This
Florida lawyer has written legal forms, books & articles for West, ALI-ABA
& Fla. Bar Journal and is rated AV by Martindale-Hubbell. James W. Martin
consults from his Saint Petersburg, Tampa Bay, Florida, law office on
contract, business, corporate, probate, wills, trusts, real estate and
lawsuit matters.
Forming a Small Music
Business:
The Who Meets the Whys and the Wherefores
Copyright 2001 by James W. Martin, P.A. St. Petersburg, Florida All rights reserved
Presented at
"Does Size Matter? Representing the New Breed of Independent Labels",
Florida Bar Entertainment, Arts & Sports Law Section
Annual Retreat Seminar
May 27, 2001
Published in The
Practical Lawyer, American Law Institute-American Bar Association (ALI-ABA),
March 2002
Note: This article is for background purposes only and is not intended as
legal advice.
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 clients carefully.
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
company. Here;s what it boils
down to:
The
Who
These
are questions you need to answer in your first meeting:
1.
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 http://www.jamesmartinpa.com/lttr_eng.htm
).
2.
Who's not your client?
Tell them. Put it in
writing.
3.
Who's putting in money?
Will they be directors, officers, managers, employees active in the
business?
Will they be passive?
4.
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?
5.
Who's putting in intellectual property?
What exactly is it?
Do they own it?
Is it registered or registrable?
6.
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?
7.
Who's the customer?
Is it a business (wholesale) or consumer (retail)?
Where is it located?
How many are there?
8.
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)?
The
Whys
These
are further questions you need to answer before you get too far into the work:
1.
Why has your client come to you?
What exactly does your client see as your role?
What does your client not see as your role?
Do you agree?
2.
Why will the owners invest?
What’s in it for them? Income? Growth? Fame? Celebrity? Glamour?
Family? Enjoyment?
3.
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?
4.
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?
5.
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?
6.
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?
The
Wherefores
These
are what you do with the answers to the above questions (these are summarized in
Appendix 6 - New Entity Checklist):
1.
Diagram: Draw a diagram and
fill in what you know.
Use Appendix 1 - Business Entity Diagram.
Do this in the first meeting with the client.
Use it as a graphical outline of points to discuss.
Your client can point to it and tell you who’s doing what and why.
2.
Entity: 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).
Note: 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.
3.
CPA: 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.
4.
Securities: Bring in a
securities lawyer if there is an investment.
An investment is
a security, whether it's called stock, share, partnership interest,
membership, or nothing at all.
Even a note (loan) can be a security if sold as an investment.
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 penalties.
5.
Owners Agreement: Discuss
provisions for shareholder agreements, partnership agreements, and LLC operating
agreements.
Partnerships
need partnership agreements, and limited liability companies need operating
agreements.
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 corporations.
A well-drawn agreement will reflect the actual understanding of the parties, so
it needs to be discussed and reviewed with them.
6.
Employment Agreement:
A.
Discuss and prepare employment agreements for key employees.
B.
Discuss and prepare confidentiality and noncompete agreements.
7.
Intellectual Property:
A.
Consider trademark registrability when choosing a name and logo.
B.
Explain trademark laws in general and use of common
law and federal
registered trademark symbols.
C.
Explain copyright law in general and use of whether or not registered.
D.
Discuss signs, letterhead and business cards.
E.
Discuss Web site domain name, copyright and trademark issues.
F.
Explain need for work for hire and assignment of copyright agreements
with independent contractors.
8.
Fictitious Name: 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 Legislature.
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 Internet.
9.
Jurisdictions: 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.
Generally having an office or agent in that state triggers a requirement
to qualify with that state's Secretary of State.
For information on qualifying in all 50 states, including forms, seewww.governmentfilesonline.com.
10.
Real Estate: Review leases
and real estate purchases.
11.
Equipment: Review major
equipment purchases and leases.
12.
Insurance: 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, umbrella (excess).
Employees: workers comp, employee group medical, employee group
disability, employee dishonesty, key person life, key person disability.
Special: Performance and payment bonds, events.
13.
Licenses: Discuss city,
county, state and federal licenses required or desired.
Consider local occupational licenses and zoning, including noise
ordinances and home occupations.
14.
Suppliers: Discuss and
review or prepare contracts and relationships with major suppliers.
15.
Banks: Discuss bank
accounts, FDIC coverage, sweep accounts, safe deposit boxes, authorized signers,
etc.
16.
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.
17.
Signing 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
By:____________________________
John Doe, as its President
18.
UBR: Discuss filing Uniform
Business Report (annual reports) in applicable jurisdictions.
Failure to file may result in personal liability.
19.
Meetings: Discuss
formalities to be followed such as minutes and meetings.
20.
CYA: Confirm all of the
above in written letters to client, CPA, insurance agent and others; copy your
client on all correspondence.
Conclusion
That's
it. 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.
About the Author
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 www.jamesmartinpa.com
.
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