Articles Posted in Business Startups

_DSC7714.JPGPeople come to New York City from all over the world to pursue careers in the arts. The city is a global hub for visual arts, theater, dance, music, literature, and television, to name but a few. Not everyone can make a career out of their artistic passion, but the experience of trying can prepare one for the world of entrepreneurship and small business ownership. A recent profile of a dancer-turned-entrepreneur in Crain’s New York Business highlights how the business skills she developed during years of working as a ballet and Off-Broadway dancer led to her success as an entrepreneur. Artists can gain experience and skills in many areas of the arts by focusing on the similarities between entrepreneurship and the arts as a profession.

1. Discipline

Honing one’s crafting in the arts requires focus, dedication, and near-constant practice. Dancers and musicians train constantly. Writers and visual artists, such as painters and sculptors, create much of their work through trial and error. All artists must endure auditions and other forms of review, along with the accompanying and inevitable rejection. Artists become great not only by practicing, but also by not giving up.

Starting a business requires a similar sort of discipline. An entrepreneur must dedicate considerable resources to their new business, including both time and mental focus. Someone who has acquired the discipline to pursue artistic expression, as a profession or a hobby, can apply it to their new endeavor as well.
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file551263252097.jpgA partner in a general partnership based on an oral agreement could unilaterally withdraw from the partnership, the New York Court of Appeals held, because the partnership agreement did not define a specific duration or objective for the business. Gelman v. Buehler, 2013 NY Slip Op. 01991 (N.Y. Sup. Ct., Mar. 26, 2013). New York law allows any individual partner to withdraw and trigger the dissolution of a partnership if the underlying partnership agreement does not identify a “definite term or particular undertaking.” N.Y. Pship L. § 62(1)(b). The court rejected the plaintiff’s argument that a general goal, defined in stages, was sufficient to meet this legal standard. Business lawyers often advise their clients to put agreements in writing, and this case demonstrates one possible outcome if business partners fail to do so.

According to the court’s opinion, the plaintiff and defendant agreed to form a partnership in 2007 shortly after graduating from business school. The plaintiff would later describe their business plan in seven stages:
1. Raise money to start the partnership’s operation;
2. Find a business to purchase;
3. Raise additional money to buy the business;
4. “Operate the business to increase its value”;
5. Reach the “liquidity event,” the point when they could sell the business at a profit;
6. Identify a buyer for the business; and 7. Sell it at a profit.
Gelman, slip op. at 4.

The two partners reportedly anticipated a four- to seven-year time frame for their business plan. They spent several months looking for investors, but the defendant withdrew from the partnership after a dispute with the plaintiff.
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761822_61461701.jpgFor businesses with a unique product or service, keeping their ideas, designs, and plans secure is critical to their success. During business formation, a business owner must consult with numerous people, from designers and marketers to accountants and business attorneys. Once a business has begun developing its product, it needs employees and contractors. Non-disclosure agreements are often effective in the protection of trade secrets, but a business needs some form of recourse in the event of misappropriation of proprietary information. Most states, including New Jersey, have enacted the Uniform Trade Secret Act (UTSA), which enables holders of trade secrets to recover damages for breaches, and to restrain others from disclosing confidential information.

The term “trade secret” refers to information in any form that has actual or potential economic value, in part because it is not widely known or easily discoverable by others, and which would have economic value to someone who did discover it. The information must also be subject to reasonable efforts by its holder to keep it secret. N.J. Rev. Stat. § 56-15-2. This may include data, formulas, drawings, designs, business plans, techniques, processes, or prototypes. “Misappropriation” includes any means of obtaining secret information by a person who knows or should know that it is secret, or the unauthorized disclosure of such information to others. Id. It does not infringe on someone’s trade secret rights to discover the same information entirely independently, or to reverse-engineer information from a legitimately-obtained product. Unlike patents and other forms of intellectual property, no official procedure exists to register or declare something a trade secret.

The Restatement of Torts § 757 defined the tort of improper use of disclosure of a trade secret belonging to another. It provides that a person is liable for using or disclosing a trade secret if the person knows that it is a secret, regardless of how the person learned about it. Keeping trade secrets secure is critical to the viability and success of many businesses, and theft or disclosure of trade secrets results in substantial business losses.
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file4741281776353.jpgFinding a good location is critical to the success of a small business, but even the best location in town is of no use if the business cannot negotiate acceptable lease terms. As a general rule, commercial lease terms will favor the landlord. Unlike residential leases, however, which are frequently boilerplate and inflexible, a business may be able to negotiate improvements to the lease terms. Unambiguous provisions for rent and expenses are critical to businesses leasing office, retail, warehouse, or other commercial space in New York City and northern New Jersey. Here are four key factors to consider when negotiating a commercial real property lease:

1. Term of the Lease

Most commercial leases have a specified length, or “term,” usually expressed in months or years. A short-term lease is often preferable for small and startup businesses, as it allows the business more flexibility to respond to changing needs. A business that grows quickly, for example, may need to move to larger accommodations before the end of a multi-year lease. Landlords may prefer long-term leases for the assurance of a steady income stream from the property.

A lease agreement should also specify what happens at the end of the lease term. The parties may be able to negotiate new lease terms, continue the same lease agreement for an additional term, or continue the lease month-to-month.
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file0001008419026.jpgLocation is one of the three most important features of any small business in New York or New Jersey. The other two critical features, as the saying goes, are location and location. Any business that must maintain a permanent physical location must decide whether to purchase or lease real estate. Each offers advantages, depending on the nature of the business and the means of the company. Renting is very common for new and small businesses, and for many businesses in dense areas like New York City. Commercial leases differ significantly from residential leases. It is therefore important for business owners to understand the general types of commercial leases and a few of the features of each.

Leasing Versus Owning

Leasing a property to locate one’s business is almost always a prudent move when starting a business. As a tenant, or “lessee,” the business is typically only responsible for rent and, in some cases, pro rata shares of maintenance costs and property taxes. The lessee may vacate the property when the lease expires, or earlier with an early termination penalty. On the other hand, a landlord may choose not to renew a lease when the lessee would prefer to stay.

Owning a piece of property may offer greater flexibility and security, with no landlord or threat of lease termination, but it also offers many drawbacks. The owner of commercial property is responsible for all taxes and shoulders all liabilities related to the property. Certain state and federal laws, such as environmental regulations, may impose costs and liabilities on a property owner for pollution or other dangerous conditions, even if those conditions were created by a previous owner. Finally, selling a property can be far more costly and risky than terminating a lease.

Gross Lease

Under a gross lease, the landlord pays most or all of the costs of maintaining and operating the property. The lessee pays rent, and may also pay a share of the landlord’s costs through what is commonly called “load factor.” This type of lease is common for properties that rent office or warehouse space to multiple businesses.
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284089_4502.jpgSole proprietorships, closely-held businesses, and family businesses are often the product of years of hard work, investment, and sacrifice. To call such businesses a “labor of love” would be no exaggeration, because starting a business is like taking in a family member who needs constant care and attention to grow and thrive. Business entities in New York and New Jersey law will continue to exist after their owners are no longer able to run them. It is therefore critical for small business owners, shareholders, members, or partners to plan ahead for contingencies that might prevent them from working, and for succession of the business when the owner or owners are gone.

The preservation of a business’ legacy requires the anticipation of reasonably possible events that could severely impact a business owner, and therefore the business, and preparation for how the business may continue. The death or long-term disability of an owner can make future governance of the business uncertain. If a business owner’s spouse or child becomes disabled, that could cause the owner to need to withdraw or retire from the business. An owner’s divorce could lead to the inclusion of the owner’s business equity in a property division. Other events, such as a partner’s bankruptcy, could trigger a sale of equity in the business. Not all contingencies are entirely negative, of course, such as if an owner finds sudden fortune and wishes to leave the business behind.

Planning for legacy preservation ideally begins when the business itself begins, with planning for one’s exit from a business included in planning for one’s entrance. Here are five tips to help business owners plan ahead:
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310102_6457.jpgA Delaware court found that a corporate director breached the fiduciary duty of loyalty, despite the director’s subjective good faith, in Shocking Technologies, Inc. v. Michael, C.A. No. 7164-VCN (Del. Ch., Sept. 28, 2012). The plaintiff company filed suit against one of its directors, who was also an equity owner of a shareholder. Although this may have created some conflict for the defendant himself, the court held that his duty to the company as director were clear. Even though the defendant believed he was acting in the company’s best interest, the court found that he breached his fiduciary duty of loyalty largely because of the risk his actions posed to the company.

The defendant, Simon J. Michael, was the manager of Balch Hill Capital, LLC (BHC). BHC, in turn, was the general partner of Balch Hill Partners, L.P. (BHP). Both BHC and BHP are named as defendants in the case as well. Michael, through BHP, made three separate investments in the plaintiff, Shocking Technologies, Inc. Michael also became BHP’s designee to the board of directors.

Although the bylaws allowed for six directors, Shocking only had four during the summer of 2011. One of the directors was also the founder, president, and chief executive officer of the corporation, and the other two were shareholder-directors. Michael, as the fourth director, allegedly felt that the other directors were acting in concert and not in the company’s best interests. Communications between the other three directors and Michael broke down, according to the court’s ruling, leading to the alleged acts that formed the basis of Shocking’s lawsuit.
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800px-New_York_Harbor.jpgThe New Jersey Legislature passed sweeping reforms of the laws governing limited liability companies (LLC) in September 2012. The changes to the Limited Liability Company Act will take effect in March 2013, affecting newly-formed companies immediately. LLCs already in existence will continue to be governed by current LLC law until March 2014, when the new law becomes applicable to all LLCs in the state. The new law represents a major departure from current law, which is based on Delaware’s LLC laws. The Revised Uniform Limited Liability Company Act (RULLCA) forms the basis for the new law.

The new law began in the Assembly as AB 1542, where the RULLCA was introduced in January 2012. The Assembly passed it on May 24, 2012 by a vote of 77 to 1. The Senate passed a counterpart, SB 742, on June 21, 38 to 0. The Governor signed it into law as P.L. 2012 on September 19.

The RULLCA is the work of the National Conference of Commissioners on Uniform State Laws, commonly known as the Uniform Law Commission (ULC). The ULC prepares model statutes for a variety of purposes and proposes them to state legislatures in an effort to develop a standardized set of laws. It first developed the RULLCA in 1996, when LLCs were still a relatively new idea, and modified it in 2006. The New Jersey law is largely based on the 2006 version.
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1375057_40170684.jpgStartup businesses in New York and New Jersey always begin with enthusiasm and excitement. A new business is an opportunity to create and explore, but also requires careful planning and attention. Certain risks, if not managed effectively, can sink a new business before it has a chance to succeed. Here are five errors that new businesses often make, and tips on how to avoid them.

1. The Wrong Business Entity. Identifying the right type of business organization is critical to a company’s success. Owners must consider how they want business income to be taxed, and how they want to handle the liabilities of the business. Corporations, limited liability companies (LLCs), and partnerships each offer unique advantages. “C” corporations and “S” corporations offer similar liability protections, but different tax advantages. Partnerships offer tax benefits in some circumstances, as well as flexibility in the company’s governance. LLCs offer a great deal of flexibility, but may not be right for fast-growing companies.

2. Insufficient Planning and Agreement Among Owners. Business owners must consider not only how to start their business, but also how they plan to either end or exit it. They must plan for contingencies, like the early departure or death of an owner, with regard to how the company will handle that owner’s equity share. Any promises or contingent offers regarding additional stock or equity should be in writing. Agreement among owners at the start of the business is no guarantee of continued harmony.
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493668_69476274_12272011.jpgAs the economy makes what we are told is a slow recovery, unemployment remains at uncomfortably high levels in many parts of the country, New Jersey included. With a 9.1 percent unemployment rate, some New Jersey workers have sought out alternative solutions. As the Asbury Park Press reports, entrepreneurship may soon become an appealing option for many as jobs remain scarce.

The Press tells the story of Charles Schlapfer of Lavallette, New Jersey, who worked as general manager of a building supply company when the 2008 financial crisis hit. He survived a massive round of layoffs but suffered a fifty percent pay cut. Although he looked around for other jobs, he could not find anything that met his family’s financial needs. Rather than continue with his reduced salary and no clear job security, he rolled the dice, quit his job, and started his own company. He now runs a “manufacturers’ sales representation firm” that helps businesses in the construction industry take advantage of public-sector opportunities, which he sees as a huge and relatively untapped market for local companies. The business draws on his work experience and contacts and, he hopes, has great growth potential.

New Jersey offers resources and support for entrepreneurs looking to start their own venture. The state’s Department of Labor and Workforce Development (LWD) operates several Small Business Development Centers (SBDC’s), which have begun hosting training courses and counseling for unemployed individuals who want to pursue an entrepreneurial path. A six-week training program, the “Entrepreneurial Training Program for the Unemployed” (ETPU), instructs aspiring business owners in how to develop a business idea and handle the many aspects of the business start-up process. It also includes one-on-one counseling and assistance with applications for start-up financing. The program is free, financed by grants from the LWD), and requires applicants to meet certain criteria related to employment and receipt of unemployment benefits.

Starting a business requires careful planning and attention. Every business is unique, but all have common questions at the outset. The question of initial capital is perhaps the most important. Some businesses can be run from a laptop computer and cell phone in a corner of your home or the neighborhood cafe, while others require significant equipment purchases and office space. This also affects the questions of how to structure a business. An entrepreneur must consider whether to operate a business as a sole proprietor, to form a corporation, or to create some other business organization. That leads to questions of whether to hire staff, and so on.
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