series, I’ll discuss the process of moving your company from one state to another.

Business Entity Filings and Consulting the Source: When A Phone Call Is Not Enough

Business entity filings such as Articles of Organization and Change in Registered Agent are governed by the state’s business statutes and are typically filed with the state’s secretary of state office. Most secretary of state offices allow you to call for clarification of their business entity filing procedures.

While I would rely on written information provided on the state’s official websites, phone call inquiries yield mixed results if your question is more complicated than “What’s the filing fee?” or “What’s the address for overnight delivery?”. Let me recount one of my recent experiences in this realm.

A Personal Mini-Rant about a Phone Inquiry

I needed to convert a limited liability company from being an LLC in State One to being an LLC in State Two. After reviewing the LLC statutes of both State One and State Two, I concluded that the process required forming a new domestic LLC in State Two and then merging the old State One LLC into the new State Two LLC (with the State Two LLC being the surviving entity). I then called the secretary of state’s business entity information line to verify that there wasn’t an easier way to make the change (e.g., some states offer a streamlined method for conversion).

Yikes! I spent ten very frustrating minutes on the phone with the first customer service rep who swore up and down (i) that the state offered no conversion or merger procedures for LLCs and (ii) that my only option was to file for the LLC to be authorized to do business in State Two as a foreign LLC. That option would not have achieved the cost-saving and administrative paperwork reductions I wanted for the client. Finally, I was transferred to a supervisor who confirmed my previous conclusions that the conversion could be done via merger.

Lesson of the Day

If I knew a little less about business law or hadn’t had the state statute right in front of me during the call, maybe I would have accepted what the first customer service representative said as accurate. The take-away lesson is when you’re given verbal information from a staff person at a state or federal agency, try to find or obtain written verification of the information before relying on it.

Choosing A Business Entity Form For Maximum Respect

There are many important factors to consider when selecting the best business entity form for your company. The need for respect isn’t one of them.

I Don’t Get No Respect

I have heard the view that professional corporations are considered bottom shelf in New York. I have also heard the fear that sole proprietorships are not taken seriously. I don't understand the rationale of looking down on a business due to whether it’s a corporation, LLC, professional corporation, sole proprietorship, or some other form.

A Well-Run Company Will Earn the Respect of Those Who Matter

Here's a news flash. People who don't take your company seriously just because you’re organized as a sole proprietorship will not take you anymore seriously just because you become a single-member LLC. And I question the value of anyone’s respect who bases giving respect on which letters – whether they be Inc., LLC, PC, or d/b/a - follow your company name.

The ideal entity form is not the same for every company. The choice should be driven by the need for limited liability, tax treatment, ownership structure, financing options and other hard-core business considerations.

Respect for one’s business should be based on whether you run a professional operation. If you want your business to be well respected, provide your customers with value, follow through on professional commitments, pay your bills on time, keep your records impeccably, and act with integrity.

The Internet Booms for LILO Start-Ups; Some Legal Work Still Highly Recommended

Getting Rich Slowly in the New Internet Start-Up Boom

We’ve all heard that the current economic climate has motivated venture capitalist to scale down their investments in internet start-ups. In all this gloom, internet entrepreneur hopefuls can find encouragement in a recent Time Magazine article by Josh Quittner, "The New Internet Start-Up Boom: Get Rich Slow".

Quittner refers to our era as The New Internet Start-Up Boom in which savvy internet entrepreneurs with a great idea can get rich slowly. Quittner talks about internet start-up companies that cost little or nothing to start but can eventually yield substantial profits. He refers to these internet companies as LILOs which stands for a little in and a lot out.

The article cites the examples of MotorMouths.com, a car review site started with less than $10,000 that may grow into a $250,000 revenue company within 18 months of opening operations. The article also includes the case study of AirBnB.com, a website that matches visitors with accommodations in private homes. AirBnB.com currently produces enough revenue to support its three founders.

Even Low-Cost Internet Start-ups Shouldn’t Skimp on Certain Legal Issues

Since this is a legal blog about business transactions, I must highlight some legal issues which even a LILO internet start-up should not ignore:

• Agreement Among Co-Founders and Business Partners. I’m frequently consulted by people who find themselves in business relationships that no longer function. The situation is at its worst when the partners have not documented their relationship in a written agreement that hopefully includes steps for an amicable parting. I talked about how business people can protect themselves and their businesses from relationships that go south in an interview on “When Business Partnerships Go Bad” with Steve Mullen of Start-Up BizCast.
  
• Web Host Development Agreement. Don’t hire a web developer without a proper web development agreement. Important contractual provisions include intellectual property ownership rights, development schedule, and the developer’s maintenance obligations. See an example of the problems that can develop if you forego the written web development contract.
  
• Securities Law Compliance. If you take money from someone who will share in future company profits but will not actively participate in the operation of your company, you have sold a security and you must comply with state and federal securities laws. It doesn’t matter if the investment is $500 or $5,000,000. Non-compliance triggers potential criminal and civil penalties that you don’t want to encounter. For more information on securities compliance, see my postings about Financing a Business.
  
• Website Audit. You’ll want to verify that nothing offered through your website is going to get you in trouble. I’ll talk more about website audits in my next posting.

Should Your LLC Be Member-Managed or Manager-Managed?

After evaluating the advantages and disadvantages of each type of business entity structure, perhaps you ultimately decide to organize your company as a limited liability company (LLC). Next, you have to decide how to structure the management of your LLC. The LLC’s popularity is partly due to its adaptability and flexibility in accommodating management styles.

You can organize your LLC so it mirrors the management style of a general partnership. This would be a Member-Managed LLC. Each of the members in the LLC has an equal vote (or a vote consistent with their ownership percentage) in the LLC and each of the members is authorized to bind the company in a contract.

You can organize your LLC so it more closely resembles a corporation or a limited partnership. You can even have a Board of Directors. LLC’s selecting a corporate of LP management style might also elect to make the LLC manager-managed. In a manager-managed LLC, elected managers run the company’s day-to-day affairs. Managers can be members of the LLC but they are not required to be. This might be the route you choose if your company will have owners who do not actively participate in the day-to-day management of the company.

You can also choose a hybrid or combination management style. For example, most of the power might reside in one or a few members with the other members being silent on most matters but having a vote on major company decisions (e.g., the company going into a new line of business).

In most states, the default for LLC management is member-managed. If you want the LLC to be manager-managed, you must specify that in your LLC operating agreement. Some states also require that the election to be a manager-managed LLC be indicated in the articles of organization.

Complimentary Jan. 14 Teleseminar on Joint Ventures

I’m hosting a complimentary teleseminar, Using Joint Ventures to Survive the Economic Downturn. It takes place on Wednesday, January 14, 2009, at 3:00 pm ET/ 12:00 pm PT. You can register at http://www.joybutler.com/seminarinfo.htm

 

THE ISSUE:   We’re surrounded by constant reminders of our current challenging economic times.  A joint venture – which is a method of pooling resources with others so you don’t have to go it alone - might be the key to economic survival for some businesses and entrepreneurs. 

If you think a joint venture is the exclusive territory of Fortune 500 companies, think again. There are many opportunities for individual entrepreneurs and small companies to work together. Your joint venture might be as straightforward as sharing a customer list for a combined marketing campaign, licensing a product you've developed, or providing original content for a website.

THE TELESEMINAR.  During the seminar, I’ll address the practical questions you need to answer in order to form a beneficial and smooth-operating joint venture:

 

* Which method of joint venturing is most appropriate for your circumstances? 

* Should you organize your joint venture as an LLC, partnership, or corporation?

* Do you need a written agreement and what terms should it contain?

* What are the factors that make joint ventures fail and how can you avoid them?

* How can you save money on legal costs when structuring your joint venture?

 

REGISTRATION.  The live teleseminar occurs on Wednesday, January 14, 2009 at 3:00 pm ET / 12:00 pm PT.  Register at http://www.joybutler.com/seminarinfo.htm.

 

In Which States Are You Transacting Business?

Why should you care in which states your company is transacting business?  It is an important consideration for at least two reasons:

1. Qualifying as a Foreign Entity. If your company transacts business in a state other than the state in which it is organized, your company is supposed to register in that state as a foreign company. This holds true for companies organized as limited liability companies, corporations, or other entity types that require formal filings. In this sense,“foreign” can simply mean that your company is organized under the laws of another state. For example, if your company is organized as a Maryland corporation, it is a foreign corporation in Texas and Pennsylvania. Qualifying as a foreign entity typically requires filing the same paperwork and paying the same fees as you would file and pay had you organized as a domestic entity under that state’s laws.

2. Being Sued Out of State. The United States Constitution limits the circumstances in which a person or company can be sued in the court of another state. In order for your company to be sued in another state, your company must have some relationship or engage in some type of activity within the state. Transacting business in that state can qualify as the relationship or activity that allows your company to be sued in that state.

Whether or not you are transacting business in a particular state can be fact specific and can vary in accordance with the laws of the particular state. Here are some very general guidelines.

Your company probably is transacting business in the state if:

• The company maintains an office in the state.
• The company regularly targets residents of the state for its sales and marketing efforts.
• The company has employees that reside in the state.

Your company probably is not transacting business in the state just because:

• Company representatives attend a meeting or conference in the state.
• The company maintains a bank account in the state.
• The company conducts a one-time transaction within the state.

Alphabet Soup of Business Entity Forms. Part Two. Corporations and Limited Liability Companies.

This is the second part of a two-part blog posting on business entity forms. In Part One, I discuss sole proprietorships and general partnerships. In this Part Two, I discuss corporations and limited liability companies.

While it’s possible to form a sole proprietorship or general partnership without taking any formal action, organizing your company as a corporation or a limited liability company (“LLC”) requires filing certain documents with your state – normally with the office of the Secretary of State. You file articles of corporation to organize a corporation and articles of organization to organize an LLC. Filing requirements for both are fairly simple, normally requiring little more than the address, contact person, number of shares (for a corporation), and business purpose. Specific requirements vary by state.

The advantage that corporations and LLCs offer over sole proprietorships and general partnerships is limited liability.