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
    1. THE 4 MAIN ALTERNATIVES:
      1. The sole proprietorship
      2. Partnership
      3. Corporation
      4. Limited Liability Company
    2. SOLE PROPRIETORSHIP
      1. Definition of Sole Proprietorship: Business for profit owned by one person who takes no steps to create a separate legal entity
      2. 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
      3. 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
      4. If employees will be hired, employer I.D. Number must be obtained. Also, registration number from N.J. Division of Taxation must be obtained
    3. THE PARTNERSHIP
      1. Definition of Partnership: The association of two or more persons to carry on a business for profit as co-owners
      2. Partnership agreement not required, but desirable
      3. Each partner liable for all the obligations of the partnership
      4. Partners share equally in profits and losses, unless otherwise agreed
      5. Partnership is a tax-reporting entity. Must prepare and file informational returns, even though income and losses are flowed through to the individual partners
      6. Advantages:
        1. Expanded sharing of management responsibility, 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"
      7. 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
      8. Revised Uniform Partnership Act. Effective December 8, 2000, New Jersey general partnerships are governed by the Revised Uniform Partnership Act ("RUPA"). Although discussion of RUPA is beyond the scope of the outline, RUPA enacts one interesting change that makes the general partnership form even less attractive. Before December 8, 2000, partners of a general partnership were "jointly and severally" liable in tort, but only "jointly" liable in contract. Now, under RUPA, partners are jointly and severally liable under both tort and contracts
    4. THE CORPORATION
      1. The Corporation is a separate legal person, a separate legal entity, that comes into existence when a Certificate of incorporation is filed with the Division of Commercial Recording.
        1. 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
        2. 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
        3. 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
    5. 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.
        1. LLCs and partnerships are both taxed in the same way -- as pass-through entities
        2. 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.
        1. C corporation shareholders are taxed twice -- once at the corporate level and a second time at the individual level as shareholders
        2. Shareholders in a corporation and members in an LLC both enjoy insulation from personal liability for debts of the entity
        3. In addition to limited liability of shareholders, corporations have 3 other attributes:
          1. "Continuity of life", i.e., corporations live forever and don't terminate if a shareholder sells out or dies, etc
          2. "Free transferability of shares", i.e., shareholders are free to transfer their shares to others, unless there is an agreement to the contrary; an
          3. "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.

            NOTE: Before January 1, 1997 there was a risk that an LLC that had these corporation attributes (continuity of life, free transferability of shares and centralized management) would be taxed as a corporation and not as a partnership. Since most small business owners form the LLC with the expectation that it will be taxed as a partnership, and not as a corporation, this was an undesirable situation requiring a great deal of care in the formation of the LLC.

            Now, with the IRS adoption of the so-called "check-the-box" regulations, this risk has been removed from the LLC. Effective January 1, 1997, LLCs will automatically be given pass-through tax treatment, unless they elect to be taxed as corporations
        4. Corporations generally are required to be managed by a board of directors which, in turn, appoints officers to run the day-to-day affairs of the business. These rules do not apply to LLCs. LLCs are not required to have directors or officers. The management of the business can be done by the LLC members, or the members may appoint managers
        5. A corporation must observe certain formalities in terms of shareholder and director meetings, maintenance of corporate minutes, and filing of annual reports. Failure to observe these formalities can lead to "piercing of the corporate veil". The LLC has no such corporate formalities
        6. In the C corporation, there is often a genuine concern about the ability of the IRS to claim that shareholder-officers of the corporation have received "unreasonable compensation". The consequence of such a determination by the IRS is that the "unreasonable" portion would not be deductible by the corporation, and would, therefore be subject to double taxation. Since the LLC is not subject to two levels of tax, unreasonable compensation concerns are eliminated
      5. Comparison of LLC with S corporation.
        1. Both LLCs and S corporations offer pass-through taxation at the federal level
        2. Both LLC and S corporations afford members/ shareholders insulation against liability for the debts and obligations of the entity
        3. However, S corporations are subject to a number of tax rules that do not apply to LLCs:
          1. S corporations may issue only one class of common stock, and no preferred stock. LLCs can have flexible capital structures
          2. S corporations can not have more than 75 shareholders. LLCs may have an unlimited number of members
          3. Before January 1, 1997, S Corporations could have corporations, partnerships or non-U.S. persons as shareholders. Effective January 1, 1997, S Corporations are permitted to be 100% shareholders of other S corporations. However, a Corporation cannot own stock in an S corporation, In contrast, LLCs may have U.S. citizens or foreign persons, and U.S. corporations and foreign corporations as members
          4. iv. S corporations are permitted to own 80% or more of the stock of a Corporation, and 100% of the stocks of an S Corporation. LLCs can have unlimited numbers of subsidiaries
          5. S corporations must properly complete and timely file various tax forms. LLCs have no such filing requirements
      6. Are there any disadvantages to using the LLC for your new business entity?
        1. Until 1998, the New Jersey LLC statute required that the LLC have two members. Effective August 14, 1998, the LLC statute was amended to permit one-person LLCs in New Jersey
        2. All states recognize LLCs. However, if your business will be conducted across state lines, you need to check with your lawyer
      7. How do you know if an LLC is right for your business?
        1. 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
        2. 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
        3. 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
        4. 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:
          1. joint ventures
          2. non-U.S. investors; an
          3. passive investors
    6. 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. RUPA has effected a significant change in the law governing LLPs
      4. Before RUPA, what distinguished the LLP from the partnership form of doing business was that the partner in an LLP was 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
      5. This feature of the LLP made 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
      6. Before RUPA, the disadvantage of the LLP was that the professional remained responsible for contract liabilities of the LLP, such as office and equipment leases, bank loans and payroll
      7. Under RUPA, contract liabilities of the LLP are solely the obligation of the LLP, and the partner is not personally liable for contract liabilities of the partnership
      8. As a result of RUPA, professionals conducting business as general partners might consider registering as an LLP to obtain insulation from future claims of creditors of the partnership.
  1. BUYING AN ESTABLISHED BUSINESS
    1. AN ALTERNATIVE TO STARTING YOUR OWN BUSINESS
      1. Advantages
        1. 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 relationship
        2. If the business is profitable, you will probably be able to take a salary from the beginning
        3. In many sale-of-business transactions, the seller can be persuaded to stay on in an advisory capacity to help you learn the business
        4. 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.
        1. 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
        2. 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.
  1. WHAT'S IN A NAME: CHOOSING A NAME FOR YOUR BUSINESS
    1. 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.
    2. UNDERSTANDING THE DIFFERENCES BETWEEN CORPORATE NAMES, TRADE NAMES AND TRADEMARKS.
      1. The corporate name is the name of your corporation on file with the N. J. Secretary of State, eg., "Union Lock Company, Inc."
      2. 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.
      3. 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.
    3. WHAT IF YOU'RE A SOLE PROPRIETOR OR PARTNERSHIP TRADING UNDER A DIFFERENT NAME?
      1. 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.
      2. General partners trading under their real names, eg. "Lambert and Jones, Locksmiths" also avoid public filings.
      3. 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.
      4. 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.
    4. WHAT IF YOU'RE A CORPORATION TRADING UNDER A NAME OTHER THAN YOUR CORPORATE NAME?
      1. 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.
      2. 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!
    5. WHAT DO YOU HAVE TO DO BEFORE YOU SELECT A NAME?
      1. Distinguish between a corporate name, on the one hand, and trade names and trademarks, on the other.
      2. 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: "corporation", "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.
      3. 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.
      4. 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.
      5. 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.
  1. GOVERNMENTAL REGULATION, LICENSES AND PERMITS.
    1. STATE AND LOCAL REGULATIONS
      1. 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.
      2. The N.J. Department of Commerce and Economic Development is a valuable resource to the small business person. The license and certification hotline (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.
    2. FEDERAL REGULATION
      1. 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).
      2. 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.
  1. TAX MATTERS
    1. TAX REPORTING AND PAYMENT GENERALLY
      1. 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) 292-6400 or (800) 323-4400.
      2. This is not an outline 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)
    2. THE IMPORTANCE OF THE ACCOUNTANT
      1. 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; an
        3. General business consultation and advice.
  1. FINANCING THE BUSINESS
    1. CAPITAL CONTRIBUTIONS BY OWNERS
      1. 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.
      2. The assets contributed include cash, tangible assets such as furniture, fixtures, machinery and equipment, and intangible assets such as patents, trademarks and inventions.
      3. 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.
    2. FINANCING BY THIRD PARTIES
      1. "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.
      2. "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.
      3. 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.
      4. 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.
    3. COMMERCIAL LOANS
      1. 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.
      2. 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.
    4. U. S. SMALL BUSINESS ADMINISTRATION (SBA) LOANS
      1. 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.
      2. 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.
    5. 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.
  1. EMPLOYMENT LAW
    1. EMPLOYEE HIRING
      1. 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."
      2. 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:
          1. 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.
          2. Promising or implying that employment will not be terminated except for "good cause" or words of similar effect.
      3. 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.
      4. 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.
      5. 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.
    2. EMPLOYMENT AGREEMENTS
      1. 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.
      2. 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.
      3. The advantages of the employment agreement to the employee can include:
        1. job security;
        2. guaranteed compensation; and
        3. fringe benefits.
      4. 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.
      5. 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.
    3. EMPLOYEE BENEFITS
      1. 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.
      2. 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.
          1. Reimbursement of medical expenses
          2. Payment of premiums for health and
          3. hospitalization and medical insurance
          4. Employer-paid disability insurance
        5. Miscellaneous Employee Benefits.
          1. Vacation pay
          2. Sick pay
          3. Holiday pay
          4. Severance pay
          5. Salary continuation during disability
    4. THE OCCUPATIONAL SAFETY AND HEALTH ACT (OSHA)
      1. 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.
      2. 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 liquefied 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.
  1. REAL ESTATE AND ENVIRONMENTAL CONSIDERATIONS
    1. 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.
    2. 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.
    3. 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.
    4. 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.
  1. ONGOING CORPORATE RECORD-KEEPING
    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. It is the speaker's experience that most small companies fulfill their annual record-keeping requirements by use of the Unanimous Written Consent.
  1. DEVELOPING CONTRACTS AND FORMS FOR USE IN YOUR BUSINESS
    1. 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.
    2. 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:
      1. clarify the important business terms, including price, payment terms and other terms and conditions of sale;
      2. have a basis to pursue collection if the customer does not pay;
      3. avoid disputes; and
      4. 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.
    3. 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.
    4. 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:
      1. the employment application;
      2. performance appraisal form;
      3. employment agreements;
      4. 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").
    5. Independent Contractors and Consultants.
      1. 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.
      2. 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.
      3. 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.
    6. 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.

2003 Richard J. Lambert

Contributed by Richard J. Lambert, Dunn Lambert, LLC, The Atrium, East 80 Route 4, Paramus, NJ 07652.

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