Volume 20, Number 1
WOMEN ENTREPRENEURS: DIFFERENT NEEDS
By Stephanie Goldberg
Even though the economy is stalled, you'd never know it from the growth of women-owned companies, which are sprouting twice as fast as other U.S. businesses. Today, one out of every 18 women is a business owner, representing 5.4 million privately held companies that employ 9.2 million people and earn revenues of $1.15 trillion, according to 1997 figures.
In some ways, this is a natural client base for solo practitioners because many of the owners' concerns-leasing space, getting adequate capitalization, bringing in clients-are a lawyer's concerns, too. Still, it can seem anachronistic to focus on gender these days: Aren't the legal needs of a female entrepreneur identical to a man's? The answer is yes and no. Studies compiled by the Center for Women's Business Research (CWBR) in Washington, D.C., suggest that although their background and training resemble men's, women business owners have distinctive values and approaches to problem solving. For example:
l Women entrepreneurs favor staying small. According to the CWBR, 87 percent operate one-person businesses, and 79 percent have annual revenues of $50,000 or less, with 13 percent earning $100,000 or more. But that trend may be changing: Recent studies indicate that interest in building growth-oriented companies is on the upswing, and nearly 55 percent of these businesses are in the service sector.
l Women are not as aggressive in raising cash. Even though women's businesses are as financially viable as men's, women are less likely to seek bank loans-nearly half report lack of confidence in their skills at accessing capital.
l Businesswomen are not big on hierarchy. They tend to run companies more democratically and may take more time to make decisions because they seek wider input, including from consultants and other business owners.
l Women are interested in workplace culture. Although entrepreneurs traditionally enter the marketplace because of a desire to innovate, many women start companies because they feel they've hit a glass ceiling in corporate America and want to create a more open and flexible work environment.
A lawyer interested in cultivating this new practice area requires knowledge about a whole range of legal services. Potential areas you might venture into for a woman setting up a new business include corporate law, securities, commercial real estate, employment, insurance, worker safety, employee benefits, intellectual property rights, and so on. And, of course, not every client needs or can afford your help. Many owners will be interested only in incorporation or creation of a limited liability company. As with any other representation, the cardinal rule is to seek help or make a referral when the matter lies outside your expertise.
Creating the Business Entity
Various types of possible business entities exist, and making the best choice among them can be a difficult process, especially if a woman is a first-time entrepreneur. Here are factors to keep in mind regarding different entities:
l The majority (75 percent) of all small businesses are sole proprietorships, a figure that most likely reflects lack of sophistication or access to funds. This is best for home-based businesses with modest debt and remote prospects of tort liability. If the client leases space, incorporation may be indicated so the client isn't personally liable for the balance of the lease if her business fails. Financing a business structured as a sole proprietorship is also a disincentive to lenders because the business often dissolves when the owner dies. In addition, the informality of many sole proprietor arrangements poses the real danger of comingling assets or future problems due to poor record keeping. For that reason, it's wise to recommend a consultation with an accountant. If incorporation is not warranted, other compliance issues may merit attention: Do the lease and local zoning laws permit home-based businesses? Is the business operating under a trade name; if so, must it be registered? Are other permits or licenses necessary?
l Partnerships offer considerable flexibility for managers but are disfavored because they don't insulate partners from personal liability; liability insurance is always indicated to limit risks. Revenues here are treated as personal income. Partnership agreements should specify obligations, contributions of capital and equipment, management duties, authority, dispute resolution mechanisms, allocation of profits and losses, procedures for admitting new partners, and transfer of ownership upon a partner's death or withdrawal. Because partners can act unilaterally, it's ad-
visable to limit the ability to sign contracts by requiring consent of the full partnership.
l Subchapter S corporations are a good choice for single-owner businesses because they shield owners from personal liability while avoiding double taxation. Revenue is treated as personal income that can be offset by business losses equal to the owner's investment in the business (capital contribution or revenues). Single-owner firms can elect this status, and the company is free to use the cash rather than accrual method of accounting. By law, these corporations can offer only one class of stock and have no more than 75 shareholders. Subchapter S status is obtained by filing papers with the IRS within six weeks of the beginning of the fiscal year; otherwise the corporation defaults to Subchapter C status. A number of states impose corporate taxes on Subchapter S corporations.
l Standard or Subchapter C corporations have the disadvantage of income that is taxed twice-at the corporate rate and again as dividend income. Owners can deduct reasonable salaries, which are subject to personal income tax and self-employment taxes. Subchapter C corporations are a good choice if the goal is to reinvest income because the low corporate tax rates leave more money to be put back into the business. Investors often prefer these corporations to LLCs because requirements for annual meetings and periodic reports make it easier to monitor the company's activities.
l Limited Liability Companies (LLCs) offer the liability protection of Subchapter C corporations without the cumbersome record-keeping requirements and the need to maintain a board of directors and hold annual meetings. They offer an advantage over Subchapter S corporations in that there are no limitations on the number of shareholders or classes of stock that can be issued. Unfortunately, some states do not allow LLCs with single owners. The IRS allows owners to choose between classifying the business as a partnership or as a corporation.
l Buy-sell agreements should be drafted along with partnership, LLC, or incorporation documents. These agreements, which are funded by insurance policies, keep outsiders from taking control of the business when a principal can no longer participate by giving the other owners the right to purchase outstanding shares.
Women-owned businesses are most frequently financed by loans, personal assets and savings, credit cards, and lines of credit; equity financing is comparatively rare. If your client receives a loan from a family member, urge her to document the terms of the loan in a written agreement, to prevent ownership disputes down the road.
All bank loan applications must be supported with a detailed business plan and a financial statement (which first should be reviewed by an accountant). Loans are typically short term and may not be available if your client lacks experience managing a business, cannot pledge collateral, cannot contribute at least 25 percent of the capital investment, files an inadequate or overly optimistic business plan, or has a questionable credit history.
For help in tracking down loans and preparing supporting materials, and to cut legal costs, you can refer your client to a regional Women's Business Development Center (WBDC), which acts as a school for entrepreneurs. Women can learn how to write a business plan, estimate cash flow, tap into funding sources, etc. For a state-by-state list, see the website at www.sba.gov/womeninbusiness/wbcs.html.
Many institutions participate in the Small Business Administration (SBA)-backed loan program, for which the agency guarantees 85 percent repayment. The maximum amount is $700,000, and micro-loans of $25,000 also are available. In addition, the SBA offers a Women & Minority Prequali-fication Loan Program in which WBDCs act as intermediaries for loans of up to $250,000.
The best prospect for equity financing is through government-licensed "small business investment companies," some of which specialize in raising capital for women-owned businesses. These companies generate funds by selling government-backed securities and investing the proceeds in small businesses. They can also provide long-term loans to businesses but, by law, are not allowed to purchase an interest in limited partnerships. For a directory, see www.sba.gov/gopher/
Your client can receive an exemption from federal securities reporting requirements by satisfying the exceptions for private offerings stated in Regulation D, passed in 1982, as follows:
l Rule 504 allows an exemption to offerings under $1 million.
l Rule 505 raises the cap to $5 million but allows no more than 35 "nonaccredited" investors, i.e., individual investors with incomes of less than $200,000 or a net worth below $1 million.
l Rule 506 eliminates the cap altogether but places additional restrictions on nonaccredited investors.
The exempt business may not make general solicitations, but communications between broker/dealers and agents with preexisting clients are permitted. The SEC is currently reevaluating its rules for communicating private placement information via websites.
Instead of inventing a business from the ground up, your client may decide to purchase a franchise. Make sure she's investigated it thoroughly and ask an accountant to review the franchisor's financial statement. Questions to keep in mind as you review the franchise agreement include:
l Will your client be responsible for all debts, or does the agreement permit her to form a limited liability company?
l Is she required to buy materials, products, or equipment from the franchisor? If so, are the prices fair relative to what she could purchase on the open market?
l Are the advertising fees reasonable, and does your client have any input on the advertising?
l How reasonable is the royalty fee?
l If sales quotas are required, will your client be able to meet them?
l If it's a long-term agreement-say, ten to 15 years-what are the terms for getting out of it?
l Can she prevent the franchisor from te minating without notice or good cause?
l Does the agreement permit sale or assignment of the franchise?
Most likely, your client will negotiate for commercial space with the aid of a real estate broker. When you review the lease, make sure it accurately states conditions and responsibilities and leaves nothing out.
It's imperative to get a breakdown of all expenses included in the lease. Gross leases include base rent (the unit's square footage times a dollar figure per square foot); additional rent (insurance, utilities, and maintenance of the unit); and operating expenses (those associated with the complex). Net leases are less inclusive and therefore potentially more expensive. Check to see who will be responsible for incidentals such as window washing, trash removal, security, landscaping, snow removal, etc.
If maintenance, insurance, or heating costs are shared by tenants, make sure your client's share is not disproportionate. Negotiate for the right to challenge these expenses and to receive documentation. Make sure the landlord isn't attempting to pass on expenses associated with improving other units. If the landlord is obligated to repair or improve the premises before the move-in date, check that the lease contains penalties for noncompliance. It's important that the client is not prevented from subdividing or subletting space-both may be necessary if she experiences financial difficulties.
For new businesses, the best ar-rangement is often a one- or two-year lease with a five-year option to renew. Bear in mind that your client will likely pay a fee for this option. If the lease is longer than a year, insist on a cap on increases.
Does the business have a trade name, trademark, service mark, trade secret, or distinctive domain name that requires protection? Check the business name with the secretary of state's database before incorporation to make sure it's not already in use. The name also can be considered a trademark (a word, name, symbol, or device associated with a product) or service mark (distinctive words, names, or symbols associated with a service). To prevent others from using the mark, register it with the state if the company does only in-state business and with the U.S. Patent and Trademark Office if the company does business out of state. Search business directories and the government trademark register to make sure the name is available, then file an application with the state or federal agency. Federal information is available at www.uspto.gov/teas/index.html. To register a domain name, which costs approximately $40, search for the desired name at a recognized registrar (see www.icann.org/registrars/accredited-list.html for a list).
Trade secrets are protected through nondisclosure agreements. Examples are recipes, manufacturing processes, marketing plans-information that yields a competitive advantage and represents an investment of time and effort. The agreement should define the information to be kept confidential, list exclusions, specify a length of time for the agreement to remain in effect, and state the responsibilities of the employee or client signing the agreement.
HIRING AND OTHER EMPLOYEE-RELATED CONCERNS
l Brief your client so that her hiring procedures are in compliance with antidiscrimination and antiharassment laws. Even though small businesses are exempt from Title VII, employees may still have a right of action under state law.
l Draft nondisclosure agreements, noncompete covenants, and employment contracts where indicated.
l Determine whether the job being created is exempt or nonexempt. If it's the latter, make the client aware of her responsibility to pay overtime under the Fair Labor Standards Act.
l Advise the employer of relevant OSHA safety rules.
l Make your client aware of her responsibilities to state unemployment compensation and workers compensation funds.
l If the client is hiring independent contractors, advise her of procedures to ensure she does nothing to compromise their status. Claims are less likely if consultants do not work on the premises and if little or no supervision or materials are provided.