Business law is most commonly a product of contract law, involving both general and specific sub-topics of law such as labor, corporate, employment, franchise, and leases—many businesses find themselves in all of these categories in one form or another. A business is either the originator of a contract, a party to a contract prepared by the other party, or a negotiator where both sides are involved in negotiating the terms.
To the extent possible, it is preferable to be the originator of the contract and to ensure that the terms are most favorable to your business. If the contract is the product of negotiation, then it is important to know what terms are critical to the success of the business and negotiate those terms. If you find that you have no choice but to accept the contract presented by the other side, you need to go into the process with your eyes open, be aware of the consequences of signing the agreement, and make an informed decision whether to accept and plan accordingly.
Contract Drafting in California
While attorneys are often involved in direct contract negotiations, it is not necessarily always required to achieve the desired outcome. However, at a minimum, it is advisable to consult with an attorney before signing a contract to get a better understanding of any potential consequences.
The purchase of an ongoing business requires a specialized written contract known as a Purchase Agreement. From the buyer’s perspective, consultation with a savvy business and tax law attorney is fundamental to ensure that the buyer receives what was bargained. The key is due diligence to ensure the financials of the business are as represented. Often, an accounting professional should be consulted to guarantee that the financials are properly disclosed and audited. The role of the business lawyer is not to kill the deal, but to help the client understand the terms of sale, and provide appropriate contingencies and timing to give the client an “out” if the terms are not agreed or understood. A successful purchase agreement must have the business lawyer involved while the deal is being formed so as to grant the buyer and/or the seller successful results.
Another agreement that is critical when a business has two or more co-owners is a Buy-Sell Agreement. Also known as a “buyout agreement,” a buy-sell agreement is one between the co-owners that sets forth the terms and conditions of sale when one of the owners leaves the business—either voluntarily or involuntarily—such as upon death or from a significant illness. When a business is a closely-held entity like a small corporation or partnership, it may be difficult to value the interest of the separating co-owners. In such situations, the agreement will typically reference an agreed-to formula that may include various factors: capital contributions, earnings, profits, and/or goodwill. The nature and circumstances of the business and its co-owners will dictate which formula is most suitable in a buy-sell agreement.
Just as with a prenuptial agreement before a marriage, a successful buy-sell agreement should have one in place before the relationship goes sour or terminates. Unfortunately, many businesses do not plan for a buy-sell agreement, which could result in difficulties when the time comes to sell the business.
When starting a business, the business owner needs to decide how to operate. If an individual is running a business and takes no steps to create any other business form, it is a sole proprietorship. If two or more individuals are operating a business, it is by default a general partnership. A sole proprietorship usually has no need to create any business documents other than a business license as required by the locality, and a fictitious business name statement if the business operates under a name than that of the individual owner. In addition to these documents, it is advisable for a general partnership to have a partnership agreement in order to formalize the agreement between the partners. Sole proprietorships and general partnerships provide no legal protection to the business owners, which may potentially expose the owners’ personal assets to business liabilities.
Business owners who wish to operate as a corporation, limited partnership, or limited liability company (LLC) are advised to retain the services of an attorney to prepare the necessary documents required to file and register with the State of formation. It is important to also have documents that govern business operations such as bylaws for corporations, partnership agreements for partnerships, and operating agreements for LLCs. In addition, if it is advantageous for tax purposes, a corporation can make an election to be treated as an S corporation, and an LLC can make elections to be treated as either a C corporation or an S corporation.
The advantage of the corporate form is that it is designed to limit liability to the owner’s investment in the corporation and it protects personal assets from liability exposure. Similar to a corporation, an LLC also limits liability to each owner’s investment, but generally does not adhere to corporate formalities. Limited partners in a limited partnership also enjoy personal liability protection; however, a limited partnership requires at least one general partner (and general partners do not enjoy such protection). A common strategy to protect personal assets involves the use of a corporation as the general partner. See our Business Formation page for more information on selecting the most appropriate business entity.
Employment agreements are often used as a component part of business formation documents. Corporations, partnerships, and LLCs may elect to provide additional terms for key players in the business, taking the form of an employment agreement. Such agreements allow the company to specify the terms and conditions of employment for officers who are involved in the day-to-day operations of the enterprise.
How a Roseville Business Lawyer of NewPoint Law Group Can Help You
NewPoint Law Group has experience in drafting, negotiating, and reviewing all types of business contracts. Please contact us online or at 1-800-358-0305 if you need assistance entering into a contract, modifying the terms of an existing contract, purchasing a business, forming a business entity, or if you require specific incentives for certain employees.