"LEGAL ASPECTS OF STARTING AND RUNNING A SMALL BUSINESS"
The following should not be construed as legal advice.
It is not intended and should not be used as a substitute for
consultation with legal counsel.
1. CHOOSING THE LEGAL ENTITY THROUGH WHICH YOU WILL DO
BUSINESS
a. THE 4 MAIN ALTERNATIVES:
i. The sole proprietorship
ii. Partnership
iii. Corporation
4. Limited Liability Company
b. SOLE PROPRIETORSHIP
i. Definition of Sole Proprietorship: Business
for profit owned by one person who takes no steps to create a
separate legal entity.
ii. Advantages:
(1) The most simple form, especially if owner
performs most job functions.
(2) Freedom from legal formalities.
(3) Usually, others can't create obligations
which bind you.
(4) Since a sole proprietor is not considered
an "employee" of a business, you will not have to pay
unemployment taxes on your income from the business.
(5) You can move monies out of your business
account, and withdraw assets from the business with very few
legal limitations and without paying taxes.
iii. Disadvantages:
(1) No insulation from personal liability for
obligations of the business.
(2) No avoidance of trade name filing if
business done under another name.
(3) Sole proprietorship does not qualify for
tax breaks accorded corporations for group-term life insurance,
long-term disability insurance, and medical insurance.
iv. If employees will be hired, employer I.D.
Number must be obtained. Also, registration number from N.J.
Division of Taxation must be obtained.
c. THE PARTNERSHIP
i. Definition of Partnership: The association of
two or more persons to carry on a business for profit as
co-owners.
ii. Partnership agreement not required, but
desirable.
iii. Each partner liable for all the obligations of
the partnership.
iv. Partners share equally in profits and losses,
unless otherwise agreed.
v. Partnership is a tax-reporting entity. Must
prepare and file informational returns, even though income and
losses are flowed through to the individual partners.
vi. Advantages:
(1) Expanded sharing of management
responsi-bility, i.e., "two heads are better than one".
(2) Minimal legal formalities. NOTE: Trade
name certificate must be filed if you do business under any name
other than names of all partners.
(3) Limited duration: No formal action
required in order to "kill it off".
vii. Disadvantages:
(1) Potential for deadlock if partners don't
agree on management of business.
(2) Each partner is personally liable for
partnership obligations incurred by other partners.
(3) Partnership interests are not freely
transferable by a partner.
(4) Unless the partnership agreement
otherwise provides, the death or bankruptcy of a partner, or the
unilateral decision of a partner to withdraw from the
partnership, will result in the dissolution of the partnership.
d. THE CORPORATION
i. Advantages:
(1) Limited liability of shareholders. This
is one of the most important "gifts" in our common law.
Especially important in view of our society's litigiousness.
(2) Centralized management in the
corporation's board of directors.
(3) Continuous existence. The corporation
does not cease to exist upon the death or bankruptcy of a
shareholder, or the decision of a shareholder to withdraw from
the business.
(4) Acceptability of business format makes it
easier to raise equity financing (eg. sale of shares to
investors), and debt financing (eg. bank loans or other loans).
(5) Use of corporate stock to "incentivize"
key employees.
(6) Unless restricted by corporate documents,
shares of stock are freely transferable.
(7) As noted above, corporations receive
favorable tax treatment for certain fringe benefit plans,
including medical insurance, disability insurance, and group-term
life insurance.
ii. Disadvantages:
(1) Expense of incorporation and recurring
expense of annual franchise or corporate income taxes.
(2) Need to observe corporate formalities,
including annual meetings of shareholders, regular meetings of
directors, maintenance of corporate minutes and other corporate
records, and filing of annual reports with New Jersey Secretary
of State.
(3) Consideration of federal and state
securities law questions in issuance of capital stock.
(4) If business conducted in other states,
corporation may need to apply for a certificate of authority in
such other states.
(5) Duplication in licensing, i.e., both
individual and corporation may be required to obtain licenses.
iii. Tax Considerations:
(1) For tax purposes, corporations are either
regular corporations, referred to as "C" corporations, or "S"
corporations. In order to qualify for "S" corporation treatment,
you must meet strict requirements and file an "S" election on
Form 2553.
(2) "C" corporations are subject to two
levels of taxes: once at the corporate level, and again when the
corporation makes distributions to its shareholders.
(3) "S" corporations escape double taxation
since they operate as pass-through entities. The corporation
generally pays no tax on its income; the shareholders are taxed
at their individual rates on the corporation's income. The "S"
corporation combines the best features of the corporation
(limited liability) and the partnership (one level of taxation).
(4) Until 1993, "S" corporations were a very
popular choice for the new business entity. However, the Clinton
Deficit Reduction tax package passed in 1993 has made the "S"
corporation less attractive, since the top individual tax rate
was raised to 39.6%, up from the previous high of 31%. The top
tax rate for most corporations stayed at 34%. This leads to a
situation where "S" corporation shareholders may pay individual
income tax at a higher rate than the "C" corporation would pay.
"S" corporations no longer have a distinct advantage over "C"
corporations.
(5) However, the "S" election still deserves
careful consideration and consultation with the business owner's
accountant. "S" corporation status may be very beneficial if
it's expected that the business will incur losses in the early
years or if the owner is expected to be in the lower individual
tax brackets for a while.
E. THE LIMITED LIABILITY COMPANY
1. What is it? A limited liability company ("LLC") is
a relatively new type of business entity that combines features
of a corporation and a partnership.
2. When did the LLC first become available to business
owners? January 26, 1994 is the date on which the New Jersey
Secretary of State first began to accept Certificates of
Formation for LLCs.
3. Comparison of the LLC with the Partnership.
a. LLCs and partnerships are both taxed in the
same way -- as pass-through entities.
b. Partners in a general partnership are
personally liable for the debts and obligations of the
partnership. Members of an LLC are not personally liable for
debts and obligations of the LLC. The most they can lose is
their investment in the LLC.
4. Comparison of the LLC with a C corporation.
a. C corporation shareholders are taxed twice --
once at the corporate level and a second time at the individual
level as shareholders.
b. Shareholders in a corporation and members in
an LLC both enjoy insulation from personal liability for debts of
the entity.
c. In addition to limited liability of
shareholders, corporations have 3 other attributes:
(i) "Continuity of life", i.e.,
corporations live forever and don't terminate if a shareholder
sells out or dies, etc.
(ii) "Free transferability of shares", i.e.,
shareholders are free to transfer their shares to others, unless
there is an agreement to the contrary; and
(iii) "Centralized management", i.e., as a
technical matter, the business of the corporation is managed, not
by the shareholders, but by a board of directors.
d. In order to qualify for partnership tax
treatment, the LLC must lack 2 of the 3 additional features of a
corporation listed above. If it does not lack 2 of the 3
features, it will not be entitled to partnership tax treatment.
e. New Jersey's LLC statute has "default
provisions" which ensure that the LLC will lack all 3 features,
and will thereby qualify for pass-through tax treatment. The
"default provisions" (i) require the LLC to terminate on the
happening of certain events, (ii) permit transfer of a member's
interest in the LLC only with the consent of all the other
members, and (iii) permit all members to be involved in the
management of the LLC.
f. Caveat: If you wish to change any of the
"default provisions," you can do so by agreement, but it must be
done with assistance of your lawyer, otherwise you risk losing
the tax treatment you sought in forming the LLC in the first
place.
5. Comparison of LLC with S corporation.
a. Both LLCs and S corporations offer
pass-through taxation at the federal level.
b. Both LLC and S corporations afford members/
shareholders insulation against liability for the debts and
obligations of the entity.
c. However, S corporations are subject to a
number of tax rules that do not apply to LLCs:
(i) S corporations may issue only one class
of common stock, and no preferred stock. LLCs can have flexible
capital structures.
(ii) S corporations can not have more than
35 shareholders. LLCs may have an unlimited number of members.
(iii) S corporations may not have
corporations, partnerships or non-U.S. persons as shareholders.
LLCs may have U.S. citizens or foreign persons, and U.S.
corporations and foreign corporations as members.
(iv) S corporations may not own 80% or more
of another corporation. LLCs can have unlimited numbers of
subsidiaries.
(v) S corporations must properly complete
and timely file various tax forms. LLCs have no such filing
require-ments.
6. Are there any disadvantages to using the LLC for
your new business entity?
a. The New Jersey LLC statute requires that the
LLC have two members. So, for the individual who does not wish
to give any ownership interest to another, the LLC is not a
viable alternative.
b. Not all states recognize LLCs. If your LLC
does business in a state which does not recognize LLCs, then your
personal assets will be exposed to claims of creditors in that
state.
7. How do you know if an LLC is right for your
business?
a. The LLC provides the same limitation on
personal liability and pass-through tax treatment as an S
corporation, without the need for various S corporation tax
filings.
b. Avoidance of the need for a board of
directors. All members of an LLC can participate directly in the
management of the company, without the need for a board of
directors.
c. Avoidance of the need for a shareholders
agreement. In order to prevent free transferability of shares of
stock of a corporation, you need a shareholders agreement. By
law, however, the interest of a member in an LLC cannot be
transferred without the consent of all the other members. This
alleviates the need for a shareholders agreement. However, every
LLC requires an "Operating Agreement". The Operating Agreement
takes the place of corporate by-laws and organizational
resolutions, and, in most cases, will cover many of the same
subjects as a shareholder agreement.
d. The combination of limited liability,
pass-through taxation, relaxed rules for non-U.S. investors, and
flexibility in capital structures will make the LLC the vehicle
of choice for situations involving:
(i) joint ventures;
(ii) non-U.S. investors; and
(iii) passive investors.
F. THE LIMITED LIABILITY PARTNERSHIP
1. The "limited liability partnership" is the new kid
on the block. LLPs first became available for use in New Jersey
on May 1, 1995.
2. The LLP is really a general partnership which
registers with the New Jersey Secretary of State by filing a
Certificate of Registration and paying a $100 filing fee.
3. What distinguishes the LLP from the partnership
form of doing business is that the partner in an LLP is not
liable for obligations or liabilities arising from the
"negligence, omissions, malpractice, wrongful acts or misconduct"
committed by the other partners or employees of the LLP.
4. This feature of the LLP makes it attractive to
professionals such as accountants, lawyers, doctors, dentists,
architects, actuaries, engineers and other professionals who are
concerned about being held personally responsible for the
malpractice performed by their partners.
5. It is important to note that, even in an LLP, the
professional remains responsible for his or her own malpractice,
as well as for contract liabilities such as office and equipment
leases, bank loans and payroll.
6. Because of its continuation of unlimited personal
liability for contract obligations of the firm, the LLP will not
be attractive to general business owners.
2. BUYING AN ESTABLISHED BUSINESS
A. AN ALTERNATIVE TO STARTING YOUR OWN BUSINESS
1. Advantages
a. The primary advantage for the buyer of an
existing business is that you start out right away with a network
of customer, supplier and employee relationships.
b. If the business is profitable, you will
probably be able to take a salary from the beginning.
c. In many sale-of-business transactions, the
seller can be persuaded to stay on in an advisory capacity to
help you learn the business.
d. If the transaction is properly structured,
negotiated, documented and closed with the assistance of
experienced legal and financial professionals, the financial
risks are lower than they are with most new business start-ups.
2. Disadvantages.
a. Caveat emptor ("buyer beware") applies. The
buyer who does not exercise good judgment in (i) finding
businesses for sale, (ii) selecting skilled professionals to work
with, and (iii) conducting due diligence, may actually increase
the risks of financial failure, as compared with the new business
start-up.
b. The purchase of an existing business is, for
most people, the most complicated financial transaction of their
lives. It is essential that the business person build a good
team that will include the attorney, the accountant and other
consultants.
3. WHAT'S IN A NAME: CHOOSING A NAME FOR YOUR BUSINESS
a. THE BUSINESS CONSIDERATIONS.
You need to choose a name that creates a memorable
impression of your business in the mind of the public.
Generally, it makes sense to stay away from names that are
descriptive only of one product or one geographical location, eg.
"Union Lock Company". Names like this hold you back from
expanding into new territories or adding additional related or
unrelated product lines.
b. UNDERSTANDING THE DIFFERENCES BETWEEN CORPORATE
NAMES, TRADE NAMES AND TRADEMARKS.
i. The corporate name is the name of your
corporation on file with the N. J. Secretary of State, eg.,
"Union Lock Company, Inc."
ii. The trade name is the name under which you
trade or do business, eg. "Safe & Secure Lock Company". Even
"Union Lock Company" is a trade name because it is not the same
as the corporate name "Union Lock Company, Inc.
iii. The trademark of a company is the word, name
or symbol that a company uses to identify its products and
distinguish its products from those of its competitors. For
example, if Union Lock Company, Inc. sells a private-label brand
of locks under the label, "Sure Locks", that would be a
trademark.
c. WHAT IF YOU'RE A SOLE PROPRIETOR OR PARTNERSHIP
TRADING UNDER A DIFFERENT NAME?
i. An individual conducting business as a sole
proprietor using his real name, eg. "Richard J. Lambert,
Locksmith" does not have to file any public record of such fact.
ii. General partners trading under their real
names, eg. "Lambert and Jones, Locksmiths" also avoid public
filings.
iii. However, any individual or partnership that
does business under any name, other than the real names of the
business owners, must prepare and file a trade name certificate
in the County Clerk's office in the county in which the business
is conducted. Failure to file a trade name certificate is a
misdemeanor.
iv. If the trade name includes the designation
"and Company" or " & Co.", then a business name certificate is
required to be filed in the County Clerk's Office.
d. WHAT IF YOU'RE A CORPORATION TRADING UNDER A NAME
OTHER THAN YOUR CORPORATE NAME?
i. If a corporation trades under a name other
than its corporate name, eg. if Union Lock Company, Inc. trades
under the name "Safe & Secure Lock Company", then the corporation
has to prepare and file what's called an alternate name
registration with the N. J. Secretary of State. The only
exception to the filing requirement is if the two names always
appear together, i.e., on letterhead, business cards , signage,
advertising, etc.
ii. The alternate name registration does not
confer any legal rights; its sole purpose is to inform the public
that Safe & Secure Lock Company is really a New Jersey
corporation by the name of Union Lock Company, Inc. Therefore,
if a competing lock company in Essex County traded under the name
"Safe & Secure Lock Company" or similar name, and its market area
included Union County, then the Essex County company would be
able to get the Union County company to cease and desist from use
of the name "Safe & Secure Lock Company". The fact that the
Union County company had an alternate name registration on file
would be no help at all!
e. WHAT DO YOU HAVE TO DO BEFORE YOU SELECT A NAME?
i. Distinguish between a corporate name, on the
one hand, and trade names and trademarks, on the other.
ii. You check on the availability of a corporate
name by checking name availability with the N.J. Secretary of
State.
(1) The corporate name must include one of
the following or its abbreviation: "corpor-ation", "company",
"incorporated" , "a New Jersey corporation", or "limited".
(2) The corporate name must be capable of
being distinguished from other corporate names already on file
with the N. J. Secretary of State.
(3) Due to the explosion of incorporations in
the last 10 to 15 years, the approval of a name for use as a
corporate name requires only a slight variation from similar
names already on file.
(4) Note that the Secretary of State's
approval of a name for use as a corporate name does not confer
any protection against claims of third parties under trademark
law or the common law of unfair competition.
iii. If the corporate name or a close variation of
the corporate name is also going to be used as a trade name, or
if a trade name dissimilar to the corporate name is to be used,
then additional investigation is required.
(1) The index of alternate names maintained
by the Secretary of State.
(2) The business name and trade name filings
maintained by the County Clerks of the counties in which the
company will do business.
(3) Telephone directories and trade
directories.
iv. If the corporate name or a trade name is also
going to be used as a trademark or a service mark, then
additional trademark searches may be required.
(1) If the mark, either currently or in the
reasonably foreseeable future, will be used in interstate
commerce, then a federal trademark search in the U.S. Patent and
Trademark Office ("USPTO") should be conducted.
(2) If the mark will likely be used only in
the State of New Jersey, then a state trademark search in the
N.J. Secretary of State's office should be conducted.
v. If the trademark is available and meets the
requirements of applicable law, i.e., state and/or federal, the
trademark may also be registered with the USPTO or N.J.
Secretary of State, as the case may be.
4. GOVERNMENTAL REGULATION, LICENSES AND PERMITS.
a. STATE AND LOCAL REGULATIONS
i. There are multiple layers of state and local
regulations that the small business person must contend with:
(1) State licensing of certain businesses,
such as warehouses, nursing homes, secondary mortgage lenders,
pharmacies and employment agencies.
(2) State licensing of an individual's
practice of certain trades and professions, including architects,
professional engineers, pharmacists, plumbers, morticians, real
estate brokers, psychologists and nurses.
(3) Municipal licensing of certain
businesses, such as automobile garages, movie theaters and other
places of public entertainment, lumber yards, hotels and motels.
(4) Local board of health permits for certain
businesses, such as hotels and restaurants.
(5) If the business will be involved in
retail sales or in furnishing certain services, then you will be
required to collect and remit sales taxes. An application for
registration on Form REG-1 must be prepared and filed with the
N.J. Division of Taxation.
f. The Office of Business Advocacy of the N.J.
Department of Commerce and Economic Development is a valuable
resource to the small business person. The Office of Business
Advocacy (800-533-0186) maintains a computer database on New
Jersey's licensing requirements for businesses and professions,
and can steer the business person to the appropriate state
agency.
g. Another good source of information about state
licenses and permits is the Office of Business Ombudsman, N.J.
Department of State (800-533-0186).
b. FEDERAL REGULATION
i. In addition to state and local licenses and
permits, some small businesses also require federal licenses or
permits, including the following:
(1) Radio or television broadcasting (Federal
Communications Commission);
(2) Manufacturing or dealing in firearms
(Treasury Department/Bureau of Alcohol, Tobacco & Firearms);
(3) Making alcohol or tobacco (Treasury
Department/Bureau of Alcohol, Tobacco & Firearms);
(4) Preparation of meats (Food and Drug
Administration);
(5) Providing common carrier services
(Interstate Commerce Commission);
(6) Investment Advisory Services (Securities
and Exchange Commission).
ii. In addition to state and local regulations, and federal
license requirements, there are numerous federal regulations
affecting the operation of small businesses. The following is a
list of some of the federal regulations, and is not intended to
be comprehensive:
(1) Employment regulations, including equal
opportunity and antidiscrimination.
(2) Consumer credit regulations.
(3) Occupational Safety and Health
Administration (OSHA) regulations.
(4) Federal Trade Commission regulations
concerning false advertising.
(5) Antitrust regulations.
(6) Immigration regulations.
5. TAX MATTERS
a. TAX REPORTING AND PAYMENT GENERALLY
i. Every business in New Jersey is required to
register with the New Jersey Division of Taxation. You can
obtain the New Jersey Tax Registration Packet (Form REG-P) by
contacting the Division's Taxpayer Information Services at (609)
588-2200 or (800) 323-4400.
ii. This is not a workshop on taxes. Specialized
workshops on tax and accounting matters are available. However,
the small business should be generally aware its obligation to
pay the following taxes:
(1) Federal Income Tax;
(2) New Jersey Gross Income Tax or
corporation business tax (also known as "franchise" tax);
(3) Federal Unemployment Tax;
(4) New Jersey Unemployment Compensation
Contributions;
(5) New Jersey Disability Benefits
Contributions;
(6) New Jersey Sales and Use Taxes;
(7) Real Property Tax; and
(8) Miscellaneous Other Taxes (eg. the
Alcoholic Beverage Taxes, and Litter Taxes, among others).
b. THE IMPORTANCE OF THE ACCOUNTANT
i. The small business needs to retain the
services of a qualified accountant who, in addition to preparing
and filing tax returns on behalf of the business, can also help
the small business owner in a number of other ways, including the
following:
(1) Establishing bookkeeping records and
procedures;
(2) Preparation of annual or more frequent
financial statements, including balance sheets, statements of
income, and statements of changes in financial position; and
(3) General business consultation and advice.
6. FINANCING THE BUSINESS
a. CAPITAL CONTRIBUTIONS BY OWNERS
i. By far and away, the most frequent method of
financing the start-up of a new business is by the capital
contributions of its owners. The seed capital for most new
businesses is provided by the life savings of the owners and
funds provided by relatives and friends.
ii. The assets contributed include cash, tangible
assets such as furniture, fixtures, machinery and equipment, and
intangible assets such as patents, trademarks and inventions.
iii. If the business is structured as a
corporation, some of the contributions will have to be classified
as equity investment (i.e., payment for stock) and the balance
may be classified as debt (i.e., loans that may be repaid to the
owner). The allocation or split between debt and equity should
be worked out in consultation with the accountant and attorney so
that applicable tax and legal rules are complied with.
b. FINANCING BY THIRD PARTIES
i. "Sweat Equity".
Occasionally, the owners are able to step outside
their circle of family and friends to tap the resources of
outside investors, who may be individuals or institutions.
ii. "VCs and Angels".
Historically, venture capitalists (affectionately
referred to as "VCs") provided healthy amounts of funding to
start-ups and small businesses. This has changed in the last 5
years or so, as the VCs invest in larger deals and more mature
companies. However, to a certain extent, the vacuum has been
filled by smaller investors, sometimes called "angels" who like
to invest in these small risky deals.
iii. Corporate Partners.
Some of the slack in availability of investment
capital has been taken up by so-called "corporate partners",
which are established companies (usually, but not always, larger
companies) that are interested in making investments in start-up
and small ventures. The "corporate partner" is often driven by a
different motivation than the venture capitalist, who is usually
motivated strictly by return on investment. The corporate
partner usually seeks benefits in other ways such as by
assignment of inventions, licensing rights, manufacturing rights
or marketing rights.
iv. Customers and Suppliers.
A little-used but often successful financing source
for the small business owner is a major customer or major
supplier. The financing might consist of cash for debt or
equity, but more often will take the form of extended terms (in
the case of the supplier) or prepayments (in the case of the
customer) or some combination of the foregoing.
c. COMMERCIAL LOANS
i. Bank Loans.
Generally, banks are poor sources of funds for
start-up companies. Banks like to make commercial loans on a
"secured" basis, taking liens in real estate, machinery and
equipment, inventory, accounts receivable and other assets of the
borrower. The problem is that most start-up companies don't have
the asset base to support a commercial loan.
ii. Alternatives.
If the business owner has equity in a residence or
other real estate, then the real estate might be sufficient
collateral to support a loan to the individual or to the company
with the personal guarantee of the owner. Explore all avenues.
In one case handled by speaker, the business owner's lottery
prize was utilized as a major component of the collateral
package.
d. U. S. SMALL BUSINESS ADMINISTRATION (SBA) LOANS
i. Due to funding cutbacks the SBA will consider
applications for direct lending only to Vietnam era veterans;
disabled veterans with a rated disability of at least 30%;
handicapped individuals who qualify under the SBA's handicapped
loan program; business located in high - unemployment areas, or
owned by low income individuals.
ii. Most SBA lending is now provided under the
SBA's Loan Guaranty program, whereby the SBA guarantees up to
$750,000 of a loan made by a lending institution.
e. N. J. ECONOMIC DEVELOPMENT AUTHORITY (EDA) LOANS
1. The N.J. Economic Development Authority (EDA) helps
businesses in New Jersey by providing loans, loan guarantees, and
both taxable and tax-free bonds.
2. For more information about the EDA's "Statewide
Loan Pool for Businesses", you may call or write: New Jersey
Economic Development Authority, Capital Place One, 200 South
Warren Street, CN 990, Trenton, New Jersey 08625-0990, (609)
292-1800.
7. EMPLOYMENT LAW
a. EMPLOYEE HIRING
i. The Employment Application.
The small business owner should have an employment
application that has been reviewed by counsel.
(1) Be on the look-out for illegal questions.
By regulation in New Jersey, employers may not ask any questions
regarding the job candidate's race, creed, color, national
origin, ancestry, age, marital status, sex or liability for
service in the U.S. Armed Forces unless the requested
information legitimately relates to the fulfillment of a "bona
fide occupational qualification".
(2) There are many questions that should not
be asked, in conversation or on the application form, eg., what
is the applicant's native language. Watch out for use of photo
before hiring.
(3) The use of an employment-at-will
disclaimer on the application is recommended such as the
following:
"In consideration of my employment, I agree to
conform to the rules and regulations of XYZ Company, and my
employment and compensation can be terminated, with or without
cause and with or without notice, at any time, at the option of
either the Company or myself. I understand that no manager or
representative of the Company, other than the President or
Vice-President of XYZ Company, has any authority to enter into
any agreement for employment for any specified period of time, or
to make any agreement contrary to the foregoing."
(4) Include on the application an agreement
not to reveal trade secrets or confidential information; also, a
statement about false or fraudulent information.
(5) If any pre-employment investigation of an
applicant is made, the Federal Fair Credit and Reporting Act
requires a disclosure statement such as the following:
"We intend to request a background
investigation regarding your general reputation, education, work
experience, finances and community standing. In accordance with
the Fair Credit and Reporting Act, you have a right to request in
writing a disclosure of the nature and scope of the information
requested. Please sign and indicate your acceptance of these
terms."
ii. Basics of Interviewing.
The interview process can be a legal minefield for
your company.
Some of the things an interviewer may properly do
include:
(1) Telling prospective employees that the
company is a nice place to work, treats employees well, is
forward-thinking, and is concerned about employees.
(2) Engaging in fair commentary about the
company's treatment of employees.
(3) Giving information about performance
appraisals and salary reviews.
(4) Giving information about the company's
fringe benefits.
Some of the statements that the interviewer should
avoid include:
a. Inducing individuals away from other
employment with assurances or promises such as: "you'll have a
permanent job here," or "you'll be able to work here the rest of
your life," etc.
c. Promising or implying that employment will not
be terminated except for "good cause" or words of similar effect.
iii. Interviewing - Other Things You Should Do.
(1) Determine position requirements before
recruiting starts.
(2) Study the applicant's resume and job
application thoroughly and determine additional information
needed before the interview.
(3) Plan to hold the interview in private,
free from interruptions.
(4) When asking questions, make sure they are
job-related and non-discriminatory. If you would not ask the
same question of men and women or minorities and non-minorities,
don't ask it.
(5) Let the applicant do most of the talking
- ask questions that require more than a yes or no answer.
(6) Let the applicant know what the next step
is as you conclude the interview.
(7) Don't make notes on the application for
employment.
(8) Fill out an evaluation report completely
for every applicant you interview.
iv. Child Labor Laws.
(1) The federal law, the Fair Labor Standards
Act, places restrictions on the employment of children when the
employer is engaged in interstate commerce or is producing goods
for sale in interstate commerce. Children between the ages of 14
and 18 are restricted both in occupations in which they may be
employed and the number of hours they may be employed.
(2) State law prohibits the employment of any
child under the age of 14. As with the federal law, children
between the ages of 14 and 18 are restricted both in occupations
in which they may be employed and the number of hours they may be
employed. Notice of the child labor laws must be prominently
displayed in the work place, and the employer must maintain
records for all employees under the age of 19. For additional
information contact the New Jersey Department of Labor, Office of
Wage and Hour Compliance.
v. The Minimum Wage.
(1) The Fair Labor Standards Act applies to
employees engaged in interstate commerce or in producing goods in
interstate commerce. As of April 1, 1991, the minimum wage
became $4.25 per hour. Lower wage rates apply to agricultural
workers and domestics. Employees covered by this law are
entitled to time and a half for overtime. The overtime
requirements do not apply to certain types of employees,
including bona fide executive, administrative or professional
employees, and outside sales people.
(2) The minimum wage under the N.J. State
Wage and Hour Law is $5.05 per hour. It supersedes the federal
rate for all covered employees. Overtime requirements are
similar to those under federal law. Notices of the minimum wage
laws must be posted in the work place and records of wages paid
and hours worked by employees must be available for inspection by
the N. J. Commissioner of Labor.
b. EMPLOYMENT AGREEMENTS
i. The employment agreement has undergone major
change in the last 10 to 15 years. Whereas historically it was
used primarily with top executive officers, now it is used with
employees all up and down the line.
ii. Employees became accustomed to thinking of the
employment agreement as a pro-employee document. Although the
employment agreement does offer significant benefits to the
employee, it also carries with it major drawbacks.
iii. The advantages of the employment agreement to
the employee can include:
(1) job security;
(2) guaranteed compensation; and
(3) fringe benefits.
iv. The employer, however, can load the agreement
with provisions that benefit the company, at the expense of the
employee, including:
(1) acknowledgement of the employee's
employment-at-will status;
(2) restrictive covenants, including
noncompetition, nonsolicitation and nondisclosure agreements; and
(3) assignment of inventions provisions.
v. Even in a situation where the owners are the
sole employees, an employment agreement makes sense for tax
reasons:
(1) the agreement validates the company's
payments of profits to the owners, and blunts the ability of the
IRS to claim that the owners' compensation is really disguised
dividends which should be subject to double tax.
(2) Another benefit of the employment
agreement in the small company setting is to avoid disputes
between the owners as to sharing of profits.
c. EMPLOYEE BENEFITS
i. The development of the employee benefits
program has several objectives:
(1) to attract qualified personnel;
(2) to retain such personnel;
(3) to "incentivize" employees to high
performance; and
(4) to create a long-term bond between the
company and its work-force.
ii. Some of the available alternatives include:
(1) Qualified Pension Plan. Because the
benefits under these plans are geared to an employee's length of
service, they tend to be effective in creating a long-term bond
between the company and the employee. However, annual
contributions are mandatory, regardless of the financial
condition of the business, so the qualified pension plan may not
make sense for the new business.
(2) Profit-Sharing Plan. Unlike the pension
plan which requires certain annual dollar contributions to fund a
predetermined retirement benefit, the profit-sharing plan usually
calls for employer contributions only when the company is earning
money, and the company has some flexibility in the amount of the
contributions it makes.
(3) Deferred Compensation Plan. Unlike the
qualified pension or profit-sharing plan which benefits virtually
all of the company's employees, as a group, deferred compensation
plans are put in place with an individual or small group of
individuals. Deferred compensation might be used with a key
executive employee to enhance achievement of profit objectives,
or with salespersons to motivate them to meet sales objectives.
Sometimes the payment of deferred compensation is made payable
after the employee has achieved a certain number of years of
service, or upon retirement, so the deferred compensation plan
takes on some of the long-term incentive features of the
qualified pension and profit-sharing plans. One of the major
drawbacks to the deferred compensation plan is that it does not
generate current tax deductions for the employer. Another
disadvantage: The monies are not segregated and held in trust,
free from claims of creditors. Company creditors may reach the
monies to satisfy their claims.
(4) Welfare Benefit Plans.
* Reimbursement of medical expenses
* Payment of premiums for health and
hospitalization and medical insurance
* Employer-paid disability insurance
(5) Miscellaneous Employee Benefits.
* Vacation pay
* Sick pay
* Holiday pay
* Severance pay
* Salary continuation during disability
d. THE OCCUPATIONAL SAFETY AND HEALTH ACT (OSHA)
i. What is the Scope of OSHA? The Occupational
Safety and Health Act requires every employer to provide a
workplace free of hazards that are likely to cause serious
physical injury or death to employees.
ii. Enforcement of OSHA. The U. S. Secretary of
Labor issues regulations which employers and employees must
comply with. In order to enforce OSHA standards the Secretary of
Labor may conduct inspections, issue citations for violations and
enforce penalties.
3. Notice to Employees. OSHA requires that the
employer post certain notices to employees.
4. Recordkeeping Requirements. Employers are required
to maintain a log of all job-related injuries or illnesses.
Employers with more than 10 employees are subject to additional
recordkeeping requirements. You may obtain additional
information on OSHA's recordkeeping requirements by contacting
the U.S. Department of Labor/OSHA at Marlton Executive Park, 701
Route 73 South, Building 2, Suite 120, Marlton, New Jersey 08053,
(609) 757-5181. They can supply you with a booklet entitled
"Recordkeeping Requirements for Occupational Injuries and
Illnesses".
5. Reporting Requirements. In the event of a
workplace death or accident which results in 3 or more employees
being hospitalized, the employer must notify the local OSHA
office within 8 hours. (This is a recent change from the 48 hour
notification requirement which existed previously).
6. N.J. Health and Safety Laws. In addition to OSHA,
New Jersey has also passed health and safety laws to protect
workers in certain types of businesses, including quarries, ski
lifts, carnival amusement rides, and liquified petroleum gas.
7. Free Consultation Service. If you wish to obtain a
free consultation regarding your company's health and safety
obligations and programs, you may contact: New Jersey Department
of Labor, Occupational Safety and Health Consultation Services,
(609) 292-0404.
8. REAL ESTATE AND ENVIRONMENTAL CONSIDERATIONS
a. Selecting a Site for Your Business.
As a business person, you will be faced with a number of
different considerations in selecting a physical location for
your business, including market considerations regarding the
company's goods or services; the local labor pool;
transportation; and local purchase or rental costs.
b. Zoning and Other Restrictions.
You should have your attorney check local zoning laws to
make sure that you may operate your business in the chosen
location. Your attorney can also assist you in investigating
local ordinances that affect signage, exterior lighting,
permitted hours of operation and other matters affecting your
business.
c. Leasing Versus Purchasing.
One of the major business decisions you will have to
make is the decision of whether you should lease or purchase your
facility. Some of the considerations are the relative costs of
lease versus purchase, initial versus projected space
requirements, available funds for purchase, possibility of
financing the purchase, etc.
d. Environmental Laws.
There are numerous federal and state environmental laws
and regulations affecting the operation of your business,
including laws and regulations affecting air emissions, water
pollution, and the treatment, storage and disposal of hazardous
wastes and substances. Before purchasing an industrial or
commercial site, significant investigation is required concerning
the prior owners of the site and the manner in which the site was
used. Under applicable federal and state law, the current owner
of a site may be responsible for the clean-up of environmental
contamination caused by a prior owner.
The New Jersey Industrial Site Recovery Act ("ISRA")
applies to the sale of the "industrial establishment" or the
cessation of operations. ISRA is far-reaching in its application
to New Jersey businesses. What many business people do not
realize is that it covers both businesses that own the real
estate on which they are located and tenants.
9. ONGOING CORPORATE RECORD-KEEPING
a. You can't just form a corporation and then ignore
it. In order to continue to receive the benefits of
incorporation --insulation of personal assets from claims of
business creditors --you have to observe certain record-keeping
requirements.
b. The board of directors should have regular
meetings. Board meetings should be held as often as the
corporation's business requires, but no less frequently than once
a year. At a minimum, the board of directors should elect
officers for the next year. Action should also be taken on other
major corporate decisions, such as purchase or lease of a new
facility, acquisition of new pieces of equipment, entering new
lines of business, and so forth.
c. A meeting of the corporation's shareholders should
be . held at least once a year to elect directors for the next
year and to take any other corporate action that is required at
that time.
d. Instead of an actual sit-down meeting, the board of
directors and shareholders may adopt resolutions by signing a
document called a "Unanimous Written Consent". As its title
indicates, the Unanimous Written Consent is required to be signed
by all of the shareholders or directors of a New Jersey
corporation. If even one shareholder or director fails or
refuses to sign, the Consent will not be effective.
e. It is the speaker's experience that most small
companies fulfill their annual record-keeping requirements by use
of the Unanimous Written Consent.
10. DEVELOPING CONTRACTS AND FORMS FOR USE IN YOUR BUSINESS
a. No Two Businesses Are Alike. Each business has its
own needs when it comes to contracts and forms. Some businesses
have extensive needs for contracts and forms and others require
only one or two forms, but just about every business has need for
some contracts or forms.
b. Customer Contracts. It is a good idea to analyze
your method of dealing with customers in order to determine if
your business requires a contract or form for use with customers.
Whether you sell goods or services it is advisable to have a
customer contract or form in place so that you can:
i. clarify the important business terms,
including price, payment terms and other terms and conditions of
sale;
ii. have a basis to pursue collection if the
customer does not pay;
iii. avoid disputes; and
iv. put in terms and conditions that are favorable
to you so that, if you can't avoid a dispute, at least the
contract governing your dispute will be in your favor.
c. Forms for Use With Suppliers. If you purchase goods
or services from a vendor or supplier, then consideration should
be given to the development of a form setting forth the terms and
conditions under which you will buy. If you are a purchaser of
goods, you should have a purchase order form. Many small to
mid-sized businesses overlook the need for a purchase order form
with terms and conditions on the reverse side.
d. Employment Contracts and Forms. In the employment
law section of the workshop, we identified a number of
employment-related documents that every employer should have in
place:
i. the employment application;
ii. performance appraisal form;
iii. employment agreements;
iv. a restrictive covenant agreement containing
one or more of the following: noncompetition agreement;
nonsolicitation agreement; and nondisclosure agreement (also
known as a "secrecy agreement" or "confidentiality agreement").
e. Independent Contractors and Consultants.
i. Many businesses have agents or representatives
who are not employees, but independent contractors. An example:
a real estate sales person for a real estate brokerage business.
Independent contractor status offers advantages for the business,
if you qualify. An independent contractor agreement, by itself,
will not suffice, but if you do qualify under the complicated
legal and tax rules, you should have a written independent
contractor agreement in place to support your claim of
independent contractor status.
ii. If you work with consultants, for example, a
software programmer who is hired to develop custom software, you
should also have a written contract in place. The U.S. Supreme
Court decision in Community for Creative Non-violence v. Reed
highlights just one of the reasons why.
iii. If you have contractors who come onto your
premises, eg. a building contractor to handle a plant renovation,
you should have forms in place whereby the contractor waives all
rights to sue you for personal injury to his workers.
f. Special Situations. The types of contracts and
forms listed above are by no means comprehensive. There are
numerous special situations that come up in your day-to-day
business which also require contracts and forms. Whenever you
encounter such a special situation, you should consult with an
experienced business lawyer to counsel and assist you.
1996 Richard J. Lambert
Contributed by Richard J. Lambert, Dunn Lambert, LLC,
(www.njbizlawyer.com) the Atrium, East 80, Route 4, NJ 07652. Telephone:
201/291-0700. E-mail: rlambert@njbizlawyer.com