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If you want the help of a trained professional, consult an attorney licensed to practice in your state. Seventh edition Legal Guide for Starting & Running a Small Business by Attorney Fred S. Steingold edited by Ilona Bray SEVENTH EDITION Editor Illustration Book Design Cover Design Production Proofreading Index Printing FEBRUARY 2003 ILONA BRAY MARI STEIN TERRI HEARSH TONI IHARA SARAH HINMAN ROBERT WELLS JEAN MANN ARVATO SERVICES, INC. Steingold, Fred. Legal guide for starting & running a small business / by Fred S. Steingold — 7th ed. p. cm. Includes index. ISBN 0-87337-910-1 1. Small business—Law and legislation—United States—Popular works. 2. Business enterprises—Law and legislation—United States—Popular works. I. Title: Legal guide for starting and running a small business II. Title KF1659.Z9S76 2003 346.73’0652—dc21 2002045235 Copyright © 1992, 1995, 1997, 1998, 1999, 2001 and 2003 by Fred Steingold All rights reserved. Printed in 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 the prior written permission of the publisher and the authors. 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. iv ACKNOWLEDGMENTS Special thanks to Nolo Publisher Jake Warner—the cheerful perfectionist whose ideas infuse every page of this book—and to Nolo Editor Mary Randolph, who deftly whipped the early manuscripts into final shape. Thanks, too, to the rest of the remarkable Nolo family for their invaluable contributions—especially Steve Elias, Robin Leonard, Barbara Hodovan, Jackie Mancuso, Tony Mancuso, Barbara Kate Repa, Beth Laurence and Ilona Bray. In addition to the folks at Nolo, these other professionals generously shared their expertise to make this book possible: • Attorneys Charles Borgsdorf, Larry Ferguson, Sandra Hazlett, Peter Long, Michael Malley, Robert Stevenson, Nancy Welber and Warren Widmayer. • Certified Public Accountants Mark Hartley and Lonnie Loy. • Insurance Specialists James Libs, Mike Mansel and Dave Tiedgen. Finally, thanks to my small business clients, who are a constant source of knowledge and inspiration. v Table of Contents INTRODUCTION CHAPTER 1 Which Legal Form Is Best for Your Business? A. Sole Proprietorships ....................................................................................... 1/4 B. Partnerships ................................................................................................. 1/7 C. Corporations .............................................................................................. 1/11 D. Limited Liability Companies ........................................................................... 1/21 E. Choosing Between a Corporation and an LLC ................................................. 1/23 F. Special Structures for Special Situations .......................................................... 1/26 CHAPTER 2 Structuring a Partnership Agreement A. Why You Need a Written Agreement .............................................................. 2/2 B. An Overview of Your Partnership Agreement ...................................................... 2/3 C. Changes in Your Partnership ......................................................................... 2/13 CHAPTER 3 Creating a Corporation A. The Structure of a Corporation ........................................................................ 3/2 B. Financing Your Corporation ............................................................................ 3/5 C. Compensating Yourself .................................................................................. 3/6 D. Do You Need a Lawyer to Incorporate? ........................................................... 3/7 E. Overview of Incorporation Procedures .............................................................. 3/8 vi F. Twelve Basic Steps to Incorporate .................................................................... 3/8 G. After You Incorporate .................................................................................. 3/17 H. Safe Business Practices for Your Corporation ................................................... 3/17 CHAPTER 4 Creating a Limited Liability Company A. Number of Members Required ........................................................................ 4/2 B. Management of an LLC ................................................................................. 4/3 C. Financing an LLC .......................................................................................... 4/3 D. Compensating Members ................................................................................ 4/5 E. Choosing a Name ........................................................................................ 4/6 F. Paperwork for Setting Up an LLC ..................................................................... 4/7 G. After You Form Your LLC ............................................................................... 4/11 H. Safe Business Practices for Your LLC ............................................................... 4/13 CHAPTER 5 Developing a Buy-Sell Agreement A. Major Benefits of Adopting a Buy-Sell Agreement ............................................... 5/3 B. Where to Put Your Buy-Sell Provisions ............................................................... 5/7 C. When to Create a Buy-Sell Agreement ............................................................. 5/8 CHAPTER 6 Naming Your Business and Products A. Business Names: An Overview ....................................................................... 6/4 B. Mandatory Name Procedures ......................................................................... 6/7 C. Trademarks and Service Marks ..................................................................... 6/10 D. Strong and Weak Trademarks ...................................................................... 6/11 vii E. How to Protect Your Trademark ..................................................................... 6/12 F. Name Searches ......................................................................................... 6/13 CHAPTER 7 Licenses and Permits A. Federal Registrations and Licenses ................................................................... 7/3 B. State Requirements ........................................................................................ 7/4 C. Regional Requirements ................................................................................... 7/6 D. Local Requirements ........................................................................................ 7/7 E. How to Deal With Local Building and Zoning Officials ....................................... 7/9 CHAPTER 8 Tax Basics for the Small Business A. Employer Identification Number ....................................................................... 8/2 B. Becoming an S Corporation ........................................................................... 8/6 C. Business Taxes in General .............................................................................. 8/7 D. Business Deductions .................................................................................... 8/14 E. Tax Audits ................................................................................................. 8/19 CHAPTER 9 Raising Money for Your Business A. Two Types of Outside Financing ...................................................................... 9/3 B. Thirteen Common Sources of Money ................................................................ 9/8 C. Document All Money You Receive ................................................................. 9/15 viii