Volume 20, Number 1
Jan/Feb 2003
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.
Getting Financed
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/
Local-Information/Small-Business-Investment-Companies.
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.
Buying Franchises
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?
Leasing Space
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.
Intellectual Property
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.
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