The Law (in Plain English) for Galleries

A Guide for Selling Arts and Crafts

Leonard D. DuBoff, Christopher Perea

• Publisher: Allworth
• Year: 2020
• ISBN:
  9781621536826
• Edition: 3
• Topic: Art
• Subtopic: Art & Business

An Essential Reference for Sellers of Arts and Crafts In The Law (in Plain English)® for Galleries, Third Edition, Leonard DuBoff and Christopher Perea walk readers through the legal intricacies of selling arts and crafts. This helpful guide provides clear explanations and examples of real cases to furnish readers with a strong understanding of their obligations and vulnerabilities. Updated to reflect recent changes in the market and technology, this new edition is the go-to guide for all aspects of running a gallery. Chapters cover a wide range of topics, including:

• Organizing a business
• Franchising
• Working with employees and contractors
• Selling pieces
• Contracts
• Artists' and galleries' rights
• Catalogs and online sales
• Copyright and trademark
• Customer relations
• Product liability
• Filing taxes
• Estate planning

Gallerists, artists, craftspeople, and anyone else interested in the buying and selling of arts and crafts must have this book in their libraries.

CHAPTER 1

Organizing Your Business

Everyone in business knows that survival requires careful financial planning, yet few fully realize the importance of selecting the best legal form for the business. Art galleries and craft retailers have little need for the sophisticated organizational structures utilized in large, publicly traded corporations, but since all entrepreneurs must pay taxes, obtain loans, and expose themselves to potential liability with every sale they make, it only makes sense to structure one’s business to address these issues.

Every business has an organizational form best suited to it. When we counsel people on organizing their businesses, we usually adopt a two-step approach. First, we discuss various aspects of taxes and liability in order to decide which of the basic legal structures is best. There are only a handful of basic forms to choose from: the sole proprietorship, the partnership, the corporation, the limited liability company, the limited liability partnership, and a few hybrids. Once we have decided which of these is most appropriate, we go into the organizational documents such as partnership agreements, corporate bylaws, or operating agreements. These documents define the day-to-day operations of a business and must be tailored to individual situations.

What we offer here is an explanation of the features of each of these kinds of organizations, including their advantages and disadvantages. This should give you an idea of which form might be best for your gallery business. We will discuss potential problems, but since a full discussion of the more intricate details cannot be had here, you should consult an experienced business attorney before deciding to adopt any particular structure. Our goal is to facilitate your communication with your lawyer and to enable you to better understand the choices available.

SOLE PROPRIETORSHIPS

The technical name sole proprietorship may be unfamiliar to you, but chances are you are operating under this form now. The sole proprietorship is an unincorporated business owned by one person. As a form of business, it is elegant in its simplicity. All it requires is a little money and work. Legal requirements are few and simple. A business license and registering the name of the business, if you operate it under a name other than your own, are generally all you need.

Disadvantages

There are many financial risks involved in operating your business as a sole proprietor. If you recognize any of these dangers as a real threat, you probably should consider an alternative form of organization.

If you are the sole proprietor of a business venture, the property you personally own is at risk. In other words, if for any reason you owe more than the dollar value of your business, your creditors can force a sale of most of your personally owned property to satisfy the debt.

For many risks, insurance is available that shifts the loss from you to an insurance company, but there are some risks for which insurance simply is not available. For instance, the risk that a promotional event, such as an opening, will be unsuccessful or the risk that a prominent artist, whose work you sell, will no longer work with you. In addition, the cost of liability insurance has become so high that, as a practical matter, it may be unavailable to most small businesses. Even when procured, every insurance policy has a limited, strictly defined scope of coverage. These liability risks, as well as many other uncertain economic factors, can drive a small business and its sole proprietor into bankruptcy.

Taxes

The sole proprietor is personally taxed on all profits of the business and may deduct losses. Of course, the rate of taxation will change with increases in income. Fortunately, there are ways to ease this tax burden.

IN PLAIN ENGLISH

Maximize your tax savings by establishing an approved IRA or contributing to a pension fund. By deducting a specified amount of your net income for placement into an interest-bearing account, approved government securities, mutual funds, or company pension plan, you can withdraw the funds at a later date—when you are in a lower tax bracket. There may, however, be severe restrictions if you withdraw the money prior to retirement age.

For further information on tax planning devices, check out irs.gov, or use the services of a tax professional experienced in dealing with business tax planning.

PARTNERSHIPS AND JOINT VENTURES

A partnership is defined by most state laws as an association of two or more persons to conduct a business for profit as co-owners. No formalities are required. In fact, in some cases, people have been held to be partners even though they never had any intention of forming a partnership. For example, if you lend a friend some money to start a gallery business and the friend agrees to pay you a certain percentage of whatever profit is made, you may be your friend’s partner in the eyes of the law, even though you take no part in running the gallery business. This is important, because each partner is subject to unlimited personal liability for the debts of the partnership. Each partner is also liable for the negligence of another partner and of the partnership’s employees when a negligent act occurs in the usual course of business.

A joint venture is a partnership for a limited or specific purpose, rather than one that continues for an indefinite or specified time. For example, an arrangement whereby two or more persons or gallery businesses agree to sell a single painting or a Chihuly chandelier is a joint venture. An agreement to sell numerous works over a period of time is a partnership.

Advantages and Disadvantages

The economic advantages of doing business in a partnership form are:

• the pooling of capital;

• the collaboration of skills;

• easier access to credit enhanced by the collective credit rating; and

• a potentially more efficient allocation of labor and resources.

A major disadvantage is that, as noted above, each partner is fully and personally liable for all the debts of the partnership, even if not personally involved in incurring those debts.

This means that if you are getting involved in a partnership, you should be especially cautious in two areas. First, since the involvement of a partner increases your potential liability, you should choose a responsible partner. Second, the partnership should be adequately insured to protect both the assets of the partnership and the personal assets of each partner.

Formalities

No formalities are required to create a partnership. If the partners do not have a formal agreement defining the terms of the partnership, such as control of the partnership or the distribution of profits, state law dictates the terms. State laws are based on the fundamental characteristics of the typical partnership and attempt to correspond to the reasonable expectations of the partners. The most important of these legally presumed characteristics are:

• no one can become an actual member of a partnership without the unanimous consent of all partners;

• every member has an equal vote in the management of the partnership regardless of the partner’s percentage interest in it;

• all partners share equally in the profits and losses of the partnership, no matter how much capital each has contributed;

• a simple majority vote is required for decisions in the ordinary course of business and a unanimous vote is required to change the fundamental character of the business; and,

• a partnership is terminable at will by any partner. A partner can withdraw from the partnership at any time and this withdrawal will cause dissolution of the partnership.

Most state laws contain a provision that allows the partners to make their own agreements regarding the management structure and division of profits that best suit the needs of the individual partners.

Partnership Agreements

A comprehensive partnership agreement is no simple matter. Some major considerations in preparing a partnership agreement include the name of the partnership, a description of the business, contributions of capital by the partners, duration of the partnership, distribution of profits, management responsibilities, duties of partners, prohibited acts, and provisions for the dissolution of the partnership. (These items are detailed in Chapter 2.) It is essential for potential partners to devote time and considerable care to the preparation of an agreement.

IN PLAIN ENGLISH

Enlist the services of a competent business lawyer. The expense of a lawyer to help you put together an agreement suited to the needs of your partnership is usually well justified by the economic savings recouped in the smooth organization, operation, and, when necessary, the final dissolution of the partnership.

Taxes

A partnership does not possess any special tax advantages over a sole proprietorship. Each partner pays tax on his or her share of the profits, whether distributed or retained, and each is entitled to the same proportion of the partnership deductions and credits. The partnership must prepare an annual information return for the IRS known as Schedule K-1, Form 1065. It details each partner’s share of income, credits, and deductions that the IRS uses to check against the individual returns filed by the partners.

LIMITED PARTNERSHIPS

The limited partnership is a hybrid containing elements of both partnerships and corporations. A limited partnership may be formed by parties who wish to invest in a business and share in its profits but seek to limit their risk to the amount of their investment. The law provides such limited risk for the limited partner, but only so long as the limited partner plays no active role in the day-to-day management and operation of the gallery business. In effect, the limited partner is very much like an investor who buys a few shares of stock in a corporation, but has no significant role in running the business.

Formation

In order to establish a limited partnership, it is necessary to have one or more general partners who run the business (and have full personal liability) and one or more limited partners who play a passive role. Forming a limited partnership requires documentation to be filed with the proper state agency. If not filed or improperly filed, a limited partner could be treated as a general partner and lose the benefit of limited liability. In addition, the limited partner must refrain from becoming involved in the day-to-day operation of the partnership. Otherwise, the limited partner might be found to be actively participating in the business and thereby held to be a general partner with unlimited personal liability.

Uses

Limited partnership is a convenient form for securing needed financial backers who wish to share in the profits of an enterprise without undue exposure to personal liability when forming a corporation or limited liability company (LLC) may not be appropriate, i.e., when one does not meet all the requirements for an S corporation or when one does not desire ownership in an LLC.

IN PLAIN ENGLISH

A limited partnership can be used to attract investors when credit is hard to get or is too expensive. In return for investing, the limited partner may receive a designated share of the profits. From the entrepreneur’s point of view, this may be an attractive way to fund a business, since the limited partner receives nothing if there are no profits. Had the entrepreneur borrowed money from a creditor, he or she would be at risk to repay the loan regardless of the success or failure of the business.

Another use of the limited partnership is to facilitate reorganization of a general partnership after the death or retirement of a general partner. Remember, a partnership can be terminated upon the request of any partner. Although the original partnership is technically dissolved when one partner retires...