Business Law

How can you protect yourself if you are buying or selling a business? There are so many traps for the unwary, such as assumption of unknown liabilities, income and property tax issues and governmental regulations.

Tip: Many times purchasing the assets of a business is better than buying the stock of the corporation, but if you continue the same business under the same or similar name, a court may still hold you liable for the former company's product liability claims.

If you are starting a business, what form of ownership should it be in? Sole proprietorship, corporation, partnership, limited partnership or limited liability company? Each one of these choices may have major legal and tax consequences.

Tip: Some landlords, banks and other creditors want the owners to personally guaranty the lease or obligation, which will defeat the limited liability of certain legal entities, such as corporations and limited liability companies. Check to see if such guaranty provisions are part of your lease, loan documents or supplier agreements.

If you are in business with other co-owners, what will happen if you or another co-owner dies, gets divorced, becomes disabled, retires or just stops working?

Tip: A buy-sell or shareholder agreement can prevent problems and litigation. Life insurance and disability insurance can be used to fund the purchase of a deceased or disabled co-owner's interest in the company under a buy-sell agreement.

How do you protect your personal assets from your business's creditors if your business fails or is sued? The form of your business entity, such as a corporation, may not protect you if it is not properly set up and administered.

Tip: Doing business as a corporation or a limited liability company can provide some insulation from claims and debts. Transferring your assets to a friend or a relative usually does not give any protection. Treat your corporation as a separate person. Do not co-mingle funds, or pay personal bills with the corporate checking account or vice versa. If you need to lend money to your corporation have the corporation give you a promissory note that is approved by formal action of the board of directors. Creditors can "pierce the corporate veil" and hold you personally liable if you fail to honor the corporate formalities.

What do you do if you are sued? What will your insurance cover?

Tip: You should notify your insurance company immediately. Your insurance company will hire a lawyer to defend you if the claim is or might be covered by the policy. The cost of defending a lawsuit can be enormous. Your comprehensive general liability insurance covers many types of claims arising out of a business, except workers' compensation. See an attorney immediately if your insurance company refuses to defend or sends you a "reservation-of-rights letter."

What do you do with that problem employee?

Tip: A properly drafted employee manual can be used to support your disciplining or firing an employee and protect you against allegations that you wrongfully terminated the employee.

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