A sole proprietorship is a business owned by one individual.

• Filings with the State.  Aside from obtaining a Master Business License and any local permits, no special paperwork or filings with the state are necessary to establish your business legally so long as you use your own name as the name of your business.  If you decide to use a tradename (for example, Joe Johnson wants to operate as Joe’s Bar and Grill), you must register the trade name with the State when you submit your Master Business License Application.
• Employees.  A sole proprietor can have employees.
• Taxes.  Income and expenses are reported on Schedule C attached to your Form 1040 Individual Tax Return, and income is taxed at individual tax rates.
• Personal liability.  A sole proprietor is personally liable for all debts and obligations of the business.
• Community Property Liability.  If a sole proprietor is married, the couple’s community property, including the spouse’s income, is at risk to satisfy debts and other obligations of the business.
• Limited ability to fund losses.  Liability insurance may be able to fully fund losses incurred as a result of professional or general negligence, but the owner remains personally responsible for operating liabilities (office expense, payroll, taxes) and liabilities not funded through insurance.

Recommended where:  1) the owner has limited resources, 2) the owner is not sure whether the business will be successful, and 3) liability protection is not a major concern.
Corporation

A corporation is an entity organized to carry on a business either for profit or not.

• Filings with the State.  Articles of Incorporation and filing fee are required as well as annual maintenance and filings.  A corporate name must include the designation Incorporated, Corporation, Limited or some abbreviation of these words such as Inc., Corp. or Ltd.
• Taxes.  Two options are available:  1)  C Corporation -  Subject to federal corporate tax rates.  Profits distributed as dividends are taxed as ordinary income to the shareholders; and 2)  Subchapter S Corporation -  Must qualify and file an election.  Profit is taxed at each shareholder’s individual tax rates rather than the corporate rates.  Self-employment tax does not apply to shareholder wages.
• Employment Taxes.  The corporation pays employment taxes; shareholders do not pay employment taxes unless they are also employees.
• Personal liability.  The shareholders are generally shielded from responsibility for the corporation’s debts and liabilities, but the “corporate veil” may be pierced for willful actions, such as breach a fiduciary duty, violation of law, or fraud.

Recommended where the owners:  1) work in the business, 2) want the tax advantages of a Sub S corporation, and 3) either want or are willing to deal with the formalities of a corporate structure.

Limited Liability Company (LLC)

A limited liability company functions more like a partnership but has liability protection similar to a corporation provided that requirements are met.

• Filings with the State.  A Certificate of Formation and filing fee are required.  The entity name must include the designation Limited Liability Company or some abbreviation of that term such as LLC or L.L.C.
• Taxes.  Treated same as a partnership, but an LLC may elect to be treated as a corporation for tax purposes and may lose its ability to be treated as a partnership if it has more than two of the characteristics of a corporation:  1) continuity of life; 2) centralized management; 3) free transferability of interests, and 4) liability for debts limited to the value of assets.
• Allocation of profits and losses are as specified in the LLC agreement; otherwise, they are allocated according to the value of each member’s contributions.
• All earnings of members are subject to self-employment tax.
• Personal liability.  The LLC itself, rather than its members, is responsible for the debts, obligations and liabilities of the LLC, but members who participate in the management of the LLC are personally liable for certain acts and omissions, such as gross negligence, intentional misconduct or a knowing violation of law.
• Professional LLCs (PLLC) must maintain a minimum of $1 million of professional liability insurance.

Recommended where the owners:  1) do not work in the business (e.g., passive income such as real estate rental income), and 2) there is only one owner or the owners know each other well (domestic partners, spouses, family members).

2. How a contract is formed. A contract is formed when there is an offer by one party which is accepted by another party and there is a mutual exchange of value (cash, services, promises) between two or more competent parties.

3. Counteroffers. A counteroffer automatically rejects a prior offer. If you make a counteroffer and the other party rejects it, you cannot revive a prior offer unless the other party allows it.

4. Some contracts must be in writing to be valid and enforceable. Examples include real estate listing agreements, real estate purchase and sale agreements, contracts between merchants for the sale of goods valued at greater than $500, contracts where the performance cannot be performed within one year, and prenuptial agreements.

5. Contracts do not need to be in writing unless required by law. But it’s highly recommended that you have a written contract when

• 1) you are the one being paid for your products or services,
• 2) the scope of work is detailed or complex,
• 3) contract performance will be on a very tight time schedule, and 4) you want to be able to enforce the contract if the other party fails to perform.

6. Leases. A lease is a type of contract. You can’t just walk away from a lease without compensating the other party.

7. Oral contracts are extremely difficult to enforce. Oral contracts are contracts where there is capacity, offer, acceptance, and consideration but no written contract or memorandum of the parties’ agreement.

8. Implied Contracts. To prevent injustice, courts have developed case law creating implied contracts.

9. Implied-in-Fact Contracts. A court will find that an implied-in-fact contract exists where the parties have demonstrated by their conduct an intent to be bound.

10. Implied-in-Law Contracts. A court will find an implied-in-law contract exists to prevent unjust enrichment where one party confers a benefit upon another party, who is aware of and retains the benefit without paying for it.

11. Contract Disputes Can Be Resolved Without Litigation. There are 4 ways to resolve disputes without going to court (called Alternative Dispute Resolution or ADR):

• Negotiation by the parties directly or through their attorneys
• Collaboration. This is a formal process where the parties and their attorneys commit to resolving the dispute together, which enables the parties to retain control of the outcome. Each party has the benefit of legal counsel and the parties and counsel (the “collaborative team”) may seek the advise of other professionals, such as engineers, accountants and appraisers, to help the parties resolve the dispute.
• Mediation. In this model, the parties and their counsel seek the help of a mediator to resolve the dispute. The parties still retain control over the process, but less so than with collaboration.
• Binding Arbitration. The parties and their counsel submit the dispute to an arbitrator, who makes a decision as a judge would. The process is streamlined and less formal (and thus less costly) than litigation. The parties have less control over the outcome than they would with the other methods.

The benefits of ADR are significant savings in legal fees, saving the turmoil and emotional energy of litigation, and keeping the dispute and confidential business or personal information out of public records.

12. You may be “right” but that doesn’t mean you will win in court. Although “justice” is the goal of the legal system, in reality it’s rough justice at best. The judge only gets a snapshot of your case before having to make a decision. And the rules of evidence may disallow some of your evidence. Going to court is expensive, time consuming, and emotionally and financially draining. The legal system is designed to be a last resort when parties cannot resolve a dispute by any other means. Litigation is a form of war: everyone loses something, everyone spends a lot of money, and no one is really happy with the outcome.

13. Damages. When one party fails to perform a material (important) contract obligation (called a breach of contract), the other party is entitled to seek damages. The measure of damages will be an amount sufficient to put the non-breaching party in as good a position as if the contract had not been breached. A party may sometimes be awarded consequential damages and incidental damages. Consequential damages are foreseeable damages that directly result from a breach of contract. Incidental damages are related to a breach of contract, but do not directly result from the breach.

14. Noncompetition Agreements. These agreements with employees will only be upheld by a court if they are reasonable in geographic area and duration.
15. Oral Amendments to Written Contracts. Oral agreements or amendments to written contracts are rarely enforceable. They are extremely difficult to prove.

16. Business owners are held to a higher standard than consumers. When it comes to contracts, business people are presumed to be more savvy than consumers. Where a consumer might be able to get away with saying he/she didn’t understand the contract, a business owner will not.

17. Contracts are construed against the drafter. Where a contract is unclear, the interpretation of the party who did not draft the contract will control.

18. Nondisclosure Agreements. These will be enforced if they are clearly written.

19. Loan documents are a form of contract. A promissory note is a promise to pay.

20. Read all contracts carefully. If you don’t understand a provision, seek the advice of an attorney. Do not rely of what the other party says the contract means. A contract should say what it means. If it doesn’t, the language should be rewritten to clear up any confusion. A contract should not need “interpretation.”

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