Business Law


Warning: The information provided herein is for general background purposes only. You should consult an attorney for advice concerning your circumstances.

  • Business Contracts
  • Corporations
  • Partnerships
  • Limited Liability Companies
  • Arbitration of Disputes
  • Mediation of Disputes

What are the steps necessary to form a new business?

A business can be operated as a sole proprietorship, partnership, limited liability company, or corporation. The selection of the type of business entity depends in part upon the manner in which the owners wish to manage the business and upon tax considerations. Some businesses are managed by a team approach, for example, a member-managed limited liability company; while other business entities are operated by a traditional structure, such as a corporation or a manager-managed limited liability company. A business entity can usually elect to be taxed at the entity level or can pass through items of income and expense to its members, partners, or shareholders, as for example, a corporation electing Subchapter ‘S’ tax treatment. Careful planning is critical so the owners can address important issues at the beginning of the formation of the business that will govern their business relationship into the future, such as the manner in which the business will be controlled, the rights of the individual parties in the event of death, disability, or the proposed retirement of a party, the rights of the parties concerning liquidation of the business, as well as the rights of a party to sell or transfer his or her interest to third parties.

What is a corporation and how does it operate?

One of the most common forms of business entity is the Corporation. The shareholders (owners) of a corporation generally hold a Shareholders Meeting at least once per year and elect members of the Board of Directors. The Board of Directors governs the affairs of the corporation and appoints officers, such as the President, Vice President, Secretary, and Treasurer to manage the day-to-day business of the corporation. A corporation is a separate legal entity that can hold title to assets and is separate and apart from its shareholders.

How is a corporation taxed?

A corporation can elect to be taxed as a separate legal entity, or, per Sub-Chapter S of the IRS Code, it may pass items of income and expense to its shareholders, in a similar manner as a partnership.

What is a Limited Liability Company?

A Limited Liability Company (LLC) is a separate legal entity formed by one or more persons. The LLC can be more flexible in its operation in many respects than a corporation. An LLC is governed by an Operating Agreement executed by the members of the LLC. The LLC may be “manager managed” or “member managed.” The Operating Agreement sets forth the rights and duties of the members and can address specific issues, including the nature of the business to be conducted, the manner of making business decisions, the persons authorized to make business decisions, limitations and rights on the sale or transfer of ownership interests, and transfers and buyouts in the event of disability or death of a member.

What is a partnership?

A partnership is an agreement between two or more persons to participate in the operation of a business for profit. A partnership agreement can range from a simple document setting forth the method of dividing the profits and losses of the business, to a rather complex agreement covering transfer rights, the right to buyout a partner in the event of death or disability, rights of first refusal, the rights of the partners as to management of the business, the manner in which capital accounts will be maintained, the responsibilities of partners, and circumstances in which a partner can be removed from the operations of business.

What is a business purchase and sale agreement?

A business purchase and sale agreement is an agreement to transfer a business opportunity from a seller to a buyer. The agreement should address all aspects of the transaction, including a description of equipment, trade name, leasehold premises, business equipment, inventory, and other assets being sold, and the manner in which the purchase price will be paid. The purchase and sale agreement addresses the issues in conveying good and marketable title, free of liens, from the seller to the buyer. Unless the buyer complies with various laws, such as the Bulk Transfer Law, the buyer might be liable for the unpaid debts of the seller. The buyer must obtain tax clearances from the State Board of Equalization, Employment Development Department, and other governmental agencies or the buyer may be liable for unpaid taxes owed by the Seller. A search must be conducted to determine if a federal tax lien or judgment lien was filed against the assets of the business. There are laws that concern when a non-competition agreement can be given in connection with the sale of a business. If the transaction is not conducted properly, the purchaser of the business could be surprised to learn that he/she is liable for certain debts of the seller.

How can business disputes be resolved efficiently?

Often disputes between the owners of a business can be resolved by mediation or arbitration, without the necessity of court litigation. Mediation is a process where a neutral person, referred to as the mediator, determines what issues are important to each side, and the mediator helps both sides come to an agreement that addresses the concerns of the parties. The parties normally appoint a person to act as a mediator that is familiar with the area of law involved. Retired attorneys and retired judges often act as mediators. In a dispute involving a specialized trade, such as the practices of the construction industry or the practices of a particular trade or profession, a mediator may be selected who is experienced in that practice, trade, or profession. Mediation is a voluntary process, and the mediator does not render a binding decision.

What is the difference between mediation and arbitration?

Mediation is a voluntary process where the mediator attempts to help the parties negotiate an agreement that helps the parties resolve their concerns involving a particular dispute. Arbitration can be either binding or nonbonding. In a binding arbitration, the parties submit their controversy to an arbitrator who acts as private judge. The arbitrator hears the evidence presented by all side and renders a binding decision. The arbitration process is usually set up in a manner that the arbitration award can be easily adopted as a judgment of a court and therefore be enforceable against the parties. Arbitration has certain advantages over court litigation. It may be faster, less expensive, and it is private. While the general public is normally allowed to be present in court proceedings, arbitration is a private matter and arbitration proceedings are normally held in the arbitrator’s office. A person selected as an arbitrator is usually either an experienced attorney or a retired judge. There are organizations, for example the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Service (JAMS), that are in the business of providing highly experienced arbitrators who hear and resolved disputes.

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