Having been a start-up lawyer and entrepreneur, I have been asked many of the following questions over the years from entrepreneurs when starting their company.

As a San Diego business attorney, I am frequently asked: “What type of business should I be?” It generally depends on what kind of business you want to conduct. The type of business entity should reflect the kind of business you do.

As a San Diego business attorney, I am frequently asked: “What type of business should I be?” It generally depends on what kind of business you want to conduct. The type of business entity should reflect the kind of business you do.

For many individuals, self-employment as an independent contractor can be a rewarding and satisfying career option. As is true with any employment relationship you enter, it’s important to understand the roles and responsibilities of everyone involved. Below are FAQs about independent contractor work to help you gain an understanding of what is involved. WHAT WOULD MY EMPLOYMENT STATUS BE AS AN INDEPENDENT CONTRACTOR? There is a fundamental difference between being employed on a full-time regular basis by an employer and engaging in an independent contractor relationship. An employment relationship involves being placed on the employer’s payroll. Employees will be paid either a pre-determined amount (on an hourly or salaried basis), on a commission basis (which means earning income based on a sales-based schedule), or some combination of base pay and commission. All income earned is subject to federal, state, and local taxes, where applicable, and typically, the employer withholds those taxes from the employee’s paycheck. All income earned during the course of a calendar/tax year is reported to the employee and to the federal government by the employer on the form W-2. The employer determines the employee’s work methods and evaluates the employee’s performance. Independent contractors are self-employed. Independent contractors sign a contracted agreement to provide services to a client in exchange for an agreed upon fee (lump sum, hourly, weekly, monthly, etc.), which may include some form of commission. Independent contractors are not placed on an employer’s payroll; instead, the independent contractor invoices the client for work performed and the client pays the independent contractor through Accounts Payable. The client does not withhold federal, state, and local taxes from the payment, and the independent contractor is responsible for satisfying all tax obligations. All income earned during the course of a calendar/tax year is reported to the independent contractor and to the federal government by the client on form 1099. The independent contractor is responsible to the employer for the end “product” but determines his/her own work methods. Most organizations are careful to distinguish independent contractors from employees. The federal government has adopted common law principles to determine an independent contractor relationship for federal income tax purposes. (Please refer to the checklist at the end, which can be used to assist in determining if someone is an employee or an independent contractor.) You should also be aware that courts in different jurisdictions may apply different tests for making the determination. WHO MIGHT I WORK FOR AS AN INDEPENDENT CONTRACTOR? Many businesses, large and small, engage the services of independent contractors. You’ll find that independent contractors work in a wide variety of industries, such as consumer products, transportation, technology, manufacturing, real estate, and so forth. HOW WILL I BE PAID? Reputable organizations typically disclose the terms and conditions of payment through a written compensation agreement. If commission is involved, the agreement should indicate whether the contractor is paid on a commission-only basis, draw vs. commission, or combination of base fee plus commission. The agreement will also describe how and when payment will be made. The terms of each applicable pay structure should be spelled out clearly in writing and agreed to by all parties before work is performed. The agreement should also clearly explain how payment disputes are settled. Remedies are available to independent contractors should a dispute involving payment for services arise. As independent contractors are self-employed, any dispute involving payment would be resolved either independently or with the help of dispute resolution services, such as collection services, mediation, or arbitration. As with any agreement, you should seek advice and counsel from a trusted professional before signing and sign only when you fully understand what you are agreeing to. ARE INDEPENDENT CONTRACTORS ELIGIBLE FOR BENEFITS OFFERED BY AN EMPLOYER TO ITS EMPLOYEES? No. Independent contractors are not eligible for benefits the client makes available to its employees. The independent contractor is self-employed and therefore responsible for his/her own benefits. ARE THERE RISKS AND RESPONSIBILITIES ASSOCIATED WITH BEING AN INDEPENDENT CONTRACTOR RATHER THAN AN EMPLOYEE? Self-employment involves some risks and responsibilities that employees typically don’t assume. For example, the independent contractor assumes all responsibility for tax obligations, handles his/her own benefits, manages billing and collections; maintains appropriate licensing and insurance, and accepts legal responsibilities and exposure associated with performing the job. AM I PROTECTED BY THE SAME EMPLOYMENT LAWS AS AN EMPLOYEE? In general, independent contractors are not protected by employment laws since they are self-employed. The area of employment law is very complicated, and laws vary by state; questions about specific situations should be addressed to legal counsel. For example, laws that provide for a safe work environment, free from health risks, harassment, or discrimination, protect the rights of employees but may exclude independent contractors. This underscore the critical importance of a written agreement that spells out how the relationship will function, what the expectations are on both sides, and how payment and work performance will be handled. WHAT KIND OF INVESTMENT MIGHT I BE EXPECTED TO MAKE? Independent contractors who sell the products and/or services of a client will likely be required to first learn everything there is to know about the client’s product and/or services. This may involve an investment by the independent contractor both in time and expense. The time investment may include taking weeks or months to be trained in product knowledge, and this time may be without income. Some positions require independent contractors to purchase goods and/or services, which the contractor then sells to customers. It is important to understand up front if unsold inventory can be returned after a specific period of time or if the independent contractor assumes the loss. This should be stipulated in the agreement. The independent contractor may also be expected to incur other related expenses, such as securing licensing, where applicable. WHAT IF A CUSTOMER IS UNHAPPY WITH THE QUALITY OF MY WORK OR THE PRODUCTS OR SERVICES WE ARE SELLING? The independent contractor is usually accountable for satisfying specific performance expectations, including delivering customer service. Your agreement…

In the months leading up to opening a business, there are hundreds of questions that come up. It’s part of the process to have questions that you want answered; it means your mind is dedicated to the business. With that said, we’ve picked 20 of the most common questions that people have asked us about the businesses they’d like to open, and we’ve given our answers as well. If you’re in the midst of opening a business, one or more of these questions is likely on your mind. WHAT KIND OF BUSINESS SHOULD I START? This is something that only you can answer, but as a rule of thumb you should aim to start something in a field you’re familiar with. Think of any business that you start up as an investment of your own human capital. You could be using your talents to generate money working for another company, but you’ve decided that you’ll get the most return by opening a company. You wouldn’t invest your money in stocks or other investment vehicles that you’re not familiar with, so it doesn’t make sense to do that with your own strengths. Picking a business in a field that you’re already well-versed in will offer the path of least resistance to starting a business, even if it’s not necessarily always a smooth path. CAN I OPERATE MY BUSINESS FROM HOME? Like the first question, the answer to this one hinges on the type of business you’re looking to start. If you require a storefront of some sort, then the answer is an automatic no. However, if you’re doing work where you don’t need an area for clients or customers come see you, such as an online business or one where you meet clients in the field, then home is a viable option. It’s actually a great tool to save money, too. Just make sure that there aren’t any licensing laws prohibiting it. HOW MUCH MONEY DO I NEED? The age old question of how much money is needed to start a business. A good idea is to try to project out what your expenses for the first year will be, as well as how long it will take you to become profitable. There are a lot of failed entrepreneurs out there who took out loans or home equity lines of credit, only to realize that it wasn’t enough and have to begin bootstrapping their business. Although some companies survive such debacles, it’s not one that you want to subject yourself to in the first place. Perform a cost analysis and you’ll avoid this highly preventable headache. HOW DO I PICK A LOCATION? This again depends on the type of company you’re starting, although typically the more foot traffic the better. If you’re in a market with a lot of competition and you are brand new to the scene, sometimes it’s best to be located in proximity to your competitors. There’s a built-in market in the area. However, if you’re in a saturated market that has some major brands in it, then maintaining a safe distance can be a good strategy as well. After all, you wouldn’t open a small grocery store right next to a Wal-Mart, at least not unless you’ve got a great strategy to differentiate yourself. Look at other companies in your field and see how they’re located, then try to reverse engineer the strategy. That will help simplify the location decision. WHO WILL MY CUSTOMER BASE BE? Hopefully you already have at least a vague idea of the answer to this one. However, it’s not a bad idea to break down the profiles of the typical customers or clients of your business. This type of research helps you break down things such as general preferences, buying triggers and more. In the end, it will make your marketing efforts much more effective and allow you to better target your products towards the people most likely to use them. SHOULD I WRITE MY OWN BUSINESS PLAN? The short answer is yes, with the help of someone that can walk you through it, such as attending a workshop where you can purchase a business plan template. Writing your own business plan has a couple of primary benefits. First, it will help you gain a better understanding of your business. Although you may feel confident that you already know how your business will function, sitting down and writing out an entire business plan will prompt you to think about even the most minor details. It will also be beneficial for when you begin seeking investors, as you’ll be able to better articulate what your business will do and how it will become profitable. You may purchase a business plan template from www.baglalaw.com and attend a workshop to help you understand the business plan. AM I BETTER OFF BUYING A FRANCHISE OR STARTING A NEW COMPANY? Deciding on this depends on personality type as well as the amount of capital that you have available. If money is no object and you’re looking to begin a business in a market where there is an established franchise, then purchasing a license to open a franchised company can be a very reasonable path. However, franchising is not without its drawbacks. You’ll invest a lot more money in the beginning, you won’t get a choice over a lot of the minor details in your company, and you’ll virtually never be able to keep all of your profits. If you’re considering franchising, make sure that you thoroughly review every detail and assess whether you’re okay with giving up that much control. SHOULD I START ONE COMPANY OR SEVERAL? Starting multiple companies spreads your resources thin. Even if you have a few ideas for companies, start with one and keep it basic. You can diversify later on, but the short-term goal is to become as stable and profitable as possible with one. WHEN CAN I EXPECT TO BE PROFITABLE? A general rule has always been that it takes…

As an attorney involved with startups, I have seen plenty of legal mistakes made by entrepreneurs and startup companies. The following are some of the more common and problematic legal mistakes we have seen. NOT MAKING THE DEAL CLEAR WITH CO-FOUNDERS You absolutely have to agree with your co-founders early on what the deal is among you. Not doing so can cause enormous problems later. In a way, think of the founder agreement as a form of “pre-nuptial agreement.” Here are the key deal terms you need to address in some kind of written founder agreement: Who gets what percentage of the company? Is the percentage ownership subject to vesting based on continued participation in the business? What are the roles and responsibilities of the founders? If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares? At what price? How much time commitment to the business is expected of each founder? What salaries (if any), are the founders entitled to? How can that be changed? How are key decisions and day-to-day decisions of the business to be made? (majority vote, unanimous vote, or certain decisions solely in the hands of the CEO?) Under what circumstances can a founder be removed as an employee of the business? (usually, this would be a Board decision) What assets or cash into the business does each founder contribute or invest? How will a sale of the business be decided? What happens if one founder isn’t living up to expectations under the founder agreement? How is it resolved? What is the overall goal and vision for the business? NOT STARTING THE BUSINESS AS A CORPORATION OR LLC One of the very first decisions that founders must make is in what legal form to operate the business, but founders often start a business without consulting a lawyer and, as a result, often incur higher taxes and become subject to significant liabilities that could have been avoided if the business was started as a corporation or as a limited liability company (“LLC”). The types of business forms that are available to a startup business are as follows: Sole Proprietorships. Generally speaking, a sole proprietorship requires no legal documentation, fees, or filings other than state and local business permits. On the other hand, there are disadvantages to operating in the form of a sole proprietorship: (1) it only has one owner and if additional capital is required from another investor, the form is not available and a partnership or other entity form is required and (2) a sole proprietorship provides no protection for the founder against creditors of the business (in other words, creditors can directly sue the founder), in contrast to corporations and LLCs where, generally speaking, the creditors of the business cannot successfully sue the founders and other investors. We don’t recommend sole proprietorships. General Partnerships. If there is more than one founder, a general partnership is often chosen as the legal form of business entity. Preferably, the founders will agree on a partnership agreement to “set the rules” among the founders; however, if the founders do not agree on a partnership agreement, most (if not all) state laws will supply the rules in the absence of an agreement. The income of a partnership is taxed directly to the partners generally on a pro rata basis. Finally, each partner of a partnership is generally liable for the debts of the business and thus exposes the personal assets of each partner to the business’ creditors. We don’t recommend forming a general partnership. C corporations. These are formed under state law (usually of the state where the business will be first operated or in a state such as Delaware that is known for its well-developed corporate law). Most venture capital backed companies are C corporations. S corporations. These are formed under state law like C corporations but have favorable tax treatment for closely held (not more than 100 shareholders) corporations under federal and state tax laws. LLCs. These are formed under state law and are a hybrid form of corporation and limited partnership and have certain tax advantages over C corporations. Limited partnerships. These are formed under state law and are often formed to hold investment real estate and also are often the “investment vehicle of choice” for private equity firms and hedge funds. Corporations, LLCs, and limited partnerships are formed by filing documents with appropriate state authorities. The costs for forming and operating these entities are often greater than for partnerships and sole proprietorships due to legal, tax, and accounting issues. However, all of the entities generally offer significant advantages for founders (and subsequent investors) including, significant liability protection from business creditors, tax savings through deductions and other treatment only available to corporations and LLCs, and ease in raising capital in contrast to sole proprietorships and partnerships. Sole proprietorships and partnerships can later convert to a C or S corporation, LLC, or other legal entity but keep in mind that the conversion costs can be significant. NOT COMING UP WITH A GREAT STANDARD FORM CONTRACT IN FAVOR OF YOUR COMPANY Almost every company should have a standard form contract when dealing with customers or clients. But, there really isn’t a “standard form contract,” as every contract can be tailored to be more favorable to one side or the other. The key is to start with your form of contract, and hope the other side doesn’t negotiate it much. Here are some key items to come up with your form of contract: Get sample contracts of what other people do in the industry. There is no need to re-invent a contract. Make sure you have an experienced business lawyer doing the drafting, one that already has good forms to start with. Don’t make it so ridiculously long that the other side will throw up their hands when they see it. Make sure you have clearly spelled out pricing, when payment is due, and what penalties or interest…

When it comes to creating a business plan that attracts investors, these tips will help you get it right the first time. Every business should have a business plan. Unfortunately, despite the fact that many of the underlying businesses are viable, the vast majority of plans are hardly worth the paper they’re printed on. Most “bad” business plans share one or more of the following problems: THE PLAN IS POORLY WRITTEN. Spelling, punctuation, grammar and style are all important when it comes to getting your business plan down on paper. Although investors don’t expect to be investing in a company run by English majors, they are looking for clues about the underlying business and its leaders when they’re perusing a plan. When they see one with spelling, punctuation and grammar errors, they immediately wonder what else is wrong with the business. But since there’s no shortage of people looking for capital, they just move on to the next plan. Before you show your plan to a single investor, go through every line of the plan with a fine-tooth comb. Run your spell check, which should catch spelling and punctuation errors, and have someone you know with strong “English teacher” skills review it for grammar problems. THE PLAN PRESENTATION IS SLOPPY. Once your writing’s perfect, the presentation has to match. Nothing peeves investors more than inconsistent margins, missing page numbers, charts without labels or with incorrect units, tables without headings, technical terminology without definitions or a missing table of contents. Have someone else proofread your plan before you show it to an investor, banker or venture capitalist. Remember that while you’ll undoubtedly spend months working on your plan, most investors won’t give it more than 10 minutes before they make an initial decision about it. So, if they start paging through your plan and can’t find the section on “Management,” they may decide to move on to the next, more organized plan in the stack. THE PLAN IS INCOMPLETE. Every business has customers, products and services, operations, marketing and sales, a management team, and competitors. At an absolute minimum, your plan must cover all these areas. A complete plan should also include a discussion of the industry, particularly industry trends, such as if the market is growing or shrinking. Finally, your plan should include detailed financial projections, monthly cash flow and income statements, as well as annual balance sheets going out at least three years. THE PLAN IS TOO VAGUE. A business plan is not a novel, a poem or a cryptogram. If a reasonably intelligent person with a high school education can’t understand your plan, then you need to rewrite it. If you’re trying to keep the information vague because your business involves highly confidential material, processes or technologies, then show people your executive summary first (which should never contain any proprietary information). Then, if they’re interested in learning more about the business, have them sign noncompete and nondisclosure agreements before showing them the entire plan. THE PLAN IS TOO DETAILED. Do not get bogged down in technical details. This is especially common with technology-based startups. Keep the technical details to a minimum in the main plan, if you want to include them, do so elsewhere, say, in an appendix. THE PLAN MAKES UNFOUNDED OR UNREALISTIC ASSUMPTIONS. By their very nature, business plans are full of assumptions. The most important assumption, of course, is that your business will succeed. The best business plans highlight critical assumptions and provide some sort of rationalization for them. The worst business plans bury assumptions throughout the plan so no one can tell where the assumptions end and the facts begin. Market size, acceptable pricing, customer purchasing behavior, time to commercialization, these all involve assumptions. Wherever possible, make sure you check your assumptions against benchmarks from the same industry, a similar industry or some other acceptable standard. Tie your assumptions to facts. THE PLAN INCLUDES INADEQUATE RESEARCH. Just as it’s important to tie your assumptions to facts, it’s equally important to make sure your facts are, well, facts. Learn everything you can about your business and your industry, customer purchasing habits, motivations and fears; competitor positioning, size and market share; and overall market trends. You don’t want to get bogged down by the facts, but you should have some numbers, charts and statistics to back up any assumptions or projections you make. Well-prepared investors will check your numbers against industry data or third-party studies, if your numbers don’t match with their numbers, your plan probably won’t get funded. YOU CLAIM THERE’S NO RISK INVOLVED IN YOUR NEW VENTURE. Any sensible investor understands there’s really no such thing as a “no risk” business. There are always risks. You must understand them before presenting your plan to investors or lenders. Since a business plan is more of a marketing tool than anything else, I’d recommend minimizing the discussion of risks in your plan. If you do mention any risks, be sure to emphasize how you’ll minimize or mitigate them, and be well prepared for questions about risks in later discussions with investors. YOU CLAIM YOU HAVE NO COMPETITION. It’s absolutely amazing how many potential business owners include this statement in their business plans: “We have no competition.” If that’s what you think, you couldn’t be further from the truth. Every successful business has competitors, both direct and indirect. You should plan for stiff competition from the beginning. If you can’t find any direct competitors today, try to imagine how the marketplace might look once you’re successful. Identify ways you can compete, and accentuate your competitive advantages in the business plan. THE BUSINESS PLAN IS REALLY NO PLAN AT ALL. A good business plan presents an overview of the business, now, in the short term, and in the long term. However, it doesn’t just describe what the business looks like at each of those stages; it also describes how you’ll get from one stage to the next. In other words, the plan provides a “roadmap” for the…

When you come up with an amazing idea for a new product, service, or anything else really, it’s a very exciting time. Having your very own startup is probably the most exciting time of your life. So, it’s easy to get carried away and start your business without any of your legal needs being fulfilled. However, once your idea makes it big, you could pay dearly for not having legal protection. Therefore, before you do anything else you should consider the following: Decide where you would like to form a legal entity. When it comes time to form a legal entity, most people just say that they want to form in Delaware. However, it may be more advantageous for your business to be formed in your home state. This first step is very important because it determines whether you have to file annual reports, how much you will pay for taxes, and may determine where you have to litigate all lawsuits. Form a legal entity. There are many considerations that go into choosing the right type of legal entity for your business. The type of entity that you choose impacts whether you have personal liability for your business and may also have tax ramifications. Therefore, it’s best to choose the legal entity very carefully. Establish clarity between co-founders. If you are starting a business with other co-founders, you need to have complete clarity between each other. While at the beginning of the venture, everyone wants to play nice and be friends, the tables may turn when you start making money. Thus, it’s best, at the beginning, to discuss your visions for the company, whether you are aligned on management styles and the culture of the company, and other important considerations such as these. Have bylaws, a partnership agreement, or an operating agreement. Having a document that explains the procedure for making decisions and voting rights helps clear up a lot of confusion and possible disputes down the road. Also, I have found that by discussing such things as what happens when a partner wants to leave enables the co-founders to understand each other better and to make the final decision as to whether or not they want to go into business together. Qualify to do business in the state in which you are going to be doing business. A lot of states require that you register with their Secretary of State and qualify to do business in that state. Protect your intellectual property. Register all trademarks and copyrights. File all patents. This will ensure that your big ideas do not get stolen by someone else. If you are planning on having employees, you should: Post all notices required by the state in your office. Ensure that you are paying your workers at least the minimum wage. Have employment contracts for every employee. Make sure that you comply with all reporting requirements established by your state. Pay employer taxes. Comply with securities laws if you are issuing stock to investors, friends, or your family. The SEC has strict guidelines for issuing stock and the penalties for not complying with these laws is very high. If you have a website, have Terms of Use Agreement and Privacy Policy on the website. This will ensure that your potential customers have a clear understanding of what to expect from you and the website. It will also help dissuade lawsuits. Have a standard-form contract with your customers. Having a standard-form contract with your customers contributes to an overall understanding of the rights and responsibilities of each party and reduces misunderstandings from the very beginning. Also, having a contract with your customers helps dissuade litigation and establishes rights that you may otherwise not have. We hope that this checklist has been helpful. Please contact us with any questions.