Legal Issues in Organizing your Business USAC National Conference November 1, 2014 Dave Steigerwald
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: 1 st offense up to $5,000 per day per misclassified employee 2 nd 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 DPS@SparksWillson.com The materials presented hereby are informational only and do not constitute legal advice with respect to any particular situation.