Written contracts and the delivery requirement

As a small business owner you undoubtedly enter into many contracts, most of them written.  Some may be contracts others initiate to enter into with you.  Some may be contracts you seek out.  In either case, any written contract you enter into, must be “delivered to the party in whose favor it is made.” California Civil Code 1626.

So when you enter into a written contract, make sure it is delivered to all parties involved.  It may be a good idea to document delivery of the contract as well, to clear up any questions of whether someone received a copy of the contract.


Has your landlord shifted American Disabilities Act liability to you?

The American With Disabilities Act is a civil rights law, designed to prevent discrimination against the disabled. Although passed with good intentions, the application of the act has proven controversial, opportunistic for some plaintiffs (and their lawyers), and for some small businesses, very costly.

It is a federal act but gives great leeway to states on how to enforce it. In a lot of states, injunctive relief is the only remedy (plus attorneys fees). That’s just a fancy way of saying if you get sued under the ADA in some states, you will have to fix the violation, pay the attorneys fees, and that’s it.

In California however, the violations may run afoul of a few state acts, including the Unruh Civil Rights Act and the California Disabled Persons Act, allowing state claims damages to be added on. On top of all that, treble damages may also be added. Treble damages are just another fancy legal term, meaning the judge can add another amount, up to 3 times the original damages, to the judgment.  Oh yeah, each occurence gives rise to a violation. So if you visit a place twice, that’s two violations.

It’s no wonder then, California, 1/50th of the United States, is home to over 40% of all ADA lawsuits. What this means is that you are at risk of being sued under the ADA and other related acts.

Usually the landlord and the owner of the business (if not the same person) or both liable for any lawsuits under the ADA. However some landlords may have shifted the burden of this liability to the tenant. So go and read your lease to see if such a shift has occurred.

Whether it has or not, it’s a good idea to brush up on ADA requirements and examine your business location to find any violations of the Act. Maybe it makes sense to hire an ADA expert to give the location a top to bottom review. If there is a violation, you’ll eventually have to fix it anyway. Better now, before being sued, then after.

A proper buy-sell agreement for your San Diego small business

If you own a company with anyone other than your spouse, you need a buy sell agreement. Also called a buyout agreement, or a business pre-nupt.

A proper buy-sell agreement, will protect all business owners when one of the co-owners wants to leave the company. It will protect the remaining business owners as well as the one leaving. If an owner wants to retire, sell their shares, goes through a divorce, or even passes away, the agreement will have clear, defined procedures that the owners are bound to. It will set the terms and prices for such a buyout. Each day a co-owned business is without an agreement is a financial risk

I have personal experience with this as a company I was hired to be General Counsel for was going through the process of buying out a deceased partner’s share. The kicker here is, that there was a buy sell agreement. However, it was a boilerplate buy sell agreement, meaning it came in a form and was not modified for this particular business. So it did not take into account the particular concerns with this highly regulated business and it was a much messier process than it should have been.

So a proper buy-sell agreement for your California small business will take into account what the owners want to happen if one of these triggering events occur. Do the co-owners care if one of the owner’s spouse is a managing partner should that partner pass away? Or divorced? Do the owners want to allow unknown partners if one owner wants to sell their share to a 3rd party? How do you value the interests when one of these triggering events occur. Business valuation is a complicated and involved process. Sometimes you can simplify it with an agreement. Other times you don’t want it to be so simple.

These are just some of the questions that would be raised in a detailed buy-sell agreement planning session.

Incorporate your business too … avoid an IRS audit?

According to a IRS statistics, those who incorporate their business is 10 times less likely to be audited than those who run a business and report that income on a Schedule C form. Schedule C is for sole proprietors who report that income directly to their personal 1040 tax form.

Now, correlation does not equal causation. That is for certain. So all we can do is guess as to why this is. Is it possible that the IRS algorithm’s feel that those who report income on the Schedule C are more likely to hid income, or take inappropriate deductions? It’s possible. Also, is it harder to do these things when the Corporation must file its own tax return? That is also highly possible.

When you incorporate your San Diego small business, you will most likely elect to tax the corporation under Subchapter S. This makes it a separate entity. You must file a tax return for the Corporation, then report the results of that onto your own tax return. Most of this must be done by an accountant or CPA. It is therefore not an unreasonable assumption to believe there is less risk of abuse here, although the risk still remains.

Oh and you also get increased asset protection as well. Not a terrible side effect.

Small businesses are the IRS favorite targets. They are ripe for abuse. Unnecessary deductions, excessive deductions, hidden income here and there. Sure why not, who is counting anyways.

So as a small business you must do your best to keep a low profile from the IRS so you don’t risk being on the receiving end of an audit. According to figures from the IRS, rates of audit for Schedule C filers can reach as high as 3.68%. The rate for Corporations under Subchapter S? 0.30%.

That is amazing and quite surprising to see such low rates of audit.

So whether it’s causation or just plain old correlation, it appears that incorporating your business may lower your audit risks substantially.