The Business of Going into Business: Using the Letter of the Law (and More) For Your Business Startup

Unfortunately, the U.S. economy is not rebounding as fast as anyone would like.  High unemployment rates have many Americans considering establishing their own businesses. If this is something you’re contemplating, remember, it's one thing to start a business...and quite another to start a successful business.  So before you decide to hang out a shingle, here are a few best practices, both legal and practical, for you to consider.

Getting Started – Make a List and Check it Twice

You probably don’t head to the grocery store without making a shopping list.  Your new business should not be of any less importance.  Here is a basic (but certainly not exhaustive) list of some business essentials:

• Decide on a business entity.  This is the most important step.  Will this be a Limited Liability Company (LLC)? A corporation?  A partnership?  A qualified CPA or attorney will be able to walk you through the process of obtaining the correct documents to establish your business identity.  Note:  This decision can impact your personal assets directly; more on this in the next section.
• Get a place, and some space.  Will you be working out of your home or are you planning to have a “brick and mortar” establishment for your customers?  Make sure your work environment has enough space to allow for potential employees, customers, and products.  And be sure you have enough funds on hand for a monthly lease or rent.
• Set up the proper bank accounts (and get checks) at your financial institution.  Consider banks other than the national chains.  Smaller banks, such as The Commerce Bank of Washington offer fantastic customer service for small and growing businesses. 
• You'll want to establish a Federal Tax ID number.  Some business owners use a Social Security Number, but it might be a better idea to file for a Federal Tax ID.  You'll also need a State Unified Business Identifier (UBI) number.  Also file a Master Business Application and a City Business license to make sure you’re following local and state ordinances.
• An Electronic Federal Tax Payment System (EFTPS) makes paying taxes for employees a breeze.  Alternately, consider outsourcing your payroll and tax payment needs to a bookkeeping service. In Seattle, I recommend Pearson Business Management Services.
• You'll need to keep track of every dollar coming in and going out.  Unless you hire a CPA, you'll need business and accounting software to keep all of those financial columns in line.
• Malpractice insurance, employee health insurance, business insurance: make sure all your insurable exposure is covered.
• Head to the Office Supply Store.  Marketing materials, computer equipment, furniture, copier, phones, postage meter, stationery, business cards are just some of the items you'll need.   
• Set up your mail accounts.  Don't open those doors without setting up accounts with UPS, FedEx, or whatever postal and/or delivery service you plan to use.

Protect Your Assets

As I mentioned earlier, protecting your assets is the most important step during a business startup.  If you choose to go into business as yourself (e.g.: John A. Smith's Shoe Repair), you run the risk of unlimited liability against your personal assets – your bank account, your house, your car – in the event something goes wrong.  It's much better to do business as an LLC or a corporation so that your personal assets are kept separate from your business assets.  Discuss with your attorney or accountant the potential benefits of filing taxes as an S-Corp, an option available to both corporations and most limited liability companies. 

Personally, I recommend LLC over a corporation.  There are a lot of formalities associated with becoming a corporation: annual meetings, reports to shareholders, bylaws, amendments, etc.  With an LLC, you have the flexibility of being recognized by the IRS as an S company without all of the formalities. 

Obviously, there's a lot to think through before becoming your own boss.  If it is something you’re seriously considering, contact us to discuss all of the options available to you to protect your assets, and put your new business legally in the best position to succeed.

Your Career and the Right Employment Agreement

In part one of this two part series, I went over some items that employers should focus on in an effective employment agreement. These included the need for a good employee handbook, policies on equal opportunity and harassment, considerations for social media postings and email, and the definition of contract employment.

Here in part two, we will examine the other side of the agreement, focusing on items that protect the interests of the employee.

Detailed job duty description: Both sides will want to have a clear understanding of what is expected of the employee in their new job. The agreement should include clear language describing the employee’s duties and the employer’s expectations of the job. This will help prevent any confusion or misunderstanding regarding job performance down the line.

Employee Handbook: This document is important to the employee as well as the employer. The employee should examine the handbook closely to determine how job performance will be monitored and what the various company policies are that would need to be followed.  Understanding what’s in the handbook is a good way for the employee to ensure that they do the right things at work to keep their job.

Access to employment file: The employer will be keeping many records about the employee while they work there; and the employment agreement is a good place to set forth what the employee’s access to those records will be, if any. The employer may have specific guidelines for how and when the file can be requested by the employee and whether it’s an open record or maintained for the sole use of management.

I usually recommend that the employee have access to their own file, but it’s also important to spell out who else can see it. For example, do co-employees have the ability to view the file? It’s usually best that access is limited solely to upper level management for purposes of evaluation, promotions, a raise, etc., and that this limitation be spelled out in the employment agreement.

Attendance and leave policies: This is another area where it is best to have documentation of what’s expected. Employees should be mindful of taking time off in case of emergency, family matters, illness, etc. By examining these topics at the beginning of employment, they can help prevent conflicts with their employer in the future when unforeseen events happen.  

Alternative dispute resolution: It’s best that every employment agreement provide that before an employee can sue the employer for misconduct or discrimination, the two sides should go to mediation.

Another strong recommendation for this section is that employers, before termination of an employee, go to mediation to resolve the perceived disciplinary problems. This approach can significantly reduce litigation costs as parties can first sit down and try to talk through issues rather than immediately resorting to the courts.

Confidentiality agreement: Both parties will want to have this language in place. This is simply an agreement between employer and employee that neither side should disclose confidential information to third parties.

Termination: It may not be the topic one wants to consider when starting a job, but it’s good to at least keep it in mind — how can the employee be terminated? Can one individual manager terminate the employment; or does the decision go to upper-level management? This should be clearly outlined in writing for both sides. It’s usually best that no single manager be able to dismiss an employee — upper level management should be in charge of this — but it’s not always the case, so setting it out in the employment agreement eliminates confusion should the event ever come to fruition.

Severance pay upon termination for no-cause: Generally when an employer wants to retain employees with a certain skill or expertise, they will offer some incentive to stay with the company. A severance package is a good way to accomplish this. Discuss with the employer what will happen in certain scenarios. For example, should the employee leave voluntarily, will they still get a severance package — then make sure language covering all the possibilities is included in the employment agreement.

If you are an employee examining an employment agreement and need assistance, contact my office. We can discuss the particulars of the employment agreement that is being considered and how it could affect you and your career.

Disclaimer: Nothing in this posting should be construed as legal advice or the commencement of an attorney-client relationship.  The opinions are solely those of the author acting in his capacity as an author, not an attorney.

Choosing an Employment Agreement that’s best for your Business

In the employer-employee relationship, creating a thorough employment agreement is important not only for the employer, but also the employee.

This is part one of a two-part series in which I will review some provisions that should be considered for both businesses and employees when entering into an employment agreement. In this article, we will examine the employer’s point-of-view and items that should be included to protect their best interests.

Employee handbook: The handbook should cover the policies, terms and conditions that an employee is expected to adhere to while working at the business. Important topics like work hours, attendance policies, sick time, and vacations should be covered. The handbook is also a good place for employers to plainly state to employees that both parties have entered into an at-will arrangement, meaning that the employee can be terminated for any reason or no reason whatsoever, at any time.  Likewise, the employee can terminate the employment arrangement at any time for any reason, or no reason whatsoever.

Policy on equal opportunity & harassment: This is where the employer conveys that there will not be any discrimination based on race, color, religion, gender, sexual orientation or national origin. This is a sound business practice, and ensures compliance by the employer with the laws of the state of Washington. Presenting this policy helps protect employers against lawsuits while demonstrating to employees that the business is fair and will not tolerate discrimination.

Progressive discipline policy: An employment agreement should include a progressive discipline policy. That is, if there is misconduct or a complaint about an employee, proper procedures should be followed to ensure the employee is given an opportunity to correct the behavior.

In this regard, the employer is protected from harmful acts by the employee. Issuing a warning is an opportunity to correct the behavior or conduct, but if the behavior or conduct is not corrected, then the employee could be terminated. There should be a firm understanding on both sides what the conduct is, as well as what the practices are for warning an employee of misbehavior, misconduct, and problems with their employment.

Email/Internet/social media policy:  With the expansion of social media, policies with regards to email, Facebook, Twitter, and other social media postings should be addressed. No information gleaned about the employer or clients through the course of employment should be shared on social networking sites at any time. With regards to email, it should be clearly stated that the employee should not expect a guarantee of privacy using a workplace email account. In other words, employers can look at individual work email accounts at any time.

Full-time employees vs. contractors:

More often than not, employers want to retain people as contractors rather than employees. They do this to save on employment taxes, but solely relying on this arrangement can become problematic, especially if the work is closely overseen. As a business, it’s very important that you inform any independent contractors that they are free to work their own hours and at a location of their choosing.

Documentation of job performance: Employers need to keep documentation of each employee’s job performance for discussion during periodic performance reviews. Employers should clearly lay out the specifics of such reviews. For example, at what interval will they be performed; who should be present (certain members of management); will evaluations be given in writing or orally, etc. A detailed written job description is also needed not only for performance reviews, but also so that both parties have a clear understanding of what the duties and expectations of a position are.

Severance pay: Employers need to find ways to retain valued employees and their beneficial skills and expertise. A severance package can be a good incentive for an employee to stay with the company. However, it should be conveyed that if an employee leaves voluntarily, he or she will not be awarded a severance package.

Confidentiality agreement: Both sides should automatically agree that confidentiality is essential to their best interests. In my opinion, the employer and employee should always agree in writing to keep information between them confidential, and out of the hands of a third party.

In part 2, I’ll review items that pertain to employees and what they should be mindful of when reaching an employment agreement.

If you have questions about employment agreements, please feel free to contact my office. We can discuss the employment agreement that you are considering and how it could affect you and your business.

Disclaimer: Nothing in this posting should be construed as legal advice or the commencement of an attorney -relationship.  The opinions are solely those of the author acting in his capacity as an author, not an attorney.

Key Provisions of an Effective Operating Agreement

Every limited liability company should have an operating agreement reflecting the understanding of the parties on how the business should be run.  In part 1 of this series, we examined some real-world business relationships pertaining to operating agreements. In this post, I’ll discuss some important provisions that an effective operating agreement should have to protect the business parties.

Most operating agreements have standard sections, but that doesn't mean that changes can’t be made. An operating agreement should not be viewed as a one-size-fits-all document. Each business is unique and these provisions should be clearly laid out to handle issues as they arise.

Here are some sections and key points that deserve special consideration when a business draws up an operating agreement.

• Capital and capital contributions — Subsequent contributions should only be an obligation if unanimously agreed upon by all the members.
• Allocations and distributions — The company should have the right to distribute cash and property to the members pro rata, based on the relative membership interests.
• Management — The managing member should have the power pursuant to the operating agreement to perform the following on a day-to-day basis: open and manage bank accounts, borrow funds or establish lines of credit up to $5,000, purchase insurance on company assets, enter into agreements with vendors, suppliers, and contractors, and perform other operational tasks and duties.

More substantial actions should require the approval of a majority percentage of the members. These can include: borrowing more than $5,000 or making any capital expenditure in excess of $5,000, commencing lawsuits or other legal proceedings, making a filing under the Bankruptcy Code, purchasing, leasing, or disposing of property—including real property—in excess of $5,000. Lastly, any action to dissolve the company would fall under a majority percentage of member participation as well.

Adding new members to the company (or altering the percentage ownership in the company) should require the unanimous approval by all members.

Withdrawal and transfers of membership interests — This should cover such issues as how a member may withdraw from the company prior to the winding down and dissolution of the company, such as if a 60-day prior notice should be given. Also, restrictions on transfer should be clearly laid out, and sale of membership interest details should be given so that adequate time requirements are made known to all members.

A very important provision you always want to include is what would happen in the event of a member’s death, or if a member gets divorced. Washington is a community property state, which means that a spouse has a 50% interest in every single dollar made by a spouse. In every business, a spouse automatically shares a 50% economic interest with the other spouse. So a divorce could significantly impact the business if provisions aren’t made.

I always recommend a clause that says in the event of disillusion of marriage, we’ll recognize that the divorcing spouse has a 50% interest that’s economic only. The divorcing parties agree to put a dollar figure on that interest and the non-member spouse is given 50% monetary value, but not membership in the company, so he or she would not be able to make any decisions pertaining to the business. 

Since each business is unique, your business may require special language to protect all members. If you are considering drafting an operating agreement for your business, contact us to set up a consultation. 

Protecting Your Business with an Operating Agreement

When forming a business partnership, it’s important for the parties to protect themselves with an operating agreement so that issues can be resolved in an orderly fashion.

This is part 1 of a 2-part series examining operating agreements. In this post, I’ll begin by looking at two real-world examples that illustrate why it’s crucial to create and abide by an operating agreement. In part 2, I’ll discuss some key provisions needed in a standard operating agreement.

The first case involves two people who had a 50-50 arrangement in a business they co-owned as an S-Corporation. The business was succeeding and everything was fine between the two sharehholders. However, as the months passed, one partner was doing far more work than the other. I was representing the active business partner, who was handling the operational and business side of things, while the other partner just wanted to collect a check from the monthly profits.

Understandably, the partner doing all of the work wanted to buy out the other partner, since she was collecting a check for doing nothing. Because the two didn't have an agreement, the non-active partner had been hiring accountants and lawyers to do things that my client didn't agree with. A considerable amount of time was spent answering his legal questions about what his partner could or couldn’t do, and what the legal ramifications of dissolving the corporation would be going forward. Unfortunately, the way they formed their corporation, evenly dividing everything, required a unanimous decision by both partners on every matter. Once they became adversarial, the only solution legally was to dissolve the partnership.

Having had an operational agreement in place in the beginning could have gone a long way to avoiding the problems that had arisen. Specifically addressing such important matters in the decision-making process is something I advise for any partnership looking to do business.

The alternative to seeking legal counsel in this situation might have been to hire a life coach or business coach. A lot of times, people seek me out for legal counsel, but the problems they have aren’t (yet) of the legal nature. This is a great solution when people are not getting along and need to find a way to resolve interpersonal conflicts. In other words, they think they've got a legal problem, but that’s not necessarily true. These coaches can talk you through decision-making and how to be happy in your business. Irene Leonard and her business, Coaching for Change, is someone I highly regard offering this service.

In the second case I encountered, another client thought ahead about decision-making. He and his partner drew up an operating agreement where a coin flip would be the deciding factor for disputed management decisions.

They had been working together for 15 years, and they were positive that they'd work together for more.  I pointed out that, while there may not be disagreements at this exact moment, they could arise years from now. For example, what if one wanted to move the location, but the other person didn’t? Neither wanted to decide who would have to make these kinds of decisions, so they entered into an agreement where they would have to flip a coin and abide by the outcome. The partnership has been working just fine the last three years, and if any issues arise, they will pick up a coin and toss it.

No matter what way a business decides to resolve issues, they should be in writing to protect all parties. Each business partnership is different, so if you feel you should have a formal arrangement drawn up, contact us to set up a meeting.

Employment Contracts at the Executive Level

In the previous post, I discussed the importance of, and need for, employer/employee contracts and focused on agreements for entry-level or mid-level positions. Part 2 of this series examines executive-level employment agreements.

Executive employment agreements are for officers of the corporation who have management level authority. They typically contain more protection for the executive-level employee than an entry-level agreement would afford.

With the executive agreement, the company may recognize that it has a valuable prospective employee whose employment will benefit the company. Therefore, company leadership frequently allows agreement terms to be beneficial to that executive candidate. There are, however, a few key provisions that should be included in an executive contract.

Severance After Termination

Unlike the entry-level agreement, the executive contract would likely have language included for a severance package. For example, it might read that for every year the executive works for the company, he or she would get one month's salary as compensation, if the company terminated him or her. Rarely would you see a written severance package for entry-level or mid-level employees.

In an executive employment agreement, there are usually two termination provisions: termination for cause and termination other than for cause. Termination for cause is if the executive does something contrary to the best interest of the company, such as dishonesty, for example. If the executive is terminated for cause, he or she is not entitled to any severance pay. Termination other than for cause means that the executive is let go due to a downturn in business or he or she decides to leave for other reasons.

Generally, when an executive decides to leave voluntarily, there is no severance pay. The executive will only receive the severance pay if the company terminates employment, other than for cause.

Other Differences between Executive and Entry-Level Agreements

• Unlike entry-level agreements, executive-level ones might include bonus provisions if the executive meets certain goals or targets.
• Another key difference relates to disability. If the executive employee becomes disabled, that is not considered a voluntary leave — it's a "constructive discharge," so there should be a severance package.
  
  To satisfy the disability clauses, employers often offer a disability insurance package. That is, if the employee becomes disabled, the insurance company will compensate the executive for not being able to work. This is in lieu of severance pay and as long as the benefit of the insurance policy equals or exceeds the severance compensation that would be due, it is a fair way for the two parties to resolve the situation.

An executive-level agreement is a commitment for both the prospective employee and the business. If you are an employer or employee and you have questions about an executive-level employment agreement, contact us to set up a consultation.

Key Provisions of an Employment Contract

The employer/employee contract is a simple document that should be used to protect both parties when they agree upon an employment position.

This is part 1 of a 2-series post. This article will examine entry-level or mid-level employment agreements. In part 2, I will walk you through the executive employment agreement.

An entry-level contract should have a configuration that can be used for most employer/employee agreements, meaning that the layout and sections should resemble each other from contract to contract. An example follows below. This is favorable for the business since it doesn’t have to expend time and resources to draft a unique document each time a new employee is hired.

In this article, I will briefly discuss some of the provisions that a standard employment contract should include.  Two, however, are critical; the non‑compete and non-solicitation clauses.

Non-compete Clause

In entry-level or mid-level employment, a non-compete clause is included primarily to protect the employer’s interests. In practice, it is preventing an employee from leaving the company to work for another business — or start a business — in the same industry. For example, if an employee spends years learning a very specialized set of skills, he is prevented from quitting his job and starting a business that offers the same services as his now former-employer.

Non-compete agreements have to be reasonable in terms of duration to be effective. In Washington, three to five years is considered reasonable.

Non-solicitation Clause

A non-solicitation clause restricts an employee who has left a company from contacting the clients or customers of her now former-employer. Clearly, if an employee spends a number of years at an employer’s company, relationships can build and the possibility for an employee to solicit business from those relationships is very real. By including the non-solicitation provision, the company is protecting itself from a potential loss of business and revenue.

To Sign or Not to Sign?

Employers include these provisions to keep their business intact and guard against clients or customers from leaving and potentially taking new skills and clients with them. But what should a prospective employee do? A consideration of future plans should be the first order of business. If your career goal is to start your own business in the line of work that you’re being offered, you’ll want to seriously consider signing a non-compete, unless you’re going to move out of state.

In my law practice, I hear from people who want to start their own venture after years of employment at a business. They’re excited to strike out on their own, but they are surprised to discover that they signed a non-compete or a non-solicitation clause. Maybe they had forgotten about that part of the contract, or they overlooked it at the time, but that agreement may still be binding.

When you sign that important document, it is crucial to read it carefully and understand what implications might affect your future plans.

Other Aspects of the Contract

In addition to the non-compete and non-solicitation clauses, there are other aspects covered by a general employer/employee contract:

1. Employment Duties — a listing of job expectations.
2. Term — the date which employment starts and how long it is expected to last. This is typically either a fixed-term or automatically renewing.
3. Compensation — payment and vacation time allotted.
4. Benefits — health insurance, disability, life insurance, etc.
5. Confidentiality and Competitive Activities — prohibitions (described above), which might include names of direct competitors that an employee may not work for.
6. Company’s Property — terms of how the employee should act on company property.
7. Termination — the reasons for and the methods by which an employee can be terminated from employment.
8. Miscellaneous — extra provisions, which can include Titles and Subtitles, No Implied Waivers, Personal Services, Severability, Applicable Law, Notices and others.

Although these employer/employee agreements are intended to be simple and routine, you may still have questions that are specific to you. If you are an employer or employee and you have concerns regarding an employment contract, contact us to set up a consultation.