The legal structure of your business is not a one-and-done proposition. As businesses grow, evolve, and change, it may make sense to change the legal structure of your business. The good news is that in most cases changing your business structure is more simple than you might imagine.

In the vast majority of cases, small businesses change from a simple business structure (sole proprietor or simple partnership) to a more complex one (LLC or Corporation). Occasionally, corporations will decide to change to simpler structures to reflect changes in their company, but that’s not common.

For most small business owners, a structure change will come because they’re taking on new owners or investors. Another common reason small businesses change structures is because they are seeking financing and their prospective lender requests to review a formal business plan. And many change their structure to take advantage of the legal protections and potential tax options available to some of the more complex structures.

So, when is it time to take the plunge and make a change? And how do you get it done? First, remember that you should always consult your attorney and accountant before you make any decisions regarding the structure of your business – that choice can have serious long-term consequences and you can’t always switch back. That said, we can give you some general tips for what you should be looking out for and what you need to do when you’re ready to make changes.

 

When Is It Time To Change Business Structure?

When you first started your business, you chose the business structure which was right for you and your new company at the time. For most small business owners, many found that a sole proprietorship or a simple partnership was sufficient for their start-up business needs. In fact, you may not have considered your structure at all and just started doing business (that makes you a sole proprietor). Sole proprietorships and simple partnerships are considered default business structures, since you don’t have to register.

Those simple structures are really easy to manage, but they do have some limitations. They’re really only cut out for businesses owned by one or two people, ideally without employees. They also don’t offer much by way of legal protection for the owners. As your business grows, it may make sense to consider changing your structure.

What are the main reasons small businesses consider changing their business structure? The top reasons include:

• Increasing the number of employees: Employees come with liability and you’re going to want the protection offered by an LLC or Corporation, rather than being on the hook for everything yourself.
• Protection from liability (LLC or Corporation): In addition to the liability that comes with employees, your business may be liable for injuries to your customers, for loans, and for other issues. By switching to a more formal business structure, you can protect your personal assets from that liability.
• Allowing outside investment: Anyone that wants to buy a portion of your business or become a partner is going to want a formal structure (and if they don’t, they may not be the kind of investor you want). And you’ll want it too! A formal structure like a corporation, LLC, or partnership involves setting out clear rights and responsibilities up front so everyone knows how the arrangement will work and what their options are.
• Need for greater bank financing: If you’re looking for a loan to grow your business, the bank may want to see a formal business structure. That indicates that you’re serious about your business and have put work into setting it up the right way. It lends a sense of legitimacy.

Note that you don’t have to wait for one of these reasons to pop up

. It’s a good idea to plan ahead for your business needs and make any structural changes before you need them. That way, you’re ready to take advantage of opportunities that come up. And it’s always a good idea to consider a structure that protects you from personal liability!

 

What Structure Should You Choose?

Before changing your business structure, the SBA recommends that you look at these five characteristics of the proposed new business structure:

• Liability
• Taxation
• Fees and Forms
• Investment Needs
• Operational Continuity

Legal professionals, accountants, and your financial team can help you review these components and determine whether a change in business structure would benefit your company. Both tax and legal issues arise when you change business structure, so you want to make sure you’re not missing any crucial details.

 

How Do You Change Business Structures?

Changing business structure depends on what the current structure of your business is. The easiest change to make is from a sole proprietorship or simple partnership to a more complex business structure. If you haven’t registered a specific structure with the government, then you’re automatically a sole proprietorship (or a simple partnership, if you have a partner).

Whether you want to change your sole proprietorship to an LLC, a partnership, or a corporation, the first step is to register with the state where you conduct business. Try a Google search for “[your state] incorporation.” You’ll need to fill out a couple of forms and send them in. After a few weeks, the paperwork will be approved and you’ll get notice through the mail or online.

But the paperwork you file with the state isn’t enough. If you’re changing to an LLC or a partnership, you’ll need to create a formal operating agreement or partnership agreement. That’s a legal document that sets out the ownership, rights, and responsibilities of the owners. You can find boilerplate agreements online but you should consult an attorney to make sure you have all your bases covered.

If you’re changing your business structure to a corporation, you’ll need to act like a corporation. That means choosing officers (a president and secretary, for example), a board of directors (you can be the sole board member, although having other board members is good business practice), and creating a shareholders agreement. Like an operating or partnership agreement, that document should cover the rights and responsibilities of the owners. And you’re going to want to run it by your attorney.

Note that you may not be required to file these extra documents with the state, but that doesn’t mean you can skip them. If you run into a legal issue or if the IRS asks, you need to be able to show that you have those documents in place, especially in the case of a corporation. It’s called “following the corporate form” and if you can’t show that you’ve done it, they may treat you as a sole proprietorship (which means you’re on the line for any liability.

In almost every case, you’ll be changing from a very simple structure to a more complicated one. But there may be reasons to go from a more complex structure to a simple one. Unfortunately, that process can be really complicated. You’ll need to work with an attorney to get it done.

 

And Don’t Forget

A business structure only works if you’ve handled all the details. To make sure your change is recognized, the SBA recommends that you:

• File a DBA (Doing Business As) form (you can do this online on your state’s website and with the IRS)
• Register with the IRS to apply for an updated Employer Identification Number (EIN) (you’ll need that to file your taxes and pay your employees)
• Register your new business structure with the state
• Reapply for state licensure
• Update your bank accounts and records to reflect your new business
• Update your insurance records to reflect your changed business structure
• Create (or update) partnership/stock agreement
• Contact your vendors and suppliers to update them on the change
• Double check with your tax and legal professionals that all paperwork is filed and complete

 

Finally, stay in touch with your financial and legal advisors. Filing the forms and making the change official is the first step, but your obligations are going to change from then on. For example, you may need to deal with corporate taxes and you’ll have to handle payroll once you start hiring employees. Take advantage of their expertise to make sure you’re doing it by the book.

Learn more about legal considerations for food and beverage businesses by exploring this interactive article.

 

We’re pretty comfortable with the laws that govern our day-to-day lives—don’t speed, don’t steal, don’t assault anyone—they’re intuitive and we don’t think much about them. But business law is different. For one, most of us don’t grow up knowing how to put it into practice and adhere to it. It’s also more complicated and less intuitive than the laws we deal with every day. That’s why it’s important to get small business legal advice from someone who is qualified: a business lawyer.

Business law seriously affects how your business runs, from contract law to employment law to tax law to workplace safety law and more. There’s a reason lawyers spend 3 years in school to understand what’s going on! The good news is that you don’t have to become a lawyer. You just need to be aware of potential issues and then work with your lawyers to make sure you’re on the right side of the law.

If you’re seeking small business legal advice, here are a few of the biggest legal issues small business owners need to know about.

1. A Binding Contract Requires a Meeting of the Minds

The basic tenet of contract law is an important one to know when you’re running your own business. The fundamental premise of all contracts is that there cannot be a binding contract unless there has been a “meeting of the minds.”

In plain English, this means that both parties should share a core understanding of the contract terms and agree to be bound by those terms. Problems arise in contract interpretation and performance when there is an ambiguous interpretation of the contract terms.

Be clear about what you’re signing, as well as what you’re agreeing to. And while form contracts pulled from online can help give you a starting point, you’re going to want the help of an attorney (on both sides) to make sure everyone understands each other and the duties involved in the contract.

Making sure you both understand and agree to contract terms can help avoid disagreements and costly litigation down the road.

2. The Validity of Written Contracts vs. Oral Contracts

You may be surprised to know that oral contracts are legally enforceable—technically. Of course, it’s often nearly impossible to determine who agreed to what when the only evidence is your word. But just because it isn’t written down, doesn’t necessarily mean it’s not a valid contract.

There are, however, certain types of contracts that must be written to be valid. These include contracts for 1) real estate sales 2) sale of goods of more than $500 and 3) contracts that cannot be performed in less than one year. Most attorneys would agree that it’s always best to err on the side of a written contract to avoid confusion down the road.

3. Protection of Your Intellectual Property Is Important

Without a patent, copyright, or trademark, you have little to no recourse if any company “steals” your logo, branding, or business name. Tech companies and e-commerce companies are especially vulnerable to intellectual property issues.

Laws about patents, copyrights, and trademarks protect your businesses’ intellectual property, unique creative output, and branding efforts. Small business attorneys advise that protecting your intellectual property is easier than disputing unfair usage after the fact.

Intellectual property law is inherently complicated. If you’re interested in protecting your company’s intellectual property, consult with a specialized attorney who knows the field, beyond general small business legal advice. A qualified intellectual property attorney can help you assess whether or not your business has IP assets that warrant formal IP protection.

Visit the United States Patent and Trademark Office (USPTO) website to locate attorneys, as well as resource centers near you.

4. Privacy Policies Are Crucial to Protect Customers

One issue which is an especially hot legal topic in recent years is that of customer privacy. It is important that all businesses set up a formal privacy policy to protect their customers’ data and demographic information. Note this is different from cybersecurity (we’ll cover that later).

In this instance, we’re referring to email addresses, home addresses, demographics, and other sensitive information. Some companies share or sell this data to other companies. If your company shares this information with others, you are legally obligated to formally disclose this fact to your customers via a clear privacy policy.

5. Your Small Business Should Adequately Safeguard Data

One huge legal issue which has made the news recently is the issue of cybercrime and corporate data breaches. Even huge multinational corporations have fallen prey to data breaches, and the legal and PR fallout has been severe.

No matter the size of your company or the number of customers, your small business has a legal obligation to safeguard the personal cyber info of both customers and staff. Current antivirus measures and security software can help protect this valuable information from theft.

It’s also important to back up your paper files in the event of theft, fire, or another disaster. Business experts recommend backing up all critical files and storing back-ups offsite from your place of business for safe-keeping.

6. Consider a Trust for Legal Protection

The majority of small business owners operate as the default business structure: sole proprietorship. More advanced legal business structures require additional steps to set up.

The advantage of running a small business as a sole proprietorship is that, unlike more advanced legal business structures such as corporations, it requires no special filings or paperwork to start up and begin running a business. The disadvantage of running a sole proprietorship is that if your business is sued, then the litigant could go after not just your business assets, but your personal assets as well. This could include your home, your car, and your bank accounts.

Some business experts recommend that sole proprietors explore setting up a trust to own the business. This trust would protect the business owner from personal liability in the event of a business lawsuit.

What is a trust? A trust is simply a legal entity that can file its own tax returns, as well as own property and other assets. If a trust is established for the business, then in the event of the lawsuit, that trust will protect the owner’s personal assets from judgment.

7. Always Keep Personal Funds and Business Funds Separate

If setting up a trust is not feasible or desirable, it’s still crucially important to separate yourself and your personal information from your small business. Your small business should have a separate bank account, credit cards, etc.

Your business funds and your personal funds should always be kept clearly distinct and separate to avoid the appearance of commingling. Any commingling can open you up to legal issues. The same goes for using business funds to pay for personal expenses.

8. Your Small Business Should Maintain Comprehensive Insurance

Any business, regardless of size, should maintain adequate insurance to protect itself in the event of an accident, natural disaster, data breach, or any number of possible claims. Dealing with property and general liability claims can result in lost time, expense, and frustration. All small businesses should maintain adequate insurance to prevent such problems. Depending on the size and nature of the business, specialized insurance policies may be advisable to provide additional cover.

For more on the detailed insurance needs of small business owners, visit our resource How Small Businesses Can Manage Risk and Prevent Loss.

9. It’s Usually Better to Negotiate Versus Litigate

Lawsuits are expensive, time-consuming, and stressful, and in the end, you may not be happy with the outcome. Even if you think you are the wronged party, a judge may not agree with you. Taking a case to court should almost always be the last resort.

Most business attorneys will advise trying to negotiate a settlement agreement rather than litigating a business dispute in court. Alternative dispute methods such as mediation and arbitration can save business owners significant sums of money, as well as valuable hours. They may also offer a way to salvage something out of a business relationship if you so desire, where a court battle is likely to cause irreparable damage.

10. Your Choice of Legal Business Structure Is Important

Small businesses can be structured in a number of different ways. We already discussed sole proprietorship in point number 6, but to recap: the default option of business structures are a sole proprietorship. The downside is that there’s no separation between the business and the business owner.

The more advanced business structures, such as LLC or corporations, exist as their own entities to protect personal assets. In the eyes of the law, there is a corporate shield that exists to protect you personally from business debts.

Keep the Law on Your Side

When you’re starting or running a small business, it’s important to know the basics of business law that can impact your company. Remember, lack of knowledge is not a defense to an illegal act or regulatory infraction. That’s why it’s important to seek out small business legal advice from someone who is qualified to give it. To help you locate an attorney, visit the interactive American Bar Association Lawyer Referral Directory.

It’s best to always consult with an attorney to provide insight on any legal issues before you commit to a course of action, but this guide can at least give you a sense of some major issues to watch out for.

Learn more about legal considerations for food and beverage businesses by exploring this interactive article.

The federal Truth in Lending Act, which we count on for transparent disclosures in consumer lending, does not protect small business owners. In this regulatory gap, predatory small business lenders using abusive, irresponsible practices have become prevalent. One such practice, confessions of judgment, was recently highlighted by Bloomberg reporters in the video and story below.

We are committed to connecting small business owners with the financing and advice it takes to create and grow healthy enterprises. You deserve an efficient and transparent borrowing experience that helps meet the needs of your business in an ethical way. As a founding member of the Responsible Business Lending Coalition, we helped create the Small Business Borrowers’ Bill of Rights, which outlines six fundamental rights we believe every borrower should have.

If you’re running a small business in the U.S. and you need to borrow money, you may be forced to sign a “confession of judgment” – an obscure legal document that gives your lender the right to seize your assets with no trial or advance warning. Bloomberg investigative reporters Zeke Faux and Zachary Mider discovered that some lenders have used this strategy to seize borrowers’ money thousands of times in recent years, often bankrupting businesses and ruining lives. Watch the video below to learn more about confessions of judgment:

 

Read the full story on Bloomberg BusinessWeek:

• Part 1: https://www.bloomberg.com/graphics/2018-confessions-of-judgment/
• Part 2: https://www.bloomberg.com/graphics/2018-confessions-of-judgment-millionaire-marshal/

Learn More

When it comes to your finances, you want clear guidance and easy-to-implement tools based on your unique needs. Visit Learn with AOF to get started strengthening your financial management and meeting your goals.

Experience a different kind of financial education. Learn with AOF has flexible, on-demand courses developed by small business owners, for small business owners. Learn on your schedule, with no time commitment or limit. Save your progress any time to fit courses into your busy schedule.

Setting up and running your small business with a business partner has many pros, such as increased capital, more available labor, and greater potential profits. Done well, a business partnership agreement can be a lucrative and successful way to start up a small business.

Business partnerships can often be between friends or family members. These are people you know well, trust, and are comfortable working with. Those are all good things to have in a business partner. But money can put a strain on even the strongest relationship. You may find that you disagree about the track the business is on or the way you’re managing your finances. You may find you have different opinions about hiring and firing employees or about bringing in new partners. You may have trouble dividing your responsibilities. Basically, there are a lot of things that can cause disagreements in a business partnership.

The most important tool for navigating those tricky waters is to go through the process of negotiating a business partnership agreement. The process itself forces you to think about those issues, hammer out your differences of opinion, and formalize the whole thing so you both know what you’re getting into. That protects you, your partner, and the company. Ideally, you want to have these discussions before you get too far in business together—when you’re on good terms with one another, not when someone is already upset or something has already gone wrong.

So what goes into your business partnership agreement? There may be certain issues specific to your business, but there are certain broad categories that every partnership agreement should cover. Let’s take a look at those. Afterward, we’ll dig into how to go about negotiating a business partnership agreement with your partner.

Drafting a Written Agreement

Legal and business experts advise that all business partnerships should be formally memorialized with a written business partnership agreement. You may think that your business is too small or too new to need a business agreement. The truth is that all businesses—regardless of size, number of partners, age, or revenue—should have a well-drafted, complete business partnership agreement.

This agreement will prevent financial and legal disputes down the road, as well as detail a financial and operational roadmap for how business operations will run. How do you get started working out terms for your partnership agreement?

Step One: Decide on Mutual Goals

A successful business partnership has three key components. The business partnership needs to take into account your own interests, your partner’s interests, and the overall interests of the business entity.

Before drafting a business partnership agreement, you and your partner will need to do some homework. Decisions on all mutual business goals should be made first.

Discuss Projected Business Growth

The matter of business growth should be mutually agreed upon. What are the growth goals for the business? How fast do you want the business to grow? How will that growth be funded? How will capital be used to grow the business? How will debt be used to grow the business? Are you willing to branch into other areas or do you want to stick to your core business areas?

Assess Profit Taking

A second mutual goal to decide upon is the issue of profit-taking. How will the business profits be distributed? Will each partner share equally in the business profits? How often will payments go out?

This is also a good place to talk about certain employment policies. It’s very common for small businesses to hire friends or family members, or to have those folks come in from time to time to help out. You need to work out whether you’re happy hiring family members and friends and how you’re going to handle it if one of those people ends up being a bad fit for the business.

Protect Your Own Interests

In any business arrangement, it’s important to make sure that your own interests are protected. You should view the business as its own separate entity that you’re investing in. That means you need to plan for certain long-term issues. What is the process for bringing in new partners? What happens if one partner wants to leave the partnership or buy the other out? By putting procedures in place ahead of time, you can make sure that process is fair and sensible. That protects both the partners and the business itself.

Be Clear About Goals—and Conflicts

In an ideal business world, your goals, your partner’s goals, and the business goals would all align. However, the world is not perfect, so you need to address any conflicts early on.

You should assess whether or not you have personal goals which run counter to your partner’s or to the overall health of the business. You likely will, so don’t be discouraged when you identify areas of potential friction. For example, you may want to pass the business on to your children and your partner may not want your children involved. Or your partner may want to eventually expand into other cities while you’d rather focus closer to home. When you find personal goals that run counter to your business partner’s or the business, this an area where you both need to compromise for the health of the business and to allow for lifestyle differences.

Take the time to think about what your personal goals are and how they fit with the business. Then you and your partner can sit down and explore those plans, identify potential conflicts upfront, and come up with ways to approach the different goals together.

How Will Business Conflict be Handled?

No matter how aligned your interests are up front, there’s going to be a conflict at some point between you and your partner. You should include terms in the business partnership agreement that clearly outlines how the business conflict will be handled down the road. Those formal procedures can help you take the personal edge out of the issue and bring everyone into a professional state of mind.

Make sure that you include provisions for situations in which you simply can’t reach an agreement on your own. Third-party mediation is a good option; an impartial judge can help both sides see a little more clearly and may be able to spot novel solutions.

Negotiating Your Business Partnership Agreement

As discussed, compromise is key to any successful and viable business partnership. There will be areas that you will need to compromise on when negotiating your business partnership agreement. It can feel a little strange to go into negotiations with someone you’re on such good terms with but remember that it’s a lot better to have these discussions in that state of mind than when you’re in crisis conflict mode.

Know Your Personal Deal Breakers Before Beginning Negotiations

When entering into any negotiation, each person has their own “must-haves” and “deal-breakers.” It’s crucial to know what those must-haves and deal-breakers are so that you can set up a mental “hard stop” for yourself on important issues.

The only way to get what you want from any negotiation is to know your own personal endpoint: Where will you draw the line? You may want 50/50 partnership and won’t settle for less. Or, you may want full control over the legal aspects of the company. Or, you may want the bigger office space.

Articulate what you feel strongly about and will fight for versus what you’re willing to give up in order to reach a mutually agreeable arrangement. Whatever your must-haves and deal-breakers are, know where you will ultimately draw the line at negotiating. From there, virtually everything else is fair game for negotiations.

Clarify Ownership of All Property Before Negotiating

Property ownership and use can be a sticky issue when it comes time to negotiate a business partnership agreement. Both you and the other party have amassed individual property prior to entering into the partnership. Before you begin negotiations, each party must identify, inventory, and value their own property.

Note that the term “property” does not apply only to physical, tangible property, such as real estate or business equipment. Property should also encompass all intellectual property each party brings to the table. Inventions, patents, and copyrights should also be included in your comprehensive property inventory since intellectual property can potentially add significant value to a small business. For a detailed discussion of the various types of intellectual property, visit our resource Definition of Intellectual Property.

You need to make sure you know what belongs to whom before you go into this negotiation (and you’ll want to negotiate who gets what in case of a breakup). That way, if negotiations fall apart, you don’t have to worry about one partner unfairly walking away with valuable physical or intellectual property and setting up shop on their own.

Discuss and Set Mutually Agreed Upon Goals

Once you’ve done your homework and have the goals and background info you need to be laid out, it’s time to come to the table with your partner. It’s always helpful to start with the positives: your mutual business goals. Considering that you’re in the process of starting a business together, it’s likely that you’ll have a lot of goals in common. But don’t just let this slide because it seems easy, either. You need to make sure you clearly articulate your goals and clearly understand theirs. Ask a lot of questions. Give thoughtful answers. Take the time to make sure you’re on the same page. And when you find places you don’t agree, take notes so you can address them.

Use Your Agreements to Address Your Conflicts

You’re going to have areas in which your goals or ideas conflict with your partner’s. It doesn’t mean you can’t work together, but it does mean that you need to hammer out those details now and put them in writing. This is where the compromises are going to happen. Chances are that neither party is going to get 100% of what they want, but that’s just the nature of working with other people. You already have your mutual goals set out, so you can refer back to those as an aid for compromising in some of the areas where you disagree.

And if you do find that you have differences of opinion that absolutely can’t be reconciled, it’s a lot better to know that before you’ve got the whole operation up and running.

Discuss What Will Happen Upon Partnership Dissolution

Once you agree on your goals and methods, a lot of the hard work is done. But the process isn’t over. You both need to acknowledge that a time may come to end the partnership. Business failure is possible, or one partner may want out, or both partners may decide to sell the business. It’s important to be aware of this and to talk about it.

You’ll need to decide how things go in case the partnership dissolves or changes. That includes bringing in new partners, one partner selling or buying out, selling the whole business, or dissolving it. Talk about how those decisions get made and what sorts of limitations you want to put on those processes to protect everyone’s interests. For example, you’ll probably want the right of first refusal if your partner wants to sell. You may also want to have the right to approve a potential outside buyer.

Two Heads Can Be Better Than One

Starting a business with a partner can be exciting and rewarding—or disastrous and traumatic. The trick to the former is creating a clear, strong business partnership agreement upfront so everyone knows the score and has committed to well-defined business goals and processes. This is a situation in which an ounce of prevention is worth a pound of cure.

You may have heard the term “DBA” and wondered what those three letters stood for. Simply stated, DBA is a legal term that means “doing business as.” In short, if a company is using a DBA, it means that the company is doing business under a different name than that company’s legal business name. But you chose your business name for a reason—why use a DBA?

What is a “Doing Business As” or DBA?

The three letters “DBA” stand for “Doing Business As.” A DBA is an operating name that a company uses to conduct business, which is a separate and distinct name from the formal legal name of the company.

DBA names are also commonly known as “trade names,” “assumed names,” or “fictitious names.” Certain states, counties, and cities require that companies using a fictitious DBA name file that “fake” name for the ultimate protection of that businesses’ consumers.

It is important to know that using a DBA to do business under another name doesn’t create a distinct business entity. Rather, the DBA is merely a description of the person or corporation who does business under some other name. The original legal business still exists and has not been superseded, replaced, or in some way altered by the “fake” DBA business name.

Why Use a DBA?

• Separating Business Names from Personal Names: When you’re running a sole proprietorship, your personal name and your business name are legally the same. The same principle applies to businesses run as a simple partnership. In these instances, using a DBA allows you to conduct business under another name rather than just using your personal name(s) and identity as the “face” of your business.
• Banking and Accounting Reasons: Filing a DBA for your small business can help you with your small business banking and accounting. Your DBA will be assigned a federal tax ID number that permits you to open a business bank account under your DBA. Filing a DBA as a sole proprietorship or simple partnership makes it possible for you to open bank accounts and receive payments in the DBA name of your business.

Note that if you plan to get a bank account for your DBA, many banks won’t allow you to open a business bank account without verifying a copy of your filed DBA. Your bank may require you to provide a DBA certificate at the time of your account opening.

• Wooing Prospective Clients: Some clients may require you to have a DBA in order for your business to contract with them. It can help avoid legal confusion between your own name and your business name, which could cause contractual difficulties. A DBA also sounds more professional than a personal name.
• Expand to a New Area: When you’re a small company, as you grow, you may expand to new areas which are not currently reflected in your legal business name. Using a DBA to create a more descriptive business name can help earn you new clients or customers.

For example, if you currently own a house cleaning service called “Pam’s House Cleaning Services” but want to expand to pet and house sitting, then you can file a DBA called “Pam’s Pet and Home Sitting Services” to include your new focus.

• Create Specialized Marketing Names: Filing a DBA allows your business the freedom to use a business name that can help you specifically market your products or services. This specific focus can allow a business to create a DBA that is in line with your targeted marketing and PR efforts.

DBAs also allow you to pick a business name that reflects your brand identity. For example, if you’re starting up a handmade jewelry business, you have the option of selecting a DBA for your business which reflects your company and your name. If you wanted to operate the company under a name other than your own, for instance, you could use the legal business name “Jennifer Smith” and file the DBA as “Jen’s Custom Jewelry.”

• Use a DBA When Your Company Operates Another Business: If you run multiple segments of one company, you may want a DBA for each section to keep them separate in people’s minds while still keeping your business as one legal entity. For example, you may want different DBAs if you’re selling both men’s and women’s clothing. That makes it easier to operate with two distinct websites (designed to appeal to each market).

Creating DBA Names

There’s broad latitude in creating and using a DBA name. In fact, there are not many restrictions at all on what is considered an appropriate DBA — it’s up the business owner to choose the best name fit for their unique business.

There is one major restriction: DBAs cannot include language that may lead customers to think that the unincorporated business is a corporation. Therefore, the words “corporation, Inc., incorporation, or Corp.” are prohibited from use in a sole proprietorship or general partnership DBAs.

Of course, this exception does not apply if the company is a formal corporation legally registered with the Secretary of State. This limitation exists to prevent businesses from using DBAs to falsely indicate that they have incorporation status.

How Do Small Businesses Register DBAs With State and Local Entities?

Procedures for filing a DBA vary among states. It’s important to determine your DBA requirements based on your specific location. In general, you’ll need to submit a form and pay a registration fee.

Some business experts recommend that all small businesses should register their DBAs, regardless of whether you are legally required to file. Multiple businesses are allowed to go by the same DBA name in the same state, so if you find out your DBA is already in use, you may still be able to use some parts of the name or pick a different name entirely.

The DBA Publication Requirement

Some jurisdictions require businesses to publish their prospective DBA names in the legal notices of a local newspaper. This is intended to give proper notice to anyone else using the DBA name. The time period may vary, but typically, the DBA notice may need to be published once per week for a period of four weeks.

Is a DBA a Trademark?

It is important to note that a DBA name is different from a trademark. A DBA gives your business certain distinctions and benefits but does not protect your business name from being used by others. For that, you need to seek separate trademark protection.

Business experts recommend that all small businesses conduct a business name search and search for existing trademarks before filing a DBA. For more information on trademark protection and intellectual property issues, visit our resource What is a Trademark (and Why Do I Need One)?

What’s in a Name?

Using a DBA allows your small business to conduct business, open bank accounts, and receive payment under a name different than the legal name of your business. It can help you cater your business name to your legal and marketing needs, as well as helping avoid confusion with your customers and vendors. Just remember to check all the legal boxes to make sure your DBA is legally recognized as legitimate.

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When it comes to your finances, you want clear guidance and easy-to-implement tools based on your unique needs. Visit Learn with AOF to get started strengthening your financial management and meeting your goals.

Experience a different kind of financial education. Learn with AOF has flexible, on-demand courses developed by small business owners, for small business owners. Learn on your schedule, with no time commitment or limit. Save your progress any time to fit courses into your busy schedule.

Not all startups are solo endeavors-lots of small businesses come about as the result of a partnership agreement. In a partnership, you each bring unique strengths to your business, you have multiple people to share the workload, and you get the two-heads-are-better-than-one bonus. Of course, there’s a downside-you’re not going to get along with your partner 100% of the time. You may have different visions for the business, for example, or disagree about how much to borrow or where to spend it. You may butt heads over employment policies or how one partner wants to bring a dog to the office but the other is allergic – even little issues can add up to big trouble when there’s a business on the line.

Noam Wasserman, author of The Founder’s Dilemma: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (The Kauffman Foundation Series on Innovation and Entrepreneurship), reports that a staggering number of new businesses – up to 65% – fail as a result of co-founder conflict!

And here’s the thing – conflict is going to happen. There’s no perfect partnership and at some point, you’re going to have to deal with a disagreement. You can just start up your business and hope for the best, but then you’re just hoping that you and your partner can talk it out and come to a happy resolution. It’s a lot safer (and easier on both of you) to start out with a partnership agreement.

What Is A Partnership Agreement?

A partnership agreement is a contract between two or more partners in a business. It’s a way to make sure everyone understands their rights and responsibilities upfront in order to help head off problems before they happen. The partnership agreement can cover issues like how a partner can leave the business, how much the business can borrow, how profit will be distributed, and more.

By creating a partnership agreement up front, you’re forced to address important issues upfront and make sure you and your partner are on the same page. You don’t want to find yourself 5 years down the road fighting over how much of the company you own. Put it all on paper upfront.

So, what goes into a good partnership agreement?

Note: A partnership is a legal document and should be drafted with an attorney’s help. This article is intended to provide helpful information but not legal advice.

The Partners’ Ownership Interests and Authority

The partnership agreement should clearly lay out each partners’ ownership interests in the company. Is it a 50/50 split? 80/20? You need to figure out how much of the company each partner owns and set it down in writing. You’ll also need to detail what each partner is contributing – cash, property, or services, for example.

You’ll need to set out the partners’ rights as owners. Who casts the final vote in case of a disagreement? Can a partner sell their part of the company or pass it along to their heirs? If one partner wants to leave, how is their portion of the company split up among the other partners, and where does the cash to buy them out come from? If there is a minority owner (less than 50%), how can they protect their interests when they disagree with the majority?

Some partners opt to allow other partners carte blanche to make all decisions on behalf of the business. Some partners request that all partners get formal consent from the other partners before making important decisions on behalf of the business. Decide which strategy works best for your partnership and include that in your agreement.

If you decide that partners need the consent of other partners before making binding business decisions, then work out ahead of time how that consent will be dealt with. Will you require a partnership vote? What situations would trigger a vote? Will smaller business decisions be subject to voting or just larger ones? Include these specifics in your partnership agreement so each partner is clear on their respective authority about small and large business decisions.

You should also consider issues that aren’t directly related to your line of business. For example, it’s not uncommon for a partner to borrow cash from the partnership. Will your partnership allow that? What are the terms and restrictions? Will you allow family members to work for the company and, if so, what are the rules on qualifications and hiring and firing?

Managing the Money

One of the most important sections all small business partnership agreements should include is each partner’s portion of the business’s profits and losses. How the money will be divided up may not be the same for each partner, so it’s crucial to clearly delineate these details in your written partnership agreements.

Consider the following questions when drafting this section:

• How will your business allocate profits? How much will go to the partners and how much will be reinvested?
• How will your business handle losses?
• How will your business deal with draws?
• Will profits and losses reflect each partners’ percentage stake in the business?
• Will each partner take regular draws from the business?
• How often will profits be distributed to each partner?

You’re going to want to spend a lot of time and thought on this area since money tends to cause conflicts. And in a worst-case scenario where you end up in court, you want all of the details of your agreement set down on paper. In fact, this can help you avoid court altogether since everyone can simply go back to the document to resolve conflicts.

Running the Business

Partnerships can take a lot of different forms. Sometimes, one partner will provide cash and another will run the business. Sometimes, both partners run the business equally. Sometimes they split up duties, like one partner handling the operations and the other handling the finance. And remember that partnerships can involve more than two people, so there are a lot of potential options.

With that in mind, you need to make sure that all the necessary work is being done and nothing is falling through the cracks. That means assigning responsibility for all that work to the various partners (including the authority to hire and fire). You’ll want to include that in your agreement.

You should also include managerial duties shared by all partners. For example, you may want to require all partners to sit down for a meeting every week or month to check-in, raise any concerns, and generally stay up to date on what’s going on with the business. You may want to require all partners to meet with an estate planner and draw up a will to protect the business.

Conflict Resolution

One of the most important aspects of a well-thought-out contract is the fact that it can help prevent bigger conflicts before they devolve into costly litigation. When you talk through everything and come to an agreement beforehand, you’re a lot less likely to have a nasty blow-up down the line over how you’re allocating your profits. But there’s no such thing as a perfect contract and at some point, you may find that you’ve understood things differently or that one partner simply feels that part of the agreement is unfair.

That’s why we include sections on dispute resolution in a partnership agreement. Make sure there’s a clear process set out for how you’re going to handle things if there’s a disagreement between partners. That could take a lot of forms; some kinds of disputes may be best handled through mediation or arbitration while others may come to a vote of all the partners. You’ll want to cover a wide range of disagreements, from management decisions to profit allocation to investment decisions to a partner leaving.

Change in Business Size or Structure

Small businesses often change size or structure, either due to a planned event (new partners) or an unexpected one (death or illness). By clearly specifying what will happen in the event of loss of a partner, addition of a partner, or business dissolution, you’ll be able to circumnavigate these key business changes without additional strife.

As small businesses expand and grow, some partnerships opt to add new partners. Does your business anticipate adding additional partners down the road? If so, what procedures will you follow to add these new partners? What roles and responsibilities will new partners have? How will new partners share in the profits and losses?

Just as a small business should anticipate growing with new blood, they should plan for the inevitable loss of a partner through either death, firing, or voluntary departure. Under what circumstances can a partner be forced out? What happens in the sad event that a partner passes away? What if a partner wants to leave voluntarily? Does your business have a structured buy-out plan?

You may also decide to change the structure of your business from a partnership to a corporation. Your partnership agreement should address how that decision could be made and how the transition would be handled. For more details on how to handle business changes, visit Nolo’s resource: Plan Ahead for Changes in Partnership Ownership.

Partners on Paper

It’s always a good idea to write a contract down and a partnership agreement is no different. You’re going to put a lot of time and work into your business and it’s better for everyone involved if you sit down upfront and agree on how you’re going to handle things. The fewer surprises, the better! So grab your partner and your attorney and think hard about what your partnership is going to look like.

According to The Hartford’s analysis of small business claims, “4 out of 10 small business owners are likely to experience a property or general liability claim in the next 10 years.” Dealing with property and general liability claims can result in needless lost time, great expense, and extreme frustration. In this case, the adage “an ounce of prevention is worth a pound of cure” holds true. Fortunately, there are simple, actionable ways small business owners can manage risk and prevent loss. Here’s what you need to know.

 

Key Property and General Liability Claim Statistics

According to The Hartford, common property and general liability claims for small business fall under the following categories:

• Burglary or Theft (20%)
• Damage from Wind or Hail (15%)
• Damage from Water or Freezing (10%)
• Fire Damage (10%)
• Customer Slip and Fall (10%)

The costs of these property and general liability claims can add up quickly. According to the Hartford, the average claim is:

• Reputational Harm ($50,000)
• Vehicle Accident ($45,000)
• Fire Damage ($35,000)
• Product Liability ($35,000)
• Customer Injury or Damage ($30,000)

The numbers are pretty clear – taking smart risk prevention and loss management steps can save small business owners substantial amounts of money, not to mention lost time and headaches dealing with claims.

Preventing Burglary and Theft

As a small business owner, one of the most common risks your business faces is the loss of money and property due to theft or burglary. The Hartford reports that 20% of small business claims involve burglary or theft. The Hartford advises that small business owners take a few simple steps to manage risk and prevent loss from burglary or theft.

The first step is to conduct employee background checks. The advent of modern technology has made background checks simple and low-cost. By conducting preliminary background checks of potential employees, you avoid hiring candidates who have red flags in their history.

The second step is to have adequate devices installed to protect and monitor your business property. Spending a few bucks up front for a security system not only helps you catch any crooks that do make their way in, but also serves as a deterrent.

Protect Your Reputation

The costliest potential claim for small businesses is due to reputational harm. The Hartford reports that the average cost of a reputational harm claim is $50,000.

Experts advise that there are two simple ways to prevent a reputational claim:

1. The first is to avoid criticizing a competitor, either publicly or to customers. This may open you up to an unwanted claim of harm.
2. The second is to be aware of intellectual property infringement issues. Be sure to have permission to post other businesses’ photos or content on your website, business materials, press materials, etc. According to copyright law, photos and images aren’t the only items protected by copyright. Copyright can also protect original works of music, writing, creative art, films, computer software, architecture, or websites.

Failure to obtain the proper consent and unauthorized use of any of these items can open your business up to a copyright infringement claim, and potentially expensive litigation. The Hartford reports that 35% of all general liability claims end in a lawsuit. The cost of small business litigation can quickly add up; that lawsuit may increase the average claim to more than $75,000 in order to defend and settle.

Intellectual property laws are complex. To learn more about intellectual property, copyrights, and small business, visit Accion’s Business Resource, Definition of Intellectual Property. When in doubt, consult with an intellectual property lawyer before using another’s potentially copyrighted material.

Educate Yourself About Other Potential Risks

Part of running your small business is sheltering that business from harm and liability. Theft and reputational harm are not the only potential risks small businesses face. They’re the most common and most expensive, but you’ll need to carefully consider your business’s needs and risks to make sure you’re minimizing your risk. You may need to consider premises or product liability, for example. To get started, check out The Hartford’s Business Insurance for Start-Ups.

Better Safe Than Sorry

No small business owner is immune from potential risks and loss. But there are a lot of simple steps you can take to help manage those risks and prevent as much loss as possible. Start with common sense – keep your premises up, put up a security system, and put safety first. And whenever you’re in doubt, contact an attorney, insurance specialist, or other professional to make sure you have the protection you need.