1000 Word Essay
akefle
abrams_2012_ch16.pdf
Chapter
16 Company Legal Structure 376 Dealing with Partners 381
Deciding whether to have a partner 381 partnership agreements: how to protect yourself 381
Protecting Your Intellectual Property (IP) 383 Copyrights 383 patents 385 trademarks 386 Ip agreements 387
Contracts 389 Licenses, Permits, and More 391
Federal tax ID numbers 392 State licenses, certifications, and ID numbers 392 reseller’s license 392 County and city licenses and permits 393
Taxes 393 payroll taxes and withholding 393 Income tax 395 Sales tax 397
Real-World Case Giving away Facebook 398
Critical Thinking Exercise Get It in Writing 400
LEGAL ISSUES
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Company Legal Structure Taking care of your company’s legal health is like taking care of your personal health: An ounce of prevention is better than a pound of cure. Time after time, entrepreneurs end up in legal battles costing thousands of dollars that could have been avoided with a $300 trip to an attorney.
When starting a business, one of the first questions you need to answer is what legal form your business will take. This may sound like a question that shouldn’t be important to a lot of businesses—especially when they’re just starting out. Who needs to pay hundreds of dollars in corporation or legal fees to a government agency simply to acquire a certain kind of legal structure?
Choosing a legal form affects how much you pay in taxes, who can invest in your company, and most important, your own personal financial security. Three things to keep in mind when choosing a legal form are:
n Liability. Legally, corporations and other corporate forms (see the following section on legal structures) are considered individual entities. As such, the corporation—not individual shareholders—is responsible for the actions of the business. In other words, if something goes very wrong and the company is sued, only the assets of the corporation are at stake, not the owners’ personal assets. (There are some exceptions to this rule, but generally, your personal liability is greatly limited.)
Obviously, having liability limited to the company’s assets is quite desirable, since it means your personal assets—your home, investments, and savings— can’t be seized if your company has a legal judgment against it.
In this chapter, you’ll learn how to: n Evaluate the various company legal structures and select one
n Determine whether to take on a partner
n Establish and evaluate partnership terms and draw up partnership agreements
n Understand the various forms of intellectual property (IP) and how to obtain IP rights
n Analyze and create simple written contracts and agreements
n Determine which licenses, permits, certifications, and ID numbers are necessary
n Establish a basic understanding of taxes
learning objectives
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Buy-sell agreement this spells out the terms by which one partner can buy the other out. In the event of a dispute, the departure of a principal, or differing goals, a buy-sell agreement can enable the company to survive.
Copyright Legal protection covering any type of work that is “fixed” and “tangible” from others who would copy, imitate, or steal that work.
DBA “Doing business as” (DBa or d/b/a) is a legal term that means the business name differs from the legal name of its owner(s), whether they are human or corporate.
Fictitious business name a business name that differs from the legal name of the owner(s).
Intellectual property (IP) Unlike physical or real property, refers to creations aris- ing from the human intellect and inventiveness, such as inventions, designs, artistic works, software, names, and music. Ip is typically intangible and has value in com- merce.
Nexus a presence in a particular state. a company has a nexus once it reaches a certain threshold for business activity in that state. at that point, it must pay income taxes and must collect and remit sales taxes to the state.
Nondisclosure agreement (NDA) protects a company’s ideas. By signing an NDa, a person promises not to disclose any of the confidential infor- mation they learn during their dealings with another company.
Pass-through taxation allows the income or loss generated by the business to be reflected on the personal income tax return of the owners, eliminating the possibility of double taxation.
Patent a government-issued protection of an invention, pro- tecting the inventor from having others copy or sell imi- tations of the invention for an extended period.
Quarterlies tax estimates paid every three months, generally based on the previous year’s earnings.
Trade secret a formula, practice, process, design, instrument, pat- tern, or compilation of information used by a business to obtain an advantage over competitors.
Trademark (or Service mark) a word, phrase, symbol, or design (or a combination of these) that identifies and distinguishes the maker of a product (or service) from makers of other, similar, prod- ucts (or services).
en.tre.pre.neur.ship key terms
n Double taxation. No one likes paying taxes, and you certainly don’t want to pay taxes twice—once on income for the business and then again when that income is distributed as profits to you. Instead, look for a legal form that allows for the profits of the company to pass through to the owners, without having to pay corporate taxes first.
n Ownership. Some legal forms of business limit the number or type of people who can invest in your company. If you’re seeking a large number of investors or international investors, find a corporate structure (for instance, a C corporation) that permits such stockholders.
Three things to remember when choosing a legal form n Liability n Double taxation n Ownership
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Types Of LegaL fOrms Of U.s. BUsiness OrganizaTiOns
LegaL Form What Is It? advantages
sole Proprietorship an unincorporated business owned by one person. If you don’t set up a legal structure, and no one else owns any part of your business, you have a sole proprietorship.
Simple. No legal forms or costs to establish. No double taxation.
general Partnership a business with more than one owner. all partners actively participate in the business.
You have the time and talents of more than one person. No double taxation.
Limited Partnership a business with an owner or owners who manage the business (general partners) and other partners who do not (limited partners).
protects the personal assets of lim- ited partners, who aren’t responsible for the debts and obligations of the business. Limits investors’ financial exposure.
Limited Liability Company (LLC) or Limited Liability Partnership (LLP)
a popular legal form that provides much of the protection of incorporat- ing with most of the simplicity of a sole proprietorship. LLps are LLCs for certain professional practices.
protects personal assets against most business losses. No double taxation. relatively simple, inexpensive to establish and maintain. Can distribute profits and losses disproportionately.
“C” Corporation a corporation is a legal entity, sepa- rate from its owners. Major investors often want companies to be C corpo- rations.
protects owners’ personal assets against corporate losses and obliga- tions. Can issue stock. Unlimited number of stockholders. Costs of ben- efits for employees and owners are deductible.
“s” Corporation a type of corporation that allows pass-through taxation instead of double taxation. S corporations are less popular since the introduction of LLCs.
the personal liability protection of a corporation with the pass-through taxation treatment of a sole propri- etorship.
“B” Corporation a type of corporation, allowed for in a few states, that is organized for the public benefit as well as for the ben- efit of the shareholders.
Gives directors of a company more legal protection and responsibility for making decisions motivated by achieving a public good rather than merely maximizing profits.
not-for-Profit, "501(c)(3)" organization
an organization, agency, institution, charity, or company with charitable, educational, or other public benefit goals, that has been certified as tax exempt by the IrS.
No federal income taxes; usually exempt from state and local taxes. Donations are tax deductible. has members and Board of Directors rather than shareholders.
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dIsadvantages tax treatment WatCh out For
the business owner, and possibly their spouse, has unlimited personal liability for the debts, obligations, and judgments against the company.
pass-through profits and losses. the business owner can deduct losses against other personal income.
In community property states, spouses may be liable for business debts as well as having an ownership interest in the company.
each partner can enter into contracts and incur debts for which all partners are responsible and have unlimited personal liability.
pass-through profits and losses to the partners who pay tax at their indi- vidual rates. partnership pays no taxes but must file a Form 1065.
If in business with others, you have a partnership whether you draw up documents or not, and partners have a share of the business and other rights.
Limited partners cannot participate in running the company. General partners are all liable for the company’s obligations.
Limited partners can deduct “passive” losses against “passive income” only, and the amount they can invest is capped.
If a limited partner participates in any way in the management of the company, they can lose their liability protection.
each owner can enter into contracts and incur debts for the entire LLC. Must file articles of Organization with your state; often requires annual state fees.
pass-through profits and losses to each owner. LLCs pay no taxes but must file a Form 1065.
Can be cumbersome converting from an LLC to a C corporation in order to accept VC financing or to be acquired by a large corporation in return for stock.
Double taxation. Must file articles of incorporation with your state. annual state fees. requires record-keeping, annual meetings, and a Board of Directors in most states if more than one stockholder.
Double taxation: Corporation and shareholders each pay tax on income. however, if the corporation keeps significant cash reserves, this can have lower tax consequences than pass- through taxation.
Securities rules affect how you sell stock and to whom. Use a lawyer to help you determine whether to set up a C corporation.
Disadvantages over an LLC include limits on number and residency of stockholders, proportionate distribution of profits and losses, and more record keeping.
pass-through taxation, but profits and losses must be allocated at same per- centage as ownership.
ask your lawyer if there is any benefit in choosing an S corporation over an LLC or C corporation in your specific situation.
Limited number of states allow this option.
Same tax treatment as other corpora- tions.
requires an annual "benefit report," detailing which public benefits the company has achieved, that meets independent, third-party standards.
Must not be operated for the financial benefit of any individuals; no profits distributed to individuals. Must meet IrS requirements.
tax exempt. May not engage in any political activity. typically must raise money through contributions and grants. Board of Directors can oust founders or restrict salaries.
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Build-Your-Business Worksheet
Your Legal structure LegaL Form
What is the legal form of your company currently?
¨ sole proprietorship ¨ limited liability company ¨ Partnership ¨ B corporation ¨ subchapter s corporation ¨ not-for-profit corporation ¨ C corporation ¨ no legal entity/status ¨ other, describe:_________________________________
What is the intended legal form if different from above?
¨ sole proprietorship ¨ limited liability company ¨ Partnership ¨ B corporation ¨ subchapter s corporation ¨ not-for-profit corporation ¨ C corporation ¨ no legal entity/status ¨ other, describe:_________________________________
ownership
if a sole proprietor or partnership, list the owners: ______________________________________________________
if incorporated, how many shares of stock have been issued? _____________________________________________
Who owns the stock and in what amounts? ___________________________________________________________
in which state(s), province(s), country(s), etc. are you legally incorporated or registered to do business? list dates and
specifics: ______________________________________________________________________________________
have you secured written agreements between/with:
¨ Principals, partners ¨ key employees/management ¨ suppliers ¨ Customers ¨ investors ¨ strategic partners
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Dealing with Partners Nothing affects your day-to-day work life more than the people you work with. Yes, work can be satisfying when you have challenging tasks, play with cool technology, or make lots of money. But whether or not you feel like getting out of bed in the morning can be greatly influenced by whom you’re going to work with that day.
Deciding whether to have a partner If you’re going to take on a partner, carefully consider why you want or need one. As you start your business, you may feel uncertain about being on your own, but that feeling of uncertainty may pass quickly. A partner will be around for a long, long time. Remember, partners own a piece of the busi- ness. Even if you bring in someone with only a minority interest as a partner, your future is tied to them.
The best way to take on a partner is with clear-cut definitions of responsibili- ties and authority. It’s nice to believe you will make every decision together, but that’s not realistic. Who, in the end, gets to call the shots? And be careful about going into business with a friend—often both the business and the friendship suffer.
Make certain your partnership expectations are realistic. Are they willing to work as hard as you? Do they bring the same level of talent or skill (although perhaps in a different area) as you? Do they have the same long-term view of where they want to be? Partnerships can be terrific, but when things go wrong between the partners, it can often mean the demise of the whole company.
Partnership agreements: How to protect yourself If you intend to go into business with other people, even a spouse or a friend, formalize your arrangement with a written partnership agreement. If you already work with a partner, you still need to do this! If one partner doesn’t want to do this, that’s a big red flag. Take the time to work out as many details as you can. Be certain to include a way to buy each other (or the other’s heirs) out of the business. A messy “divorce” from a business partner is as difficult as a messy marital divorce—with potentially greater financial consequences. Drawing up an agreement, often called a buy-sell agreement, now will help avoid difficulties if you later decide to go your separate ways.
And here’s something to keep in mind: In the eyes of the law, you don’t need a written agreement to have a partnership. If, over a beer, you and a friend decide to start selling your own special salsa at a street fair, you make up a batch, and you start selling some salsa to friends, you may have become part- ners. Your friend may acquire rights to your salsa recipe, and you may each be responsible for all bills and obligations. So be very clear about the nature of the relationship before you begin working with anyone.
Getting to know you... Spend time getting to know the business skills, attitudes, and aspirations of any potential part- ners—even if you’ve been friends or acquaintances for years. Find out whether their goals, work style, and values fit yours. You have more leeway, legally, to ask questions of potential partners than of employees.
Of course, make certain your poten- tial partner is honest, but also examine their personal attitudes, how they handle stress, how much money they need and how soon, family or other demands on their time, and any other issues that may affect your working relationship.
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Build-Your-Business Worksheet
discussing Partnership terms Work with one or more other students and determine with your “partners” the terms of your partnership. If you are launching a new business with partners, after completing this exercise, meet with a lawyer to draw up a formal partnership agreement.
ownership Division Who owns what percent?
goals how big a company do you want to have? Where do you see the company being in five years? What personal goals of yours will affect how much time you have to spend with the company?
Jobs/responsibilities What jobs and responsibilities does each partner have? Can partners work for any other company or do any other work on the side?
Decisions how will general business decisions be made? What decisions does each partner have final authority on? Who has the final authority for decisions for the company as a whole?
Communication how will you communicate regularly? how will you resolve serious disputes?
exit strategy and dissolution agreement What happens if one partner wants to leave the business or move? What if one partner wants to sell the company? What happens if a partner dies or becomes disabled?
other issues:
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You’ll also want to discuss with your lawyer what legal form your partnership should take. A simple partnership does not provide protection for your per- sonal assets or your partner’s. Instead, consider incorporating or becoming a limited liability company (LLC) or a limited liability partnership (LLP).
Protecting Your Intellectual Property (IP) One of the most important legal considerations for an entrepreneur is the concept of intellectual property, or “IP.”
Every company has certain intangible assets that are, or can be, extremely valuable. Most of them come under the heading of IP—assets that have value because of the knowledge, recognition, and inventiveness they consist of. Some businesses, such as software companies, publishers, inventors, consul- tants, and so on, only have products composed of intellectual property.
It’s easy to understand and place a value on physical property. We know how much a running shoe or a mobile phone may cost. But what’s the value of the Nike “swoosh”? The design of an iPhone? The content of a Beatles song? We all recognize that these things possess a value far beyond simply the physical property, because of the value of the ideas or the brand recognition behind them: in other words, the intellectual property underlying the “swoosh,” the iPhone design and interface, or the Beatles’ timeless music and lyrics.
Entrepreneurial companies quickly acquire intellectual property beyond their physical property, and you’ll want to protect that IP. If you design and manufacture furniture, you’ll want to protect its design and not merely the wood that you use to make it. If you develop a luxury resort, you’ll want to protect its brand name, not just the buildings. If you devise ways to manu- facture products cheaper and faster, you’ll want to find ways to protect those processes.
While protecting intellectual property is always a challenge—it is, after all, intangible—there are several methods to protect a company’s IP.
Copyrights If you’re creating works that others might want to copy—content (such as text, books, articles, or blogposts), music, art, software, illustrations, videos, apps (such as mobile phone or Internet-based applications)—you’ll want to protect what you’ve created. This is where copyright law comes in. Copy- rights cover any type of work that is “fixed” and “tangible” even if it’s only computer code, words spoken on an audiotape, or images “fixed” in a movie.
Copyrights do not cover ideas, no matter how unique—only the particular fixed expression of those ideas. For instance, you can’t copyright your idea for the story of a boy who goes to a school for wizards, but you can copyright your novel telling the story of that boy. Once you have received a copyright, you retain the rights to that creation, and no one else can make a movie about your hero without your permission. You also can’t copyright “facts.” So
Buy-sell agreements Sooner or later, it’s likely that one or more partner will leave a part- nership due to personal reasons, disagreements, or death or disabil- ity. A buy-sell (or buyout) agree- ment spells out, in advance, how the company will be valued and how the departing partner, or their heirs, will be paid (for example, over time or with the proceeds of an insurance policy). A buy-sell agreement should also cover what happens if a partner becomes divorced, since part of their own- ership interest could become the property of their ex-spouse.
It’s highly advisable to put a buy- sell agreement in place as soon as a partnership is formed. It’s more difficult to discuss these issues once personal situations arise. And without a buy-sell agreement, you may be forced to sell the company to pay out a departing partner or their heirs, end up in litigation with a disgruntled partner, or find your- self in business with the ex-spouse of a partner.
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Build-Your-Business Worksheet
Questions to ask Potential Partners Use the questions in this checklist to discuss the terms of your partnership.
¨ Why are you going into business?
¨ What past experiences have prepared you for going into business?
¨ What are your personal goals for this business?
¨ how much money do you need now? how much money will you need over the next 12 months? 24 months? 36 months?
¨ how much money are you able and willing to invest in the company, if any?
¨ What kind of credit rating do you have?
¨ how big would you like the company to one day be?
¨ What would you like to see as the eventual exit strategy?
¨ how much time do you have to devote to the business?
¨ What other obligations do you have, both business and personal, that will affect your commitment of time, money, and attention?
¨ how do you see decisions being made? By whom?
¨ What areas of responsibility do you feel capable of taking on?
¨ What areas of responsibility do you want to be in charge of?
¨ how formal/informal do you like to be about such things as work hours, dress code, and so on?
¨ What are your business values and what kind of corporate culture do you want to create?
¨ is your family supportive of this commitment?
¨ have you ever been in a partnership before? What happened?
¨ What are your fears in this partnership?
¨ how will you resolve differences? What if one of the partners wants to sell or leave the business?
¨ Are you willing to sign a buy-sell agreement?
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if what you’re creating is purely the compilation of facts, you won’t be able to copyright that.
Under U.S. and Canadian laws, the rights to your creation are yours at the moment you create it. Theoretically, you don’t have to do anything to ensure your copyright. But that’s putting you at some risk.
You should take at least some steps to protect your asset. The easiest thing to do to protect your copyright is to add a simple copyright notice whenever you produce something. Just add the word “copyright,” the © symbol, the date, and your name.
However, this does not enable you to challenge someone who illegally cop- ies your work and it does not, conclusively, establish authorship. Instead, it’s wise, for greater protection, to register your copyright with the U.S. Copy- right Office (www.copyright.gov); it’s inexpensive and easy. In Canada, reg- ister your copyright with the Canadian Intellectual Property Office (www. cipo.ic.gc.ca).
Patents Unlike copyrights, patents are designed to protect new inventions rather than creative works. A patent is a government-issued right, protecting your invention from competition from other imitators. It enables you to—in the words of U.S. patent law—“exclude others from making, using, offering for sale, or selling” or importing into the United States your invention (or copies of your invention). The three types of U.S. patents are:
n Utility patents: for inventing or discovering any new and useful process, machine, article of manufacture, composition of matter, or any new and useful improvement of the above.
n Design patent: for inventing a new, original, and ornamental design for something manufactured (made).
n plant patent: for inventing or discovering and artificially reproducing a distinct and new variety of plant.
To qualify for a patent, your new invention or process must be both unique and “nonobvious.” If someone infringes on your patent, it is your responsi- bility—not the government’s—to pursue legal action.
Copyrights are easy to get; patents are very tough to acquire. Copyrights cost little or nothing; patents are typically expensive. Copyrights are yours the instant you create the work; patents can take years to get issued. Patents are also difficult and costly to enforce—if someone violates your patent and starts selling a knockoff of your product, it may take a lot of money (in legal fees) and time to put a stop to it. And if the perpetrator is overseas, enforce- ment will be even harder. So if you’re building your business around a new invention, process, machine, recipe, or formula that needs to be patented, it will be tough going.
Shhhhh! Trade secrets are more difficult to protect and defend in court than are patents or trademarks. One company that has managed to protect its trade secret well is Coca-Cola. For more than 120 years, the company has zealously guarded its formula for mixing its flagship product. Trade secrets are not limited to products, though. Many manufacturing firms have business processes that allow them to operate more efficiently than other firms, and they classify those processes as trade secrets.
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If, however, your invention is likely to be worth a good deal of money, you’ll want to pursue the patent process. You’ll need a competent patent attorney. An experienced one will warn you of the costs and pitfalls before you get too far down the road.
Trademarks One of the most valuable IP assets a company can develop is the brand name of its company, products, or services. You’ll work hard to get customers to look for and trust your brand names, so you certainly want to keep others from offering similar goods using your names. That’s where trademark laws come in. There are two primary kinds of trademarks:
n Trademark. A word, phrase, symbol, or design (or a combination of these) that identifies and distinguishes the maker of a product from makers of other, similar, products.
n service mark. The same as a trademark, except that a service mark identifies and distinguishes the provider of a service rather than a product. (In Canada, a trademark can be used for either a product or a service.)
When your company acquires the rights to a trademark or a service mark, other companies are legally prevented from using your trademark or ser- vice mark, whether expressed in a name, logo, tagline, or other distinctive marker, on their competing products or services. Note the emphasis on the word “competing”: Two companies that operate in completely different busi- ness spheres can have the same name. It’s only when there’s possible confu- sion between two entities that trademark law becomes relevant.
There are limits to what you can trademark. You may be surprised—and frus- trated—to learn that you can’t trademark the simplest names. That’s because the U.S. Patent and Trademark Office requires a mark to be “distinctive” and not simply “descriptive.” For instance, you can’t get a trademark for a health resort called Spa, because it’s merely descriptive.
You may run into difficulty if you use a name that’s similar to that of a bigger, better-known company, even if you think you can get a trademark for that name. McDonald’s, for instance, has been very effective in keeping others from using the “Mc” as a prefix for many different kinds of products and companies. A national juice bar company whose name started with the letter “J” was able to keep other, small juice bars from using names starting with the letter “J” just by taking them to court. Often, it’s the company with the biggest bank account and most aggressive lawyers, rather than the ones with the law on their side, that controls a name or trademark.
Methods to protect intellectual property (IP) n Copyrights n Patents n Trademarks
Is registration of my mark required? No. You can establish rights in a mark based on its legitimate use. But in the United States, owning a federal trademark registration on the Principal Register secures the following advantages:
n Constructive notice to the public of the registrant’s claim of own- ership of the mark
n A legal presumption of the reg- istrant’s ownership of the mark and the registrant’s exclusive right to use it nationwide on or in connection with the goods and/or services listed in the reg- istration
n The ability to bring an action concerning the mark in federal court
n The use of the U.S. registration as a basis to obtain registration in foreign countries
n The ability to file the U.S. reg- istration with the U.S. Customs Service to prevent importation of infringing foreign goods
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DOing a TraDemark searCh
When deciding on a name for your company, product, or service, first check for trademarks to determine whether anyone else is already using the name you’re considering. To begin a trademark search, go to the website of the U.S. Patent and Trademark Office, or USPTO (www.uspto.gov/), find the section for trademarks, and follow the links to “Search.” In Canada, you can do a trademark search on the website of the Canadian Intellectual Property Office (www.cipo.ic.gc.ca).
To see the various results, try the different ways offered to search. Begin by searching as broadly as possible—singular and plural forms of your words, similar words, alternate spellings, and so on. Results may show both “live” and “dead” marks. Dead marks are those that previous owners have let lapse.
Keep in mind that even if a particular name or mark doesn’t show up as being taken, that does not necessarily mean you will be able to trademark the name or mark. Some names may already be in use in interstate commerce but not yet officially registered. Other names or marks may not be allowed to be registered as trademarks. So don’t print up hundreds of brochures quite yet!
If you’re going to spend a great deal of money investing in a name and trade- mark, you might consider using a professional trademark search firm or hir- ing a trademark attorney to conduct a more complete search.
IP agreements In addition to copyrights, patents, and trademarks, the following two agree- ments may help protect your intellectual property as well:
n nondisclosure agreements. One of the simplest ways to protect your ideas is to get a signed nondisclosure agreement or confidentiality agreement before discussing your concepts with others, including partners, contractors, employees, and the like. This is a standard business procedure, and you’ll often be asked to sign NDAs if you’re trying to do business with another company. But be forewarned: Venture capitalists will refuse to sign NDAs, because they see far too many new business ideas.
n noncompete agreements. Once a trade secret is learned, it can’t be unlearned. So sometimes the biggest fear you’ll have is that a valuable and knowledgeable employee or a partner will leave you and go to work for a competitor or set up their own business. To guard against this, you may want to have employees sign an agreement limiting their ability to work for a competing firm (or start their own competing company) for a given period. However, not all noncompete agreements are enforceable (they must be reasonable and not keep someone from making a living), and the State of California, for one, doesn’t allow them at all except in very limited circumstances. Make certain an attorney reviews any noncompete agreements before you put them into effect.
When can I use the trademark symbols TM, SM, and ®? “Any time you claim rights in a mark, you may use the ‘TM’ (trade- mark) or ‘SM’ (service mark) desig- nation to alert the public to your claim, regardless of whether you have filed an application with the USPTO. However, you may use the federal registration symbol ‘®’ only after the USPTO actually registers a mark, and not while an application is pending. Also, you may use the registration symbol with the mark only on or in connection with the goods and/or services listed in the federal trademark registration.”
– from the U.S. Patent and Trademark Office
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re: (Company name)
nondisclosure Agreement
i agree that any information disclosed to me by ___________________________________ Company in connection with my review of the company will be considered proprietary and confidential, including all such information relating to the Company’s past, present, or future business activities, research, product design or development, personnel, and business opportunities.
“Confidential information” means any information disclosed, either directly or indirectly, in writing, orally, or by inspec- tion of tangible objects (including business plans, research, product plans, products, services, customers, markets, software, inventions, processes, designs, drawings, engineering, marketing, or finances).
Confidential information shall not include information previously known to me or the general public or previously recog- nized as standard practice in the field. it will also not include information that becomes generally available in the public domain through no action or inaction of myself, my employees, or others associated with me.
i agree not to use any Confidential information for any purpose except to evaluate and, if applicable, implement a poten- tial business relationship with ______________________________ Company. i agree not to disclose any Confidential information to third parties or to anyone except those who are required to have the information in order to evaluate or engage in discussions concerning the contemplated business relationship.
i agree that for a period of five years, i will hold all confidential and proprietary information in confidence and will not use such information except as may be authorized by the Company and will prevent its unauthorized dissemination. i acknowledge that unauthorized disclosure could cause irreparable harm and significant injury to the Company. i agree that upon request, i will return all written or descriptive matter, including the business plan and supporting documents, to the Company.
Accepted and Agreed to:
________________________________________________________________________________________________ signature
________________________________________________________________________________________________ Printed name
________________________________________________________________________________________________ Company/title
________________________________________________________________________________________________ date
Sample Document: nda
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Contracts A contract is an agreement between parties. Although the days of doing busi- ness with only a handshake may not be entirely over, having a written con- tract or signed letter of agreement is a normal, advisable business practice in virtually every instance.
As a business owner, you should get used to drawing up contracts or written agreements as a routine part of doing business, whether with customers or clients, vendors, employees, partners, distributors or retailers, landlords, and anyone else with whom there may later be the potential of misunderstanding or disagreement over the nature and terms of your relationship.
With a contract or letter of agreement, you:
n Spell out all terms, such as what each party will pay or be paid
n Detail the nature of the work to be performed as well as the deadlines for performing it
n Describe the conditions under which the work will be performed
n Elucidate ownership of and rights to any and all work created under the contract
n List all other considerations that are important to all parties
What’s the difference between a contract and a letter of agreement? Nothing, legally. Once you have a letter of agreement signed between two parties, you’ve entered in to a contract. The term “contract” tends to refer to a more formal document. It usually includes more detailed provisions, such as which state or country law applies, but you could include that in a letter of agreement as well.
In most businesses, you’ll find that you have a number of types of agreements or contracts that you use repeatedly. For instance, if you’re a consultant, you may have a standard consulting agreement. If you’re a distributor, you may have a contract you use with manufacturers to detail the conditions under which you distribute their products and the commissions or prices you charge. A lawyer can help you draw up standard agreements or contracts, to have them on hand. Attorneys should also be used to help you negotiate and draw up contracts for significant deals.
From the start of your business, get in the habit of drawing up contracts or let- ters of agreement and having them signed by all parties. Failure to get a written agreement leaves you at risk. Ours is a litigious society, and the best way to avoid ending up in court—or in hot water—is to get things in writing. You may be tempted to forgo written agreements—they seem so formal!—but when you’re in business, it’s normal, expected, and prudent to get everything in writing and signed and dated.
Types of legal agreements The many types of legal agree- ments you may need include:
n Contracts n Letters of agreement or
engagement n Leases n Employment contracts n Distribution agreements n Project proposals n Statement of work (SOW) n Work-for-hire agreements n Nondisclosure agreements n Noncompete agreements
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[dAte] december 1, 2012
[nAMe/ContACt oF ContrACtor] Aaron hill 3456 university drive Chapel hill, north Carolina 27516
[sAlutAtion] dear Aaron:
[BrieF oPeninG PArAGrAPh]
i am delighted that you will be assisting telescope Financial services in launching our new company website, and i look forward to working with you on this project. listed below are the details of our work together. i have enclosed two signed copies of this letter. Please sign and return one copy to me. i am excited about getting this project under way.
ProJeCt: Content writing for Web pages for the relaunch of the telescope Financial services website.
sCoPe oF Work: Aaron hill (“Contractor”) will write copy for the new telescope Financial services’ (“Client”) website based on materials provided by telescope Financial services and interviews with telescope executives and staff. the Contractor will be responsible for editing and rewriting copy on approximately 50 existing Web pages and writing new copy for approximately 30 new pages.
tiMeline And due dAtes: the project will begin on January 1, 2013, and continue through May 30, 2013, with the Contractor expected to devote approximately 20 hours per week to the project during that period, for approximately 160 hours. Client acknowledges, however, that significant revisions of the text requested of Contractor after completing initial drafts may result in the project’s extending beyond the due date and add additional hours.
Fees And eXPenses: Contractor will be paid a rate of $60 per hour. Contractor will be reimbursed for the following expenses: overnight courier services. Contractor will not be paid for travel time to Client’s offices nor be reimbursed for any other expenses.
terMs And Conditions: Contractor is engaged by Client as an independent contractor and is not deemed an employ- ee of Client in any manner. Contractor acknowledges that this is a work-for-hire relationship in which all work, including but not limited to the content of the Web pages, is created for Client and is the sole property of Client. Contractor further acknowledges that all information provided by Client shall be deemed Confidential and agrees not to disclose such information unless necessary in the scope of the work for Client and with Client’s prior approval.
upon signing, Client will make a nonrefundable deposit of $1,000, which will be applied against the first month’s billing. Contractor will then invoice Client for fees at the end of each month. invoices are due upon receipt. either Client or Con- tractor can terminate this relationship by giving at least 30 days’ notice.
the above is accepted and agreed to by:
_____________________________________________ ___________________________________________
For telegraph Financial services (Client) By Aaron hill (Contractor)
_____________________________________________
title
_____________________________________________ ___________________________________________
date date
Sample Document: Letter of agreement
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Licenses, Permits, and More You may be ready to start your business, but, in some cases, you must make sure you have the proper licenses or permits. As frustrating as it may seem, you can’t just rent an office or a building and set up shop. Although establish- ing a business in the United States or Canada is far, far easier than in most parts of the world, you still have to deal with a bit of paperwork.
The bureaucratic things you’ll deal with fall into three general categories:
1. identification numbers. To keep track of your dealings with government authorities. Example: identification numbers for income tax authorities, such as the Employer Identification Number (EIN) in the United States or the Business Number (BN) in Canada.
2. Licenses or certifications. Required to engage either in any business (in a specific locality) or in certain types of businesses or professions. Exam- ples: a city business license, a contractor’s license, a license to sell alcoholic beverages, an optometrist certification, a beautician certification.
3. permits. Required for particular, often more limited, actions. Exam- ples: construction permits, special event permits. The requirements vary greatly, depending on the type of business you’re opening and the state, county, or city in which you plan to do business.
Sometimes these terms are used interchangeably, such as “permit” instead of “license” or vice versa. To make matters more complicated, you may need to acquire licenses, permits, or identification numbers from different levels of government. In the United States, for example, these may include:
n Federal
n State
n County
n City
Primarily, you’ll be dealing with state and local licensing and permit regulations. The federal government generally doesn’t regulate local or state businesses. There are exceptions, of course, especially if you’re involved in interstate transportation (such as interstate moving companies or trucking). And there may be federal requirements regarding your production, especially if you use hazardous materi- als. That’s why it’s important to ask your attorney about these types of licenses.
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Federal tax ID numbers One number you’ll be asked for repeatedly in the United States is your Fed- eral Employer Identification Number. This ID number may also be referred to as your Employer Identification Number, or Tax ID number, or a variety of different abbreviations: FIN, TIN, FEIN, and so on. Getting a Tax ID number is very easy.
You’ll need a federal tax ID number if your business has employees, or is formed as a corporation, LLC, or partnership. Don’t be misled by the word “Employer” in the name—you do not need to have employees to get a “Fed- eral Employer Identification Number.”
Even if you’re not required by law to have a Federal Tax ID number—for instance, if you’re operating as a sole proprietor—you may still want to get one. That’s because many of your customers, especially if they are other com- panies, institutions, or government entities, will ask for your Tax ID number. It’s more professional (and safer) to provide a Tax ID number than to give out your Social Security number.
State licenses, certifications, and ID numbers Individual U.S. states may also assign you an identification or account num- ber, for various reasons. The usual IDs are: corporation number for incor- porated businesses, employer account number for employer businesses, and certificate numbers and license numbers to operate certain businesses (such as a contractor’s license number).
It’s a good idea to ask your own attorney about the types of licenses, certi- fications, and permits you need in your community and for your type of business. You might also consult with a local Small Business Development Center (SBDC).
Reseller ’s license There’s one government permit you won’t mind getting—a reseller’s license or reseller’s permit. If you’re a manufacturer, wholesaler, or retailer, and your state collects sales tax, you may qualify for a reseller’s license.
Such a license enables your company to purchase goods or materials for manufacture or sale without paying sales tax, since you’re not the ultimate consumer—your customer is. In other words, if you own a chain of sporting goods stores, you can buy golf clubs from the manufacturer without paying sales tax because you’ll charge your customers the tax. If you’re going to use the clubs yourself, you do need to pay the sales tax, since the exemption is allowed only on goods you will resell.
Once again, each state has its own requirements and terminology. So check your own state’s rules. Some states don’t even require a license for you to get an exemption from sales tax—just a signed statement of intent to resell goods.
How to get a federal tax ID number online Most new businesses can apply for an EIN on the Internal Revenue Ser- vice (IRS) website (www.irs.gov). Navigate to “Business Topics” and look for “Employer ID Numbers.” Answer a handful of questions, wait for validation, and the site will generate and confirm your new number, which you can use imme- diately.
In Canada, if you run a business with simple registration requirements, go to the Canada Revenue Agency (CRA) website (www.cra-arc.gc.ca). Find “Businesses” and look for “Business Number (BN) registration” under topics.
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County and city licenses and permits Most cities or counties require some form of basic business license, no mat- ter what kind of business you’re in. If you want to open up shop—whether a retail store, a manufacturing plant, a high-tech start-up, or even just a con- sulting practice—you have to get a business license from your county or city.
In addition to basic business licenses, cities frequently require permits to operate certain types of businesses, install various kinds of business equip- ment, or make changes in buildings or facilities. The more likely you are to be dealing with any kind of food, chemicals, equipment, manufacturing, construction, and such, the more likely you are to need additional certifica- tions, licenses, or permits.
If you use a fictitious business name—in other words, any name other than your own personal name—you may also be required to file a DBa (“doing business as…”) or fictitious business name statement with your county, city, or state authorities. In other words, if your bakery is called “All You Knead,” you’ll most likely have to file a fictitious business name statement stating who the real owner of “All You Knead” is.
The distinction between an actual and a “fictitious” name is important because with the latter, the world can’t tell who is legally responsible for the business. This lack of transparency in ownership has the potential to give rise to shady business practices. This is why many local governments require companies operating with fictitious names to file a DBA.
Taxes Paying taxes is a part of operating a business, and understanding key tax con- cerns is critical for most businesses. No matter what business structure you choose—sole proprietorship, partnership, or corporation—there are taxes you need to pay, and pay on time, or face penalties. Be certain to keep track of when taxes are due, and give yourself enough time to prepare them.
New entrepreneurs should plan on spending some time with their accoun- tants, talking about taxes. Ask them to help you understand which taxes you’re liable for, when your taxes are due, and how various transactions and expenses are taxed. Have your accountant also help you plan how to mini- mize your tax liability.
Payroll taxes and withholding Payroll taxes are the U.S. state and federal taxes that you, as an employer, are required to either pay or withhold from employees’ payroll checks on their behalf. Payroll taxes fall into three basic categories:
n Taxes employees pay
n Taxes employers pay
n Taxes both employees and employers pay
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Build-Your-Business Worksheet
Business Licenses and Permits Use this worksheet to list the licenses and permits you’ll need, including where and how to apply, requirements, and fees.
License Type agency and Contact info requirements Fees
Local Licenses
Local permits
County Licenses/ permits
state Licenses
DBa required
Federal Certification
other:
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You—and your employees—have federal as well as state obligations. In some states, there are also local payroll taxes for cities, counties, or school districts. The types of payroll taxes you and your employees face are:
n income taxes. Employees pay the entire portion of their federal and state income taxes. As their employer, you do not pay any of these taxes. However, federal and state governments require you to withhold these income taxes from your employee’ paychecks and submit these amounts, as required, to meet federal and state deadlines. In some places, employers may be required to withhold state income tax, or even city income tax.
n social security and medicare. FICA is the combination of Social Security and Medicare taxes that are paid and deducted from payroll to help ensure an employee’s future retirement and health care. These are federal taxes. Both the employer and the employee pay a portion of these taxes. There’s an annual maximum on Social Security tax, an amount that usually increases every year. Check www.ssa.gov for current and annual limits. There is no annual limit for Medicare.
n Unemployment taxes. On a federal level, only employers pay for unem- ployment insurance—or what’s referred to as FUTA (Federal Unemploy- ment Tax Act) on payroll slips. You’re also responsible for state unem- ployment insurance, though rates for that tax vary (and several states don’t require any state income tax at all). Some states require employees to also pay a portion of state unemployment taxes.
Income tax You’re required to pay tax on the profits you generate in your business. How your company is legally structured determines how your income tax liability will be handled.
Most small businesses have pass-through taxation. In other words, the com- pany or corporation doesn’t pay the income taxes, but instead the tax liability passes through to its owners. This is true for sole proprietorships, LLCs, S corporations, and most partnerships. Say you have a small company, struc- tured as an S corporation, that generates $100,000 in annual profits. The corporation files an income tax return, but the profits are deemed distributed to you, the owner, so you pay the tax on those profits as part of your own income tax return.
One exception to the pass-through treatment is C corporations. Such corpo- rations are treated as separate entities whose income tax on profits must be paid by the corporations. Any profits distributed to C corporation owners or stockholders are also subject to income tax on those individuals’ tax returns. Because of this, this type of income tax treatment is sometimes referred to as double taxation. For example, if you were the sole owner of a C corpora- tion that had profits of $100,000, the corporation would pay income tax on $100,000. If, after paying the corporate income tax, the corporation then distributed the remaining amount to you—let’s say $80,000—you would
U.S. taxes you may be required to pay include: n Payroll and other employment-
related taxes (Social Security, Medicare, workers’ compensa- tion, unemployment, etc.)
n Income tax (federal, state, county, perhaps even local)
n Sales tax n Personal property tax and use
taxes n Property tax n Special taxes (hotel, food, trans-
portation, etc.) n Import/export, custom taxes,
duties n Transfer taxes n Capital gains taxes n Inventory taxes
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then also pay tax on that amount on your individual tax return, though per- haps at a lower tax rate than on other, earned income.
After your first year in business, you will generally be required to make esti- mated income tax payments four times a year—commonly referred to as quarterlies, because they’re paid each quarter of the year. These are estimates of how much you’re likely to owe at the end of the year, typically based on how much you made the previous year. So, while employees who receive wages or salaries subject to withholding only have to worry about April 15 (in the United States) as tax day, business owners have tax payments due more frequently. Be sure to ask your tax advisor how to handle your quarterly tax payments.
DeDUCTiOns
A tax deduction is a business expense the government allows you to sub- tract from your overall revenues, resulting in a reduction, or deduction from income, in the total tax you pay. This is obviously desirable, and you want to make certain you take advantage of each and every deduction you are legally allowed.
For example, if you generated $10,000 a month selling your new gizmo, and it cost you $5,000 to pay your employees to sell, manufacture, and ship your gizmo, plus you had another $1,000 in overhead expenses, you would be able to deduct $6,000 in expenses and only pay taxes on $4,000 of that income. You’d probably also be able to deduct, or “write off,” a portion of the cost of your equipment, lowering even more the amount you’d pay taxes on.
You’ll likely make some decisions—or alter them—based primarily on tax implications. Some business expenses are fully deductible. Some are only partially deductible, and others have to be depreciated over a number of years. And still others are not deductible at all. You should have at least a fair understanding of those issues as you make choices in your business. If you purchase a very expensive piece of equipment, for instance, and expect to deduct the total cost of it from your income this year, you may be surprised to discover that the expense has to be spread out (depreciated) over as many as five to 10 or even 20 years.
Because all these issues are so complicated, it’s advisable to get a reliable accountant to work with your business and to consult with on financial matters.
States with no personal income tax n Alaska n Florida n Nevada n New Hampshire* n South Dakota n Tennessee* n Texas n Washington n Wyoming *Residents are required to pay income tax on dividends and interest income, but not on wages.
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Sales Tax As a business, you may pay sales tax on products you purchase for your use, though inventory and raw materials purchased for resale are usually exempt from sales tax in most jurisdictions. Still, you’ll likely be required to collect sales tax on most of the products and perhaps (in limited cases) some services that you sell.
Most U.S. states and some counties and cities tax the sale of most goods and some services. Sales tax rates and rules vary from state to state, even from city to city, and there are an enormous number of laws and taxing authori- ties. These taxes can go by various names: sales tax, franchise tax, transaction privilege tax, use tax, and more. Some are the responsibility of the seller, oth- ers of the buyer. But the government typically makes it the responsibility of the business to collect the tax at the time of sale.
Generally, if you’re going to collect sales tax, you must get a license from your state. On each taxable transaction, you calculate the applicable sales tax, col- lect it from the buyer, keep tax records, and then file a tax return and pay the total taxes to your state. You’ll pay monthly, quarterly, or annually, depending on your level of sales.
Each state makes its own rules as to which sales are taxable. Although most products sold to end-users are taxable, major exemptions include:
n Prescription drugs
n Food, especially groceries and nonprepared food
n Animal feed, seed, and many agricultural products
n Products for resale—raw materials, inventory, and other items that are going to be sold, rather than used, by your customer
Many states also exempt services from sales tax. But that varies greatly from state to state, and even within a state the rules as to what is taxable and what is not seem very inconsistent.
As to collecting sales tax on sales from out of state, the U.S. Supreme Court has twice ruled that states can’t require a business to collect sales tax unless it has a physical presence—or nexus—in the state. This is obviously important to consider if you sell goods or services over the Internet. Although one of the lures of ecommerce, at least at the beginning, was that goods could be purchased tax free, that is frequently no longer the case.
The sales tax clearinghouse Founded in 1999, the Sales Tax Clearinghouse (STC) provides tools and data to help U.S. sellers navi- gate the complicated landscape of calculating sales and use taxes in more than 7,000 taxing authorities (states, counties, and cities).
STC offers two forms of sales tax calculations: manual, in which sub- scribers can use either an online or a desktop calculator, and automatic, in which an automated service allows businesses to connect their business software systems directly to the STC’s servers to calculate rates automatically. Find more informa- tion at www.thestc.com.
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r e a L - W o r L d C a s e
challenge to launch and finance a new
company, the founders promised large shares of ownership to those
who helped get it off the ground
solution Lawsuit after lawsuit after lawsuit,
with huge sums of money involved
giving away Facebook For a bunch of seemingly smart kids, the guys involved in Facebook’s founding did some pretty stupid things—at least from a legal point of view. this resulted in years of lawsuits and billions of dollars in settlements.
Most new start-ups are in the position of having to give up some degree of ownership in return for early-stage financing. after all, investors want to get something for their money, and that is typically a percent of the equity—or ownership—of the company. and they deserve a big payout for taking a chance on an entrepreneur, for risking their money before anyone else. Nevertheless, those decisions shouldn’t be made lightly or without considering the legal consequences, even when a “business” is still in the idea stage. Or when it’s just being discussed in your college dorm.
the exact facts revolving around the founding of Facebook remain in dispute. But some things are agreed upon. a site called “theFacebook. com” was launched in 2004, by Mark Zuckerberg, Dustin Moskovitz, Chris hughes, and eduardo Saverin while they were students at harvard Univer- sity. Saverin, a wealthy student, provided Zuckerberg with $15,000 to pur- chase the servers for theFacebook. In return, Zuckerberg allotted Saverin 30 percent of the company.1 that was generous—extremely so. and it was a decision that would come back to haunt Zuckerberg.
In the meantime, while getting ready to launch theFacebook, Zuck- erberg was also working for twins Cameron and tyler Winklevoss and for Divya Narendra, who had hired him to work on their own social network- ing site. their site had essentially the same concept that would become Facebook. the decision not to tell his employers that he was working on a competing site was another problem that would come back to haunt Zuck- erberg and Facebook.
those are the facts that are agreed upon. Other issues remain in dispute and have eventually ended up in court.
Like many teams in a start-up venture, some founders—notably Zuck- erberg and Moskovitz—stayed more closely involved with growing the venture, while others, particularly Saverin, had other demands on their time. When founders don’t clearly delineate their responsibilities and what consequences will happen for failing to live up to their responsibilities (if any), this inevitably creates tensions and disagreements, which is exactly what happened in the case of Facebook.
Zuckerberg moved the new company to palo alto, California (from Cambridge, Massachusetts). to help finance Facebook’s growth, Zucker- berg brought in other investors, notably peter thiel, cofounder of paypal. as a result of this investment, Saverin’s 30 percent ownership was diluted substantially. Saverin alleged this was done unfairly, and later sued the company. although the exact terms of the suit were not revealed, Saverin
1. “Facebook’s Complicated Ownership History Explained,” by Ben Parr. Mashable.com. April 13, 2011.
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questions 1. Can you know if you have a
potentially hugely successful company on your hands when you first launch it?
2. Should all companies take the precautions Facebook failed to take? Or can some companies be more relaxed about such legal issues as partnerships and ownership? Why or why not?
3. What types of agreements and contracts do you think Mark Zuckerberg, his partners, and Facebook’s early investors should have drawn up?
4. What contracts do you think the Winklevoss twins and Divya Narendra should have drawn up when they hired Zuckerberg to work for their company?
eventually received 5 percent of the ownership of Facebook. his $15,000 investment ended up being worth many billions.
another complication came about because Zuckerberg failed to disclose that he had a conflict of interest while working on the Winklevosses’ project. he launched Facebook a few days before their intended launch, and they immediately alleged that he had stolen their idea and intentionally delayed the launch of their proj- ect so he could launch his. the Winklevosses later sued, winning a lawsuit against Facebook for more than a million shares of Facebook stock and $20 million in cash.
Zuckerberg’s legal complications continued. another person, paul Ceglia, alleged that he hired Zuckerberg to work on his company, Street- Fax.com, at the same time that he was working on what would become Facebook. In 2010, Ceglia sued, producing a document showing that Zuck- erberg gave him 50 percent of the company in return for a $1,000 invest- ment. Facebook’s lawyers assert the document is a fake.2
Of course, it’s true that every extremely successful company is likely to encounter legal challenges. after all, once millions or even billions of dollars are involved, many people will want a piece of ownership. But many of the problems and huge settlements encountered by Facebook were avoidable.
Zuckerberg was accepting money to work on the Winklevosses’ social networking program while simultaneously developing his own compet- ing program. this was a clear scenario for conflict. It was inevitable that his motives would come into question—especially when he launched a competing site a mere few days before his employers planned to. It may have seemed to Zuckerberg like a mere gig for him to pick up a few extra dollars, but whenever you’re working on another company’s projects, you are responsible for maintaining its trade secrets. Moreover, it’s likely that Zuckerberg was laboring on a “work-for-hire” basis, meaning that anything he produced while working for them—such as computer code—in fact belonged to them. that could have been another area of conflict.
But perhaps the biggest problem was that in his eagerness to raise the money he needed to launch, Zuckerberg gave away a huge percentage of the company. he failed to get any kind of legal advice that might have helped him structure an agreement that would have delayed putting a percentage value on Saverin’s investment (such as until the first round of financing) or that would have made clear how Saverin’s percentage would be diluted.
as the Facebook example proves, simple college-dorm agreements can later become the basis for extremely serious stock ownership battles.
even though most of those involved with Facebook’s founding eventu- ally got fabulously rich, the complications arising from their lack of legal foresight created tremendous problems, strained friendships, and led to legal battles and settlements worth millions—even billions. n
2. “The Guy Who Says He Owns 50% of Facebook Just Filed a Boatload of New Evidence—And It’s Breathtaking,” by Henry Blodget. Business Insider. April 12, 2011.
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get It In WrItIng goal: Create a strong partnership agreement with a built- in “exit” strategy.
What to do: Working with one other person, imagine that you are two entrepreneurs considering pooling your tal- ents and resources to create a consulting firm special- izing in setting up websites for business clients. You each bring different skills to the table. You need to create a partnership agreement that makes sense for both of you.
One of you will put more money into the operations; the other will put in more time. Neither of you will take a salary until you begin to make a profit.
1. First, list all the resources you’re committing to the company. Include funds, time, and all other resources you’ll contribute.
2. List the respective roles and responsibilities each of you will undertake. Who will be responsible for which activities in the company?
3. Determine how you will make decisions. Will either of you be able to make decisions without the other?
4. Specify how much time each of you will put into the business each week. What happens if one of you doesn’t put in the time you’ve committed to?
5. Establish how you’ll handle the company’s money. Who will be able to make spending decisions? Who will be able to make withdrawals or transfers from bank accounts?
6. Make decisions regarding the following issues:
a. Have you agreed upon a business plan? A future growth strategy? Are you in agreement on how big you want the company to be?
b. What happens if one of you decides to leave the company?
c. What happens if one of you doesn’t perform adequately?
d. What happens if you no longer want to work together? How will you dissolve the company? What happens with any remain- ing assets—including the customer list and active accounts?
e. Can one of you buy the other out? If so, how will the value of the company be determined? Will you have a buy-sell agreement in place?
7. Finally, draw up a partnership agreement that spells all this out.
8. Discuss all the other steps you’ll take, both indi- vidually and jointly, before you sign the agree- ment. Include getting an attorney to review the agreement.
9. Be prepared to explain why you think you’ve cre- ated an agreement that works for both of you.
exerCise: c r i t i c a l t h i n k i n g
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