How Do I Sell My Small Business?

            You own a small business. It may have been a good experience or a headache but for whatever reason, you've decided to sell it. You've never done this before and aren't sure what's involved.

            The first thing is to carefully analyze your business from every angle. Get all of your business documents organized. These could include financial records, profit and loss statements, accounts receivables, tax returns, transferable leases, contracts and agreements, pending orders, furniture and equipment lists, warranties, covenants not to compete, and consulting or management agreements, among many other possible things particular to your business. If the business operates as an LLC, make sure you have your articles of organization and any operating agreement available. If the business operates as a corporation, make sure all of your governing documents are in one place and up to date.

            Before you attempt to sell your small business you want to have a clear handle on what you are selling and be able to present it accurately and to your best advantage. Doing the above organization will help you ensure that you have covered each aspect of your business.

            Early on, you will need to decide whether you will be selling the assets of the business or whether you will be selling the ownership interests (LLC interests or corporation stock). You should consult with a tax professional at this point because the type of sale can affect your tax situation. This can be tricky. Since there are tax ramifications in the sale of a business, you not only want to be sure that you sell your business for the right price, you also want to know what, if any, tax liability you will have after the sale closes.

            Next you want to be sure that you have accurately valued your business and/or the assets of the business. You will likely need to hire a business appraiser. Often a broker is hired to help in this process. A broker will be able to develop a marketing plan and sales strategy.  You will want to be sure you have research supporting the value of your business and your sales price, with supporting information tailored to your type of business and location. 

            It is likely that the sale of your business will be more complicated than you think. You should have a purchase agreement or letter of intent for the proposed purchaser. With this is hand, you know you have a prospective buyer but you are not done yet. You need to do your "due diligence,' meaning to check the finances and representations of the prospective buyer to see if you wish to move forward with this buyer. If not, the whole process starts again.

            Once you have found a buyer that meets your criteria, you will want to have a detailed contract for the sale of your business drawn up. This is a critical document with all the important terms and details of sale. Therefore, it is very important that it is accurate, complete, and covers all areas. Not doing so can invite costly litigation or disputes after the closing. It's wise to have an attorney draft the contract. You'll want an attorney you are comfortable dealing with to do this, and one who understands your business and objectives in the sale.

            If you sell the ownership of the LLC or corporation, after the sale the entity will continue under new ownership and you, as the former owner, can enjoy the fruits of your years of labor. If, however, you sold only the underlying asset of the business, then after the sale of assets you will continue to own the entity. A knowledgeable business attorney can also help you file necessary legal documents to dissolve your business. For example, if you own a corporation, it you may need to file articles of dissolution. This is an important step to ensure that there is no lingering liability or obligation for you as owner.

           

            

WHAT IS AN S CORPORATION?

             Exactly what is an S corporation and what types of businesses may be interested in being an S Corp?  First, it is very important to understand that an S Corp is a FEDERAL TAX STATUS of a corporation and not a type of entity. What does this mean? This means that when you form a corporation in Maryland (or any other state), you do not form an S Corp per se. In Maryland, you will form a regular corporation and then file an S Corp election with the IRS. (The Articles of Incorporation and/or the Organizational Meeting minutes will state that the corporation's owners will elect S Corp status.)

             So, why would my corporation choose to be an S Corp? Under IRS regulations, because a corporation is a separate legal entity, it must usually file a tax return and pay taxes on its taxable income. However, the IRS regulations allow certain small businesses to be treated for tax purposes as if they were being run by the owners themselves without a separate entity. Under Subchapter S of the IRS regulations (this subchapter is where the name "S Corp" comes from), a corporation can elect to have the IRS disregard the corporation as a separate taxable entity and allow the taxable income or losses of the business to be reported on ("flow to" or "pass through" to) the owner of the business in proportion to their ownership shares. This prevents "double taxation" of corporate income because the income is taxed only at the owner level rather than at the corporate level as income and then again at the owner level as dividends.

            Aside from the avoidance of double taxation, an S corporation offers flexibility regarding

how earnings are paid to its owners, whether they are paid as salaries (subject to FICA and other taxes) or as distributions, not subject to these taxes. An S corporation must file a tax return but the

shareholders, not the S corporation,  pay taxes on profits on their individual tax returns. 

            The I.R.S. has very specific criteria that must be met before an S corporation election is

approved. To be eligible a corporation must:

            1. timely file Federal Form 2553;

            2. have no more than 100 shareholders, who meet the specified I.R.S. definition of "shareholder;"

            3.  have no nonresident alien shareholders; and

            4.  have only one class of stock.

            5.  and not be an "ineligible corporation" under the I.R.S. Code.

            The following links provide more information on the required form and criteria in order

to be a qualified S corporation: https://www.irs.gov/pub/irs-pdf/f2553.pdf.

https://www.irs.gov/uac/Form-2553,-Election-by-a-Small-Business-Corporation.

            Before attempting to file these forms, however, you first must incorporate in

Maryland and file the required documents with Maryland's State Department of Assessment

and Taxation ("SDAT"),  found at http://dat.maryland.gov/businesses/Pages/Maryland-Checklist-for-New-Businesses.aspx.  Maryland requires that any corporation provide the following information: name of corporation, purpose for which the corporation is formed, the addresses of the principal place of business and resident agent, the issuance of stock shares and the par value, the number of directors pursuant to the bylaws (which  can be increased or decreased), and the name of the directors and successors who shall act until the first meeting or until their successors are chosen.

            Once the corporation is filed, the next step is to file an I.R.S. Form 2553 to elect S

corporation status.  After both of these steps, if all criteria has been met, an S corporation is

valid.

            Once the S corporation is formed there are legal requirements going forward. The most important requirements relate to the number of shareholders and the type of person or entity that can be a shareholder. S Corps are also limited to certain classes of stock they can issue. For this and other reasons, many tech startups planning to look to venture capital investment should not elect S Corp status. 

  

            Since there are many considerations in evaluating what type of business entity is best for

your  business, and once you decide that, how to go about meeting the requirements for both

setting up and then maintaining your business, an attorney can be one of you most valuable assets.

DO YOU WANT TO FORM A MARYLAND SMALL BUSINESS?

            Are you considering starting a small business in Maryland? If so, it is important that you select the right type of entity and comply with Maryland requirements. A Maryland business attorney and accountant can be helpful in guiding you through the necessary steps. As a broad overview, take note of the following tips.

            1. What type of entity should my business be?  This depends on many factors.

Maryland recognizes the following business entities: sole proprietorship, general partnership,

corporation and limited liability corporation. Sole proprietorships and general partnerships do

not require the formation of an entity. Instead, Maryland simply requires registering such

businesses with the State Department of Assessments and Taxation and paying personal property

assessments.  In contrast, corporations and limited liability corporations must be properly

registered business entities with the State Department of Assessments and Taxation. Regardless

of the type of entity, certain businesses in Maryland also require a business license.

            2. Do I need a Business Name? The name of your business can be critical.  You want a

name that suits your business and can be used effectively in marketing. However, for a

corporation, you must ensure that the name you select is available in Maryland and then file

required forms with the State Department of Assessments and Taxation.  If you have a trade

name or trademark, you should also considering registering them. Trade names can be registered

with the Maryland Department of Assessments and Taxation. Trademarks can be registered with

the U.S. Trademark Office. An experienced Maryland business attorney can assist with this.

            3. How are taxes paid? All businesses must pay Federal and Maryland taxes. New

businesses should obtain an "EIN," or taxpayer information number from the IRS. This is needed

for withholding and tax payments. Your new business should also obtain a Maryland Combined

Registration Number from the Maryland DLLR if the business will have employees.

            4.  Are there zoning considerations? Where you locate your business is

another key consideration. You must comply with local zoning laws to be sure that your business

can be located in the area you select. If you plan to run your business from home, you must be

sure that there are no zoning restrictions for home-based business.

            5. Do the founders need an agreement in writing?  Absolutely yes! If there is more than one founder, you must have an agreement - called an operating agreement for an LLC and a shareholders' agreement for a corporation. This is something that many founders forego, but not having a well drafted agreement can cost many headaches, a lot of money and even spur lawsuits later on. 

            These are some initial things to consider when planning a new business.  This list, however, is not exhaustive. There are many considerations. Selecting the right entity and carefully following Maryland's requirements can make a big difference and get your business off to a strong start.

Katherine Taylor is an experienced Maryland small business attorney who has drafted hundreds of operating and shareholder agreements. Go to www.taylorlegal.com for more information. 

IS RUNNING A HOME-BASED BUSINESS FOR ME?

                Running any type of business is challenging, but running a home-based business has its own set of challenges. If you are considering running a home based business you should thoroughly weigh the pros and cons for your type of business and your personal needs. You need a fit for both to be successful and happy.

                A wide variety of small businesses are home based. Examples include, daycare, home improvement, retail, cleaning services, bed and breakfasts, catering, baking and some franchises. Technology and the ability to run and stay connected to a business remotely, have made home based businesses much more common and acceptable today. According to the U.S. Small Business Administration (quoting Forbes magazine), more than 52% of all small businesses in the U.S. are home based. https://www.sba.gov/blogs/5-reasons-start-home-based-internet-business.

                In many ways, thoroughly evaluating two factors before you start a home based business are the most important:

                1. Does my type of business lend itself to being home based?

                2. Does my personality have the characteristics for a successful home based business?

                Oftentimes, the first thing people jump to is the legal requirements for running a home based business without really thinking through what it takes and whether it is the best scenario for you and your business. This is a big decision which should not be based solely on saving money or not paying rent.

                On the type of business, ask yourself if it's feasible to run your business from home? What kind of equipment or tools will you need? How much space will you need? Do you have a separate and dedicated office, computer, and phone? Do you have a business address? Does it matter? Will you need to meet with clients or customers? Will they be deterred from hiring you if you work from home? What zoning requirements are there for your type of business? Will you have room for employees and growth? What about parking? What about homeowner's nearby or homeowner association covenants? What about traffic flow? What about supplies and technology you will need?

                On whether a home based business suits your personality ask yourself if you would like not being in an office or around others regularly? Are you disciplined enough to work at home and ignore household chores and other distractions? Will you put in the required hours? Are you good at or do you have the money to hire someone to help you with taxes, payroll, necessary filings, accounting, marketing, equipment repair and maintenance, and every other aspect to keep your business afloat and flourishing? Can you really treat your home office like an office? Are you good at time Management? Do you have the discipline to treat this like your real job, which it is, without being tapped by friends and family during the workday to run errands or do non-work related things?

                Like any other type of business, there are people who love working from home and others who hate it. This is a personal decision. To help you, here are some links to websites and articles discussing this topic:

• https://www.sba.gov/content/home-based-business-zoning-laws
• http://commerce.maryland.gov/start

                If you decide that a home based business is right for you, you must still form the right type of business, get any necessary licenses, and comply with tax laws and other laws and regulations. http://www.taylorlegal.com for more information about Katherine Taylor, a Maryland business attorney. 

   

WHY YOUR START-UP COMPANY NEEDS A LAWYER

            If you are starting a new company in Maryland, particularly a small business, you may wonder, "why do I need a lawyer?"  With the abundance of information readily available on the Internet, couldn’t you save money on lawyer fees by not retaining a business lawyer from the outset and just hope legal issues either don’t arise or are simple enough for you to navigate on your own?  After all, you can find a lot of legal information readily available in Maryland, for example, on the State Department of Assessments and Taxation (http://dat.maryland.gov) and Department of Commerce (http://commerce.maryland.gov/start/resources) websites, such as the types of legal entities recognized, the forms to set up the type of entity you select, and some basic business information.

            However, retaining a knowledgeable Maryland business lawyer from the start has many advantages, including: advice on planning and starting your business, evaluating the right type of business entity for your needs, selecting a location, complying with zoning laws, tax planning and business deductions, employee issues, copyright/trademark, complying with regulations and business filing requirements, safeguarding your work product, understanding covenants not to compete, licensing and permit requirements, technology, financing, loans, and many other issues just to get our business off the ground and started on solid footing. Often starting a business is much more complicated and involved than most people realize.

            Consequently, advanced planning with the business knowledge of a reputable Maryland business attorney can save you headaches, money, and avoid potential costly legal battles that may have been avoided. An  attorney who understands your business model, goals, customers, competition, and cash flow can offer a wealth of wealth of strategic advice and help you steer clear of  rouble areas or effectively resolve them.

            So, while you can try to “wing it,” trying to piece together information from the Internet (perhaps not knowing whether certain cites are up to date or credible), it is advisable to have a trained lawyer skilled in understanding, explaining, and keeping up to date on statutes, regulations, and case law governing start-ups in Maryland.

            Katherine Taylor is an experienced Maryland business attorney and a former CPA who understands the ins and outs of starting a business. Go to www.taylorlegal.com to see more about TaylorLegal.

EMPLOYERS BEWARE! YOU MAY BE LIABLE FOR AGENTS' AND EMPLOYEES' ACTS

                In Maryland an employer can be liable for the negligence of an "agent, servant, or employee." The legal term for this is "respondeat superior." In Latin this literally means "let the master answer." First, while we often hear the word "negligence," what does it mean in this context? In general, negligence is a breach of a duty owed that "proximately" (or directly) causes the alleged harm. This is a threefold test and all three elements above are required to establish negligence. Therefore, questions arise in evaluating an employer's responsibility for an employee's  negligence include: Is the person someone to whom a duty was owed? What is the applicable "standard of care" (this varies depending on the context)? Was there any intervening act or omission that caused or contributed (called "contributory negligence") to the alleged negligence? If so, does this break the "chain of causation?" Applying this to the employer context, an employer can be held "vicariously liable" for negligent acts of an agent, servant or employee.

                Who is an "agent, servant or employee?" The definition of an employee was discussed at length in a previous blog written by Maryland business attorney Katherine Taylor (Employee or Contractor?). An agent is someone doing something on behalf of an employer, who Figuratively stands in the shoes of an employer and acts on his or her behalf. The arcane term Servant" comes from early Maryland common law and does not mean "servant" in the way we think of it today. Instead, it is basically another term for employee.

                Under what theory does someone sue an employer for negligence of an employee? The Theory is that an employer is responsible for the acts of an employee. Are there any prerequisites? An employee must be "acting within the scope of employment" before employer liability can attach. How does this work in the real world? Say an employee is driving a delivery truck for an employer and causes an accident. The first question to ask is whether the employee was acting on behalf of the employer. For example, when and where did the accident happen? Was the employee using the truck during regular work hours? Was the employee on a "mission" for the employer or was the employee doing personal business unrelated to the employer? Did the employee have a valid license? Did the employee have training or ability to drive the type of truck? Did the employee have a good driving record? If not, did the employer know this or should the employer have know about this?  Was the employer aware of any issue that should have prevented this employee from driving this truck for this mission?

                As you can see, there are many issues that can arise in the employer/employee context. What can an employer do to reduce the chances of being held liable for an employee's negligence?

The following tips can help:

                1. Carefully screen and interview potential employees to make sure they are a good fit for you and your business.

                2. Do a background check, including driving record and criminal history.

                3. Check references.

                4.  Communicate clearly what is expected and what is prohibited during employment hours.

                If an issue arises, you should think about contacting a Maryland business attorney who can help you wade through the many layered issues in an employer liability case.  A business lawyer experienced in this area can help you evaluate the facts, understand the law, advise you, and assert any available defenses on your behalf.

Katherine Taylor is a Maryland business attorney who has extensive experience dealing with employer/employee issues. Go to www.taylorlegal.com for more information.

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