Learn about litigation and how to decide whether your claim is worth your time in court.
How your business is effected during a Divorce.
Learn about the common pitfalls when starting a business and how to avoid them.
When you may have personal liability stemming out of your LLC.
When is it possible to get relief from a contract?
What you should know about Garage and Repair Liens.
The decision to start a business is both exciting and challenging for those with an entrepreneurial spirit. This blog has already featured many articles about the different types of businesses; from LLC’s to corporations and sole-proprietorships, as well as some of the positive and negative aspects associated with each. The blog has also featured articles about the steps needed to start a business from the ground up. This article will focus on what to do if you want to buy a business that is already in existence.
It’s no surprise that starting a business is challenging and risky, however if your business is successful the upside potential is major. For those less willing to take on the risk, another option might be to purchase a business that has already proven to be successful. The tradeoff for this added security of course, is that purchasing an existing business comes with a higher price tag. This is a major investment and a smart purchaser will protect their investment by ensuring the transaction is completed via a thorough sales agreement.
Buying a business can be a complex transaction. There are multiple issues that a purchaser needs to be aware of. This is true for any purchaser, but especially important to a first time purchase who may not have experience in the nature of purchasing a business, or is purchasing a business in a new field. For any particular business there are important focus areas strongly tied to future success that should be addressed. Some of these can include the purchase of good will, the formation of a new entity and simply purchasing assets, the future liabilities, and the overall purchase price to name a few. Each business will have different answers depending on the specifics of the business you are looking to acquire. However, the answers are important, not just from a purchase standpoint but also future considerations such as tax consequences and profitability.
The first thing to consider is what type of business do you want to have. There are there major categories of business, with some additional subcategories (which won’t be discussed here. The first is the sole proprietorship. In our previous blog article we discussed the pros and cons of a sole proprietorship versus an LLC. For additional information refer to that blog.
Another major business type is a corporation. Corporation is formed when papers are filed with the ACC. Among others, the first papers that must be filed are the Articles of Incorporation. The articles must include key information about the corporation such as name, address and contact information. In addition, the Articles must provide a statement of the nature of the business the corporation will be involved in. Along with the articles a Certificate of Disclosure for Business Corporations must be submitted as well. In addition to the articles there are other requirements that must be met. For instance, a corporate records book must be set up. In addition to the record book a corporation should set up by laws. Corporations must publish the articles of incorporation within a set period of time after the ACC has approved the application. This was discussed more extensively in our previous blog on how to form a corporation.
A third major business type is the LLC. Formation of an LLC is governed by Arizona Revised Statute § 29-631. LLC’s allow for management directly by the members, however, members can also opt out and allow a more centralized style management, similar to a corporation if they choose. An LLC is formed by filing the Articles of Organization with the ACC. The articles must include certain information such as the name, address and statutory agent among other things. LLC will be registered with the city they are doing business in and apply for any additional business licenses or other licenses that may be required by Federal law for tax purposes. Once an LLC is formed it generally can continue as long the members want to. This was discussed more thoroughly in our blog How do I form an LLC.
The discussion between an LLC and a sole proprietorship focuses primarily on four major areas: liability, asset protection, tax consequences and costs. To determine which entity is best for your business a short introduction on each area is necessary.
The main benefit of an LLC is that it provides “corporate shield” protection to protect an owner of a business from personal liability for business dealings. It requires business to be started by taking specific actions. No specific action however, is required to start a sole proprietorship. Therefore, for the discussion between a sole proprietorship versus an LLC, a sole proprietorship does not provide liability protection. An LLC has the exact same corporate shield as a “traditional” corporation.
In the event of a lawsuit, the person who formed the LLC is usually sued personally along with the LLC or corporation. This is where it will be important to have followed to correct formalities to start and continue to run the LLC. If this has not occurred, the person bringing the lawsuit will claim the LLC is not valid, and they may be allowed to “pierce the corporate veil.” If this happens the LLC and the person who started it will both be liable, as if it had been a sole proprietorship.
In many ways, business partnerships are like a marriage. There is a courtship phase, the wedding, and then the on-going marital relationship. During the course of the marriage, there will be disagreements and arguments along the way, and the successful marriage will figure out how resolve those issues in order to stay married. Those that do not figure this out will end up separating and/or divorcing.
The best way to know what will happen to your business if you and your partner disagree is to address as many issues as the outset as possible. This is done via a partnership agreement (or if in an LLC in an operating agreement, or if a corporation, in a shareholder agreement). Codifying these agreements ahead of time when each partner is still happy and agreeable with the other is just common sense. It forces the partners to think ahead, anticipate potential problems, and their resolution. Some of the issues you should address are performance expectations, buyout provisions, profit distribution, startup capital, sale of the business, expansion, and adding partners.
However, since you cannot possibly think of every problem that will come up, you should also provide a formula or mechanism for handling a disagreement. This can take many forms. Perhaps you will have an advisory board you can refer the dispute to. Perhaps you have informal business mentor who can assist. Or maybe you will want to agree to some kind of formal mediation or arbitration process to get the matter resolved.