Rush on Business : Iowa Corporate Lawyer & Attorney : Rush Nigut of Brick Gentry Law Firm : Serving Des Moines, Cedar Rapids, Davenport, & Sioux City

Gavin Craig in his new Twin Cities Business Litigation Blog has an excellent post on the importance of making sure the world knows you have a corporate entity.  Craig is convinced that many small business owners (especially contractors) do not know how to properly operate a corporation or LLC. Craig says,

When a person incorporates their business, it takes more than just filing a form with the Secretary of State. When a business is incorporated, it can't be a secret to those that do business with the new corporation. In other words, the new corporation needs to disclose the fact that the business (the party that is contracting with others) is incorporated on its letterhead, business cards, invoices and checks.

Craig is right on with his warning on this issue.  Whether you live in Minnesota, Iowa or Timbuktu, you must make sure you disclose the fact you have a corporate entity on your letterhead, business cards, invoices, checks and especially CONTRACTS. 

This is a particularly important message for franchisees.  Many franchisees operate under franchise trade name but fail to disclose in contracts, letterhead, business cards, etc. the name of their actual corporate entity.  One franchisee I know was personally sued for the damages related to an advertising contract because he had not disclosed to the other side that he actually operated with an LLC rather than as a sole proprietorship.  He had signed the contract using only the trade name of the franchise.  The other side said at trial that it didn't know the franchisee had an LLC.  So ultimately the judge sided with the advertising company.  It was an expensive lesson that could have been easily avoided. 

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Is your business in need of a buy-sell agreement?  Don't know how to get started? 

An excellent resource worth considering is a book from Z. Christopher Mercer called Buy-Sell Agreements:  Ticking Time Bombs or Reasonable Solutions?   A blog post from Mercer worth reading also raises an excellent point regarding buy-sell agreements:

If you are in the process of creating a buy-sell agreement, be sure that the document actually reflects the agreement of the parties to the critical business and valuation issues that relate to the particular situation.  If you have an existing buy sell agreement, review it to insure that it reflects agreement of the parties on key business and valuation issues that currently pertain to your situation (and not to the situation fifteen years ago when you first signed it!).  In both cases, be sure through review by competent legal counsel, that the agreement appropriately considers legal issues that pertain to your situation.

Seems like common sense but I recently learned of a situation where two owners had drafted their own agreement. (Kudos for at least recognizing the need for it).  The owners agreed upon a valuation.  The problem that arose is that neither owner really understood the valuation they had agreed upon and as their business progressed the valuation did not reflect the realities of their business.  The failure to review and implement an agreement with competent counsel has now resulted in litigation. 

It's also wise to get advice from an accountant or other business valuation expert when creating the buy-sell agreement.  A team approach is often very helpful.

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Where should you incorporate your Iowa small business?  This question is asked a lot by many prospective small business owners.  The question used to be surprising but after seeing and hearing numerous advertisements for Delaware and Nevada corporations on the Internet and on satellite radio it is definitely a legitimate question.

Delaware has reputation and history on its side.  Delaware's Division of Corporations boasts that more than a half a million business entities make their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500.  Businesses, especially large ones, choose Delaware because of the state's business laws and respected Court of Chancery.  Most observers say it is because of Delaware's predictability. 

Nevada has recently exploded in popularity for many businesses.  This is due to Nevada's pro-business climate, low-tax mentality and the lack of an information sharing agreement with the IRS.

Delaware or Nevada may offer viable options for some companies but in general most Iowa small businesses are probably wise to incorporate in Iowa.  First, Iowa has very low fees when it comes to incorporating your business.  It is a $50.00 fee to file Articles of Incorporation for a domestic corporation in the state of Iowa.  Further, it only a $30.00 fee every two years for a biennial report if you file online.  These fees are extremely low compared to other states.

Second, you won't avoid Iowa taxes by incorporating your Iowa small business in Nevada or Delaware if you are doing business here in Iowa.  The tax and corporation laws of Iowa will require you to register your company and pay fees as a foreign corporation in Iowa and you will be required to pay Iowa state income taxes for any income earned.  (You also do not avoid federal income taxes by incorporating in Nevada despite the lack of an information sharing agreement with the IRS).

And the perceived court advantages in Delaware?  That might be fine for a large business that is actually going to litigate a case in Delaware but it is probably not cost effective for most Iowa small businesses to litigate their cases in Delaware.  Besides unless you have well-written forum selection clause in contracts your Iowa small business will likely end up in Iowa courts anyway.

If you have questions regarding where you should incoporate your Iowa small business be sure to contact a business attorney licensed in Iowa. 

Photo on flickr by rsgranne.

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It is possible to form your own corporation without a lawyer's help.  Every day, many entrepreneurs do exactly that by using online incorporation kits.  I have written about such companies in the past.  There is definitely a segment of the market these incorporation companies serve.

The most obvious motivating factor for setting up a corporation on your own is to save fees.  But there is a potential trade-off.  You now subject yourself to the hassles of filing a corporation yourself and the possibility of filing erroneous paperwork.  At least if you hire a lawyer you have someone to blame, right?

But the real question to ask yourself is this:  "Have I considered how it all fits together?"  See this post on incorporating in Iowa for a checklist of steps.

But filing articles of incorporation is only one step in the process.  Have you also considered:

• Is a Corporation the right entity for me?
• Bylaws.
• Shareholder Agreements - Buy/Sell Issues.
• Board of Directors.
• Officers.
• Employees.
• Obtaining an Employer Identification Number (EIN).
• Banking arrangements.
• Issuance of Stock.
• Financing your corporation.
• Insurance.
• Whether or not to elect S corporation status.
• Corporate name protection.
• State government requirements.
• Taxes.
• How to Avoid Lawsuits.
• Following corporate formalities.
• Signing documents as an officer.
• Assigning existing business to the Corporation.
• Leases.
• Intellectual property.

The above list is just a sampling of the issues you may deal with as you start your business.  A good business lawyer should be able to help you with all these issues either by providing you with direct advice or connecting you with someone else (often accountants, bankers and insurance agents) that can help fill in the gaps.  Most business people will tell you that hiring a good lawyer is crucial to your business success.   Plus, you might actually be surprised at the cost of hiring an Iowa lawyer compared to some of the online incorporation companies.  

How do you hire an Iowa business lawyer?  I suggest you follow two rules:

1. The attorney must be experienced and competent with business law issues.  Since you are in business you probably should not hire the local personal injury, family law or other attorney that does not have experience with business law issues.  Choosing a lawyer that is not familar with business law may have serious consequences and may increase the costs because the lawyer may learn on your dime. By analogy, you don't want a plastic surgeon operating on your heart.

2.  Make sure you feel comfortable with the attorney.  Don't make a snap decision based upon hourly rates.  Do you trust the lawyer?  Did you get your call returned right away?  Is the attorney easy to talk with?  Does the attorney care about you and your business?  Does the relationship feel right?  There are many competent and experienced business attorneys in Iowa so make sure to trust your instincts.

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I ran across this list of tips for new small businesses.  Some terrific advice.  Here are the ten tips as listed:

1. Save up as much money as possible before starting.
2. Start on a shoestring.
3. Protect your personal assets.
4. Understand how--and if--you will make a profit.
5. Make a business plan, so matter how short.
6. Get and keep a competitive edge.
7. Put all agreements in writing.
8. Hire and keep good people.
9. Pay attention to the legal status of your workers.
10. Pay your bills early and your taxes on time. 

I especially appreciate the emphais placed on paying your payroll taxes on time, particularly the portion you withhold from your employees' wages. (See the commentary on No. 10).  It is critically important to understand that a corporation or LLC will not protect you from personal liability in the event these taxes are not paid.  (For an example, see a post from my favorite blogging accountant, Joe Kristan).

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