I am a small business owner. What do I need to know about warranties?

Wed, 31 Dec 2008 02:25:36 GMT

If you are a small business owner, you have probably already experienced the customer who is dissatisfied with the item or merchandise that you have sold him or her. While dealing with the unhappy customer is another issue altogether, it does pay to be knowledgeable about the warranties you are required to give for items that you sell. In other words, it is important to know what you are legally responsible for if the item you sold is unsatisfactory to the customer.

Basically, a warranty is a promise to your customer that you stand behind the item that you have sold or produced. A warranty generally tells your customer what you will do – and not do – if the item is defective or otherwise unsatisfactory.

A warranty can be implied, or unspoken. These implied warranties don’t cover every little thing that could possibly be wrong with your item; these warranties also don’t cover problems resulting from the customer’s misuse of the item. Implied warranties may differ to some degree under state law, but a customer generally has four years in which to bring a claim against you based on the violation of an implied warranty. If you want to disclaim these warranties, or sell an item “as-is”, you often will need to include specific language telling your customer that you are not selling the item with any implied warranties. However, even if you sell an item “as-is”, and it causes serious harm to a person, you might still be liable for the harm resulting from that item. Plus, some states won’t let you sell consumer items “as-is”.

The implied warranty of merchantability is your promise that your product or item is fit to be sold, or that it does what it is supposed to do, and isn’t defective in any way. Whenever you sell something to a customer, you sell that item with an implied warranty of merchantability. Likewise, the implied warranty of fitness for a particular purpose is a promise that you make about the suitability of your item to be used in a certain way.

On the other hand, warranties can also be expressly made, either orally or in writing. If you provide your customer with an express warranty, then you cannot disclaim the implied warranties described above. Express warranties are specific, voluntary promises that you make to your customer about what you will do if your item doesn’t work properly or is otherwise defective. If you make an express warranty in writing, then you must also comply with the requirements of the federal law commonly known as the Magnuson-Moss Warranty Act.

First, it is important to remember that the Magnuson-Moss Warranty Act does not require you to offer your customer a written warranty, and applies only to goods (not services) sold under a written (not oral) warranty to a non-commercial customer. Basically, if the Magnuson-Moss Warranty Act applies to your sales, you must title your warranty as either “full” or “limited”, and make the warranty information available in a single document that is clear and easy to read, before the customer buys the item. The Magnuson-Moss Warranty Act also prevents you from disclaiming or modifying any implied warranties, and using “tie-in sales” provisions in order for your customer to seek relief under the warranty. This means that your warranty cannot depend on the customer being required to buy another product in order to make a claim under the warranty for the original item. For instance, you cannot state in your warranty for a vacuum cleaner that it is only good if you also use a particular brand of vacuum cleaner bags. Finally, the Magnuson-Moss Act does not allow you to use deceptive or misleading language in your warranties.

Choosing your Business Entity Structure

Fri, 06 Jun 2008 00:09:36 GMT

Businesses can operate in a variety of structures, such as a sole proprietorship, partnership, limited partnership, corporation, or limited liability company. Each of these forms of incorporation provides certain benefits and also certain limitations. The legal structure of a business determines how it is managed, how it is taxed, and what regulations it must follow.

So how do you know what form of entity is the right one for your business? Things to take into consideration include:

Company Size– Do you plan on keeping your business small or do you plan on expanding by adding employees and locations? How many existing employees do you currently have and how many owners will there be, does every owner own an equal share? Some corporate structures require additional formalities. For instance the corporate form requires a board of directors, annual meetings, shareholder approval, etc. Smaller companies may consider more flexible forms of business, such as an LLC or even a sole proprietorship.

Business Purpose– Will your business make and sell a product or will you provide a service? Some states only allow personal services providers to register as LLCs or LLPs.

Liability –Some forms of doing business offer the protection of limited liability, which eans the owners are not personally responsible for the debts of the business. Business structures offering limited liability protection include corporations, limited liability companies (LLCs) and limited liability partnerships (LLPs). Sole proprietorships and partnerships do not have limited liability.

Taxes – Profits and losses for businesses are treated differently for each type of business entity. Profits from sole proprietorships and partnerships pass through to the owners and are treated as personal income. This means the profits are taxed one time. Profits from corporations and limited liability companies do not necessarily go directly to the owners, but are taxed when the company distributes dividends to the owners. There are some exceptions and alternatives depending on the entity structure.

The main types of business entities are:

1) A Sole Proprietorship is a business which is completely owned by one person and which the business does not have a separate legal identity. The owner personally owns all of the assets and profits and may not be required to register with the state.

2) A Partnership is a business that has two or more owners who agree to share the profits and has not formally registered as a corporation, LLC or other entity type. The general rule in a partnership is that each partner owns an equal share of the business unless there is a written partnership agreement giving one of the partners a majority interest. In most states formal steps may not be required to create a partnership, but complying with certain formalities is usually recommended.

3) A Limited Liability Partnership (LLP) is a business that is organized and run just like a partnership but limits the liability of each partner. Some states only allow licensed professionals to form an LLP, like architects, accountants or lawyers while other states allow anyone to form an LLP. Most states require LLPs to register and pay a registration fee, and include “limited liability partnership” or “LLP” in the business name.

4) A Corporation is a business that has a separate identity from its shareholders, and may be organized for any business purpose. The general requirements are that there must be at least one shareholder and the corporation must have a director(s), president, secretary and treasurer, though in some states the same person may hold all of those positions. Unlike a partnership or sole proprietorship, a corporation continues to exist even when its ownership changes hands.

5) A Limited Liability Company (LLC) is a hybrid of a corporation and a partnership. Unlike a corporation the owners of an LLC are called members, and LLCs. LLCs offer limited liability, while requiring fewer formalities than a corporation. Other features which may be provided for include continuity of life if a member dies or sells their interest, centralization of management, and free transferability of an owner’s shares.

To determine what the best structure for your business is you should consult a business law attorney today.