Starting a new business is actually quite simple: get an employer identification number (EIN) from the Internal Revenue Service. In some industries you also need to get a business license, for example for sales tax purposes. Some businesses have further licensure obligation(s), with some licensure state required (realtor) and some locally required (Contractor).
You don’t need to form a corporation or do anything else. You are in business!
Is this a wise approach: no. There are several other steps a prudent business follows:
- Get a bookkeeper or accountant to set up a chart of accounts;
- Determine the business form you want to be: a sole proprietor; a partnership; a C Corporation; an S Corporation; an LLC; or some combination.
- Prepare the necessary paperwork to create the entity. This will involve addressing a variety of issues depending on the type of business (e.g. Manufacturing vs. retail), the market (local, national, international); the number of owners (one, many); the capital requirements and contributions; buy-sell restrictions, etc.
- Determine the name of your business. This has two reasons: (a) branding, your image is reflected by the name your use. It is generally the name forever so a lot of thought should go into the decision; (b) availability, folks commonly come up with a great name, only to find someone is already using it. There are several ways to determine availability. The first is the Colorado Secretary of State website. Search for the name you want and see if it is available. As a side note, the Secretary of State has a lot of useful information. A national search is also available for out of state use.
There is a very common misconception by owners: if they form a corporation or LLC, their personal assets will be protected in the event the entity and they are sued.
That position is only partially correct. In a breach of contract matter, the entity generally does protect the individual. However, that is NOT true in the case of tort (e.g. Personal injury). The owner can be personally liable if it is shown he/she was negligent.
So, if you are considering forming a business, we can help in determining what approach is appropriate and help forming and answering the myriad of questions which arise.
Many folks have benefited from the expansion of oil and gas exploration and development in Northern Colorado. There are several elements to this opportunity that need to be understood.
Ownership of land does not necessarily mean the landowner owns all the subsurface rights. A determination of the subsurface or mineral interests must be made. It is very common for a prior owner to reserve (retain) the mineral interests or some portion when the property was sold. Those interests remain and can be through several or more ownerships ago. Thus, the first things to be determined is the mineral interests that are available to the current owner. This is always done by the Oil and Gas company when they are interested in a particular property.
The Landowner should conduct their own investigation through the title insurance policy they received when they bought the property. It will reveal the existence of any mineral interest which were reserved and not conveyed by a prior owner.
Royalties or Sale
Once it is determined the owner has mineral interests, the negotiations commonly begin with an oil and gas company. The more showing of interest by an Oil and Gas Company or “flippers” (Companies that buy the interest then later sell it, with no interest in actually drilling), suggests there is oil and gas activity in the area. Depending on the activity, there can be multiple solicitations from a variety of companies seeking to acquire the mineral interests.
The interest can take two forms: royalties or sale. Royalty commonly consist of an upfront number and a percentage of drilling income. The actual amount is very negotiable, and owners should consult with neighbors/nearby landowners and others to learn the current royalties.
A more common practice is for an oil and gas company (not necessarily the drilling company) to purchase the owners oil and gas interests. This in turn has two variations: certain land owners have royalty interests. Oil and gas companies purchase the royalty interest from the owner and in turn then receive the royalty payment from the drilling oil and gas company. This is very common, and the mineral interest purchase price can vary as much as $500-20,000 per acre.
Some folk really like this approach because they can get a large upfront payment, rather than a payment (although potentially larger) over time. Obviously, the oil and gas companies believe they will receive a greater return over time, hence their interest.
Another situation is when there is no royalty agreement and no drilling activity in the area. This presents more of a risk to the oil and gas companies or flippers, and the price are generally lower.
A variance on the royalty/sale scenario is a partial sale, whereby the owner retains a portion of the royalties and sells a portion. Some risk (royalties), but some certainty (partial sale).
Price is the major unknown in these negotiations. “Shopping the deal” is an opportunity, given the enormous amount of drilling activity in the area. Drilling companies don’t want other companies to know what they are paying, but prices have become common knowledge.
We can help folks through this minefield hopefully to benefit from opportunities that have only really appeared in the last 5-10 years.
General Counsel. I get asked all the time, what does that mean? I describe it as a cross between traffic cop, family physician and paramedic. I represented a major auto racing organization, with 50,000 members, for 25 years. I have represented a motorcycle racing organization with 5,000 members for over 20 years, since its formation. I represent a Korean high tech company in its US operations. I have represented a variety of construction companies, small manufacturers, limited liability companies and sole proprietors. In short, pretty much every type of entity.
What do I do? You name it. From contract to complex litigation. From insurance coverage to trademarks (one client owned over 50 registered trademarks). I have litigated cases in Florida, New York, Texas, Minnesota, California and Colorado. I have handled negotiations that went on for days with some of the major figures in American industry. I have been involved in deals in the beginning, in the middle when I took over from someone else or, too commonly, at the end when problems have arisen and there is panic in the air. What do we do!?
But, that’s the fun and the challenge. Identify the problem, find a solution. Generally negotiations work but the variety of courts listed suggests, not always. Sometimes the “traffic cop” requires finding a varieties of experts or attorney specialists and pointing them in the right direction; monitoring their efforts and their billings but hopefully not “herding cats”, though sometimes it feels like that.
The last blog talked about Patents and Trademarks. Before we move on, another comment about Trademarks. The Patent and Trademark Office (PTO) has an extensive web site that allows the filing of a Trademark Application on line. Before going through the process (which is somewhat self-explanatory), I urge folks to find out if the proposed name to be trademarked is actually available.
There are two companies: Thompson and Thompson, and Corsearch, which will conduct a national search to find out whether there are other uses of the proposed name. Please understand that actual use is the strongest trademark and you may trademark a name, only to find that it is already being used somewhere, thereby minimizing if not defeating your trademark.
Also, the ability to trademark and the strength of the trademark depends heavily on the “strength” of the name: is it unique, generic, merely descriptive, fanciful? Has it acquired secondary meaning? What does the name identify-product, category? The word “Apple” cannot be trademark to name a fruit, but it can be used to identify a computer. It is a common name used in an uncommon way. There are many “tricks” to trademarking, so before you go online to file an application, and spend the non-refundable fees, it is a good idea to better understand the world of trademarks. We will move on the Copyrights, the Right of Publicity and Tradenames, next time.
I represented an owner who hired a contractor to build a large equestrian center. The roofing was put on upside down! The result was that water leaked into the building, soaking the insulation, which in turn fell on the floor in great sheets, damp, smelly and a general mess. The resulting litigation involved the owner, the contractor, the architect, the roofing sub-contractor, and the roofing material supplier. That’s another story.
The point here is that when a claim was made to the insurance carrier of the general contractor, who in turn made a claim to the insurance carrier of the roofing subcontractor for the roof which had to be redone, the carrier denied coverage, based on the “your work” exclusion. The carrier would cover the damage caused by the water leak but not the cost of redoing the roof. Why? Because the “your work” exclusion means that insurance coverage does not cover poor/improper/negligent work. Damages from the work-yes. The redo of the work, no. Contractors commonly think that if they have insurance, they are covered for everything. No. They are only covered for damage caused by their poor work. The solution to the owner is to require a performance bond. It is not a cure all, but it is better than trying to recover from a contractor who has nothing, or in this case, filed bankruptcy. The reason why the roof was put on upside down is another
It is a common practice when two folks start a business to decide on joint ownership. It might be as 50-50 partners in a partnership, or 50% ownership in stock, or as equal members and joint managers of an LLC. Let me suggest it is a recipe for major trouble, or a disaster. The problem comes when there is a disagreement. How do you settle it? Somebody has to concede, or there is no resolution–which is what commonly happens. Since neither party has a majority, either party can block a decision. The decision then gets made by a third party–either an arbitrator or a judge. That means you have turned your business and the resolution of the dispute over to someone you don’t know, who knows nothing about the nuances of your business, or the effect of resolving the impasse. His/her job is to resolve the dispute–that’s it.
When tenants are negotiating a lease for a commercial property they commonly look at the rent as the main financial term. While that is critical, there is another critical element, and that is the Common Area Maintenance or CAM charges.
Those are the charges for the common area of the building. The definition of the common area is critical and should be closely examined. Some landlords include the roof, or the Heating, Ventilation and Air Conditioning (HVAC) system as part of the CAM charges. Tenants think of sidewalks, parking lots and landscaping as common area. While those are all generally included, the above examples are not unusual.
Another element is a management fee. I have seen the fee as a percentage of the rent or other times totally undefined and annually a very big number. I recently saw a 15% depreciation fee included.
The point of all this is that CAM charges are in addition to the rent. Landlords are wise enough to know that tenants focus on rent. CAM charges can add major amounts to the monthly bill, so examine them closely.