Upload
de-la-riva-associates
View
55
Download
0
Embed Size (px)
Citation preview
How to Form, Build, and Protect YOUR Business
Isabel de la RivaFounder and Senior Partner
de la Riva & Associates Legal Team
What Do I Need To Do First?Thinking of Starting A Business?
Planning on Buying A Business?
Wanting to Formalize An Existing Business?
Basic Startup Issues to Consider
Name of Entity Name Protection
Organization Partnership, LLC, Corporation
Costs and Fees Filing fees, attorney fees, startup costs
Business Plan Research, write and produce
Issues: Initial Contributions
Beginning Capital: Who and how much. Money or sweat.Property Contributions: Tax issues, changing title, costs, choosing a location.Interest or Return: Paycheck or distribution.
Issues: Management
Independent or PartnershipMember or Manager ManagedTraditional Roles or No Hierarchy
Powers of eachScope of responsibilityAccountability: To Whom and whenLimitations: Extraordinary transactionsIndemnificationRemoval or Resignation
Issues: Operations
Bank Accounts: Set up, EINAccounting Periods: Fiscal or CalendarReports: To State, to members, to IRSBookkeepingMeetingsChanges to AgreementDisputes
Issues: Exit or Ending the Business
Exit StrategiesWinding Down ProceduresLiquidation and DissolutionLimitation of LiabilityTransfer of Interests:
to family, third partiesDissolution:
Planned or Unplanned
Pros and Cons
The advantages and disadvantages of each legal business formation depend upon the objectives of the business owners and the assets that the owners contributed to the business, past and present.
With each choice of a legal formation, there are various qualifying requirements, degrees of liability, tax consequences, and possibilities for exiting and ending of the business
Issues: Formalizing A Business
No, you cannot do it all.BankerAccountantLawyerManagerMarketing PersonSalesperson
You DO need to be familiar with these areas, but it is UNNECESSARY AND UNWISE to do it alone
It’s Takes A Village
Acquire professional assistanceLegal servicesAccounting servicesMarketing services
Saves you time and money
HOW TO PROTECT YOUR ASSETS
Discuss your decision with the people around you: family, partners, friends.Create a legal entity through the Secretary of StateHave an attorney assist youHave a CPA assist you
CONTROLLED RISK
Types of Business Formations
Sole ProprietorshipPartnershipLimited Liability Company or
Professional Limited Liability CompanyCorporation
Sole Proprietorship
Simplest and Least ExpensiveOwner receives all profits
Owner has all responsibilities and liabilitiesYou get what you pay for
PartnershipBusiness enterprise owned jointly by 2 or moreProfits, debts, and liabilities are shared Can create a LIMITED PARTNERSHIP or a GENERAL PARTNERSHIP
GENERAL PARTNERSHIPAll partners participate in the day-to-day management of the business
LIMITED PARTNERSHIPHas passive partners who contribute capital but have minimal control
Corporations
Legal entity who can own a business, sue or be suedMust pay its own taxesOperates the business according to a written charter issued by the StateDifferent forms available
Sole Proprietorship and PartnershipsThe sole proprietorship contains the most risk because there is no limited liability protection inherent in this legal business form.
The business owner is personally liable for any claims against his company that are not covered by some form of business insurance.
The business owner's personal assets are not protected.
Sole Proprietorship
Enjoys complete control over businessThis type of business owner receives all the profits, but also has sole responsibility of all debts and liabilitiesIncome tax returns combine business and personal income
Sole Proprietorship
AdvantagesLeast amount of red tape to complete in establishing the businessLittle or no expense in forming or dissolving the businessSimplicity of operationCertain reporting requirements are not necessaryIncome is taxed only once
Sole Proprietorship
DisadvantagesUnlimited liability for business debts. Income tax rate may be higher than the corporate form of business organization. Tax saving or retirement plans are complicated.If the business is to operate as a sole proprietorship or partnership, the entrepreneur should consider recording a declaration of business name.
Partnership
Partnership form is necessary when there are several owners involved in a businessIncome tax returns are information returns that allocate income or losses to the partnersThe partnership or business must file its own return, but it pays no taxPartners must claim their share of the profits or losses on their personal returns
General Partnership
Most common partnershipAll partners sharing equally
Equal ownershipEqual management decisionsEqual responsibility for partnership debts
Limited PartnershipThe limited partnership must include at least one or more general partners who participate in management decisions and who have personal responsibility for the partnership debts There will also be one or more limited partners who do not participate in management and whose liability for partnership debts is limited to the amount they have contributed to the business
Partnership
AdvantagesAllows persons with insufficient net worth to pool funds to purchase a businessProvides an opportunity to split management duties, unless the partner is a limited partnerIncome is taxed only once
Partnership
DisadvantagesMust share the decision making with other partnersCompatibility and cooperation of the partners are essentialEach general partner has unlimited liability for the debts of the partnership
If all but one of the general partners are financially unsound and unable to pay debts, the one financially secure partner can be required to pay the total amount owedIncome tax rate may be higher than a corporation
CorporationsMost permanent form of business - continues for the life of its charter regardless of what happens to the original organizerOwned by stockholders in proportion to their number of sharesCan be a one person operation with only one stockholder holding all stock and being the only officer“S” and “C” Corporations dictate how taxes are handled
“S” vs “C” Corporation –Federal Income Tax Purposes
The S CorporationTaxed the same as a partnershipIncome of S Corp passes directly to stockholders who pay taxes on their shares without any federal income tax being paid for corporation itself
The C CorporationPays corporate income tax on its earningsStockholders pay income tax on dividends
Corporations
AdvantagesA corporation pays 15% of federal income tax on taxable income up to $50,000
25% tax on income from $50,001 to $75,000With incremental increases at 100k and 335k
It is easy to sell part of the business.Bank financing may be obtained more easilyABILITY TO PROTECT YOUR PERSONAL ASSETS
CorporationsDisadvantages
Earnings or income withdrawn from a corporation must be in the form of dividends or bonuses both are taxable to both the corporation and the shareholderMore difficult to transfer cash in and outRequires the most paperwork: annual meetings, minute book and record of stock and stockholdersAnnual report, annual minutes and fee due to Secretary of StateRequires By-Laws, Articles of Incorporation and issuance of stock with SOS approval
Corporations
The C CorporationIs the default corporationAll corporations are automatically C unless they are specifically set up to be S
The S CorporationKnown as the “Small Business Corporation”Governed by Subchapter S of the IRS Code of 1986To qualify, a business MUST comply with strict eligibility requirements with regards to the number and type of shareholders
Limited Liability Company
The LLC is the most flexible of the business legal forms AND it provides a considerable amount of liability protectionThe number and type of owners is NOT restrictedLiability protection for owners so long as there is no fraudulent activityRules for administering an LLC are not as strict as those for an S or a C corporation
Single-Member LLC
An individual in business by himself, with no employees, can make his/her company an LLCIt is treated as a disregarded entity for tax purposesAs a single-member LLC, a business person can treat the business like a sole proprietorship and only needs to file a Schedule C with the IRS
LLC
Limited Liability CompanyLLC is a powerful tool, and in many cases, it’s the SOLUTION.
Attractiveness and power of an LLC: single level of income tax and limited liabilityLLC members face only one level of income tax: any items of income, gain, loss, deduction, and credit flow through to the memberUnlike S corporations, the favorable tax treatment is not dependent on the identity of the members and there is no limited to the number of members
LLC
Limited Liability CompanyAdvantages
Same liability protection as a CorporationCan be taxed as a partnership, with single level, flow-through taxation vs. double taxationFlexibility of business dealsLosses – which are common for start-ups, can pass through the entity and be deducted directly by the owners of the businessAll members/owners of LLC are protected from liabilityEasy to form and dissolve
Limited Liability CompanyA disadvantage to forming an LLC:
Upon sale, the LLC would likely have some ordinary income component that would be taxed at a higher rate than if a business were to end up selling its stock as a C or S corporation, where it would receive capital gains treatment,
Limited Liability CompanyBut losses from single-member LLCs flow through automatically when filed on the Schedule CFrom a tax perspective, there is no difference between a sole proprietorship and a single-member LLCYou get the benefit of limited liability protection without having the additional administrative burden of filing an additional tax return
Limited Liability Company
It can’t hurt you from a tax perspective to form a limited liability company.
LLC Benefits – Asset Protection
A limited liability company offers the same asset protection as a corporationIf you sign agreements in the name of the LLC, then the LLC is the responsible party on the agreement, not you as an individual ownerIf the business is not successful, or if it incurs a large unexpected debt (not personally guaranteed), then your personal assets are protected from LLC creditors
Operating as an LLCTo have asset protection benefits, especially the sole member LLC, owner must observe formalities and operate business as an LLCNeed adequate capitalization depending on the nature and extent of the businessHave annual meetings and produce statements about the past business year and expectations for the future
LLC
Operating as an LLCOwner must enter into contracts through LLC and not personallyUse checks and stationary to give notice to third parties they are dealing with an LLC
LLC
Operate LLC As Separate Business
Needs a separate checking account and set of booksFormal bookkeepingNo need for separate federal income tax filingIncome tax reported on Schedule C of your personal tax returnFor federal income tax purposes, the single member/owner LLC is disregarded
Comparison
Limited Liability CompanyNatural asset protection featuresShields investors and active participants of the business in the same way as corporationAdvantage over corporation when it comes to creditors’ claims against the owner of the business
CorporationSeparate legal entity that pays taxesOwn by shares
Comparison
Limited Liability CompanyAsset protection advantage
Limited Liability PartnershipFully responsible for all claims against the partnershipLLP will likely have a corporation for a general partner to limited the liability of the GP, but then you increase complexity when setting up a business arrangement by creating a corporate entity within a partnership entity
LLC Agreement
Agreement by which owners govern themselves can have additional asset protection features written into the business arrangement
Issues will vary depending on whether owners are family, strangers, wealthy, cash-tight, or a mixture
Management of business
LiabilityOwnership
Operating Agreement can delineate duties, roles, responsibilities, etc.
Operating AgreementAnswers the HOW, WHEN, WHO, WHAT questions of your business
LLC – Basic Asset Protection
Many people create LLCs for protection of their personal assets from creditors and lawsuit related to their businessIf proper procedure is followed, an LLC will extend protection to the owners of the LLC from the creditors of the LLC
LLC Asset Protection RequirementsComprehensive LLC Operating Agreement followed by the ownersAccounting procedures to keep the owner’s personal asset separate from the business assetsClear, timely, and accurate documentation of funds going in and out of the LLCOperating procedures consistent with the LLC being a separate valid business entity
Singing contracts in the name of the LLCUsing personal guarantees only as a last resort
Issues to Consider
EmployeesContractsTrademarkMarketingTeam of Professionals
Will you take the leap?
What does it take?
Take it
Be your own boss
Offices in San Antonio, Houston, and McAllen
SAN ANTONIO OFFICE13407 NW MILITARY HWYSAN ANTONIO, TEXAS 78231(210) 224-2200
HOUSTON OFFICE2180 NORTH LOOP WEST, STE
550HOUSTON, TEXAS 77018
(281) 769-1150
MCALLEN OFFICE520 WEST PECAN BLVD,
STE GMCALLEN, TEXAS 78501
(956) 616-4151
www.delarivalaw.com
Find us on