When do I need to hire a corporate attorney for my business?

Some scenarios are obvious — you should call a criminal or corporate attorney when you’re being investigated by government officials for tax or securities fraud, when an employee is injured on the job or when a customer is injured by one of your products.

But you should also consider hiring a corporate attorney in other situations, like:

• When you are starting a business.

• When you are buying or selling a business.

• When you are considering dissolving your business.

• When you are hiring senior or key employees.

• When you are hiring employees with access to company secrets or confidential information.

When You Probably Need a Business Attorney

Here are a few examples of when you should consider hiring a good business attorney for your large business or small business.

• The members of your LLC, shareholders of your company, or partners of your partnership want to allocate the profits and losses is a special way in the LLC operating agreement, shareholder agreement or partnership agreement.

• The business partners will be contributing capital other than cash to the partnership, company, or LLC — like intellectual property, know-how, or appreciated property.

• In connection with the purchase of a business that has significant potential liabilities like: environmental issues (state and federal environmental laws impose liabilities on landowners in the chain of title, regardless if they caused the contamination); product liability, employee liability (sexual harassment or employee discrimination claims); excessive debt; or special capital calls.

Please note.  If you are a member of a limited liability company, a shareholder in a closely held company, or a partner in a partnership, keep in mind that the company lawyer is representing the company, not you.  There are times when members, shareholders or partners decide to form their business or eventually go separate ways.  The corporate attorney hired for the business has the business as its client and protects the business’ interests.  In the scenario of forming the business, each business partner has its own interest in mind, which may be adverse to the proposed company (for example, if one member is contributing intellectual property to the new business, it may want to have an exit strategy to keep its intellectual property if they part ways).  Or in the event of a “business divorce,” where the remaining members, shareholders or partners are buying out other LLC members, company shareholders or partnership partners, the company lawyer has the company’s best interest in mind, which interest is adverse to the departing business partners.  Business partners, members and shareholders should be represented by their own corporate attorney to avoid conflicts of interest, or at the very least, the business lawyer needs to advise the partners of, and they have to waive in writing, the conflicts of interest.

If you need help with deciding whether you need to hire a business attorney, you should contact a licensed business lawyer for an initial consultation.  As the old saying goes, an ounce of prevention is worth a pound of cure.

This is intended to help outline the general process of buying a small business in New York, explaining the legal aspects of how a corporate attorney can assist in a business purchase transaction (it is not intended to be construed as legal advice for your particular situation).

Your business acquisition attorney is not only your legal expert, but also will facilitate the business purchase process.  Your business lawyer will coordinate the processes, interface with all the players, and move the business transaction along, culminating in a successful closing.  As your legal expert, your business lawyer will conduct the legal due diligence, negotiate, draft and review the necessary legal documents, and should be intimately familiar with the legal intricacies aspects of your business purchase — keeping abreast of the facts and circumstances of the deal and advise you on any resulting legal consequences, and preparing the strategies to avoid legal problems.

1.  Of course, the first step in buying a business is to find a business to buy.

You can find businesses to buy in the classified section of most metropolitan newspapers, on those newspapers’ websites, in the Wall Street Journal, through your own networking efforts – whether in person or on the internet (like LinkedIn or Facebook), or through business brokers.  Corporate lawyers generally do not sell businesses unless they act as a broker or finder or happen to know a client or acquaintance who wants to sell a business.  There are tons of businesses for sale — the question is whether acquiring the business makes economic sense (and is the right business for you).

After you have identified the possible acquisition target, you (with the assistance of your corporate attorney) need to conduct due diligence on the business (investigate the business, its contracts, customers, financial reports, among other things) and determine what the business is worth and the terms of the purchase.  These steps are not mutually exclusive, they are interdependent and occur simultaneously — as you find out facts about the business, these may reflect on the business terms of the deal.

2.  The “Term Sheet” — Negotiating the Business Terms of the Purchase

While you are conducting due diligence on the business you intend to buy, you should begin negotiating the terms and conditions of the purchase of the business. This high level “term sheet” outline, would sufficiently detail (without necessarily including all the legalese), some of the following items, among others:

The parties to the business transaction;

Is the transaction to be structured as a stock purchase (buying all of the assets and liabilities of the business) or only purchasing certain assets of the small business (real estate, accounts, intellectual property, among other assets);

The purchase price and what assets or stock is being purchased;

The timing of the payment of the purchase price (lump sum or in installments);

If payment is installments, the amount of the down payment and the interest rate, and the collateral securing the note (also consider conditions to repayment (e.g., only from profits);

Binding and non-binding terms; and

Confidentiality obligations.

The “term sheet” (also known as a “LOI,” “letter of intent,” “MOU,” or a “memorandum of understanding”), which could be as short as a page or two, should expressly state that certain obligations are non-binding on the parties.  You may want to state that either party could walk away from the deal if they change their mind (maybe after a no-shop period), but you might want to make certain terms binding like reimbursement and confidentiality obligations.  As that the stock purchase agreement or asset purchase agreement will be drafted from the term sheet, you need to be as specific as possible with respect to contingencies to closing, offsets to the purchase price and other obligations (it will be hard to convince the seller to agree to terms in the resulting agreement differing from the deal points already agreed upon in a term sheet).

You should consult a business attorney at some point during the drafting of the term sheet (even if the first draft of the term sheet is prepared by the business person, you should have your business attorney review and/or negotiate it before it is signed).  Please see my post “Negotiating the Terms of the Deal — Buying or Selling a Small Business In New York” for a more detailed discussion about putting together a term sheet.

3.  Conducting Due Diligence

Due diligence is the process of thoroughly investigating the business being acquired.  The outcome of your business due diligence may very well impact the price you are paying and other terms and conditions of the term sheet.  You will want to have your financial advisor review prior years’ tax returns and financial reports.  You should have your business lawyer review all major contracts (including leases) to see if there are any “atomic bombs” that may be triggered by the sale of the business or that have any surprise obligations or rights (balloon payments, rights of first refusals, right to terminate, rights of consent, etc.).  If the business owns or leases real estate you want to review all documentation, leases, surveys, and environmental reports (or order one if there is a possibility that the business in question (or its predecessors) might have contaminated the land.  Read “How to Conduct Due Diligence for a Merger or Purchase of a Business“, for more details and a checklist of some due diligence items that should be reviewed by you and your corporate attorney.

4.  Preparing the Proper Documentation for the Business Purchase

There are many documents needed when transferring a business: the stock purchase agreement or asset purchase agreement, assignment and assumption agreements, deeds, consents, tax filings, among others.  You should consult a New York business attorney to negotiate, draft and/or review these instrumental agreements and documents which are necessary to transfer the business.

The most important document in a business sale is the “purchase agreement” (also known as the “sales agreement” or “acquisition agreement”) — and will be in the form of a stock purchase or asset purchase.  To protect yourself as the buyer, your attorney should prepare the first draft of this document. Otherwise, if the seller’s attorney prepares the sales agreement it can be one-sided, or worse yet, if the attorney is not too experienced, it might not cover the terms and conditions to the business sale that properly encompasses the complexity of the business or transaction.

Once the purchase agreement has been finalized, your business attorney can prepare the “closing checklist” of all of the consents, documents, filings, and agreements that need to be prepared and executed, and a list of all contingencies that need to occur on or before the “closing.”

5.  The Closing of the Business Purchase

Generally, the closing consummates the transaction (unless of course, there are post closing obligations to occur).  At the closing the parties and their corporate attorneys get together to exchange money and property, sign documents, and handle the remaining paperwork.

If you are considering a buying a small business in New York, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer.  There may be important tax and other legal consequences to consider before making the decision.

Regardless of whether you are buying a business as an asset purchase, a stock purchase, or a merger, you (and/or your corporate attorney) must conduct due diligence on the target company.  Due diligence involves an in-depth investigation of the business.  It requires review of a lot of documents by your corporate attorney and a review of the financial reports and tax returns by your financial advisor or accountant.  By conducting due diligence on the target business, you and your corporate attorney will have a thorough understanding of the business — being better able to ascertain a fair purchase price of the business, and identify any surprise business liabilities for which you likely will be liable after you become the business owner.  Due diligence also is important because, depending on the outcome of the due diligence, you (perhaps with the help of your corporate attorney) may want to incorporate certain seller obligations in the term sheet of the deal (e.g., clearing any liens on the assets of the business, obtaining required third party consents, etc.).

Here is my due diligence checklist of the most common items to investigate when conducting due diligence in the buying or merging of a small business (of course, these are among other things to review depending on the facts and circumstances of the specific transaction):

Legal Due Diligence

1.  Corporate Documents (or LLC Documents)

If the target business is a corporation, you (or your corporate attorney) should review the certificate of incorporation, good standing certificate, by-laws, minutes of shareholder and director meetings, shareholder agreements, and any outstanding warrants and option agreements.

If the target business is a limited liability company (LLC), you (or your corporate attorney) should review the articles of organization, good standing certificate, operating agreement, minutes of membership meetings, manager agreement, and any outstanding purchase rights agreements and option agreements.

In New York, you can order a good standing certificate from the New York Department of State, Division of Corporations.

2.  Agreements

Major Contracts:  You (or your business lawyer) should review all major distributor, supplier and customer agreements, all confidentiality and non-compete agreements, all intellectual property agreements (licenses into and out of the company), and all equipment leases.

Real Estate:  You need to review all real estate leases entered into by the target company (whether as a tenant or a landlord), purchase agreements, surveys (if a long term lease or fee owned), title insurance policies (if fee owned); you should ascertain whether any consents are needed for the contemplated business sale (or merger) transaction, how much the rent liabilities are, whether there are sufficient term(s) remaining on the lease(s), among other things.

Insurance Policies:  Have your risk advisor or insurance agent review all insurance policies carried by the target business to determine if the present coverage is adequate for the business as it is conducted (or plans to be conducted).

3.  Licenses and Permits.  Is the target business required to maintain licenses and permits with the local and state authorities (such as a liquor license or other operating permit)?  If so, you (or your corporate attorney) need to obtain all copies and determine which licenses may require the seller’s obtaining prior consent for the contemplated sale or merger of the business.  To find out what licenses and permits may be required in New York, you can visit the New York State’s Online Permit Assistance and Licensing website.

4.  List of all (major) Assets and Liabilities.  Regardless of whether you are buying the business as an asset purchase or a stock purchase, you want to be sure of what the target company owns and owes.  The target company’s assets may include cash, securities, equipment, inventory, intellectual property (copyrights, trademarks, patents, domain names, and other proprietary rights), notes and accounts receivables, real property (leased and owned).  Liabilities may include bank debt, employee benefits and bonuses earned and not yet paid, threatened, pending and current lawsuits, licensing violations, etc.  You should be provided with a list of all employees and their current salaries.  You should identify which employees are key to a successful transition and continued operation of the business.

5.  UCC Liens.  Uniform Commercial Code (UCC) information is important to any business or financial institution contemplating entering into a lien transaction as the secured party (the party providing funds or financing collateral). Knowing the current financial status of the target debtor business before extending credit is crucial, and it is the number of active, existing liens already in effect for that particular debtor party that most interests any future lender or secured party.  You can search the New York Uniform Commercial Code Bureau files and records to see what financial obligations (including IRS liens) have been incurred by the target business and to see what, if any, liens exist on the selling business’ assets.

6.  Customer Problems.  You can easily search the internet to see if there is any negative publicity or customer complaints about the target business.  The internet is a very powerful tool for viral marketing and unfortunately, for flaming a business.  You don’t want to buy a business that is saddled with a lot of negative consumer awareness.

Financial Due Diligence

You should have your accountant or financial advisor review the following diligence materials.  She or he should check whether there are any questionable accounting practices.

1.  Tax Returns.  Up to 5 years’ prior federal, state and local tax returns, including any sale and use tax returns.  In New York and in other states, the successor to a business may be liable for tax liabilities incurred in the years prior to its purchase of the business.  In order to be certain that you have the same returns that were filed with the taxing authorities, you can have the seller provide the applicable written consent so you can request copies of the actual tax returns directly from the applicable taxing authority.

2.  Financial Statements.  The seller of the business should provide detailed financial statements (including balance sheets and profit and loss statements) for the prior 3 to 5 years.  If the target business is large enough, your financial advisor or accountant might request to review “audited” financial statements that have been prepared and certified by a certified public accountant.

3.  Tax Liens.  Your accountant or financial advisor should review the any tax liens filed on any assets owned by the target business.

If you need help with conducting due diligence on a business, you should contact a licensed business attorney.

After you have found your target New York business to acquire, you (and/or your corporate attorney) have to negotiate the terms of the business purchase transaction.  In this article I will outline some of the typical terms of a term sheet for the purchase of a small business and some of the things you need to consider.

As I mentioned in “Buying a Small Business in New York”, you need to put together a  “term sheet” (also known as a “LOI,” “letter of intent,” “MOU,” or a “memorandum of understanding”).  This can be done as you and your corporate attorney are conducting your due diligence on the target business.

The term sheet should consist of the broad basic terms of the deal.  As that the stock purchase agreement or asset purchase agreement will be drafted from the term sheet, you need to be as specific as possible with respect to contingencies to closing, offsets to the purchase price and other obligations (it will be hard to convince the seller to agree to terms in the resulting agreement differing from the deal points already agreed upon in a term sheet).   The term sheet, will set forth the parties’ mutual understanding of the terms of the small business purchase.

Having a term sheet serves purposes in addition to acting as the blue print of the business deal from which to draft the stock purchase agreement or asset purchase agreement.

The business purchase term sheet communicates to the seller that you are serious about purchasing the small business.  Depending on how the term sheet is drafted, while you may have an “out” to walk away from the business acquisition, it shows that you are committed to culminate the purchase;

It can lock the seller into looking for other purchasers of the small business; and

The term sheet helps flesh out the major issues that often arise in a business purchase and sale, so to avoid surprise roadblocks that may pop up along the way to closing;

Here is a list of typical terms and other issues to be addressed in a term sheet to buy a business:

1.    The Names and Contact Information for all parties that are involved in the purchase transaction — buyer, seller, buyer’s corporate attorney, seller’s company attorney, names of any business brokers involved in the deal, and the names of the financial advisors and/or accountants.  If any of the parties are not individuals, you should have the full entity’s legal information (including state of incorporation, officer’s names and contact information, etc.)

2.    Purchase Price and Other Consideration – Will this be a cash deal, or a combination of cash and other real or personal property, stock, or intellectual property?

3.    Payment Terms. If a cash deal, will it be paid in a lump sum, or paid in installments?  If in installments, will it be tied to profitability, or other contingencies?  If seller financed, at what interest rate and term?  If financed by a third party, is the deal contingent on obtaining that financing?  Will there be a downpayment?

4.    Collateral (or security) for the Purchase Price. If the business is being sold with seller financing, the seller may want collateral for your promise to pay back the loan.  Perhaps the security interest pledged will be the stock of the company, some or all of the business property or business assets, or some other real or personal property that you own.  Of course, if you fail to make the financing payments, the seller will want to then be able to foreclose or repossess the collateral that is being pledged against the seller financing.

5.    Structure of the Deal. Will it be an Asset Purchase or Stock Purchase?

Assuming that the business target is a corporation or limited liability company (LLC), you can structure the purchase in one of two ways — either it will be a stock purchase or an asset purchase.   There are advantages to both, and both may have significant tax implications.  You should structure the transaction after obtaining advise from your financial advisor or accountant.

From a legal perspective a stock sale is quite different from an asset sale.  In a stock sale transaction, you are buying all of the stock of the company — so the company’s assets, liabilities, goodwill, contracts, intellectual property, real property stays with the company (assuming that there are no prohibitions of or conditions to transfer contained in any of of the documents relating to same). In a stock purchase, you are buying the company entity “lock, stock and barrel.”  That also means you may be buying the company’s headaches as well (like lawsuits, and other contractual obligations).  So when you buy the stock of the company, you and your corporate attorney should conduct intensive due diligence into the business’ history, contracts, minute books, financial reports and records.

In an asset purchase, you are cherry-picking and buying the plum assets that you need for your own business (or even a division of the seller’s business).  In an asset sale (or asset purchase)  the company’s liabilities and other headaches stay with the seller.  You can buy all or substantially all of the assets of a business in New York, with little risk that you will be held responsible for the debts and obligations of the business incurred prior to the purchase of the business by you.

6.  Transfer Issues.  Whether the business is being sold as a stock sale or as an asset sale, you have to be concerned about whether there are restrictions to transferring the assets of the business.  When conducting due diligence, you (with the help of your corporate attorney) should determine which assets may need prior consent for the transfer (like business space leases, major contracts with customers or vendors, or bank loans or credit agreements).  Depending on how the restriction is worded in the respective contract, a mere transfer of any stock or a controlling interest of the ownership of the business stock, may trigger the obligation to obtain consent.

7.    Covenant not to Compete.  Generally, how successful the the business you are buying was in the past was a result of the management and ownership of the business.  So you might want to consider keeping those employees on after you buy the business for continuity purposes and have them enter into employment agreements or consulting agreements with you.  Of course, if you have the expertise to run the business from day 1, then you may want to “buy” the benefit of having the prior management and prior business owners from competing with your newly purchased business.  You would want to enter into an agreement with covenants not to compete (sometimes referred to as a “non-compete agreement” or “forfeiture for competition agreement”), to prevent the sellers from immediately soliciting their old customers or competing with you.   Under New York law, covenants not to compete (or “non-compete agreement” or “forfeiture for competition agreement”) are valid as long as they are reasonable in duration and scope.

8.    Non-binding Nature of the Term Sheet.  As I discussed in “Buying a Small Business in New York”, you should consider having a “non-binding” term sheet (e.g., there should be contingencies when you can walk away from the deal without liability).  But note, the term sheet should be drafted properly so that certain provisions of the term sheet should be binding, like the provisions regarding limitation of liability and confidentiality, among others (you don’t want the seller to sue you nor disclose your confidential information like financial information).

9.    Post-Closing Seller Obligations or Buyer Obligations that Continue after the Sale of the Business. As discussed above, there might be times that you want the seller to continue to provide consulting services to the business after the sale of the business.  Maybe you decided to close the deal before all of the non-material consents were obtained or prior to when the applicable taxed needed to be prepared and filed.  Any post-closing obligation that need to be written in the stock purchase agreement or asset purchase agreement should be included in the term sheet.

Which is Better – An Asset Purchase or a Stock Purchase of a Company? From first impressions, you might think an asset purchase is more advantageous. Generally, buyers prefer an asset purchase for reasons of tax deductibility and cherry-picking the favorite assets (without being saddled with the liabilities). However, in a stock purchase you can buy the business as a going concern with minimal interference of the business (and sellers prefer to sell the entire business with all its blemishes and liabilities). Of course, the bottom line will be price (an asset purchase will probably be more expensive than buying the stock of a company).

If you are considering a buying a small business in New York, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer.  There may be important tax and other legal consequences to consider before making the decision.

(You may also want to read our related post, “How Do I Convert a Partnership, Corporation or Other Entity into an LLC?“)

The New York Limited Liability Company Laws and the Delaware General Corporation Laws have provisions to easily convert an existing limited liability company, and with respect to Delaware, general partnership, limited partnership, other unincorporated business entities, into a corporation.  Perhaps the owners want to convert the original entity into a corporation for tax reasons or perhaps the startup company/partnership is seeking venture capital financing and the venture capital investors don’t want to invest in a partnership.  Consequently, the business needs to convert to a corporation.  How is a conversion of a partnership, LLC or other business entity to a corporation accomplished?

Under Delaware General Corporation Law Section 265 et seq., “Any other entity may convert to a corporation of this State” by complying with certain procedures.  Under this Delaware General Corporation Law, the term “other entity” means “a limited liability company, statutory trust, business trust or association, real estate investment trust, common-law trust or any other unincorporated business including a partnership (whether general (including a limited liability partnership) or limited (including a limited liability limited partnership)), or a foreign corporation.”  This provision allows for a conversion of an LLC, partnership, trust or foreign corporation (a corporation formed under any other States’ laws) into a Delaware corporation.  If all of the procedures are followed, you will end up with a Delaware corporation where you used to have an “other entity” and the conversion will not “affect any obligations or liabilities of the other entity incurred prior to its conversion to a corporation of this State or the personal liability of any person incurred prior to such conversion.”

If you have a limited liability company formed under the laws of New York, look in Section 1001 et seq. of the New York Limited Liability Company Law.  Under these provisions, a “a domestic limited liability company may merge or consolidate with or into one or more domestic limited liability companies or other business entities formed or organized under the laws of this state or any other state or the United States or any foreign country or other foreign jurisdiction”.  Again, if all of the procedures are followed, your LLC can merge (or consolidate) with or into any other business entity.

If you are considering a conversion of a general partnership or limited partnership (or “other entity” in Delaware) into a limited liability company, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer (or corporate attorney).  There may be important tax and other legal consequences to consider before making the conversion of a partnership, LLC or other business entity to a corporation.

(You may also want to read our related post, “How Do I Convert a Partnership, LLC or Other Business Entity into a Corporation?“)

The New York Limited Liability Company Laws and the Delaware Limited Liability Act have provisions to easily convert an existing general partnership or limited partnership (and with respect to Delaware, “other entities” as well, like trusts or other unincorporated business entities) into a Limited Liability Company.  Perhaps the owners want to convert the original entity into an LLC for tax reasons (like passing through the LLC’s losses to the owners’ tax returns) or perhaps the startup company/partnership is seeking venture capital financing and the venture capital investors don’t want to invest in a partnership.  Consequently, the business needs to convert to a limited liability company.  How is a conversion of a partnership,  corporation or other entity into an LLC accomplished?

Under Delaware Limited Liability Act Section 18-214 et seq., “Any other entity may convert to a domestic limited liability company” by complying with certain procedures.  Under the Delaware Limited Liability Act, the term “other entity” means “a corporation, a statutory trust, a business trust, an association, a real estate investment trust, a common-law trust or any other unincorporated business or entity, including a partnership (whether general (including a limited liability partnership) or limited (including a limited liability limited partnership)) or a foreign limited liability company.”  This provision allows for a conversion of a Delaware partnership, trust or foreign limited liability company (an LLC formed under any other States’ laws) into a Delaware limited liability company.  If all of the procedures are followed, you will end up with an LLC where you used to have an “other entity” and the conversion will not “affect any obligations or liabilities of the other entity incurred prior to its conversion to a domestic limited liability company or the personal liability of any person incurred prior to such conversion.”

If you have a general partnership or limited partnership formed under the laws of New York, look in Section 1006 et seq. of the New York Limited Liability Company Law.  Under these provisions, a New York general partnership or limited partnership can be converted to an LLC.  Again, if all of the procedures are followed, you will end up with a LLC where you used to have a general partnership or limited partnership, and under Section 1007 et seq. of the New York Limited Liability Company Law, “a partnership or limited partnership that has been converted pursuant to this chapter is for all purposes the same entity that existed before the conversion” (e.g., all property, debts, and actions or proceedings of the partnership will be same of the resulting LLC).

If you are considering a conversion of a general partnership or limited partnership (or “other entity” in Delaware) into a limited liability company, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer (or corporate attorney).  There may be important tax and other legal consequences to consider before the conversion of a corporation, partnership or other entity to an LLC.