Q&A Topic: What Are Some of the Most Important Areas I Need to Address When Starting a New Business or Buying an Existing Business?
Kevin B. Faga, Esq., PC
Q: How do I determine the best type of business entity for my business?
A: Regardless of whether you’re going to open a new business or buy another (existing) business, you need to decide what sort of business entity you want to operate within: sole proprietorship, partnership, or via a more formal entity such as a corporation or limited liability company (LLC).
Corporations or LLCs shield the owner(s) from most liability to a third party and, in most cases, especially when you’re dealing with the public, I recommend establishing a corporation or an LLC for the benefit of those protections.
Once you make the decision about one or the other, it’s important to consider where your business entity will be established. Even though you’re operating in New York State, there may be benefits to incorporating in another state, like Nevada or Delaware, which offers favorable tax rates. The answers depend largely upon tax advice, which is why I advise my clients to work with a tax advisor as well as an attorney during the decision making process to develop an understanding of what’s best for them.
Q: I’m ready to acquire assets for my business operation, but what do I need to consider when deciding to buy or lease? What are some distinctions between buying assets for new and existing businesses?
A: After setting up your official business entity, you’ll want to begin conducting business and acquiring assets. Depending upon whether you’re buying an existing business — and its accompanying inventory, equipment, good will or intellectual property — or whether you’re buying or leasing new equipment direct from the manufacturer or a retailer, the decisions you make will be different.
In the first case, if you’re buying (or leasing) from the previous owner, you’ll need to make sure the items are not encumbered by liens or judgments against the seller. Other parties may have claims against the items you want to acquire. The kitchen equipment in that restaurant may all be leased, even though the seller told you he owns it outright. Operating on “good faith” is risky, so due diligence is always recommended. An attorney can assist you in doing lien, judgment and tax searches.
If you’re acquiring items outright (and not from the previous owner), you’ll first need to decide if it’s in your best interest to buy or lease. Purchasing will cost more upfront out of pocket; financing or leasing will allow you to expend a minimal amount upfront. But you’ll incur ongoing monthly payment expenses that you must include in your budgeting. The question of whether to purchase or lease equipment is another one to discuss with your tax advisor, in part because owned/leased assets depreciate according to different schedules.
Q: I’m planning to lease space for my business. What details do I need to discuss with my landlord?
A: You need a written lease, signed by both you and your landlord, to detail each party’s rights as well as your distinct obligations. It is no surprise landlords require tenants to pay their rent on time. But, if you are operating a storefront or other business that’s open to the public, your landlord may also require you to keep the sidewalk clean of everything from garbage to snow and ice. The lease should specify who is responsible for any violations or liability for injuries that may occur as a result of failure to properly perform delineated responsibilities.
Even though you are convinced you’ll be successful, try to avoid personal guarantees of rent payments. If that’s not possible, a ‘good guy clause’ will limit the amount of personal liability you may incur. Leases are normally drawn up to cover a certain number of months. However, if you sign a five-year lease and your business fails after year one, you will want to be able to surrender your keys and walk away without the responsibility to pay rent for the rest of the full term. This is very important: I’ve seen good guy clauses that limit payment of rent to as little as three months following business failure or another reason for surrendering the premises.
Q: How important is it to have a business plan, research regulations in your field of business, establish systems for recordkeeping, obtain insurance, and more, prior to opening my doors?
A: In New York State, there are many businesses that require licenses, such as restaurants, mortgage brokers, therapists and others, and you’ll be dealing with a licensing term — that is, an application and approval period — that may extend four to six months, or more. You could be ready to open the doors of your new upscale wine bar — and paying rent on your building—but you don’t have your liquor license yet. Make sure to plan and budget for such downtime.
Some people decide to open a business when they get laid off. But if you’re collecting unemployment, the moment you set up your corporation or get a business phone line installed, those first steps change your status to “employed” and your benefits will cease. One mortgage broker applied for his license but couldn’t operate the business until he had the license in hand, months later. He continued collecting unemployment, under the belief that he was not employed until his business was operational. He found out he was wrong when the State demanded the return of thousands of dollars in benefits he had received.
This situation is just one of many where I advise clients to develop a business plan. Consider the advisability of entering into any business in which you must always rely on the talents of employees. For instance, if you don’t know how to cook, you’re at the mercy of your chefs; maybe you know how to cook, but haven’t a clue how to order supplies and produce or keep the books. You run the very real risk of employees making salary, vacation or creative demands that you cannot meet. Do you give in or let them walk out? Either way, you might as well be out of business.
You also need to know the regulations attendant to your field of business. If, for example, your cigar shop buys raw tobacco in addition to manufactured cigars, you need to understand the excise tax structure for each product. You do not want the unpleasant surprise of receiving an enormous, unexpected bill a year or two down the road, simply because you were unaware.
Working conditions, salary requirements and other laws have enormous impact too. If you don’t maintain proper recordkeeping, employees could claim they haven’t been properly paid for overtime. If a dozen employees united, you might be looking at a lawsuit that puts you out of business and places your entire life savings in jeopardy. The labor laws apply to “off the books” workers as well. Knowing the laws and regulations about employment is extremely important and so is following them to the letter. I have represented many clients who paid employees off the books and did not pay payroll or income taxes. But, if there are proper records, at least the employer can show they didn’t cheat the employees. The employer may have paid employees in cash because the worker was undocumented or didn’t have a bank account. But federal and state laws prohibit employers from hiring people without social security numbers. It’s a risky business practice; one I would not advise.
About The Law Offices of Kevin B. Faga
The Law Offices of Kevin B. Faga is located in Westchester County, and serves the five boroughs of New York City and surrounding counties including Westchester, Putnam, Orange, Rockland, Nassau and Suffolk. Main areas of practice include real estate law; criminal defense; wills, trusts and estates; personal injury; civil litigation; matrimonial and family law; child abuse and neglect; and general business law. Since 2006, Kevin Faga has served as Legal Advisor to Hispanics Across America, The New York State Federation of Taxi Drivers, The Bodega Association of the United States and The Upper Manhattan Restaurant and Lounge Association. Mr. Faga is also proud to serve on the Board of Directors of Happy Tales Animal Sanctuary.
Kevin B. Faga, Esq., PC
The Law Offices of Kevin B. Faga
For a free consultation, call 914.358.1373
399 Knollwood Road, Suite 301
White Plains, NY 10606