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WALL STREET JOURNAL
OVER
250,000
15th Edition SOLD
Legal Guide for
Small
STARTING &
RUNNING A
Business
Attorney Fred S. Steingold,
author of The Employer’s Legal Handbook
Free Legal Updates at Nolo.com
15th Edition
Legal Guide for
Starting & Running
a Small Business
Attorney Fred S. Steingold
LAW for ALL
FIFTEENTH EDITION APRIL 2017
Editor MARCIA STEWART
Cover Design SUSAN PUTNEY
Book Design TERRI HEARSH
Proofreader ROBERT WELLS
Index ELLEN SHERRON
Printing BANG PRINTING
ISSN: 2163-0321 (print)
ISSN: 2325-3975 (online)
ISBN: 978-1-4133-2407-5 (pbk)
ISBN: 978-1-4133-2408-2 (epub ebook)
This book covers only United States law, unless it specifically states otherwise.
Copyright © 1992, 1995, 1997, 1998, 1999, 2001, 2003, 2005, 2006, 2008, 2009, 2011,
2013, 2015, and 2017 by Fred Steingold. All rights reserved. The NOLO trademark is
registered in the U.S. Patent and Trademark Office. Printed in the U.S.A.
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Please note
We believe accurate, plain-English legal information should help you solve many
of your own legal problems. But this text is not a substitute for personalized
advice from a knowledgeable lawyer. If you want the help of a trained profes-
sional—and we’ll always point out situations in which we think that’s a good
idea—consult an attorney licensed to practice in your state.
Acknowledgments
Special thanks to Nolo publisher Jake Warner—the cheerful perfectionist
whose ideas infuse every page of this book—and to Nolo editor Mary
Randolph, who deftly whipped the early manuscripts into final shape.
Thanks, too, to the rest of the remarkable Nolo family for their invaluable
contributions— especially Steve Elias, Robin Leonard, Barbara Hodovan,
Jackie Mancuso, Tony Mancuso, Barbara Kate Repa, Beth Laurence, Ilona
Bray, Catherine Caputo, Betsy Simmons, JinAh Lee, and Marcia Stewart.
I am indebted to Attorney David Steingold for bringing this edition up to date.
In addition to the folks at Nolo, these other professionals generously shared
their expertise to make this book possible:
• Attorneys Charles Borgsdorf, Douglas Ellmann, Larry Ferguson, Sandra
Hazlett, Peter Long, Michael Malley, Robert Stevenson, Nancy Welber,
and Warren Widmayer.
• Certified public accountants Mark Hartley and Lonnie Loy.
• Insurance specialists James Libs, Mike Mansel, and Dave Tiedgen.
Finally, thanks to my small business clients, who are a constant source of
knowledge and i nspiration.
About the Author
Fred S. Steingold practices law in Ann Arbor, Michigan. His main practice areas
are business law and real estate law. Fred is the author of several Nolo books,
including Legal Guide for Starting & Running a Small Business, Legal Forms for
Starting & Running a Small Business, The Employer’s Legal Handbook, Negotiate
the Best Lease for Your Business, The Complete Guide to Buying a Business, and The
Complete Guide to Selling a Business.
Table of Contents
Your Legal Companion for Starting and Running a Small Business ...................1
1 Which Legal Form Is Best for Your Business? ...........................................................................3
Sole Proprietorships .....................................................................................................................................................6
Partnerships.....................................................................................................................................................................9
Corporations .................................................................................................................................................................12
Limited Liability Companies ..................................................................................................................................22
Choosing Between a Corporation and an LLC ..............................................................................................24
Special Structures for Special Situations ..........................................................................................................27
The Benefit Corporation..........................................................................................................................................31
2 Structuring a Partnership Agreement .........................................................................................35
Why You Need a Written Agreement ..............................................................................................................36
An Overview of Your Partnership Agreement ..............................................................................................37
Changes in Your Partnership ................................................................................................................................46
3 Creating a Corporation ..............................................................................................................................47
The Structure of a Corporation ............................................................................................................................50
Financing Your Corporation ..................................................................................................................................52
Compensating Yourself ............................................................................................................................................53
Do You Need a Lawyer to Incorporate? ...........................................................................................................54
Overview of Incorporation Procedures ...........................................................................................................54
Eleven Basic Steps to Incorporate .......................................................................................................................55
After You Incorporate ..............................................................................................................................................62
Safe Business Practices for Your Corporation ................................................................................................63
4 Creating a Limited Liability Company .........................................................................................69
Number of Members Required.............................................................................................................................70
Management of an LLC ............................................................................................................................................71
Financing an LLC .........................................................................................................................................................71
Compensating Members .........................................................................................................................................73
Choosing a Name ........................................................................................................................................................74
Paperwork for Setting Up an LLC ........................................................................................................................75
After You Form Your LLC ........................................................................................................................................78
Safe Business Practices for Your LLC ..................................................................................................................79
5 Preparing for Ownership Changes With a Buyout Agreement ...........................85
Major Benefits of Adopting a Buyout Agreement .......................................................................................87
Where to Put Your Buyout Provisions ..............................................................................................................90
When to Create a Buyout Agreement ...............................................................................................................92
6 Naming Your Business and Products ............................................................................................93
Business Names: An Overview ..............................................................................................................................95
Mandatory Name Procedures ..............................................................................................................................96
Trademarks and Service Marks ..........................................................................................................................100
Strong and Weak Trademarks ............................................................................................................................101
Before the Trademark: Name Searches ..........................................................................................................102
How to Use and Protect Your Trademark ....................................................................................................104
7 Licenses and Permits ...................................................................................................................................105
Federal Registrations and Licenses ...................................................................................................................107
State Requirements .................................................................................................................................................108
Regional Requirements .........................................................................................................................................110
Local Requirements ................................................................................................................................................110
How to Deal With Local Building and Zoning Officials ..........................................................................112
8 Tax Basics for the Small Business ....................................................................................................115
Employer Identification Number ......................................................................................................................116
Becoming an S Corporation ................................................................................................................................119
Business Taxes in General .....................................................................................................................................120
Business Deductions ...............................................................................................................................................126
Tax Audits ...................................................................................................................................................................131
9 Raising Money for Your Business ....................................................................................................135
Consider Writing a Business Plan......................................................................................................................136
Two Types of Outside Financing .......................................................................................................................139
Thirteen Common Sources of Money ............................................................................................................144
Document All of the Money You Receive ....................................................................................................150
10 Buying a Business ............................................................................................................................................155
Finding a Business to Buy .....................................................................................................................................157
What’s the Structure of the Business You Want to Buy? .......................................................................158
Gathering Information About a Business .....................................................................................................162
Valuing the Business ...............................................................................................................................................163
Other Items to Investigate ...................................................................................................................................165
Letter of Intent to Purchase ................................................................................................................................168
The Sales Agreement ..............................................................................................................................................170
The Closing .................................................................................................................................................................178
Selling a Business ......................................................................................................................................................179
11 Franchises: How Not to Get Burned ............................................................................................183
What Is a Franchise? ................................................................................................................................................185
The Downsides of Franchise Ownership .......................................................................................................186
Investigating a Franchise .......................................................................................................................................189
The Franchise Disclosure Document ..............................................................................................................190
The Franchise Agreement ....................................................................................................................................196
Resolving Disputes With Your Franchisor ....................................................................................................200
12 Insuring Your Business ...............................................................................................................................201
Working With an Insurance Agent ..................................................................................................................202
Property Coverage...................................................................................................................................................204
Liability Insurance ....................................................................................................................................................208
Other Insurance to Consider ..............................................................................................................................211
Saving Money on Insurance ................................................................................................................................213
Making a Claim .........................................................................................................................................................215
13 Negotiating a Favorable Lease ...........................................................................................................217
Finding a Place ...........................................................................................................................................................219
Leases and Rental Agreements: An Overview ............................................................................................219
Short-Term Leases (Month-to-Month Rentals) ..........................................................................................220
Written Long-Term Leases ...................................................................................................................................221
Additional Clauses to Consider .........................................................................................................................233
Shopping Center Leases ........................................................................................................................................234
How to Modify a Lease..........................................................................................................................................235
Landlord-Tenant Disputes ....................................................................................................................................235
Getting Out of a Lease...........................................................................................................................................237
When You Need Professional Help ..................................................................................................................237
14 Home-Based Business ...............................................................................................................................239
Zoning Laws ...............................................................................................................................................................240
Private Land Use Restrictions .............................................................................................................................244
Insurance .....................................................................................................................................................................246
Deducting Expenses for the Business Use of Your Home ......................................................................247
15 Employees and Independent Contractors .............................................................................253
Hiring Employees .....................................................................................................................................................255
Job Descriptions .......................................................................................................................................................258
Job Advertisements.................................................................................................................................................259
Job Applications .......................................................................................................................................................259
Interviews ....................................................................................................................................................................260
Testing ...........................................................................................................................................................................260
Background Checks ................................................................................................................................................264
Immigration Law Requirements........................................................................................................................273
Personnel Practices .................................................................................................................................................274
Illegal Discrimination .............................................................................................................................................275
Wages and Hours .....................................................................................................................................................277
Occupational Safety and Health .......................................................................................................................280
Workers’ Compensation .......................................................................................................................................281
Termination of Employment ..............................................................................................................................282
Unemployment Compensation ........................................................................................................................284
Independent Contractors ....................................................................................................................................285
Employers’ Health Care Insurance Requirements Under Obamacare .............................................293
16 The Importance of Excellent Customer Relations ........................................................295
Developing Your Customer Satisfaction Policy .........................................................................................297
Telling Customers About Your Policies ..........................................................................................................299
17 Legal Requirements for Dealing With Customers .........................................................301
Advertising ..................................................................................................................................................................302
Retail Pricing and Return Practices ..................................................................................................................305
Warranties ...................................................................................................................................................................308
Consumer Protection Statutes ..........................................................................................................................313
Dealing With Customers Online .......................................................................................................................314
18 Cash, Credit Cards, and Checks........................................................................................................317
Cash ...............................................................................................................................................................................318
Credit and Debit Cards .........................................................................................................................................318
Checks ...........................................................................................................................................................................320
19 Extending Credit and Getting Paid ...............................................................................................325
The Practical Side of Extending Credit ...........................................................................................................326
Laws That Regulate Consumer Credit ............................................................................................................332
Becoming a Secured Creditor .............................................................................................................................333
Collection Problems ...............................................................................................................................................334
Collection Options ..................................................................................................................................................337
20 Put It in Writing: Small Business Contracts ..........................................................................339
What Makes a Valid Contract ............................................................................................................................341
Unfair or Illegal Contracts ....................................................................................................................................343
Misrepresentation, Duress, or Mistake ..........................................................................................................343
Must a Contract Be in Writing? .........................................................................................................................344
Writing Business-to-Business Contracts........................................................................................................347
Signing Your Contracts .........................................................................................................................................350
Electronic Contracting ..........................................................................................................................................353
Enforcing Contracts in Court .............................................................................................................................354
What Can You Sue For? .........................................................................................................................................355
21 The Financially Troubled Business .................................................................................................359
Thinking Ahead to Protect Your Personal Assets .....................................................................................360
Managing the Financially Troubled Business ...............................................................................................363
Seeking an Objective Analysis ............................................................................................................................366
Workouts .....................................................................................................................................................................367
Selling the Business .................................................................................................................................................370
Closing the Business ...............................................................................................................................................371
Understanding Bankruptcy .................................................................................................................................372
22 Resolving Legal Disputes .........................................................................................................................381
Negotiating a Settlement .....................................................................................................................................382
Understanding Mediation ...................................................................................................................................383
Arbitration ..................................................................................................................................................................385
Going to Court ..........................................................................................................................................................387
23 Representing Yourself in Small Claims Court .....................................................................393
Deciding Whether to Represent Yourself .....................................................................................................394
Learning the Rules ...................................................................................................................................................396
Meeting the Jurisdictional Limits .....................................................................................................................396
Before You File Your Lawsuit ..............................................................................................................................396
Figuring Out Whom to Sue .................................................................................................................................399
Handling Your Small Claims Court Lawsuit .................................................................................................399
Representing Yourself If You’re the Defendant ..........................................................................................402
Appealing Small Claims Decisions ....................................................................................................................402
Collecting Your Judgment ...................................................................................................................................402
24 Lawyers and Legal Research ................................................................................................................405
How to Find the Right Lawyer ...........................................................................................................................406
Fees and Bills ..............................................................................................................................................................408
Problems With Your Lawyer ...............................................................................................................................410
Do-It-Yourself Legal Research .............................................................................................................................410
Appendix
Checklist for Starting a Small Business ......................................................................................415
Index
....................................................................................................................................................................................421
