While opening a business can be incredibly exciting, it is important not to overlook the legal aspects of the process. Entrepreneurs need to protect themselves from day one and they need to ensure that they are in a sound position (legally speaking) to pursue outside investment, consistent growth, and long-term success.
So, what are the legal issues that entrepreneurs need to address? Here are 5 key legal considerations for opening a business in Philadelphia:
1) Entity Formation and Business Registration
Entrepreneurs should begin by choosing the type of business entity (i.e., corporation, partnership or limited liability company (LLC)) that is best suited to their goals and needs. Then, the entity will need to be formed and registered with the Commonwealth. Different entities may have different tax issues/consequences, so it is important to consult with a licensed Certified Public Accountant to discuss, from a tax perspective, which entity is right for you.
Whether you form a single-member LLC or you and your co-founders establish a corporation or partnership with multiple owners, you will need to create a custom-tailored written agreement that provides suitable rights and liability protections.
Bear in mind that unless you operate under the umbrella of the corporate entity, you can face personal liability. In other words, make sure that everything you do is under the name of the registered corporate entity.
2) Zoning, Permits, Licenses and Taxes
Different types of businesses require different zoning approvals, building permits, and licenses. You will want to ensure that you have a comprehensive understanding of all applicable taxes and their due dates as well.
If you are leasing a space for your business, make sure you check to see how the building/space is zoned before you sign the lease! Do not rely solely upon the listing or the word of the real estate agent/broker. In Philadelphia, all information about a property can be found here.
If you open a business that does not have the proper permits or zoning, the city can issue fines or worse case, issue a stop-work-order and shut the business down until the permit/license issues are resolved.
Lastly, Philadelphia requires each business, regardless whether it is a formal entity or not, to obtain a Commercial Activity License and a Business Income and Receipts Tax number.
3) Commercial Leases
Unless you will be operating a home-based business, you will need to either lease or acquire a suitable commercial property. In both of these scenarios, it is critical to carefully negotiate the terms of all applicable contracts. If you renting and operating a home-based business, make sure your residential lease allows it.
A. Types of Leases
When renting a commercial space, be sure to understand the different types of commercial leases:
Triple Net Lease: Tenant pays pro-rata share of property taxes, insurance, and CAM (common area maintenance) charges + rent. Other kinds of triple-net leases require the tenant to assume all responsibility for maintenance of the property.
Net Net Lease: Tenant pays pro-rata share of property taxes and insurance + rent.
Net Lease: Tenant pays pro-rata share of property taxes + rent.
Gross Lease: Tenant just pays rent
Do not forget any other reoccurring monthly expenses you are responsible for, such as renter/liability insurance, utilities, etc.
B. Lease Terms to Be Aware of
Many commercial leases require an individual to personally guarantee the lease, and have confession of judgment language in them. Be sure to talk to an attorney before signing any contract you do not fully understand.
C. Length of Lease/Renewal
It is common for a lease to be for a fixed number of years, rather than year-to-year. However, it is possible to negotiate this.
Most leases can be renewed prior to expiration. However, notice (to renew or not), usually must be given a certain number of days in advance of the expiration.
There is no law in Pennsylvania that requires a property owner to renew a commercial lease. If you enter into a lease, it pays to think ahead about what will happen if the lease is not renewed.
In addition, what will happen if the lease is not working out for you, if you cannot afford it, your business needs have changed, need to move, etc.? Are you able to break the lease? If so, what are the consequences?
D. Problems with the Landlord or Other Tenants
Understand the lease to determine what the property owner is responsible for and what the tenant are responsible for.
If you as the tenant are having a problem with another tenant on the property, try to work out the issue with the tenant, and then involve the landlord.
Unless there is an egregious problem with the building/property, the Philadelphia License & Inspection is probably not going to get involved.
Only if you have exhausted all of the above should you contact an attorney for assistance.
E. Consequences of a Default of the Lease by the Tenant
There are no statutory protections for commercial leases, unlike residential leases. In other words, the Pennsylvania Landlord Tenant Act does not apply to commercial leases. Other statutes that protect consumer transactions also do not apply to business and commercial issues.
Most leases have an “acceleration clause” in the event of a default – the tenant would be responsible for all remaining lease payments at the time of default.
Most leases also require the tenant to pay the landlord’s attorney’s fees and costs.
Most leases have confession of judgment language (allow the landlord to obtain a judgment against the tenant immediately.
Most leases require the tenant to personally guarantee the lease, i.e. the tenant would be individually responsible for any damages awarded to the landlord.
4) Employees
A. Classification and Compensation
Workers can be generally classified into three categories: (1) intern; (2) employee; (3) independent contractor. Make sure you understand the difference between each and do not try to save money by misclassifying (i.e., do not classify an employee as an independent contractor or as an intern to avoid having to pay wages, workers’ compensation, unemployment, state, and federal taxes, etc. The state and federal departments of labor take a dim view of this and can issue fines and/or shut the business down.
Workers can be paid hourly or salary. Within that, they can be classified as Exempt (not eligible for overtime) or Non Exempt (eligible for overtime). If non-exempt, very important to account for hours worked and pay any overtime! If an employee receives tips, make sure you understand what the federal and state minimum wage is and what can and cannot be done with the tips!
B. Employee Handbook
If you have workers, (employees or interns), it is important to have a handbook. The handbook should include company’s mission, values, and a detailed code of conduct, covering everything from work hours and benefits to anti-harassment, and disciplinary procedures. Key sections should also cover policies on paid time off, sick leave, among other important items. Just as every business is unique, so is every handbook. Do Not copy from one you found from an “internet law service” or got from an acquaintance. A well-written handbook can save your business time and money in the future, whereas a poorly drafted one can cause headaches later.
C. Non-Compete and Non-Disclosure Agreements
In some cases, it will make sense to enter into non-compete and/or non-disclosure agreements with both employees and contractors. These agreements should be tailored to your business’s specific risks and needs. A non-disclosure agreement is for protecting your business’ trade secrets, customer lists, etc. A non-compete prohibits a former employee from working within a certain geographical area and/or industry for a fixed period of time.
D. Minimum Wage Compliance
If you have any employees, you must ensure compliance with the Federal and State minimum wage laws.
The Federal Minimum Wage is $7.25/hour. In Pennsylvania, the Minimum wage is $7.25/hour. In Philadelphia, a business that is participating in the City’s Quality Jobs Program must pay a minimum wage of $16.35/hour through June 2025.
For tipped employees, the Pennsylvania minimum wage is $2.83/hour and the combined cash + tip minimum wage is $7.25/hour. “Tip pools” are allowed, but subject to certain requirements. Owners (anyone who owns at least 20% of the business), managers, and supervisors CANNOT get/keep any portion of an employee’s tips, even through a “tip pool”. The Federal and State Department of Labor take a dim view of this and will launch an enforcement action if discovered.
Lastly, “Portal-to-Portal” issues are traps for the unwary in calculating hours worked. In other words, all hours worked, even time spent doing anything that is mandatory before an employee actually begins working or after they stop working, must be compensated.
E. Medical Marijuana in the Workplace
The City of Philadelphia prohibits pre-employment drug screening for marijuana, but at the Pennsylvania state level, there is no such law.
In Pennsylvania, an employee cannot be denied a job or fired solely because they use medical marijuana. However, the employer does not have to accommodate an employee’s use of medical marijuana while working. In addition, an employee can be disciplined for being under the influence of marijuana or working while impaired when the employee’s conduct falls below the normal standard of care. However, federal, state, and local anti-discrimination, disability, and medical leave laws still apply.
Lastly, marijuana is illegal under federal law, and thus, federal law supersedes Pennsylvania and Philadelphia law and governs in terms of federal Department of Transportation (D.O.T.) regulations, security clearances, etc.
5) Supplier and Customer Contracts
Forming a new business typically involves entering into various supplier contracts. Here too, it is important to negotiate—and to do so with a long-term perspective.
Just as your suppliers will want to have contracts in place with you, you will want to have contracts in place with your customers. These contracts should provide adequate protections, and they should be custom-tailored to the unique nature of your business.
This article does not constitute legal advice or a binding contract. For more information on business formations, please contact David T. Wisniewski.