The Law (In Plain English) ® for Small Business can get you started and drive you to the next level. SPHINX ® PUBLISHING AN IMPRINT OF SOURCEBOOKS, INC. ® NAPERVILLE, ILLINOIS www.SphinxLegal.com Business $16.99 U.S. As a small business owner, every decision you make directly impacts your future success. Having an understandable answer to many of your business law questions can keep your business moving forward. The Law (In Plain English) ® for Small Business is your one-stop guide for making the right decision every time. It covers the topics that concern you the most and provides clear and accurate explanations of the laws affecting your small business. Understand all the essentials of starting and running a successful enterprise, including— ✓ Filing taxes correctly ✓ Protecting your good name ✓ Obtaining necessary insurance ✓ Preparing your business plan ✓ Advertising your business ✓ Locating your business ✓ Hiring and firing employees ✓ Expanding your market ISBN-13: 978-1-4022-2875-9 ISBN-10: 1-4022-2875-9 for ✓ Organizing Your Business ✓ Developing a Business Plan ✓ Financing a New Business ✓ Working with Contracts ✓ Hiring Employees ✓ Keeping Taxes Low The Law (In Plain English) Small Business Expert guidance that includes: Leonard D. DuBoff Attorney at Law (In Plain English) ® Second Edition DuBoff Law for S MALL B USINESS The (In Plain English) ® (In Plain English) ® A MUST HAVE FOR TODAY’S BUSINESS OWNER Expert Advice for Meeting the Legal Issues Every Business Must Face Expert Advice for Meeting the Legal Issues Every Business Must Face The Law (In Plain English) ® for Small Business Second Edition Leonard D. DuBoff Attorney at Law SPHINX ® PUBLISHING AN IMPRINT OF SOURCEBOOKS, INC. ® NAPERVILLE, ILLINOIS www.SphinxLe gal.com Printed and bound in the United States of America. SB — 10 9 8 7 6 5 4 3 2 1 Library of Congress Cataloging-in-Publication Data DuBoff, Leonard D. Law (in plain English) for small business / by Leonard D. DuBoff. 2nd ed. p. cm. Includes index. ISBN-13: 978-1-57248-599-0 (pbk. : alk. paper) ISBN-10: 1-57248-599-X (pbk. : alk. paper) 1. Business law United States. 2. Small business United States. I. Title. KF390.B84D828 2006 346.73'0652 dc22 2006035227 Copyright © 2004, 2007 by Leonard D. DuBoff Cover and internal design © 2007 by Sourcebooks, Inc. ® All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechani- cal means including information storage and retrieval systems—except in the case of brief quotations embodied in critical articles or reviews—without permission in writing from its publisher, Sourcebooks, Inc. ® Second Edition, 2007 Published by: Sphinx ® Publishing, An Imprint of Sourcebooks, Inc. ® Naperville Office P.O. Box 4410 Naperville, Illinois 60567-4410 630-961-3900 Fax: 630-961-2168 www.sourcebooks.com www.SphinxLegal.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations This product is not a substitute for legal advice. Disclaimer required by Texas statutes. Dedication To my wife, Mary Ann Crawford DuBoff, for all you have done and for all we have together, and to my mother, Millicent DuBoff, for giving me the tools necessary to create this work and the drive to actually do it. Finally, to my grandson, Brian, with hopes that he will carry on the tradition. Acknowledgments There is a host of individuals who have aided me in preparing this edition of The Law (in Plain English)® for Small Business for publication. It is impossible to identify all of them within these pages, but some deserve special recognition. I would like to thank the following friends, colleagues, former students, and associates for their valuable assistance. In particular, I would like to thank Christy O. King, principal in the law firm The DuBoff Law Group, LLC, for her aid in spearheading much of the revision work that contributed to this book. Without her attention to detail, this revi- sion would not have been possible. Jed Macy of The Macy Company was extraordinarily helpful in providing up- to-date and accurate information about pensions and profit-sharing plans. I am also indebted to John Stevko, CPA, speaker and former CEO of the tax and accounting education company Gear Up, Inc., for his aid with the numer- ous changes in tax law. I would also like to thank Laurie Miller, CPA, and William Paxton, CPA, of the accounting firm of Paxton & Miller, LLC, for their help in revising the tax chapter of this book. John, Bill, and Laurie are exceptionally knowledgeable with respect to small business tax issues. My colleague and former student, Emil Berg, was extremely helpful in provid- ing recommendations with respect to the material contained in the chapter on insurance law. I would also like to thank Bert Krages, Esq., for his help in reviewing the section on hazardous substances in the employment chapter. I also appreciate the assistance of Steve Silver, Senior Vice President and Financial Advisor at Morgan Stanley, for his help in obtaining information with respect to securities and the securities market. I would also like to express my sincere appreciation to Gene W. Arant, Esq., a registered patent attorney and an author himself, for his help in reviewing the patent chapter. Gene’s knowledge of patent law is extraordinary, and his help in understanding some of the newer, more complex developments has been impor- tant to the quality of that chapter. Dennis McLaughlin, Esq., of Dennis McLaughlin & Associates, a franchise law expert, was extremely helpful in updating the chapter on franchising. A special thanks to my brother, Michael H. DuBoff, of the law firm of Snow Becker Krauss, P.C., for his astute comments and recommendations. I would also like to thank everyone, and I mean everyone, at Sphinx Publishing for their cheerful service with this book. In particular, I would like to recognize the special help of my editor, Michael Bowen. I am also indebted to Lynn Della for the countless days she spent assisting me in reworking the earlier version and compiling the myriad of changes that have occurred in the law. Lynn’s knowledge of law and business and their real-world applications have proved to be a valuable resource. I could not have revised this book without her help. My secretary, Peggy Reckow, deserves special recognition for her extra effort in converting my numerous interlinings and cryptic notes into a readable volume. Her special talent in working with the foibles of the computer system and transmitting the manuscript to the editors has been extremely beneficial. Finally, I would like to recognize the aid of my partner in law and in life, Mary Ann Crawford DuBoff, for all of her work on this text. Words are inadequate to express the appreciation I feel for all she has contributed to this and all of my projects. Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Chapter 1: Finding a Lawyer and an Accountant . . . . . . . . . . . . . . . . . . 1 Finding a Lawyer Finding an Accountant Chapter 2: Organizing Your Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Sole Proprietorships Partnerships and Joint Ventures Limited Partnerships Corporations S Corporations Limited Liability Companies and Limited Liability Partnerships Hybrids Chapter 3: Business Organization Checklist. . . . . . . . . . . . . . . . . . . . . 21 Accountant Business Name Business Structure Chapter 4: Developing Your Business Plan. . . . . . . . . . . . . . . . . . . . . . 31 Executive Summary History of the Business Products and Services The Market The Competition Source of Work Management Financial Data The Business Plan Team Chapter 5: Borrowing from Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Loan Proposal Business Outlook Application Lender’s Rules and Limitations Details of the Agreement Communication when Problems Arise Venture Capital Chapter 6: Going Public. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Advantages of Going Public Disadvantages of Going Public Federal and State Securities Laws Initial Public Offering Privatization Chapter 7: Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Contract Basics Types of Contracts Understanding Contract Principles Proving an Agreement Essentials to Put in Writing viii • The Law (In Plain English) ® for Small Business No-Cost Written Agreements Contracting Online Consumer Protection Laws Chapter 8: Consignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Advantages Disadvantages Special Laws for Artists Chapter 9: Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Point-of-Sale Payments Consignment Invoicing Ways of Encouraging Payment When Payment Never Comes Bankruptcies Chapter 10: Expanding Your Market . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Franchising Multilevel Marketing Chapter 11: Patents and Trade Secrets . . . . . . . . . . . . . . . . . . . . . . . . 107 Patents Trade Secrets Chapter 12: Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Definition Prohibited Trademarks Protecting a Trademark Confusingly Similar Federal Registration Applications Based on Actual Use Applications Based on Intent-to-Use Contents • ix [...]... enjoying the limited liability of the corporate form 18 • The Law (In Plain English) for Small Business IN PLAIN ENGLISH If the corporation is likely to sustain major losses and shareholders have other sources of income against which they wish to write off those losses, the S corporation is likely to be a desirable form for the business Small corporation, as defined by the tax law, does not refer to the. .. provisions for the dissolution of the partnership (These items are detailed in Chapter 3.) It is essential for potential partners to devote time and considerable care to the preparation of an agreement 10 • The Law (In Plain English) for Small Business IN PLAIN ENGLISH Enlist the services of a competent business lawyer The expense of a lawyer to help you put together an agreement suited to the needs... deny your business at any time, for any reason 2 • The Law (In Plain English) for Small Business An attorney experienced in business law can give you important information regarding the risks unique to your business Furthermore, a lawyer can advise you regarding your rights and obligations in your relationship with present and future employees, the rules that apply in your state regarding the hiring... require legal action or 4 • The Law (In Plain English) for Small Business advice and which require business decisions Generally, lawyers will deal only with legal issues, though they may help you to evaluate business problems Some attorneys encourage clients to feel comfortable calling at the office during the day or at home in the evening Other lawyers, however, may resent having their personal time invaded... partner Although the original partnership is technically dissolved when one partner retires, it is not uncommon for the remaining partners to agree to buy out the retiring partner’s share—that is, to return that person’s capital contribution and keep the business going Some state laws establish this as the rule unless the parties agree otherwise 12 • The Law (In Plain English) for Small Business Raising... However, even the principals of such xvi • The Law (In Plain English) for Small Business companies might gain a clearer understanding of the legal issues with which they deal with by reading an In Plain English® book This book is not intended to be a substitute for the advice of a professional Instead, it is designed to sensitize you to the issues that may require the aid of a skilled attorney or other expert... even though they never had any intention of forming a partnership For example, if you lend a friend some money to start a business and the friend agrees to pay you a certain percentage of whatever profit is made, you may be your friend’s partner in the 8 • The Law (In Plain English) for Small Business eyes of the law, even though you take no part in running the business This is important, because each... common for a corporation to have perpetual existence Shareholders, unlike partners, cannot decide to withdraw and demand a return of capital from the corporation—all 14 • The Law (In Plain English) for Small Business they can do is sell their stock A corporation may, therefore, have both legal and economic continuity IN PLAIN ENGLISH This can be a tremendous disadvantage to shareholders (or their heirs)... a business and must be tailored to individual situations 6 • The Law (In Plain English) for Small Business What I offer here is an explanation of the features of each of these kinds of organizations, including their advantages and disadvantages This should give you an idea of which form might be best for your business I discuss potential problems, but since I cannot go into a full discussion of the. .. writing The Law (In Plain English) series more than a quarter century ago, my goal was to educate nonlawyers on the business aspects of their businesses and professions At the time, I was a full-time law professor, and as an educator, I felt that one of my missions was to provide educational tools Later, as a full-time lawyer, I realized the importance of this series in educating my clients so that they . your business law questions can keep your business moving forward. The Law (In Plain English) ® for Small Business is your one-stop guide for making the right. Edition DuBoff Law for S MALL B USINESS The (In Plain English) ® (In Plain English) ® A MUST HAVE FOR TODAY’S BUSINESS OWNER Expert Advice for Meeting the Legal