CVEP’s Small Business Forum continued virtually this month with a presentation on business entity types, common issues with partnerships, and employment law. The forum was conducted by David R. Roth and Vee B. Sotelo of Slovak Baron Empey Murphy & Pinkney, LLP, a law firm with a primary presence in Palm Springs.

Roth is an associate attorney in SBEMP LLP’s Business Department where he focuses in the areas of corporate formation, mergers and acquisitions, and real estate transactions. Mr. Roth also has significant experience guiding local businesses through various crises including contracting issues, partnership disputes, and corporate dissolution. Sotelo is a partner and head of the Employment Law Department at SBEMP LLP. Mrs. Sotelo’s focus on employment law primarily includes litigation defense, employment counseling, and representation in administrative actions for local employers.

Drawing from their experience working with local Coachella Valley businesses, Roth and Sotelo devised a presentation about the most common legal questions and problems they encounter. We typically write one recap for each of our Small Business Forums. This one was so full of information, though, that I’ve divided it up; this post is part one of two.

Roth began by introducing the different business entity structures: Sole Proprietorship, Partnership, LLC, C-Corp, and S-Corp. For many entrepreneurs, the terms are common. But the intricacies of each structure are less well-understood. How can an entrepreneur choose the right structure for their circumstances?

From Simple to Complex

First, we’ll note: as you go down the list of entity types, they get more complex. Sole Proprietorships are relatively simple and don’t require any special documentation – but they also don’t offer you any personal liability protection. Once you get down the list to C-Corps and S-Corps, the difficulty to set up and maintain is rather high, but the liability protections and tax benefits gained can make the complexity worthwhile.

When considering options, though: there are trade-offs. We can look at these trade-offs in terms of costs and benefits. Entrepreneurs often only look at the benefits of a given corporate structure while paying little attention to the costs. These costs can be monetary or procedural. Procedural costs can include things like forming a corporate board or keeping accurate meeting minutes. The important thing to know is that you will lose the sought-after benefits if you don’t keep up with the costs. Be sure to factor that in when you’re deciding whether it’s worthwhile to pursue a more complex entity structure.

Small Business Partnership Problems

In addition to choosing the right business entities, we also learned a lot about partnerships. Roth noted that partnership disputes are some of the most common problems he encounters. They can also be very difficult to resolve. By planning ahead from the beginning, many common partnership disputes can be avoided.

First of all, put your agreement in writing! You think a verbal agreement is good enough, because you’ll both remember exactly what was agreed upon. Let’s just say that the human memory is not quite as good as you think it is. As a species, we only really remember what we think we remember. By putting your agreement in writing, you avoid a future game of he said/she said.

What Kills a Partnership?

What kind of events can cause partnerships to go south? Disagreements happen more often than you might think. Again, make sure you have things in writing. We found it very impactful when Roth mentioned that 49, 50, and 51 may be the most important numbers in business. Why? Because in a 50/50 partnership, a disagreement can easily turn into a deadlock. Unfortunately many of these deadlocked decisions end up being resolved in a permanent way: dissolution of the partnership.

Some partnerships are held together by a very flimsy glue: money. As long as the money is coming in, issues and disagreements can be temporarily swept under the rug. But once the money stops flowing – as has been the case for many partnerships in the age of COVID-19 – problems that once seemed small can begin to cause real trouble.

One more important tip: make sure your agreement includes plans for what might happen if a partner passes away. We learned that many problems arise when a partner dies and a spouse ends up inheriting that portion of the business. The surviving spouse may be well-meaning, but is also likely to be inexperienced, and will likely not be able to contribute in the same way as the deceased.

Remember, if you need general business assistance, we may be able to help. And in our next post, we’ll cover what we learned about common employee issues for small businesses.

Disclaimer: The author of this blog is not an attorney nor does CVEP provide legal services or advice. The information contained in this blog is for general information purposes only and should not be considered to be legal advice. If you need legal advice, you should seek appropriate counsel for your own situation.