Articles Posted in Contracts

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head-1825517__340It is important to consider certain essential factors when choosing which type of business entity for your new business.  In order to reach your goals and find the best fit for your company, you should consider protection from liability, taxation mechanisms, ease of formation, and your future requirements for raising capital. The two primary options for small businesses are the limited liability company (“LLC”) and the S Corporation (“S-Corp.”). The LLC is the structure most commonly used by small business owners, but it is important to review the S-Corp. before making your decision and forming your entity.   Once you understand the similarities and differences between the two structures, you can review your business goals and needs to make an informed decision as to which type of entity you should form.

The Limited Liability Company

Under the New Jersey business law, the LLC provides liability protection similar to that of a corporation while retaining the taxation structure of a partnership. For tax purposes an LLC is a “disregarded entity”, the LLC issues a K-1 form to each member at the end of the tax year showing the distributions made to each member.  This K-1 is used to prepare each member’s individual income tax returns.  An LLC is quite flexible as to the forms of management which are permitted.  It can be member-managed in that the members (owners) manage the business of the LLC; or manager-managed, in that an outside manager is hired to manage the business affairs of the LLC; or some combination of the two models. Additional flexibility is found in the LLC because profits and losses can be allocated in any way desired by the members, it does not have to be based on the amount of capital contributions contributed by each member. The operating agreement is the controlling document and it can be drafted to reflect the agreement of the members.  The operating agreement can also reflect different voting rights among the various members and it can relax the strict recordkeeping rules of a corporation.

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A letter of intent is a document executed generally by businesses to outline the basic terms of a commercial transaction, whether that be a complicated sale of goods or services or a real estate transaction. A letter of intent is entered into in the early stages of negotiation, when major obligations and expectations have been agreed upon, but specific details have not yet been determined. Letters of intent are useful in negotiating complex commercial transactions since they can provide a basic foundation of the understandings between the parties prior to taking part in lengthy and expensive research, investigations, financial review, environmental inspections, or other due diligence that must be conducted prior to the execution of a formal contract.

Perhaps the most important concern in drafting a letter of intent is whether the parties intend for that letter, or any sections of it to be binding. If the letter of intent resembles a contract too closely, under New Jersey contract law it could be considered an enforceable contract when the parties have actually yet to finalize the details of their agreement. That result could potentially leave one party unable to avoid a transaction that, following further negotiations or due diligence, proves to be unexpectedly disadvantageous. However, if the parties want the letter of intent to be binding, it is important to ensure that this intent is clearly set forth and agreed upon in the language of the document.

In many cases, letters of intent include both non-binding and binding terms which should be clearly delineated in the document itself. Certain sections of a letter of intent, such as a confidentiality or non-disclosure clause, will generally be considered binding because they are immediately applicable at the start of the negotiations. For instance, if the parties need to exchange information during the negotiations which is private, includes trade secrets, or is otherwise confidential in nature, it only makes sense that the confidentiality clause in the letter of intent be immediately binding upon the parties. Likewise, provisions such as those which promise exclusive rights to negotiate are also more likely to be binding since they too are immediately applicable while negotiations are continuing.
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