Small Businesses

4 Things to Know Before Signing an Office Lease

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Office leases can be some of the most expensive contracts your business may have. Understanding how to negotiate can help your bottom line. By Doug Bend  This article was originally published in American Express Open Forum. If you’re looking for space for your new business, taking the time to educate yourself about the key terms… Read More

Office leases can be some of the most expensive contracts your business may have. Understanding how to negotiate can help your bottom line.

By Doug Bend 

This article was originally published in American Express Open Forum.

If you’re looking for space for your new business, taking the time to educate yourself about the key terms of a commercial office lease before you sign can pay enormous dividends.

Unlike residential leases, commercial leases typically carry long terms, require significant monthly payments and include extensive clauses that can increase your financial obligations, such as having to pay for building maintenance and common area expenses. In addition, most leases are drafted by the building’s landlord, which means they reflect the landlord’s interests, not yours. As a result, having basic knowledge of a few key commercial leasing concepts can greatly improve the terms of your lease.

First, you should take a practical approach to gauge your relative bargaining power. During poor economic times, property owners are less likely to expand or take risks, which makes more commercial spaces available. To avoid having vacant space, they tend to be more flexible and offer perks to attract potential tenants.

But when the commercial real estate market is hot (as it is now), the inverse occurs. This makes it even more important for you to do your homework so you don’t sign a lease you might later find unpalatable.
The following four provisions can help you determine whether the lease you’re about to sign is a great business opportunity—or one you should walk away from.

1. Security Deposit

As a business owner, it’s never advantageous to have a big chunk of your money tied up. Unfortunately, many landlords often require large security deposits because it helps them manage the risk of default on long-term leases. If your potential landlord insists on a significant deposit, try to get them to compromise by offering to pay the first three months of rent in advance in exchange for a lower security deposit. This way your money isn’t simply being held for security purposes.

If you have little to no credit, however, the landlord may be concerned your startup funds will dry up before the end of the lease term and won’t want to compromise on the amount of the deposit. (This is often the thinking behind commercial space for tech startups in the Bay Area.) Under these circumstances, a landlord is unlikely to accept advance rent in exchange for a lower deposit. However, they might consider a schedule that involves releasing some of the deposit back to you yearly after you’ve proved that you’re not at risk of default.

2. Additional Rent (Triple Net Expenses)

If a landlord hands you an office lease that doesn’t require building expenses reimbursement from you, go out and buy yourself a lottery ticket because it’s your lucky day. Nearly all leases include additional rent charges, often in the form of “triple net expenses,” which means you’re required to pay your pro-rata share of all insurance, taxes, and operating expenses for the entire building.

The key to managing your share of expenses is to get the landlord to narrow their definition of covered “operating expenses.” This also limits the potential for a landlord to disguise a rent increase as a necessary operating expense.

To limit your potential exposure, you should ensure that the expenses passed on to you are industry standard, which will even vary according to where the space is located within the building. Renting space on the first floor, for instance, may require you to pay additional operating expenses, something that’s not nearly as reasonable to pass on to someone with space on the top floor.

Additionally, if you and your landlord agree to share the cost of capital improvements, you should require that those costs be amortized over the anticipated life of the improvement rather than over the term of the lease. Otherwise, you might have to pay more than your fair share, particularly if the improvement comes toward the end of the lease.

You should also consider the possibility of your landlord selling the building to another party, which could result in increased property taxes. It’s a good idea to investigate when the last reassessment occurred and seek to limit a payment increase if there’s a reassessment after the property sells.

3. Company Use Restrictions

Many commercial leases limit the permitted uses of the leased space. Restricting the use of the premises to certain business activities, such as a day spa or marketing firm, might seem reasonable at the time of signing. However, if you later want to sublease your space, a restricted-use provision could limit your pool of potential subletters.

Ensuring that the premises may be used for “any business office purpose” will help preserve your ability to find a wide variety of subletters in case your business circumstances change.

4. Subordinate Lease

If the office lease you’re about to sign is made “subordinate to an encumbrance,” such as a mortgage, the lease may be automatically terminated if the encumbrance is foreclosed. This could be particularly difficult to swallow if you’ve put in a significant amount of work to find the perfect space or if you’re renting at a below-market rate.

If there’s already an encumbrance in place at the time of signing, you should negotiate a nondisturbance agreement with the beneficiary of the encumbrance, such as the bank, that says you can remain in the leased space as long as you comply with the terms of the lease.

Signing a lease without understanding all the different clauses can be a mistake that can eventually kill your business. Even a precursory knowledge of these key provisions—and some due diligence on your end—can help you secure a lease that’s beneficial to both you and the landlord.

For questions about a lease, or to seek legal guidance and tips surrounding a lease transaction contact us at info@bendlawoffice.com or (415) 633-6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How to Select the Right Entity for Your Business

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Forbes recently published an article we wrote about factors to consider when starting a business and choosing what type of entity it will be. By Doug Bend Entrepreneurs can typically choose from a number of different entities when incorporating their business. However, due to the fluid nature of businesses, the advantages and disadvantages are not… Read More

Forbes recently published an article we wrote about factors to consider when starting a business and choosing what type of entity it will be.

By Doug Bend

Entrepreneurs can typically choose from a number of different entities when incorporating their business. However, due to the fluid nature of businesses, the advantages and disadvantages are not always clear at the time of formation.

Limited liability companies and corporations are the two most typically attractive options for small businesses considering incorporation. Unlike sole proprietorships and general partnerships, members of LLCs and shareholders of corporations have limited liability and greater protection for their personal assets. Members and shareholders can limit their liability and protect their personal assets from creditors.

But if both options offer owners liability protection, why do some business owners choose to form an LLC instead of a corporation, and vice versa? Below are some considerations to help you decide what type of entity might be the best fit for your business.

1. Corporate Formalities

Unlike a corporation, an LLC does not have to hold regular meetings and keep corporate minutes, which reduces the paperwork of maintaining your entity.

2. Taxation

The tax default for an LLC is treated as a pass-through entity, meaning the profits or losses from the entity pass through directly to the owners. An LLC can instead elect to be taxed as a C or S corporation so the owners can take advantage of certain tax advantages based the company’s income and expenses. By default, a corporation is subject to taxation at both the entity and the owner level. A corporation can also elect to be taxed as an S corporation which, like LLCs, allows for pass-through taxation. However, additional restrictions regarding who can be a shareholder of the corporation exist if you elect to be taxed as an S corporation. For example, S corporations can have no more than 100 shareholders and can have only one class of stock.

3. Inclusion of Debt

Early on, a startup or small business will often operate at a loss. Corporation shareholders may not deduct losses beyond their basis in their stock or debt obligations. In contrast, LLC owners can include their proportionate share of the debt from the LLC, so they can deduct a larger share of the losses.

4. Management

An LLC’s members or managers can manage the company. In contrast, a board of directors and its chief executive officer are in charge of managing corporations.

5. Distributions

A corporation must allocate its distributions in proportion to each shareholder’s ownership share. An LLC, on the other hand, does not necessarily have to allocate its profits or losses in proportion to each owner’s membership interest. Instead, the distributive share of gains, losses, deductions, or credits can be determined in the LLC’s operating agreement (subject to certain IRS restrictions against negative capital accounts). Additionally, members of an LLC can transfer and withdraw property into the LLC without the recognition of taxable gain by the LLC or the member with whom the property has been distributed. In the case of corporations, property distributions can result in taxable gain.

6. Investment

Entrepreneurs hoping to achieve venture seed funding typically choose the Delaware C Corporation. Venture capital firms won’t automatically screen out businesses that are not incorporated in Delaware, but they prefer Delaware due to friendly corporate governance benefits and predictable corporate law.

Selecting an entity that is appropriate for your business will depend greatly on how you plan to run the business and where you hope to take it. One size does not fit all. Crafting a strategic entity can mean a world of difference as your business begins to take off.

Bend Law Group, PC, a law firm focused on small businesses and startups. For questions or comments please contact us at (415) 633-6841, or feel free to reach out to us at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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The S Corporation “One Class of Stock” Requirement

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When starting a small business, the legal requirements and restrictions of ownership play a key part in deciding what entity to form and how the business might be run. Many companies elect to form an S Corporation, but it is important to first understand the requirements. S Corporation Eligibility Requirements Before electing S Corporation status,… Read More

When starting a small business, the legal requirements and restrictions of ownership play a key part in deciding what entity to form and how the business might be run. Many companies elect to form an S Corporation, but it is important to first understand the requirements.

S Corporation Eligibility Requirements

Before electing S Corporation status, a business must first analyze whether it meets the eligibility requirements. The eligibility requirements for an S Corporation include: (1) not operating an “ineligible corporation,” which primarily consists of banks and insurance companies; (2) having no more than 100 shareholders (for purposes of this limitation a husband and wife and their estates are counted as one); (3) shareholders must be US citizens or resident aliens (certain types of trust and charitable organizations may also qualify with certain limitations) and (5) S corporations are required to have only one class of stock.

“One Class of Stock”

When analyzing the one class of stock requirement closely, it provides that the outstanding shares confer identical rights to distributions and liquidation proceeds as the restriction is intended to simplify the allocation of income and deductions among shareholders. Left out of the equation is voting rights. Therefore, significant differences in voting rights among the one class of stock are permitted allowing an S corporation to issue both voting and nonvoting common stock (see IRC section 1361(c)(4); Reg Section 1.361-1(l)(1)). In determining whether one class of stock is present, the regulations look to the corporate charter, articles of incorporation, bylaws, applicable state law, and binding shareholder agreements.

Entity formation and operation is not a one-size-fits-all equation. Understanding the limitations of your corporate structure is key to a successful and healthy business. If you have any questions,  please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Bend Law Group is Now B Corp Certified!

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We are proud to announce that BLG is officially B Corp certified! We are one of ten law firms in California to achieve the certification. B Corps are companies that measure and report their environmental and social impact against a transparent third party standard. You can read more about the assessment, or even try it for… Read More

We are proud to announce that BLG is officially B Corp certified! We are one of ten law firms in California to achieve the certification.

B Corps are companies that measure and report their environmental and social impact against a transparent third party standard. You can read more about the assessment, or even try it for free, here.

Becoming certified was really a no-brainer, especially after we started advising clients on benefit corporation status (to understand the difference between B Corp Certification and benefit corporations you can read this article). We don’t look at this as the end of the road, but just the beginning. We hope to one day be a prominent ambassador for the cause by sharing with others a refreshing new way to look at business.

This is an exciting time in law, and for our firm specifically. We are proud to join a movement that’s using the power of business to solve social and environmental problems. Being great doesn’t mean sacrificing the future, and the benefit corporation movement has shown a tremendous appetite by both consumers and business owners to find creative ways to make a profit while also considering society as a whole.

If you have any questions about the process we went through to get certified, or would like to consider the benefit corporation legal status, please give us a call at (415) 633-6841 or send us a note at info@bendlawoffice.com.

#BtheChange

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

B Corp stamp circle

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Why Consider A Benefit Corporation?

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Forbes published the article we wrote below on factors to consider when deciding whether to form a Benefit Corporation. By Doug Bend and Alex King We have advised hundreds of companies and have found that certain preconceptions about business affect the way they are set up and run. The historical belief that corporations exist solely… Read More

Forbes published the article we wrote below on factors to consider when deciding whether to form a Benefit Corporation.

By Doug Bend and Alex King

We have advised hundreds of companies and have found that certain preconceptions about business affect the way they are set up and run. The historical belief that corporations exist solely to maximize profit for shareholders has had a profound impact on how companies operate. However, when analyzed closely, profit mandates give those in charge much less choice than they might prefer, and the sustainable business movement has felt the constraints of this legal model.

This has caused many to ask: what if a corporation was able to seek profits while also considering potential benefits to society? The answer in many states is the addition of the “benefit corporation.” A benefit corporation is the term used when a company is created under corporate law and should not be confused with a “B Corp,” which refers to a company that is certified by B Lab to meet specific standards for social and environmental performance.

What Are the Benefits of Being a Benefit Corporation?

Incorporating as a benefit corporation legally protects an entrepreneur’s social goals by mandating considerations other than just profit. By giving directors the secured legal protection necessary to consider the interest of all stakeholders, rather than just the shareholders who elected them, benefit corporations can help meet the needs of those interested in having their business help solve social and environmental challenges.

Additionally, the demand for corporate accountability is at an all-time high, with many consumers already aligning their purchases with their values. The benefit corporation status is a great way to differentiate your company from the competition and capitalize on these customers.

What Are the Drawbacks of Being a Benefit Corporation?

One of the major drawbacks is expanded reporting requirements. This is to provide shareholders with adequate information to determine if your business is achieving its stated purpose. Each year a benefit corporation must give each shareholder an annual report.

Key to this report is the requirement of a “third party standard” for assessing overall performance, and the process for selecting this third party standard must be explained within the report. The report must also indicate the efforts made to achieve a general public benefit or the circumstances that hindered that achievement. Finally, if the benefit corporation has a website, it must post this annual report on its site.

Another potential drawback is uncertainty. Benefit corporations are fairly new legal entities. It is unclear how courts will interpret their mandates to not only seek profits, but also to consider potential benefits to society. Furthermore, the impact on raising capital and how angel investors and venture capitalists will react remains uncertain.

How Do You Form a Benefit Corporation?

There are a few legal requirements to consider when forming a benefit corporation. The benefit corporation legal requirements vary between states, and this discussion is limited to California law.

Firstly, your company name. A benefit corporation does not need to make any reference to its benefit status within its corporate name. Therefore, those considering a benefit corporation don’t need to alter the name they’ve chosen, nor tailor their brainstorming any differently than if they were considering a standard C Corporation.

However, a benefit corporation must state that it is a benefit corporation within its articles of incorporation. Additionally, the benefit corporation may contain within its articles a specific purpose (such as to further the arts, improve public health, etc.), but it is not required to do so.

Finally, the share certificates of a benefit corporation must specifically state the benefit nature of the corporation. Generally, all other provisions relating to the shares and their transfer are provided within the state’s general corporate law.

Conclusion

For entrepreneurs, business owners, workers, and consumers, the introduction of the benefit corporation is an exciting development. Community and environmentally minded business owners can preserve their social goals without sacrificing the ability to make a profit.

For all inquiries about benefit corporations please call (415) 633-6841, or email us at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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The Top Four Pitfalls Of Buying Into A Franchise

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Forbes published the article we wrote below on the top pitfalls of buying into a franchise and good questions to ask before you take the leap. By Doug Bend and Tucker Cottingham. Buying into a franchise can be an incredible opportunity for the right kind of entrepreneur — but if you are not careful, you could fall… Read More

Forbes published the article we wrote below on the top pitfalls of buying into a franchise and good questions to ask before you take the leap.

By Doug Bend and Tucker Cottingham.

Buying into a franchise can be an incredible opportunity for the right kind of entrepreneur — but if you are not careful, you could fall into one of the following traps. Below are four common pitfalls and some steps you can take to avoid each:

1. Hidden Fees: In addition to receiving a percentage of the revenue, a franchise may have additional costs, such as fees for entry, training, and marketing. You should carefully review the franchise disclosure documents to make sure you understand all of the fees you will be expected to pay as a franchisee.

2. Lofty Average Income and Revenue Figures: You should be careful when relying on average figures. For example, a few very successful franchisees can make average income figures misleading. Some franchisees have much better skill sets, relevant backgrounds, and quality locations. In addition, earnings may vary significantly with geography. Instead, calculate the median income of the franchise owners from your geographic region.

Similarly, gross sales figures may only tell part of the story. Even if the gross sales are high, if costs are also high, the actual profits could be disappointing. A better measure of profitability is net profits. Even then, be sure to ask whether the net profits include company-owned locations, as those often have lower costs.

3. A Strict Boss: One of the advantages of having your own business is the independence you have in running it. However, some franchises have strict rules on how you run your franchise, such as the prices you charge and how you can decorate your location. An advantage to buying into a franchise is they give you a playbook that is more likely to be successful than if you start an independent business, but the playbook can include restrictions as well.

4. Difficulty Leaving: It can be difficult to leave a franchise, as many franchise agreements include a non-compete provision prohibiting you from conducting similar business for a certain period of time and within a certain number of miles from your franchise location. The franchise agreement may also contain very stringent confidentiality provisions and restrictions on contacting clients of the franchise. You should ask if there is anything in the franchise agreement that would prohibit you from setting up a similar business if the franchise does not work out.

How can you avoid these franchise pitfalls and others?

The best thing to do is to reach out to at least 10 current and former franchise owners to learn about their experience. Their contact information should be disclosed in the franchise agreement. Some good questions to ask include:

  1. In hindsight, would they still make the investment?
  2. How much management and industry experience did they have prior to opening the franchise?
  3. How much working capital do they recommend you keep in reserve to make sure you have enough financial cushion for the franchise location?
  4. Have they been subject to any litigation or bankruptcy as a result of the franchise?
  5. What is the unique value proposition of the franchise for the customer?
  6. Are there similar, successful businesses in the area?
  7. How long did it take them to earn a reasonable income?
  8. What was their total investment, including unexpected costs?
  9. Was the franchise training adequate?
  10. Has the franchisor provided adequate ongoing support?

The answers to these questions can help you develop your own best- and worst-case scenarios for entering into the franchise. Also, review franchisee message boards, such as unhappyfranchisee.com, to see complaints and positive feedback posted by other franchisees.

This article was co-written by Doug Bend and Tucker Cottingham. Doug Bend is the principal of Bend Law Group, PC, a law firm focused on small businesses and startups. He is also the General Counsel for Modify Industries, Inc. and tIFc LLC and a Legal Mentor in The Hub Ventures Program. If you have any questions about investing in a franchise, you can contact the authors at (415) 633-6841 or info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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