What Type of Entity Should I Create For My New Business?

One of the first and most important decisions any business owner makes is how to structure his or her business.  This will depend largely on the type of business, how many owners are involved, and tax considerations.  It is important to involve a tax professional early on to assist with this decision.

In Montana, there are four main types of entities: a sole proprietorship, a partnership, a limited liability company (LLC), and a corporation.  Some of these entities are further broken into sub-categories.  For example, in Montana, if you intend to form a partnership, you can form a: general partnership, a limited partnership, a limited liability partnership or a limited liability limited partnership.  The differences between these entities are outlined on the Secretary of State’s website here.  If you intend to form a corporation, there are five different options in Montana: S corporation, Statutory Close corporation, Public Benefit corporation, Professional corporation, or a Nonprofit corporation.

If you intend to run your business on your own and the nature of your business is such that you are unlikely to need any employees and your liability exposure is relatively low, a sole proprietorship may be a good option.  Notably, if you operate a business without registering, it will automatically be classified as a sole proprietorship by operation of law.  However, this structure will not separate your business assets and liabilities from personal assets and liabilities, so a single-member LLC as opposed to a sole proprietorship, is often advisable to reduce risk exposure.

If your business will have more than one owner, forming an LLC, LP, or LLP are all options.  An LLC will protect the personal assets of all owners (called members).  An LLC also provides the option to be taxed as an S corporation or a partnership.  An LP provides for one general partner who has unlimited liability while the other partners have limited liability and limited control over the company.  An LLP is similar to an LP but with limited liability for all partners.  Profits pass through to personal tax returns in these structures.

Corporations, on the other hand, are legal entities that are entirely separate from their owners.  Corporations can make a profit, be taxed, and can be held legally liable.  Corporations usually offer the strongest protection to their owners and shareholders, however with that increased protection comes increased costs in the form of additional taxes.

The entity you choose to form is an important consideration that should involve a team made up of a legal professional and a tax professional to ensure the greatest legal protections and mitigation of tax consequences.  If you are thinking of starting a business or restructuring your existing business, Jones Law Firm would be happy to be part of your team.

Do I Need an Employee Handbook?

Many start-up businesses are so busy with the logistics of starting and opening their business that they may not think about implementing employment policies or procedures, or those steps seem like a lower priority than getting customers in the door.  However, as businesses grow and employees are added, a need for consistent policies and procedures often arises.  Hopefully this need is not highlighted only when a problem occurs, but all too often that is the case.  An employee handbook can prevent problems before they happen. 

An employee handbook serves to set forth policies and procedures usually not covered in the employment agreement.  For example, an employee handbook can specify things as simple as expected hours of work, dress code, vacation and leave policies, and behavioral expectations, to the more complex aspects of your business such as specific operational guidelines, communications, and bonus opportunities. 

For example, if you have reached a point where you will begin providing benefits for your employees such as health insurance, life insurance, and 401(k) plans, an employee handbook is a good place to provide this information to your employees.  Details such as: where the plan information can be found and at what point in time the benefits become available to employees can be contained in a central employee handbook. 

Another important component of an Employee Handbook is a company policy on harassment and the procedures in place for dealing with complaints or allegations of harassment.  In an increasingly litigious society, it is extremely important for companies to have a clear process by which these issues can be dealt with. 

Another common pitfall we see is a lack of clarity with respect to employees’ use of the company’s social media pages or things employees post on their personal social media that can reflect on their employer.  Having clear policies and procedures governing the use of social media – both at work and outside of work – can prevent an unsavory post from going viral and harming your business reputation.

In fact, employee handbooks can prevent a myriad of business pitfalls, set clear expectations for your employees, ensure all employees are subject to the same standards, and help your business run smoothly.  Jones Law Firm recommends that all businesses with employees have an employee handbook in place.  This will ensure equal treatment among employees and clear policies in place for handling any problems that may arise.  If you need an employee handbook, we would be happy to prepare one tailored to your specific business needs!

Do I Need an Employment Contract?

If you currently have employees, or if you are thinking of adding employees to your growing business, you have probably wondered whether you need a formal employment contract.  There are many benefits to having a written employment contract.  However, a formal written contract is not always necessary.  Written employment contracts make the relationship between employer and employee clear by ensuring each party understands its obligations to the other, but they can also result in added liabilities for the employer.

The first questions to consider are how long you anticipate the employment relationship will be and how much discretion you want to separate employees from their employment with you.  Generally, employment relationships in Montana are governed by the Wrongful Discharge from Employment Act (“WDEA”), which allows an employer to terminate an employee only in certain circumstances.  However, written contracts for a specified period of time are usually exempt from the requirements of the WDEA.  Thus, if you know an employee is only going to be employed by you for a finite period of time, a written employment agreement governing the terms of that relationship makes sense.

Other valid reasons for written employment agreements include defining the employment relationship when the employee will have a great deal of discretion and decision-making authority, such as a management position.  Although the WDEA may still apply to these written agreements (if they are not for a finite period of time), clarifying the authority, duties, and expectations for your employees makes good sense.  Additionally, if you intend to have an employee agree to other terms as a condition of his or her employment, it is a good idea to have an employment contract.  For example, if you have an employee handbook and a Non-Disclosure Agreement that you want the new employee to abide by, even if only for a short time, then it makes sense to append those documents to an employment contract that provides clarity for both employer and employee.  If you are hoping this employee will stay with your company for a long time, whether an employment agreement is necessary or advisable depends on the specific needs of your business.

A clear and thorough employment contract assists employers in defining the employment relationship because it takes out the guesswork for the employer, the employee, and any third party who may be helping resolve a dispute between them.  If you are not sure whether you need an employment contract for your growing business, or if you would like your current contracts reviewed and updated, Jones Law Firm can assist you in adding clarity and peace of mind to your employment agreements.

How to Collect when a Customer Does Not Pay

An issue that we regularly assist many of our business clients with is collecting on overdue invoices.  Many businesses end up writing off a substantial portion of overdue invoices because they do not want to deal with the headache and cost of collecting.  For this reason, it is important to include language in your invoices to make collecting overdue payments a little easier on you and your business.

Depending on the type of business you have, overdue invoices may be very large, or they could be fairly small.  For smaller invoices, the costs of collection can accrue quickly, often making it more economical to simply write off the amounts owed.  One way to combat having to take a loss in this way is to include language in all invoices allowing you to recover the reasonable costs of collection and attorneys’ fees, as well as interest on the amount owed or a late charge for a failure to timely pay the invoice.

Including these fairly simple terms within your invoice will ensure that if you do need to have your corporate attorney or a collection agency assist you in collecting on overdue invoices, you can recover the costs expended in collecting the debt.  Furthermore, it provides you with some negotiating power to encourage settlement of debts that are owed, in an effort to avoid litigation.

If you would like help modifying your invoice template to include these terms, Jones Law Firm is happy to help.  Or, if you have overdue invoices that you need help collecting, Jones Law Firm can also assist.  Collecting on overdue invoices does not have to be daunting or frustrating – with the right preparation and help, you can greatly reduce business losses resulting from unpaid invoices.

Confidentiality and Non-Disclosure Agreements: what are they, and do I need one?

For the first Jones Law Firm blog article in our “Business Owners’ Series,” we thought it would be best to start simple and discuss something we deal with regularly: Confidentiality and Non-Disclosure Agreements (“NDAs”).  Most of our business clients have dealt with at least one NDA in a range of contexts.  This article will explain when having an NDA is advisable and what is typically included in the NDA.  If you are a business owner, you should consider having a basic form NDA on hand to protect your valuable confidential information.

Most business owners are familiar with NDAs in the context of purchasing or selling a business, and this is certainly a circumstance in which an NDA is appropriate.  When confidential, proprietary, and financial business information is going to be shared with anyone outside your organization, you want to protect that information from public disclosure where your competitors could potentially access it.  However, purchase or sale of a business is not the only time you may want to protect your information.  Any time you enter into a contract with a vendor, subcontractor, or customer that requires disclosure of proprietary information, such as client lists, sales information, intellectual property, marketing strategies, training materials, industry specific methodology, or know-how specific to your business, an NDA is advisable.

Additionally, NDAs are extremely useful in the employment context.  Jones Law Firm regularly prepares NDAs for clients to protect proprietary information from dissemination by employees.  Just as you do not want your confidential and proprietary information getting out through a business transaction, you want to ensure your current and former employees protect this information both during and after their employment with your company.  This ensures that an employee can’t share proprietary information to competitors without clear consequences.

So, what things are covered in a basic NDA?  An NDA begins by listing the parties and describing the confidential or proprietary information that the parties agree not to disclose.  The NDA should provide instruction to the parties as to how to designate the protected information to avoid inadvertent disclosure.  The scope of protection needs to be defined: how will the parties protect the information?  Next, it is important to clearly state what will happen if the information is improperly disclosed.  Many NDAs provide for injunctive relief, allowing the parties to quickly prevent further disclosure and damage to the company, as well as damages for any monetary loss caused by the disclosure.  The NDA also needs to have a term – how long will the confidential information exchanged be protected?  Finally, NDAs will often include other miscellaneous terms such as exceptions to proprietary information, non-solicitation and non-compete clauses, choice of law, assignability, and attorneys’ fees.

If you are a business owner not currently using NDAs or if you are considering selling your business or a portion of your business, Jones Law Firm can help.  Please contact us and we would be happy to discuss your situation and assist you in putting together an NDA tailored to your specific needs.

Jones Law Firm Blog: Business Owners’ Series

The Jones Law Firm Blog seeks to provide short, easy to digest information on timely legal topics.  For 2021, Jones Law Firm’s blog articles will primarily focus on the needs of business owners.  Check back here regularly for informative articles in Jones Law Firm’s “Business Owners’ Series.”  We are excited to provide our clients and potential clients with this additional service!