The start of the new year provides a valuable time to reevaluate the way your business operates. The old saying that an ounce of prevention equals a pound of cure is true for the legal considerations of your business.
The proper corporate formation, the registration of trademarks and logos, and a carefully drafted contract can impact the bottom line of your construction company.
In deciding if your business is ready for 2008, consider these questions:
- Are your private assets protected in the case your company is exposed to great liability?
- Do you own your company name? Your company logo?
- Could you get sued in 2008 for using a company name, slogan or mark registered by another company?
- In case of a dispute, will you have contractual rights and remedies against your adversary.
This article broadly discusses three important, and very elementary, aspects of your business. The three topics – Business Entities, Trademarks and Contracts – are important for the health of any business, but are especially critical in the fast-paced and dispute-prone construction industry.
Business Entities – Are you Incorporated? Are you sure?
When you’re doing business in the United States, you have the extraordinary privilege of operating under a corporate entity.
According to the theory of laws establishing business entities, a business is considered a separate person from those who own and/or operate the business. Since the business is its own person, the debts, liabilities and decisions of the business are the responsibility of the business itself, and not the owners and operators.
Common business entities in the United States (Louisiana and Washington included) are the corporation (Inc.), the limited liability company (LLC) and the partnership.
While every business is different, it is almost always in your best interest to form a business entity for your business. In fact, there are many instances when you should form multiple business entities.
If used correctly, a business entity can protect its owners and operators from personal liability for the debts and obligations of the company.
The formation of a business entity is easy and relatively inexpensive. The process can become more difficult and expensive as your corporate structure complicates (multiple members, etc.), but by extension, so does the benefit of forming the business entity.
What type of entity should you choose? Do you have the right corporate entity for your business?
We’ve discussed the importance of having a corporate identity, but once the decision to incorporate is made, equally important is the decision on what type of corporate entity to choose. And if you’re already incorporated, its important to inquire whether you’re operating within the entity that is right for your business.
For the limited purpose of this article, only the differences between corporations (Inc.) and limited liability companies (LLCs) will be discussed.
Corporations – Inc.
Corporations are the much, much older brother of LLCs, existing for decades before the advent of the limited liability company in the mid-90s. The laws governing corporations are time-tested, and the regulations of corporations are well-known by lawyers and synonymous with the traditional understanding of business operations.
Corporations can be classified as “S-Corps” or “C-Corps,” the classification of which affects the manner in which they are taxed.
Corporations are required to have by-laws, annual meetings, more than one officer, a board of directors and shareholders. The corporate framework is quite rigid, and if a corporation exists without adhering to the legally defined structure, it runs the risk of exposing its shareholders and officers to personal liability.
In the past, corporations were the choice business entity for anyone who wanted to incorporate. Since the mid-90s, however, smaller businesses were presented with the ability of becoming a limited liability company (discussed below), and its now more typical for small businesses to choose the LLC structure instead of the Inc. structure because of the strict requirements of corporations.
Limited Liability Companies – LLCs
Compared with corporations, LLCs are infants. From the mid-90s until just recently, many legal commentators warned businesses who were considering the LLC framework because the laws governing these entities had not been tested. As we enter 2008, however, most of this criticism has whithered away, and the Limited Liability Company has proved to be a stable and successful business entity.
LLCs are now the most popular choice for newly formed businesses, and its is common for previously existing Inc.’s to change its corporate entity to an LLC.
Unlike corporations, LLCs are not required to have meetings, have by-laws, prepare meeting minutes and/or comply with the formalities of corporations. While corporations require officers, boards of directors, shares and shareholders, the LLC requires only Members (or even a single-member).
The result of these lack of formalities is that LLCs are less expensive, require less overhead, and in-turn, present less risk to smaller organizations of subjecting their owners and operators to personal liability.
LLCs also offer tax benefits, as they allow the Members to choose between being taxed as a corporation or as a partnership.
In conclusion, if you have a business (large or small) you should seriously consider whether your business should be incorporated as a Corporation or a LLC. If your business is already operating as a business entity, you should consider the pros and cons of the entity chosen.
Speak with an attorney and/or an accountant about your business to decide what type of entity is right for your company.
Trademarks – What Every Business Owner Needs to Know about Trademarks
Sometimes business owners think of trademarks as luxuries, or something necessary only for companies who have a large or nation-wide presence. Small organizations, however, are oftentimes those most vulnerable to a trademark violation or infringement, as the expense associated with a trademark problem could have fatal consequences to their profitability.
Here are two ways trademarks, or lack thereof, can affect your business:
- You spend an enormous amount of time and money on your business, on building the reputation of its name and making yourself recognizable to potential customers. Trademarking your company name, mark and/or logo is important to protect your rights in these items, and its a small price to pay compared to the risk of not trademarking.
- A simple trademark search can ensure that you don’t accidentally use someone else’s trademark, potentially getting your company in hot water.
What is a trademark and How do I protect it?
A trademark consists of a word or words, phrases, symbols and/or images that identify a company’s product or service. You can trademark you company’s name, logo or tagline.
A trademark sets your company, product and/or service apart from others, and carries with it definite legal rights.
A trademark is established by either registering it with the United States Pa
tent and Trademark Office or by simply using it in the marketplace. That’s right, in the United States you’re not required to officially register your trademark so long as its used – however, registering the mark is a very prudent measure as it affords you greater legal protection of the mark, and perhaps more importantly, assures you that you have the legal right to use the mark.
You can register trademarks with state, federal and international agencies. Which type(s) of registrations you choose will depend on the nature and size of your organization.
You should consult with an attorney to decide the trademark needs of your organization, and thereby take the first steps necessary in protecting your company’s most valuable assets.
Contracts – If it’s not in writing, your dispute is a lose-lose
We’ve published a number of articles on wolfelaw.com concerning construction contracts. Construction contracts are notoriously complex and large, and its not uncommon for a construction project to have stacks of documents legally outlining the obligations of the parties involved with that project. Previously, we’ve discussed the importance of the contents of your construction contract (i.e., flow-down provisions, pay-when-paid clauses, indemnity provisions, etc.).
The purpose of this article is to just stress the importance of having any contract at all. Construction companies of all shapes and sizes sometimes find themselves with a construction project, or a relationship with a subcontractor or supplier, but without a written contract.
In many instances, a written contract is legally required. Beyond these requirements, however, if you become involved with a construction dispute without a contract between the parties, you may be in for an expensive and trying legal experience. Perhaps you’ll be faced with a lose-lose situation.
Without a contract defining the roles and duties of the parties, identifying the agreement struck during more cooperative days can be very difficult, if not impossible.
Unfortunately, these types of disputes oftentimes wind up in court with one party aggressively asserting that the agreement was one thing, and the other party aggressively asserting the opposite. The risk of going to trial based on self-serving testimony is high for both parties, resulting in an unfavorable settlement for the side with the least concrete support.
As you begin the new year, consider the contract needs of your organization. Prepare contracts that can be used for small and large projects, or something that can be easily presented to a new subcontractor for signing before work begins. While there are many contract forms available on the web, each company is different and has different contractual needs. If you can afford it, the advice and counsel of an attorney will benefit you greatly in case of a future dispute.