legal issues in organizing your business€¦ · entities and business goals cash flow vs. sale...
TRANSCRIPT
Legal Issues in
Organizing your Business
Dave Steigerwald USAC National Conference November 1, 2014
Business Organization Drivers
Liability Protection
Tax Efficiency
Business Goals
Liability Protection
New Legal Person – Entity
Liability Protection
Segregate personal assets
and business assets
Treat as separate legal
person
Liability Protection
Follow the rules…. Entity documents
Separate bank accounts
Adequate capitalization
Contract in name of entity
Insurance
Liability Protection
Liability holes
Failure to follow separation “rules”
Failure to pay tax withholding
Personal guarantees
Result: personal assets at risk from
business liability
Liability Protection
Insurance
Release/Hold Harmless
Contract Terms
Liability Protection
Why choose one type of entity
over another for liability
purposes?
Avoid general partnership
and sole proprietorship
Select state recognized entity
Entities and Tax Efficiency
Liability
Tax
Entities and Tax Efficiency
Sole Proprietorship
General Partnership
C Corporation
S Corporation
Limited Liability Company (LLC)
Limited Liability Partnership (LLP)
Trust
Entities and Tax Efficiency
Sole proprietorship
C Corporation
S Corp, LLC, LLP, etc…
Entities and Tax Efficiency
Double Taxation and C Corporation
Income taxed at entity level, and
then again at shareholder level
Compensation is a corporate
deduction, which mitigates double
taxation
Entities and Tax Efficiency
“Partnership” taxation is
taxable only at owner level
LLCs, S Corporations, LLPs
Entity return is informational
Entities and Tax Efficiency
Why choose a C Corporation?
Multiple classes of stock
Employee stock ownership
Tax-free acquisitions
Investor comfort
Entities and Tax Efficiency
Why choose S Corporation vs. LLC
S Corporation
• Dividends and self-employment tax
• Corporate comfort and straightforward
LLC
• No restrictions on stockholders
• Distributions do not have to follow shares
• Flexibility
Business Organization Drivers
Liability
Tax
Business Goals
Entities and Business Goals
End game –
Cash flow?
Sell?
Charity?
Other?
Entities and Business Goals
Cash flow vs. Sale (generalizations)
Single owner, cash flow business =
single member LLC
Two or three partners, cash flow
business = S corporation
Multiple owners with investors, sale
as goal = C corporation
Entities and Business Goals
Employee ownership
• Qualified stock option plan =
C corporation
Venture capital
• Preferred stock =
C corporation
Entities and Business Goals
Charitable
• Access to grants
• 501c3 non-profit corporation
Salary, not sale
Business Goals
Contracts Terms: Clarity!
Deliverables/Services
Term and Termination
Payment Terms
Liability Caps
Assignment
Business Goals
Intellectual Property
Protection
Intellectual Property
Trademark: Branding
Copyrights: Author
Patents: Inventions
Intellectual Property
Software Licensing
Website
Privacy Policy
Terms of Use
Selected Hot Topics
Independent Contractors
Shareholder Aspects
Hot Topics – Independent Contractors
Independent Contractors vs.
Employees
Common problem
IRS and DOL hot button
(revenue)
Hot Topics – Independent Contractors
continued
Employer motivation: workers comp,
unemployment and matching
Contractor motivation: cash
6 factors/9 factors/20 factors =
avoid control; enter into compliant
written agreement; avoid single
relationships
Hot Topics – Independent Contractors
continued
Any individual who performs services for pay for another shall
be deemed to be an employee
unless
such individual is:
(1) free from control and direction in the performance of the service
(both under the contract for performance of service and in fact)
and
(2) customarily engaged in an independent trade, occupation,
profession, or business related to the service performed.
Authority: C.R.S. § 8-4-202(2)(a)
Hot Topics – Independent Contractors
continued
IRS – back taxes, penalties and interest
DOL – back wages, overtime, penalties (1X),
attorney’s fees
Worker’s Compensation – back premiums,
interest
Unemployment – back premiums, interest
C.R.S. § 8-72-114 – Fines for willful violation: 1st offense – up to $5,000 per day per misclassified employee
2nd and subsequent offense – up to $25,000 per day per
misclassified employee
Selected Hot Topics
Independent Contractors
Shareholder Aspects
Hot Topics – Buy-Sell and
Shareholder Agreements
Business partner = marriage
Death, disability, separation,
deadlock
Business Goals Continued
Sweat Equity Compensation
Stock for services is
taxable (non-cash event)
LLC allows for grant of
non-taxable profits interest
Thank You
Questions?
Dave Steigerwald
Sparks Willson Borges Brandt & Johnson, P.C.
24 South Weber Street, Suite 400
Colorado Springs, CO 80903
719.634.5700
The materials presented hereby are informational only and do not constitute legal advice with respect to any particular situation.