You have a lot of options when it comes to deciding how you want to operate your business. You might want to simply open up a company under your own name (e.g., “Johnson Painting Services”) and start doing business without much fanfare. That’s called a sole-proprietorship. Or, you might want to open up a business with someone else, still in your own names (e.g., “Johnson Bros. Painting Services”), again without much fanfare. That’s called a partnership. Alternatively, you may want to start doing business, but also wish to limit your personal liability and shield your personal assets. In such a case, you could form a corporation or a limited liability company (“LLC”), both of which the law treats as separate “people,” and both of which offer their owners (i.e., shareholders and members, respectively) a shield from the debts/obligations of the business.

Choosing the correct structure for your business is one of the first important decisions you’ll have to make, and what you choose will depend on a variety of factors, including how your company will be taxed, whether (and to what extent) your personal assets will be safe from creditors, and the best way to obtain investors to help your company grow.

No matter what organizational structure you choose, however, there’s a good chance that you’re going to need at least some of the following documents properly prepared for your business:

• formation documents, such articles of incorporation and bylaws (for a corporation), or articles of organization (for an LLC);
• contracts spelling out the rights and obligations of the company’s owners, such as a partnership agreement (for a partnership), a shareholder agreement (for a corporation), or an operating agreement (for an LLC); or
• fictitious business name statements (for sole-proprietorships and certain kinds of partnerships)

To be clear, when it comes to the partnership agreement, operating agreement, and shareholder agreement, their importance must not be underestimated. Those documents become incredibly important in cases where the owners stop getting along. In fact, those contracts by and between the owners, signed when everyone was getting along beautifully, are the documents that specify everyone’s rights and obligations toward each other, the kinds of things each is allowed to do (and not do), how to value an owner’s interest, etc.

Documents that important should never be generic, one-size-fits-all, online documents that somebody threw together for you with no prior thought. They should be fully customized documents, created specifically for your company, following a detailed conversation with you regarding how you want your company to operate. Such a conversation should involve, for example, all of the following topics:

• how the company will be managed on a day-to-day basis;
• what individual(s) have the power and authority to bind the business (i.e., enter into agreements in the company’s name);
• what individual(s) have the power and authority to spend the company’s money, write checks, open bank accounts, etc.;
• whether the company will be limited to operating a certain type of business;
• whether decisions should be made on a majority basis, or something more, such as unanimity or via a super-majority vote;
• how to value an owner’s share if the owner leaves the business (either voluntarily or following an owner’s incapacity or death);
• whether distributions of net profits (in a corp or LLC) should be mandatory or not (to avoid the problems associated with phantom income); or
• what, if any, voting rights current and future owners should have.

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Simply put, a contract is a written or oral agreement between two or more parties to do or not do certain things in exchange for value. Whether we agree that you’ll paint my house in exchange for my paying you an agreed upon fee, or my company agrees to manufacture goods for your company to sell, such dealings are accomplished through contracts. For the most part, when it comes to businesses, most contracts are in writing.

But while most companies rely on written contracts to conduct business, not all contracts are created equally. Unfortunately, a lot of businesses rely on one-size-fits-all form contracts like the ones you might find on the Internet.

Such generic agreements are rarely going to be useful beyond providing some of the basics (e.g., obtaining a service or providing a product in exchange for an agreed upon fee). The danger in using such generic agreements is that they give you and your company the appearance of protection while neglecting a variety of important issues that a customized contract would otherwise address, such as provisions dealing with:

• limitations on liability;
• warranties;
• liquidated damages;
• late fees and interest;
• rights to cure;
• non-disclosure of proprietary or confidential information and trade secrets;
• venue and jurisdiction; and
• attorneys’ fees and costs for a prevailing party if litigation is ever necessary.

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If your business is a corporation or LLC, then it enjoys a variety of perks that are unavailable to sole proprietorship and most partnerships, such as limited liability. In return, however, corporations and LLCs require owners to comply with a variety of legally mandated requirements to maintain those advantages. Corporate compliance, therefore, is also an important part of any entity’s operations.

Some examples of necessary corporate compliance include adhering to:

• beneficial ownership information (“BOI”) reporting requirements to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCen”);
• reporting obligations, such as the filing of a Statement of Information;
• annual meeting and minutes requirements;
• financial reporting requirements; and
• licensing.

Non-compliance with certain corporate formalities can result in hefty fines, and in some cases the loss of the company’s limited liability status (which means that a creditor could pierce the corporate veil and go after your personal assets). And in the case of the BOI reporting to FinCen, not only do non-exempt business owners face steep monetary fines, but willful failure to file the required report can result in a two-year prison term for the business owners.

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When most people think of a business’s “intellectual property,” they think of things like:

• copyrights (intended to protect things you’ve written);
• trademarks (intended to protect business marks, logos, and designs);
• patents (intende3d to protect inventions); and
• trade secrets and confidential information.

Each of those represents a separate example of a company’s intellectual property, and depending upon the success of your business, such intellectual property could be priceless. Think of the biggest businesses you can, and then try to separate their logos, tag lines, and/or color schemes from their names. It’s impossible to picture, isn’t it?

Intellectual property is not protected simply because a company came up with it first. In fact, true protection of one’s intellectual property requires a business to take affirmative steps to secure ownership and control of the intellectual property, such as by securing a trademark, copyright, or patent, or by taking steps to secure the confidentiality of its trade secrets.

When a business fails to protect its intellectual property, it risks losing the ability to prevent others from using it, and that could be financially devastating.

The State of California is perhaps the most heavily regulated when it comes to controlling the relationship between employers and employees. Because most companies cannot operate without employees, any business that hopes to be successful must have a firm grasp on the myriad laws, regulations, and rules governing the hiring, compensation, and termination of employees in California.

One of the best ways to ensure that your company is compliant with California’s labyrinth of labor/employment laws is to obtain, use, and maintain a strong set of customized employment related documents, including:

• employee handbooks;
• at-will employment agreements;
• vehicle use policies;
• drug testing consent agreements;
• independent contractor agreements; and
• performance reviews.

When customized for your company, such documents can help you both avoid crippling penalties, as well as ensure that you consistently comply with the plethora of requirements relating to mandatory written notices/handouts regarding:

• proper classification of employees (e.g., exempt v. non-exempt or employee v. independent contractor);
• overtime;
• mandatory breaks;
• health and safety;
• job requirements/expectations;
• harassment; and
• compensation (including payment of commission-based compensation).

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When people think of franchises, they often think of the giant ones like McDonald’s, Wendy’s, or 7-Eleven. But such behemoths don’t make up the vast majority of franchised businesses out there. Most franchised businesses are much smaller than those giants and much less expensive to buy into. But, large or small, all franchises share certain things in common, the most important of which is the opportunity to sell goods or services with instant regional, national, or even international name recognition and a proven business model.

Franchises are governed by both federal and state law, but in the case of California, the state laws are actually much more stringent than the federal franchise laws. In California, franchises are overseen by the California Department of Financial Protection & Innovation and governed primarily by two separate sets of statutes: (i) the Franchise Investment Law (“FIL”) (Corp. Code, § 31000 et seq.); and (ii) the California Franchise Relations Act (Bus. & Prof., Code § 20000 et seq.).

Under California law, a business meets the definition of a franchise (and therefore the franchisor—i.e., the “parent” company—must comply with the state’s franchise laws) if it:

• grants someone a right to engage in the business of offering, selling, or distributing goods or services;
• under a marketing plan or system prescribed by the franchisor;
• where the operation of the business is substantially associated with an advertising/commercial symbol or mark (e.g., a trademark, service mark, or trade name) of the franchisor; and
• the franchisee (i.e., the person buying a franchised business) is required to pay a fee for the right to enter into (or conduct) the business.

Before deciding to franchise your business to others, or if you’re considering buying a franchised business to run, you should understand the myriad important issues inherent in such a decision, including:

• what a Franchise Disclosure Document (“FDD”) is and how to read one;
• how much control a franchisor should assert over various aspects of the business;
• provisions a franchisor can include in a franchise agreement (required supply vendors) and those that are prohibited by law (non-competition provisions);
• disclosures that the FIL require a franchisor to make in its FDD;
• whether your business is operating an illegal franchise (i.e., you’re operating as a “licensor” instead of as a “franchisor”);
• whether a franchisor is in compliance with the FIL;
• what to do if you’re in a dispute with your franchisor or franchisee; or
• other matters that you should consider before buying or selling a franchise.

You should also read “The Basics About Buying a Franchise in California,” written by MBK Chapman’s, Michael Kushner.

Given California’s strict franchise laws, in almost every situation where a consumer is offered a “license” to use a system or marks associated with a certain brand, franchise registration is required. In other words, absent registration as a franchisor with the Department of Financial Protection & Innovation, the licensor is almost certainly operating illegally, and would-be investors should proceed with due caution.

Non-compliance with California’s franchise laws by a franchisor can result not only in massive financial penalties and damages, but in some cases, criminal prosecution.

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