5th edition Legal Forms for Starting & Running a Small Business by Fred Steingold fifth Edition january 2008 Editor catherine caputo Cover Design Susan putney Production Margaret livingston Proofreader robert wells CD-ROM Preparation Ellen Bitter Index bayside indexing service Printing delta printing solutions Steingold, Fred Legal forms for starting & running a small business / by Fred Steingold 5th ed p cm Includes index ISBN-13: 978-1-4133-0754-2 (pbk.) ISBN-10: 1-4133-0754-X (pbk.) Small business Law and legislation United States Forms I Title II Title: Legal forms for starting and running a small business KF1659.A65S74 2008 346.73'06520269 dc22 2007035642 Copyright © 1995, 1996, 1998, 1999, 2001, 2004, 2006, and 2008 by Nolo ALL RIGHTS RESERVED Printed in the u.s.a No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission Reproduction prohibitions not apply to the forms ­ ontained in this product when reproduced for c personal use Quantity sales: For information on bulk purchases or corporate premium sales, please contact the Special Sales Department For academic sales or textbook adoptions, ask for Academic Sales Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, CA 94710 Acknowledgments Thanks to Jake Warner, Shannon Miehe, and Beth Laurence for their superb editing of the earlier editions of this book, and for the energy and enthusiasm they brought to this project And special thanks to Cathy Caputo for her excellent job in editing the recent ­editions Thanks also to the other Nolo wizards who contributed their enormous skills to this and the accompanying software—especially: Tony Mancuso, Barbara Kate Repa, Robin ­Leonard, Lisa Goldoftas, and Ely Newman Finally, thanks to my colleague, Brook McCray Smith, for his many wise suggestions, and to my assistant, Jamie DeFlorio, for her help in preparing the manuscript About the Author Fred S Steingold practices law in Ann Arbor, Michigan He is the author of the best­ selling Legal Guide for Starting & Running a Small Business and The Employer’s Legal ­Handbook His monthly column, The Legal Advisor, is carried by trade publications around the ­ ountry c Table of Contents Your Small Business Legal Companion Four Practical Ways to Use the Forms in This Book .3 Do You Need a Lawyer? Contract Basics Names Clause: Identifying the Parties to a Contract .8 Signature Clause: Signing a Contract 10 Standard Clauses 17 Resolving Disputes 20 Attachments 22 Amendments 24 Forming Your Business a Small Business 32 Form 2A: Checklist for Starting Form 2B: Partnership Agreement 41 Form 2C: Preincorporation Agreement 48 Form 2D: Corporate Bylaws 53 Form 2E: Stock Agreement 57 Form 2F: LLC Operating Agreement for Single-Member LLC 61 Running Your Corporation Meeting 68 Form 3A: Notice of Shareholders’ Form 3B: Notice of Directors’ Meeting 70 Form 3C: Shareholder Proxy 71 Form 3D: Minutes of Shareholders’ Meeting 72 Form 3E: Minutes of Directors’ Meeting 74 Form 3F: Minutes of Telephone Conference Directors’ Meeting 76 Form 3G: Consent of Shareholders 77 Form 3H: Consent of Directors 79 Borrowing Money Notes in General 82 Understanding Promissory The Promissory Notes in This Chapter 86 Form 4A: Promissory Note (Amortized Monthly or Annual Payments) 88 Form 4B: Promissory Note (Balloon Payment) 91 Form 4C: Promissory Note (Interest-Only Payments) 92 Form 4D: Promissory Note (Lump-Sum Payment) 94 Form 4E: Security Agreement for Borrowing Money 96 Buying a Business for Purchase of Assets From an Form 5A: Contract Unincorporated Business 104 Form 5B: Contract for Purchase of Assets From a Corporation 116 Form 5C: Corporate Resolution Authorizing Sale of Assets 118 Form 5D: Contract for Purchase of Corporate Stock .119 Form 5E: Bill of Sale for Business Assets 123 Form 5F: Seller’s Affidavit—No Creditors .124 Form 5G: Security Agreement for Buying Business Assets 127 Leasing Space Lease 134 Form 6A: Gross Form 6B: Net Lease for Entire Building .141 Form 6C: Net Lease for Part of Building 144 Form 6D: Sublease .149 Form 6E: Landlord’s Consent to Sublease .155 Form 6F: Assignment of Lease .156 Form 6G: Notice of Exercise of Lease Option .158 Form 6H: Extension of Lease 159 Form 6I: Amendment to Lease .161 Form 6J: Attachment to Lease .162 Purchasing Real Estate Beware of Possible Environmental Problems 167 Form 7A: Contract to Purchase Building 169 Form 7B: Option to Purchase Building .178 Form 7C: Contract to Purchase Vacant Land .181 Form 7D: Option to Purchase Vacant Land 183 Form 7E: Attachment to Real Estate Purchase Contract 185 Form 7F: Amendment of Real Estate Purchase Contract .186 Form 7G: Removal of Contingency 188 Form 7H: Extension of Time to Remove Contingencies 189 Form 7I: Exercise of Option to Purchase Real Estate 190 Renting, and Storing Goods Buying, Selling, Manufacturing,Payment) 193 Form 8A: Sales Contract (Lump-Sum Form 8B: Sales Contract (Installment Payments) .196 Form 8C: Bill of Sale for Goods .200 Form 8D: Security Agreement for Buying Goods .201 Form 8E: Contract for Manufacture of Goods .203 Form 8F: Equipment Rental Contract .205 Form 8G: Storage Contract .208 Form 8H: Consignment Contract 210 Hiring Employees and Independent Contractors Form 9A: Employment Application 216 Form 9B: Authorization to Release Information 219 Form 9C: Offer of Employment 219 Form 9D: Confidentiality Agreement 220 Form 9E: Covenant Not to Compete 223 Form 9F: Contract With Independent Contractor 225 Appendixes the A How to UseForm CD-ROMYour Computer 234 Installing the Files Onto Using the Word Processing Files to Create Documents 235 Using Government Forms .237 Files Included on This CD-ROM 238 B Tear-Out Forms Contract Basics Attachment Amendment Forming Your Business Checklist for Starting a Small Business Partnership Agreement Preincorporation Agreement Corporate Bylaws Stock Agreement LLC Operating Agreement for Single-Member LLC Running Your Corporation Notice of Shareholders’ Meeting Notice of Directors’ Meeting Shareholder Proxy Minutes of Shareholders’ Meeting Minutes of Directors’ Meeting Minutes of Telephone Conference Directors’ Meeting Consent of Shareholders Consent of Directors Borrowing Money Promissory Note (Amortized Monthly or Annual Payments) Promissory Note (Balloon Payment) Promissory Note (Interest-Only Payments) Promissory Note (Lump-Sum Payment) Security Agreement for Borrowing Money Buying a Business Contract for Purchase of Assets From an Unincorporated Business Contract for Purchase of Assets From a Corporation Corporate Resolution Authorizing Sale of Assets Contract for Purchase of Corporate Stock Bill of Sale for Business Assets Seller’s Affidavit—No Creditors Security Agreement for Buying Business Assets Leasing Space Gross Lease Net Lease for Entire Building Net Lease for Part of Building Sublease Landlord’s Consent to Sublease Assignment of Lease Notice of Exercise of Lease Option Extension of Lease Amendment to Lease Attachment to Lease Purchasing Real Estate Contract to Purchase Building Option to Purchase Building Contract to Purchase Vacant Land Option to Purchase Vacant Land Attachment to Real Estate Purchase Contract Amendment of Real Estate Purchase Contract Removal of Contingency Extension of Time to Remove Contingencies Exercise of Option to Purchase Real Estate Buying, Selling, Manufacturing, Renting and Storing Goods Sales Contract (Lump-Sum Payment) Sales Contract (Installment Payments) Bill of Sale for Goods Security Agreement for Buying Goods Contract for Manufacture of Goods Equipment Rental Contract Storage Contract Consignment Contract Hiring Employees and Independent Contractors Employment Application Authorization to Release Information Offer of Employment Confidentiality Agreement Covenant Not to Compete Contract with Independent Contractor IRS and Government Forms IRS Form SS-4: Application for Employer Identification Number IRS Form W-4: Employee’s Withholding Allowance Certificate IRS Form 2553: Election by a Small Business Corporation IRS Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return USCIS Form I-9: Employment Eligibility Information Index Your Small Business Legal Companion Four Practical Ways to Use the Forms in This Book Do You Need a Lawyer? | legal forms for starting & running a small business T he most important rule when making any business agreement is: Get it in writing In some situations—such as a contract to buy or sell real estate—only a written agreement is legally enforceable Similarly, a contract that can’t be carried out in one year, or a contract to sell goods exceeding a certain value set by state law (typically, $500), must be written But even in the situations where an oral contract is legally sufficient, there are many practical reasons to prefer writing down your agree­ment Two years from now, you and the other people involved in any business transaction may have significantly different recollections about what you collectively agreed to So putting agreements in black and white is an ­important memory aid A well-drafted contract also confers several other important benefits on its signers For one, it serves as a framework within which to resolve disputes And even if this proves impossible and a court contest ensues, it will be far easier to prove the terms of a written contract than an oral one Still another important benefit of drafting a written agreement is that the act of putting your contract ­together can help you and the other party(ies) focus on the key legal and practical issues, some of which might otherwise be overlooked And by starting this process with a well-designed form—like those in this book—your chances of creating a thorough document are further enhanced To help you create sound legal agreements, this book provides convenient, ready-to-use forms for most of the common transactions your small business is likely to encounter Whether you’re borrowing money, buying a business, leasing an office or store, hiring employees, or contracting for goods or services, you’ll find well-drafted contracts that are simple to customize to fit your needs Happily, the fill-in-the-blanks contracts in this book are a lot easier to use than most similar legal documents Not only have we avoided legalese, we have also adopted a modern and easy-to-use layout But don’t let the lack of gobbledygook fool you: These forms cover all the important legal bases Because a legal form without good back­ ground information and instructions is almost valueless, each chapter provides comprehensive legal and practical information that you need to create sound agreements Unfortunately, even a book as chunky as this one doesn’t have enough space to provide in-depth ­coverage of every practical and legal issue covered by every contract That’s where other Nolo products come in Throughout this book we’ll refer you to other Nolo titles where you can learn even more about a specific topic, from hiring employees to choosing a domain name When you need it, these books will provide you with ­detailed information and practical tips to get your business up and running—and keep it running Some of the other small business titles Nolo offers are: • Legal Guide for Starting & Running a Small Business, by Fred S Steingold Everything you need to know about starting your business, from which business structure is best for you to hiring employees to tips on obtaining business insurance • Tax Savvy for Small Business, by Frederick W Daily An indispensable guide to tax deductions your small business shouldn’t miss, as well as in-depth information on the taxation of different kinds of business entities • The Employer’s Legal Handbook, by Fred S Steingold Covers hiring, personnel practices, employee benefits, wage-andhour rules, taxes, health and safety, Index A Acceleration clause, promissory note, 85 Accounting, 37–38 Accounts receivable, buying a business, 109 Accrual accounting, 37–38 Amendments contracts, 24–27 to lease, 161–162 promissory notes, 86 to real estate purchase contract, 186–188 Amortization chart, 87 Amortized Monthly or Annual Payments, Promissory Note, 88–91 Appraisal, unincorporated business assets, 107 Arbitration clause, 20–21 Articles of incorporation, 48–49 Assignment of Lease, 156–158 Assumed business name, choosing and registering, 33, 35 Attachments, 22–24 to lease, 162–163 to real estate purchase contract, 185–186 Attorneys, finding and working with, 4–5 Attorneys’ fees, clause about, 22 Authorization to Release Information, 219 B Bailment law, 208 Balloon payment, promissory note, 91–92 Bill of Sale for business assets, 123–124 for goods, 200–201 Boats, lien check, 197 Borrowing money loans for your business, 32–33 promissory notes, 82–95 security agreement for, 96–100 Building Contract to Purchase, 169–178 Option to Purchase, 178–181 Bulk sales laws, 103 Business entities choosing type of, 30–32, 33 formats for names of, types of, 10 Business insurance, 37 Business name choosing and registering, 33, 35 corporate name, 49–50 LLC name, 62 partnership name, 42–43 Business plan, creating, 32 Buying a business Bill of Sale for Assets, 123–124 corporate assets, 116–118 overview, 102–104 Seller’s Affidavit-No Creditors, 124–127 unincorporated business assets, 104–115 Buying real estate Amendment to Purchase Contract, 186–188 Attachment to Purchase Contract, 185–186 Contingencies, Extension of Time to Remove, 189–190 Contingencies, Removal of, 188–189 Contract to Purchase Building, 169–178 Contract to Purchase Vacant Land, 181–183 environmental problems, 167–169 Exercise of Option to Purchase, 190 financing, 171 430 | legal forms for starting & running a small business leasing compared to, 166 name on deed, 168 Option to Purchase Building, 178–181 Option to Purchase Vacant Land, 183–185 overview, 166–167 title insurance and, 175–176 Bylaws, corporations, 53–57 C Calendar year, for tax period, 38 Cash accounting, 37–38 CD-ROM files, installing, 234–235 CERCLA, 167 Certificate of Good Standing, 113 Change of control provisions, 119 Commercial leases See Leasing space Community property states, 17 Comprehensive Environmental Response Compensation and Liability Act, 167 Confidentiality Agreement, 220–222 Consent of Directors, 79–80 Consent of Shareholders, 77–79 Consignment Contract, 210–212 Contamination of property, 167–169 Contingencies Extension of Time to Remove, 189–190 Removal of, 188–189 Contracts amendments, 24–27 attachments, 22–24 dispute resolution clauses, 20–22 names clause, 8–10 overview, signature clause, 10–17 standard clauses, 17–20 Corporations articles of incorporation, 48–49 buying assets of, 116–118 Bylaws, 53–57 Consent of Directors, 79–80 Consent of Shareholders, 77–79 forms for starting, 31 meetings, procedures for, 66–68 Minutes of Directors’ Meeting, 74–76 Minutes of Shareholders’ Meeting, 72–74 Minutes of Telephone Conference Directors’ Meeting, 76–77 Notice of Directors’ Meeting, 70–71 Notice of Shareholder’s Meeting, 68–70 organizational paperwork, 34 permission to borrow, 84–85 Preincorporation Agreement, 48–53 Sale of Assets, Resolution Authorizing, 118–119 SEC compliance, 51 shareholder proxy, 71–72 Stock, Contract for Purchase of, 119–122 Stock Agreement, 57–60 types of, 10 Counterparts clause, 19 Covenant Not to Compete See Noncompete agreement Cybermeetings, corporate, 76 D Defective or damaged good, buyers’ remedies for, 195 Deposit, buying a business, 109–110 Dept of Labor, 40 Directors’ Meeting Consent of Directors, 79–80 Minutes of, 74–76 Minutes of Telephone Conference, 76–77 Notice of, 70–71 Discharge of lien, 98 Disclaiming warranties, 195 E Earnest money deposit, 109–110 Employee handbook, 40–41, 216 Employees See Hiring workers Employment Application, 40, 216–218 index | 431 Employment Eligibility Verification (USCIS Form I‑9), 40, 216 Entire agreement clause, 18 Environmental problems, buying real estate and, 167–169 Equipment Rental Contract, 205–208 Equity investment, 83 Escrow agreement corporate stock purchase, 120–121 for payment of utility bills, 125–126 Exercise of Option to Lease Real Estate, 158–159 to Purchase Real Estate, 190 Express warranties, 195 Extension of Lease, 159–161 F Fair Credit Reporting Act, 219 Federal employer ID, 36, 38 IRS Form SS-4, 39, 215 Fictitious business name, choosing and registering, 33, 35 Financing real estate purchase, 171 Fiscal year, for tax period, 38 Form files government forms (PDF), 237–238 installing from CD-ROM, 234–235 list of files included, 238–240 word processing files (RTF), 235–237 G General partnership See Partnerships Governing law clause, 19 Government forms (PDF), 237–238 Gross Lease, 134–141 Guarantees customized guarantees, 16 personal guarantee, 13–15 Guarantors, subleases and, 154 H Hiring workers, 38–41 Authorization to Release Information, 219 checklist for, 215–216 Confidentiality Agreement, 220–222 Employment Application, 40, 216–218 independent contractors, 38, 225–231 Offer of Employment, 219–220 resources, 214 Home businesses, startup issues, 36 I Implied warranties, 195 Independent contractors, 38 contract with, 225–231 IRS classification of, 226 Information resources, 2–3 Installing form files, 234–235 Installment Payments, Sales Contract, 196–200 Insurance life insurance for buyout of deceased partner’s interest, 47 obtaining, 37 title insurance, 175–176 Integration clause, 18 Interest alternative to for installment payments, 198 for promissory note, 82 Interest-Only Payments, Promissory Note, 92–94 Inventory, purchase of, 107, 109 IRS Form SS-4, 39, 215 IRS Form W-4, 216 L Land See Vacant land Landlord’s Consent to Sublease, 155–156 Late fees, promissory note, 85 Lawyers, finding and working with, 4–5 432 | legal forms for starting & running a small business Leasing space Amendment to Lease, 161–162 Assignment of Lease, 156–158 Attachment to Lease, 162–163 buying property compared to, 166 Exercise of Lease Option, Notice of, 158–159 Extension of Lease, 159–161 Gross Lease, 134–141 Landlord’s Consent to Sublease, 155–156 measuring the space, 134 Net Lease for Building, 141–144 Net Lease for Part of Building, 144–149 net vs gross leases, 133 overview, 132–133 Sublease, 149–155 Legal structure See Business entities Liability insurance, 37 Liability issues, 11, 13–16 choosing business entity form and, 30 Licenses and permits, filing for, 36–37 Lien checks, 197 Life insurance for buyout of deceased partner’s interest, 47 Limited liability company (LLC), 10 forms for starting, 31 Operating Agreement, 61–64 organizational paperwork, 34 permission to borrow, 85 Limited partnership See Partnerships Litigation clause, 20–21 LLC See Limited liability company Loans See Borrowing money Location for business, 34, 36 Lump-Sum Payment, Promissory Note, 94–96 M Manufacture of Goods, Contract for, 203–205 Marketing plans, 33 Measurement methods, for leasing space, 134 Mediation clause, 20–21 Minutes of Directors’ Meeting, 74–76 of Shareholders’ Meeting, 72–74 of Telephone Conference for Directors’ Meeting, 76–77 Modification clause, 19 N Name for business See Business name Names on deed, 168 formats for, Names clause, 8–10 Net Lease Entire Building, 141–144 Part of Building, 144–149 New hire reporting agency, 40 Noncompete agreement Covenant Not to Compete, 223–225 purchase of unincorporated business, 106 state limits on, 224 terms of, 113–114 Notarization of documents, 17 Notice of Directors’ Meeting, 70–71 of Exercise of Lease Option, 158–159 of Shareholder’s Meeting, 68–70 Notices clause, 19 O Offer of Employment, 219–220 Operating Agreement, single-member LLC, 61–64 OSHA compliance, 40 P Partnerships, 10 forms for starting, 31 general partnership, 10 index | 433 life insurance for buyout of deceased partner’s interest, 47 limited partnership, 10, 42 organizational paperwork, 34 Partnership Agreement, 42–48 state and local paperwork, 42 Payroll taxes, 40 PDF files, 237–238 Permits and licenses, filing for, 36–37 Personal guarantee, 13–15 for promissory note, 82–84 Personal liability, business owner, 11, 13–16 Planes, lien check, 197 Preincorporation Agreement, 48–53 Prepayment of promissory note, 85 Promissory Notes, 82–95 amending, 86 amortization chart, 87 amortized monthly or annual payments, 88–91 balloon payment, 91–92 buying an unincorporated business, 110–111 elements of, 82–86 interest-only payments, 92–94 lump-sum payment, 94–96 signing and storing, 85–86 Property liens, checking on, 197 R README file, 234 Real estate purchases See Buying real estate Record keeping, 37–38 RTF files, 235–237 S Sales Contract installment payments, 196–200 lump-sum payment, 193–196 S corporations organizational paperwork, 34 tax status benefits, 51–52 See also Corporations SEC compliance, 51 Security interest agreement for, 96–99 agreement for buying assets, 127–129 agreement for buying goods, 201–203 buying an unincorporated business, 111–112 discharge of lien, 98, 128 for promissory note, 84 See also UCC Financing Statement Security measures, leases and, 147 Seller’s Affidavit—No Creditors, 124–127 Seller’s debts, buying an unincorporated business, 112 Severability clause, 20 Shareholder proxy, 71–72 Shareholders’ Meeting Consent of Shareholders, 77–79 Minutes of, 72–74 Notice of, 68–70 Signature clause, 10–17 format for signatures, 11, 12 Sole proprietorship, 10 Spouse’s signature, requiring, 16–17 Starting a small business, checklist for, 32–41 Stock Agreement, 57–60 Storage Contract, 208–210 Sublease, 149–155 Landlord’s Consent to Sublease, 155–156 Successors and assignees clause, 18 Superfund, 167 T Tax issues choosing business entity form and, 30, 37 purchase of unincorporated business, 108 Tax reporting, 37–38 Title insurance, 175–176 434 | legal forms for starting & running a small business U V UCC Financing Statement, 97–98, 100 for buying assets, 128 for buying goods, 202 lien checks and, 197 for promissory notes, 84 See also Security interest Unemployment tax, 38 U.S Citizenship and Immigration Services, 40, 216 Utility bills, sale of business and, 125–126 Vacant Land Contract to Purchase, 181–183 Option to Purchase, 183–185 Vehicles, lien check, 197 Virtual meetings, corporate, 76 W Waiver clause, 19–20 Warranties, 195 Withholding and payroll taxes, 40 Witnesses, for documents, 17 Word processing files (RTF), 235–237 Workers’ compensation, 40 Written agreements, importance of, ● ... method For information about the difference between cash and accrual accounting, see Tax Savvy for Small Business, Chapter • Calendar vs Fiscal Year Most small businesses use a calendar year (January... guarantees, copy the appropriate form and paste it into your document 14 | LEGAL FORMS FOR STARTING & RUNNING A SMALL BUSINESS Personal Guarantee of a Contract—Single Guarantor In consideration... the same or a similar name If you’re starting a small, local business, you can usually feel reasonably secure searching for name conflicts at the state and local level If you’re starting a larger