ADVISING STARTUPS AND ENTREPRENEURS

Transcription

1 ADVISING STARTUPS AND ENTREPRENEURS T. Joshua Wu Sponsored by

2 ADVISING STARTUPS AND ENTREPRENEURS 2 T. Joshua Wu

3 OVERVIEW Starting a new business venture Choosing the business form Basic compliance and governance Financing a new business Dealing with common tax issues Hiring and compensating employees Identifying tax issues during an investment, acquisition, merger, or wind down Unique ethical issues for representing startups and entrepreneurs 3

4 POLL QUESTION #1 How often to you advise clients with respect to starting a new business? 4

5 BASIC ENTITY CHART Sole Proprietor Ownership Individuals 1+ shareholders Control Proprietor Board of Directors Allocation of Income 100% to proprietor C Corp S Corp Partnership LLC 100% to C Corp entity Liability No limit Limited to capital invested Ease of Funding Difficult. Based on owner s credit. Easy. Can sell interests. Limit of 100 shareholders Board of Directors Pro-rata based on shares Limited to capital invested Easy. Can sell interests. 2+ partners 1+ members (2+ for partnership tax) Per partnership agreement Agreement controls if has economic reality No limit for GPs. Limited for LPs. Moderate. Can sell partnership interests. Per LLC agreement Depends on tax election Limited to capital investment Moderate. Can sell membership 5 interests.

6 BASIC ENTITY CHART Losses Sole Proprietor Normal individual rules C Corp S Corp Partnership LLC At corporate level Passed to shareholders Passed to partners Depends on tax election SE Tax Yes No, wages. No, wages. Yes if GP Depends on tax election Double tax No Yes No No Depends on tax election Income Character Admin. Obligations Tax Compliance Burden Depends on income Dividend to shareholder Passed to shareholders Passed to shareholders Depends on tax election Low High Moderate Moderate Moderate Low Moderate High High Depends on tax election 6

7 THE SOLE PROPRIETORSHIP Most basic business form Owned and operated by one individual Control rests with owner No legal entity required Not recognized as a taxable entity May need state and local licenses and permits Self-employment taxes No limited liability for owner Difficult to raise funding 7

8 THE PARTNERSHIP Default when two or more persons go into business for profit, as co-owners, sharing profits and losses Written agreement normally not required, but highly recommended Third parties may generally rely on authority of any partner to bind partnership General partners have no limited liability Partnership must file annual return 8

9 C CORPORATION Created under state law Controlled by stockholders, board of directors, and officers No liability for shareholders unless pierce the corporate veil (e.g., thin cap or alter ago) Double tax Corporate tax Dividend tax But, no phantom income More conducive to equity funding 9

10 S CORPORATION Variation of C Corporation Still must observe corporate formalities Ownership No more than 100 shareholders All must be U.S. citizens or permanent residents (with small exception for certain trusts) All shareholders must have same class of stock (can be voting and non-voting) Potential employment tax savings 10

11 THE LIMITED LIABILITY COMPANY All states have LLC laws Must file with Secretary of State and pay fees Should adopt operating agreement Owned by members who may run business or appoint managers. Ownership Individuals or other entities Fewer corporate formalities than C Corporation Flexible profit/loss allocations Profits taxed once Self-employment taxes 11

12 GOVERNANCE AND CONTROL ISSUES Control Voting Share classes Transferability of interests Restricted shares Re-purchase rights Anti-Dilution protections Tag Along or Drag Along rights Confidentiality agreements Noncompete Assignment of Invention Governing law 12

13 FINANCING A NEW BUSINESS Debt or Equity Founder s contributions Friends and family offerings Preferred Equity Voting or nonvoting Dividend participation Liquidation preference Convertible Securities Conversion ratio Equity Crowdfunding 13

14 POLL QUESTION #2 What is the most flexible legal business entity? 14

15 HIRING AND COMPENSATING EMPLOYEES Stock (equity) as compensation Ordinary income Deductions Stock in C corporations Stock in S corporations Equity in partnerships Section 83(b) election Section 409A Executive compensation Bonuses Deferred compensation Stock options 15

16 HIRING AND COMPENSATING EMPLOYEES Reasonable compensation (C Corps & S Corps) If compensation unreasonable might be reclassified as a dividend IRS scrutinizes owner compensation in small businesses In S Corp context IRS may try to recharacterize distributions as compensation Employee versus Independent Contractor Right to control and direct as to result and means Statutory employees and statutory non-employees IRS 20-factor test 16

17 DEALING WITH COMMON TAX ISSUES Recordkeeping Start-up expenditures Expanding existing business Travel and Entertainment Expenses Car and Truck Expenses Advertising Expenses 17

18 TSheets: Modern Time Tracking Time Tracking and Scheduling Payroll time management, Billing and Invoicing, Labor Visibility Simple clock in/out functionality Full job tracking, dept., location, service item, etc. GPS capabilities

19 TAX ISSUES IN TRANSACTIONS Due Diligence Stock Acquisitions Asset Acquisitions Deductible Expenses Winding Down a Business 19

20 DUE DILIGENCE Legal entity chart Identify jurisdiction of tax residency for all entities Review previously-filed returns (state and federal) Filed timely? Items accurately reported? Elections? Disclosures? Information reporting? Written analysis/documentation of positions and completed transactions Information pertaining to audits or agreements with various tax authorities Compensation agreements and qualified plans 20

21 STOCK ACQUISITION Target corporation Shareholders have capital gain or loss on the sale (long-term if held for more than 1 year) Not subject to tax Acquiring corporation Obtain a cost basis in the stock Tax basis in Target s assets will remain unchanged (unfavorable if value in excess of their tax basis) 338(h)(10) election T is either S corporation or has 80% U.S. corporate shareholders Parties elect to treat stock acquisition as an asset sale for tax purposes 21

22 ASSET ACQUISITION Target corporation Recognizes gain or loss on the sale of its assets at the corporate tax rate If it liquidates, shareholders recognize gain Acquiring corporation Tax basis in Target s assets equal to the purchase price including assumed liabilities Step-up in basis allows Acquirer to obtain greater depreciation and amortization deductions Report on Form

23 DEDUCTIBLE AND CAPITALIZED EXPENSES Cost related to an acquisition or restructuring must be capitalized if the costs facilitated the transaction Bright-line date : earlier of date parties execute letter of intent, exclusivity agreement, or similar written communication (other than a confidentiality agreement) ; or date on which the material terms of the transaction are authorized or approved by the taxpayer s board of directors Capitalized costs Success-based transaction fees Start-up expenditures 23

24 WINDING DOWN A BUSINESS Dissolving the company under state law S corporation Recognize gain/loss at FMV (exceptions) C corporation Two separate levels of tax Liquidation of subsidiaries Partnerships/LLCs Employment taxes 24

25 POLL QUESTION #3 When a business closes any unpaid employment taxes that the business cannot pay are discharged (True or False)? 25

26 UNIQUE ETHICAL ISSUES Fees paid as equity Circular 230, Section Practitioner may not charge an unconscionable fee. Practitioner may not charge a contingent fee for services in connection with any matter before the IRS. Relationships with funding sources Circular 230, Section A conflict of interest exists if there is a significant risk that the representation of a client will be materially limited by the practitioner s personal interests. 26

27 UNIQUE ETHICAL ISSUES Tax/legal advice versus business advice IRC 7525 With respect to tax advice, the same common law protections of the attorney-client privilege apply to taxpayer and federally authorized tax practitioner. Who is the client? Entity versus founder Founder conflicts 27

28 POLL QUESTION #4 What was the most important thing you learned on today s webinar? 28

29 Instant Benefits Save 2-8% on Payroll (APA) Invoicing with 1 click True, Accurate Data Visible Profitability

30 Free TSheets Account for your practice Discounts on your client s accounts Direct or Wholesale billing models tsheets.com/pros

31 Poll Question #5 Would you like to become a TSheetsPRO Yes, thank you No, thank you I need more information I already am a TSheetsPRO 31

32 QUESTIONS? The information contained in this presentation provides background information about certain legal issues and should not be regarded as rendering legal advice to any person or entity. As such, the information is not privileged and does not create an attorney-client relationship with JW Law PLLC, or any of the firm s lawyers. This presentation does not constitute an offer to represent you, and you should not act, or refrain from acting, based upon any information so provided. In addition, the information contained in this presentation is not specific to any particular case or situation and may not reflect the most current legal developments, verdicts, or settlements. In the event that you have questions about and are seeking legal advice concerning your particular situation in light of the matters discussed in the presentation, please contact us so that we can take the necessary steps to form an attorney-client relationship if that is warranted. Copyright 2017 JW Law PLLC All Rights Reserved. 32

33 SPEAKERS T. Joshua Wu (571)