Remember the Who?
Remember when they were young?
Well, I do.
That's when I had my first music client.
It was a local band that could cover the Who,
the Beatles, the Stones, and myriad other rock bands
so well you'd think they were from England.
They were good, they were young, they were
energetic and they thought they would be the hottest
new band by the time the sun came up tomorrow. But
they never made it.
Less than a month after I met with them, they
split up, never to be seen or heard from again.
And they didn't pay my bill.
That's a lesson a first-year lawyer never forgets.
Music is a volatile business; choose your
Just because they sound like they're on the
radio doesn't mean they are or ever will be.
So I spent the next 25 years of my law
practice developing a more analytical approach to
advising clients about the legal side of forming a
small business, whether it's an art museum, a
jewelry store, a contractor, an artist, or a record
Here;s what it boils down to:
These are questions you need to answer in your first
Who's your client?
Avoid multiple clients.
Is it an entity or an individual?
Is it the one paying you?
Do a conflicts check.
Prepare an engagement letter (see
Who's not your client?
Put it in writing.
Who's putting in money?
Will they be directors, officers, managers,
employees active in the business?
Will they be passive?
Who's putting in services?
Will they be paid compensation as employees
or be paid stock for services?
Have they considered the tax effect of this?
Who's putting in intellectual property?
What exactly is it?
Do they own it?
Is it registered or registrable?
Who's the lender?
Is it a bank?
Is it really an investor disguised as a
lender (see securities laws)?
What is the loan collateral?
Who's the customer?
Is it a business (wholesale) or consumer
Where is it located?
How many are there?
Who's the employees?
Are they the same as the owners?
Are they the same as the managers?
Do they have jobs now?
Do their present employers know (trade
secret, noncompete, breach of loyalty issues)?
These are further questions you need to answer
before you get too far into the work:
Why has your client come to you?
What exactly does your client see as your
What does your client not see as your role?
Do you agree?
Why will the owners invest?
What’s in it for them? Income? Growth? Fame?
Celebrity? Glamour? Family? Enjoyment?
Why will the lenders lend?
Is there income to pay the loan payments?
Are there assets to use as collateral?
Is the business plan sound?
Why will the customers buy?
Is there competition?
Is your client’s price lower?
Is your client’s product better?
Is what your client’s doing different legal?
Why can they make a profit?
Will their income exceed their expenses?
When and for how long?
How much working capital do they have?
How long will it take to break even?
Why all this now and not before or later?
Have they done this before?
If so, what happened?
If not, why not?
Can this be done better later?
These are what you do with the answers to the above
questions (these are summarized in
Appendix 6 - New Entity Checklist):
Draw a diagram and fill in what you know.
Appendix 1 - Business Entity Diagram.
Do this in the first meeting with the client.
Use it as a graphical outline of points to
Your client can point to it and tell you
who’s doing what and why.
Choose the simplest entity that works.
Corporations are still the simplest entity
that limit liability.
Florida has 646,000 active corporations and
just 42,000 active limited liability companies. (see
Appendix 2 - Florida Division of Corporations Annual
Filings and Active Entities).
Half of those LLCs were formed last year.
So LLCs are hot right now, but they are not
treated the same in all 50 states and have little in
the way of case law.
Much commentary has been written about them,
including whether the concept of piercing the
corporate veil should apply to LLCs.
(The consensus is that it should.)
General partnerships and limited partnerships
can also limit liability now
(see Appendix 3 - Common Legal Entities in Florida).
In 1982 Florida had more entities on file
than any other state in the U.S., even more than the
countries of Canada and Mexico; it was the most
active jurisdiction for filings in North America.
Appendix 2 shows nothing has changed but the
size of the numbers.
Bring in a CPA and defer tax, business plan
and accounting matters to the CPA.
Choosing an entity other than a corporation
should be based on tax factors per CPA advice
(see Appendix 4 - Financial Statements - Simplified
- Any Entity).
CPA should apply for tax ID number and elect
S (if corporation is to be S corp).
CPA should review business plan.
CPA should set up accounting system
customized to that business.
CPA should prepare or review state and
federal income tax returns, employment tax returns,
sales tax returns, ad valorem tangible personal
property tax returns, and intangible personal
property tax returns.
Bring in a securities lawyer if there is an
investment is a security, whether it's called stock,
share, partnership interest, membership, or nothing
Even a note (loan) can be a security if sold as an
Securities must be registered under state and
federal laws before being offered or sold.
Registration is very expensive.
Most small businesses can fall within an exemption
from registration IF detailed documentation and
other requirements are followed.
Securities lawyers know the details that must be
followed; most lawyers do not.
Securities laws have both civil and criminal
Discuss provisions for shareholder
agreements, partnership agreements, and LLC
Partnerships need partnership agreements, and
limited liability companies need operating
Corporations do not need shareholder agreements, but
they are a good way for shareholders to set forth
basic agreements such as the right to be elected a
director, receive equal compensation, etc.
The drafting that goes into an agreement is what
makes partnerships and LLCs more expensive than
A well-drawn agreement will reflect the actual
understanding of the parties, so it needs to be
discussed and reviewed with them.
Discuss and prepare employment agreements for
Discuss and prepare confidentiality and
Consider trademark registrability when
choosing a name and logo.
Explain trademark laws in general and use of
common law and federal registered trademark symbols.
Explain copyright law in general and use of
whether or not registered.
Discuss signs, letterhead and business cards.
Discuss Web site domain name, copyright and
Explain need for work for hire and assignment
of copyright agreements with independent
Discuss registration in applicable
jurisdictions if not use exact name including Inc.,
LLC, LLP, LLLP.
Florida requires registration of fictitious
name with Secretary of State if vary from actual
name in any way.
Some states refer to this as assumed names.
Registrants would no longer need to publish
the fictitious name in newspaper if the Governor
signs HB 1157 adopted by the 2001 Florida
The new law would allow the Department of
State to waive the publication requirement if the
Department indexes the fictitious name registration
in a central database available to the public on the
Qualify entity in other states and countries
where business will be done.
What is doing business is a question of state
law and varies from state to state.
having an office or agent in that state triggers a
requirement to qualify with that state's Secretary
information on qualifying in all 50 states,
including forms, see
Review leases and real estate purchases.
Review major equipment purchases and leases.
Bring in an insurance agent and discuss
coverage limits and exclusions.
Coverages to discuss:
Business owners package.
Property: fire & all risks, flood, plate
glass, valuable records, electronic data processing,
property of others, transit, foreign.
Liability: general, products, overseas,
foreign, worldwide, environmental, professional
(errors & omissions), owned & non-owned vehicle,
Employees: workers comp, employee group
medical, employee group disability, employee
dishonesty, key person life, key person disability.
Performance and payment bonds, events.
Discuss city, county, state and federal
licenses required or desired.
Consider local occupational licenses and
zoning, including noise ordinances and home
Discuss and review or prepare contracts and
relationships with major suppliers.
Discuss bank accounts, FDIC coverage, sweep
accounts, safe deposit boxes, authorized signers,
Goods & Services Contracts:
Discuss, prepare and review contracts for the
specific goods and services the entity will produce.
This is the primary work that you will do after the
entity is formed.
Your work will include drafting form contracts,
negotiating deals and preparing deal contracts.
Discuss the proper way to sign contracts to
avoid personal liability.
To avoid liability, be sure to use the words
"By" and "as":
ABC, Inc., a Florida corporation
John Doe, as its President
Discuss filing Uniform Business Report
(annual reports) in applicable jurisdictions.
Failure to file may result in personal
Discuss formalities to be followed such as
minutes and meetings.
Confirm all of the above in written letters
to client, CPA, insurance agent and others; copy
your client on all correspondence.
Ask 8 Whos and 6 Whys and then do 20
Wherefores. The music gods will surely bless you and
your client, even if the music stores don't.
James W. Martin (Stetson Univ., BS Math
1971, JD 1974) practices corporate, real estate &
estate planning law in St. Petersburg, Florida, for
business and nonprofit clients including the
Salvador Dali Museum. He has written forms books for
West Publishing (business organizations, nonprofit
corporations, real estate transactions, specialized
forms) and has spoken numerous times at the Fla. Bar
Convention seminars on contract drafting. His
article "50 Tips for Writing the Contract That Stays
Out of Court" was published by ALI-ABA and The
Florida Bar in 1997, 1998 and 2000 and has been
reproduced in textbooks. Additional articles appear
on his Web site at