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Opening a Business? Don’t Forget a Lawyer! Licenses and Leases

Congratulations, you have decided to go into business for yourself! Tired of working for others, and you are ready to take the leap. If you are opening a business in Washington State, there are many things to keep in mind, and a lawyer can bring help make the process more manageable. More importantly, a lawyer can help minimize the chances you’ll make a costly, avoidable mistake.

Funding

If you are not applying for outside funding, you may not yet have put together a business plan. If you haven’t put together a business plan, do start with that. It will help you figure out how to get on a successful path. There are a lot of resources to help you with your business plan. This article does not tell you how to make a business plan. Instead, this and other articles focus on some legal issues to consider before opening for business. By now, you have already decided on a type of entity structure for your business (e.g., corporation, limited liability company, partnership or sole proprietorship). If you haven’t  yet determined the right entity structure, don’t worry, your lawyer will be ready to help you figure out some solutions.  But now, let’s look at licenses and leases.

Licenses

Most people know they need a business license to do business in this state, need to be listed with the Department of Revenue, and Department of Labor and Industries, and possibly also the Secretary of State’s office (depending on entity type you have chosen). But you may also need a license in the city you will be working in. It is safest to assume your business will need to be licensed in your city, but because each jurisdiction handles things a little differently, it’s important to know what your jurisdiction requires.

In addition to a basic business license, do you also need a specialty license? Food and beverage businesses (restaurants, bars, food trucks, artisinal food and small batch producers, etc.) are obvious examples. Be sure to check whether the type of goods and services you will provide have special licensing or permitting requirements in your jurisdiction.

Leases

Opening a storefront or office? Great! You’ll probably be looking to rent. Don’t forget to have a lawyer help you with that process. Leases are legal documents that are important to the lifeblood of your business. Most landlords have lawyers prepare their standard leases, and that lawyer’s duty is to protect his or her client – the landlord. Who will look out for your interests? YOUR lawyer. Level the playing field and have a lawyer on your side.

For example, besides the base rent, what are you – the tenant – expected to pay for? Is it a triple net lease? How long is the initial term – and is there an option to renew? How much will the rent change if the lease is renewed? What happens if the business takes off and you want to move to a different location (or if the business is less successful than you’d like) ; can you terminate the lease early? Is there a penalty to do so? How much notice must you give the landlord if you want to leave? What happens if the landlord sells the building – must the new owner honor your lease, or can you be kicked out? These and many other questions are an important part of negotiating for terms that best suit the needs of your business. Many important terms are in the “boilerplate” sections that cause most normal people to fall asleep. But remember, lawyers are the ones who draft the boilerplate, so get a lawyer on your side.

Unless the space was used for the same kind of items you plan to sell or services you will provide, the space will need some remodeling to suit your needs. Who will pay for that? Tenant improvements are often paid for by the tenant, but sometimes the landlord will contribute, or allow a reduced rent while the space is being renovated.   These issues are typically addressed in the lease.

Try to find out what your jurisdiction requires when a new business is going into a space that will be put to a new use, so you can plan your budget and timeline as realistically as possible. What permits (if any) do you need simply because a different use of the space is planned? Is the space in a location that is zoned to allow the type of business you want to open, or would a variance have to be sought? Is it in an historic building that might have restrictions on what renovations can be done? How much work will be needed to make the space right for you (and what is it estimated to cost)? It is helpful to look into these sorts of issues and consider negotiating for an exit provision in case the building codes prohibit the renovations needed for your particular venture (or make it prohibitively expensive).

As you know, there are a lot of things to be done before ever opening your doors; level the playing field by hiring a lawyer on your team.

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Independent Contractors: What’s the Difference Between an Independent Contractor and an Employee?

Many small business owners would like to know when they can hire an “Independent Contractor” vs. an “Employee.” This article is a modest effort to help clear things up a bit.

What IS an “Independent Contractor”?

First and foremost, and Independent Contractor is a business just like any other in Washington. That means the contractor must have, at minimum: (a) a Uniform Business Identifier (UBI) number, (b) a WA state business license (c) possibly also a business license in the city or town where it conducts business, and; (d) a special license for the type of work being done if a license is required for that trade.

The UBI number establishes an account at the state Department of Revenue – as a business, the Contractor pays Business and Occupation (B & O) taxes.

Let’s say Jane Doe considers herself an independent contractor. She’s an electrician, and a sole proprietor. She advertises her business, makes bids on jobs, is her own boss and sets her own schedule. She owns her own tools. She is a duly trained and licensed electrician. She has a UBI number and a state business license. Jane works in Seattle, so she also needs a Seattle Business license. Since her business is in King County, she should also be registered with a Personal Property account with the King County Assessor’s Office and may (or may not) owe personal property tax on business equipment. Jane’s business is subject to state B & O taxes on gross income. For federal income tax purposes, she may owe Self Employment (SE) tax (similar to tax withheld from a paycheck).

Now let’s look at John Doe. John also considers himself an independent contractor. He’s not an electrician, he is a yoga instructor in Seattle. His friend Mary runs a yoga studio, and John teaches classes there 3 days per week. Mary sets his schedule, and decides which classes he should teach. He does not advertise his services; instead, he relies instead on Mary’s marketing of the studio. He does not have a business license or a UBI number. Mary pays him cash. Both John and Mary are happy with this arrangement.

Is John really an independent contractor? No. Does it really matter, since he’s happy being called an independent contractor? Yes, it matters. If the Department of Labor & Industries (or the IRS) determines that John is not actually an independent contractor, that means he is Mary’s employee, and Mary (or her company), will be liable for paying John’s employment taxes that should have been withheld, will be liable for paying into the state worker’s compensation fund for employee John, and may owe other taxes and fees. Note: for Labor & Industries, a worker is presumed to be an employee unless it can be proven otherwise. This puts the burden on the business owner to show that the worker is listed and paid correctly.

Moral of the story: just calling yourself (or your worker) an “Independent Contractor” does not make it so.

Why is Jane and “independent contractor” and John is not? Because Jane meets the criteria that are used to define an independent contractor. If you are looking to hire an independent contractor, you must look for these criteria. The worker is an independent contractor only if she meets all 6* of them: (1) the worker is free from your “direction and control” (that is, you do not control the means and methods for how to get the job done); and (2) (a) the person performs a service that is outside the course of your business, or (b) the service is performed away from your location or job site, or (c) the contractor is responsible, in contract and in fact, for the costs of her own principal place of business; and (3)(a) she is engaged in her own business of providing the services you are looking to hire for, or (b) she has a principal place of business that qualifies for an IRS business deductio; and (4) she complies with IRS rules for filing a business tax return with the IRS, and (5) she has an active UBI number with the Washington Department of Revenue, and (6) she maintains her own set of books and records showing business income and expenses.

*In addition, those in certain construction trades must also (7) have a valid contractor registration per RCW 18.27 or 19.28. Jane also meets this test.

Washington’s Department of Labor and Industries wants people to understand the rules and the criteria for independent contractors, and has published a handbook to help explain things. It can be found at: http://www.lni.wa.gov/FormPub/Detail.asp?DocID=2134

The Handbook discusses the basic criteria listed above. The Labor & Industry criteria are similar to the ones used by the federal Department of Labor. It is important to understand these criteria, because they are what the relevant agencies will look at. Knowing what the agencies use to define “independent contractor” will help minimize problems for your small business. The last thing any business owner wants is the surprise of extra costs; so get educated about the difference between “independent contractors” vs. “employees”, and plan accordingly.