SMALL BUSINESS BASICS Robert M. Avera © 2013 AVERA LAW FIRM, PLLC.

SMALL BUSINESS BASICS Robert M. Avera 2013 AVERA LAW FIRM, PLLC

DISCLAIMER This presentation is intended for educational purposes only. It is not intended to convey legal advice pertaining to any particular situation and is not a substitute for legal advice. 2013 AVERA LAW FIRM, PLLC

THE BUSINESS PLAN A business plan provides a blueprint for your business and highlights your ideas, strategy, and team; it will be used by you and others, such as banks, investors, and potential partners. A business plan is a dynamic document. 2013 AVERA LAW FIRM, PLLC

THE BUSINESS PLAN Other topics: 1. start-up costs 2. licensing and certification 3. capital (financial, intellectual, and human) 4. suppliers, equipment, and space 5. technology 6. advertising 7. banking relationships 2013 AVERA LAW FIRM, PLLC

THE BUSINESS PLAN Other topics: 8. insurance 9. taxes 10. governance and compliance 11. growth 12. alternative strategies and opportunities, and 13 strategy 2013 AVERA LAW FIRM, PLLC

CHOOSING THE RIGHT BUSINESS 1. Starting a New Business: Is your idea new or novel? 2. Purchase an Existing Business: Many entrepreneurs start as franchisees in proven businesses, thus avoiding some of the risks and challenges inherent with starting a new business from scratch. 2013 AVERA LAW FIRM, PLLC

CHOICE OF BUSINESS ENTITY Texas law (and most states) recognizes several business structures. 1. Sole Proprietorship 2. General Partnership 3. Corporation 4. Limited Liability Companies 5. Limited Partnerships 2013 AVERA LAW FIRM, PLLC

BUSINESS ENTITY: SOLE PROPRIETORSHIP An individual person (if there is more than one owner then it is a partnership as described below) is doing business under his own name (or even under an assumed name). No formal organizational requirement There is no limit to liability - your personal assets are at stake! You can only transfer the interests in your business by selling the assets themselves which could mean more tax liability. Access to capital can be limited. No entity taxation at either the federal or state level because there is no entity to tax. 2013 AVERA LAW FIRM, PLLC

BUSINESS ENTITY: GENERAL PARTNERSHIP Two or more individuals (or entities) have shared ownership of the business. No formal organizational requirements to be formed nor does it have any formal management or governance requirements Any partner of the partnership can bind or obligate the partnership There is no limit to liability for the partners Full flow through taxation - taxes are paid at the individual partners level general partners (individuals) may also be subjected to self- employment taxes. 2013 AVERA LAW FIRM, PLLC

BUSINESS ENTITY: CORPORATION Under most state laws, there is one kind of corporation. However, from a federal tax perspective there are two: 1. a C-Corporation and 2. an S-Corporation 2013 AVERA LAW FIRM, PLLC

BUSINESS ENTITY: CORPORATION Both types of corporations have: rigorous management/governance structures a certificate of formation must be filed with the Secretary of State a registered office and agent for service of process in Texas at least one director who is in charge of overseeing the corporations business at least a president and a secretary as officers one annual meeting of the directors and the shareholders of the corporation must take place to elect directors and officers 2013 AVERA LAW FIRM, PLLC

BUSINESS ENTITY: CORPORATION Both types of corporations have the following benefits: corporations provide for continuity of life regardless of whether you are still around or not free transferability of interests (with the exception of some restrictions applicable to S-Corporations as discussed below) Formalities such as annual meetings, holding corporate assets separate and having arms-length transactions between corporations and shareholders/directors must be followed to maintain limited liability of the shareholders. 2013 AVERA LAW FIRM, PLLC

BUSINESS ENTITY: CORPORATION C-Corporation: More flexible type of corporations in that there is no limit in the amount of shareholders they may have Shares of a corporation can be sold to anyone whether a corporation, individual person or different entities Double taxation o as a separate legal entity, pays federal and state taxes and then individual shareholders also pay taxes on whatever dividends (distributions of earnings) are paid to shareholders. 2013 AVERA LAW FIRM, PLLC

BUSINESS ENTITY: CORPORATION C-Corporation: If sold, there is a single tax to shareholders if the interests (shares) are sold but there is double taxation if assets are sold as it is deemed income to the entity and then a distribution to shareholders Because of the double taxation feature of a C-Corporation, it is generally not a desirable business structure for small businesses 2013 AVERA LAW FIRM, PLLC

BUSINESS ENTITY: CORPORATION S-Corporation: Named as such because of Subchapter S of the Internal Revenue Code From a governance and state law perspective, S- Corporations are essentially the same as C-Corporations. Form 2553 is filed, an S-Corporation is viewed as a partnership or sole proprietorship for taxation purposes, depending on the number of shareholders o This means that the corporation itself is not taxed, as C- Corporations are; rather the S-Corporations profits are passed on to its shareholders, who pay income tax on that money. 2013 AVERA LAW FIRM, PLLC

LIMITED LIABILITY COMPANIES LLCs in most cases may be organized in two ways: (i) member managed; or more like a partnership. (ii) manager managed more like a corporation. manager (or managers) is in charge of running the business, very much the same way directors are tasked in corporations, and members do not have an active role in running the business (like shareholders). 2013 AVERA LAW FIRM, PLLC

LIMITED LIABILITY COMPANIES LLC is formed when a certificate of formation is filed with and accepted by the Secretary of State. LLC certificate of formation is required to state whether the LLC will be manager or member managed and sets forth the names of each initial manager (if manager managed) or initial member (if member managed). LLCs have a continuity of life and are very flexible as far as transferability of interests with the exception that LLC interests can not be publicly traded 2013 AVERA LAW FIRM, PLLC

LIMITED LIABILITY COMPANIES No limitation on the number or type of members If an LLC is owned by a single member, for taxation purposes it is treated as a disregarded entity. If the owner is a corporation or another LLC, it is treated as a division or branch of that entity. An LLC with multiple members is treated for tax purposes as a partnership. Can elect to be taxed as a S-Corporation 2013 AVERA LAW FIRM, PLLC

PROFESSIONAL LIMITED LIABILITY COMPANIES The company must be organized for providing professional service and services ancillary to its provision. No unrelated business operations are permissible Protects the members from personal liability for company contracts but does not shield personal liability for acts of the member Used by lawyers, engineers, CPAs and other professionals. 2013 AVERA LAW FIRM, PLLC

SERIES LIMITED LIABILITY COMPANIES Records of Series Established by the LLC. All records of any series must be maintained so that the account of the assets of the series can be reasonably and objectively determined separately from the other assets of the LLC or assets of other series. This may be done by identifying assets by specific listing, category, type, quantity, or computational or allocational formula or procedure, including a percentage or share of any assets or any other objective method. This entity is ideal for holding several real estate investments within one entity. If properly maintained, other real estate properties will not be subject to liability arising out of an incident on or relating to a separate property within the series LLC. 2013 AVERA LAW FIRM, PLLC

LIMITED PARTNERSHIP Limited partnerships (LPs) are partnerships where certain partners have limited liability (limited partners) and at least one partner (general partner) has unlimited liability. LPs are formed by filing a certificate of formation with the Secretary of State. LPs provide limited liability for the limited partners and continuity of life. A general partner is usually an LLC or a corporation in order to provide limited liability to those forming it. Federal taxation perspective, LPs, are taxed similarly to LLCs. 2013 AVERA LAW FIRM, PLLC

WHICH ENTITY DO I CHOOSE? Consider: (i) there is a large possibility you will go public, (ii) you have foreign investors interested in investing in your business, or (iii) you are in an industry which corporations are the preferable or most commonly used business entity Remember, S-Corporations are a possibility, but not if scenarios (i) or (ii) apply. 2013 AVERA LAW FIRM, PLLC

WHICH ENTITY DO I CHOOSE? The Limited Liability Company is the most common choice of entity now with the added professional limited liability provisions and the new series limited liability company rules. Other entities may be desirable based on the needs of the owners. 2013 AVERA LAW FIRM, PLLC

OWNERSHIP ISSUES Ownership Interests Management and Control Employment Matters Buy-Sell Agreements 2013 AVERA LAW FIRM, PLLC

OWNERSHIP INTERESTS (a)What percentage of the ownership interests will be held by each founder? Will it be necessary to commission a valuation of non-cash assets which the founders might contribute to the business? (b)Should the agreement provide for preemptive rights for the founders with respect to future issuances of ownership interests? 2013 AVERA LAW FIRM, PLLC

MANAGEMENT AND CONTROL (a)What procedures should be included for insuring that the founders will cooperate regarding the election of the managers of the business? Among the issues to be considered are the following: (1)Number of persons serving on the managing board of the entity; (2)Persons to be elected as members of the managing board; (3)Functions of managing board; (4)Resolution of disputes among members of the managing board; (5)Persons to be elected as officers (including titles); and (6)Managers' and owners' meetings. 2013 AVERA LAW FIRM, PLLC

MANAGEMENT AND CONTROL (b) What instructions should be included regarding protection and disbursements of the fund of the business? Consider language regarding location of bank accounts and signature requirements for checks. (c)How will the founders select accountants and auditors for the corporation? What financial reports should be prepared for the owners? 2013 AVERA LAW FIRM, PLLC

MANAGEMENT AND CONTROL (d)What matters should require the consent of all the founders? Consider: (1) Issuances of additional ownership interests; (2)Sales of significant assets; (3)Execution of contracts which impose material financial obligations from the business; (4)Significant increases in salaries; (5)Mergers and consolidations; and/or (6)Changes in the business of the entity 2013 AVERA LAW FIRM, PLLC

MANAGEMENT AND CONTROL (e)Should the agreement include provisions regarding the payment of dividends or other distributions of profits? Consider either allowing the directors to determine the timing of dividends or requiring payment of some minimum dividend amount (subject to any restrictions on dividends or distributions included in applicable state law). (f)What books and records should be maintained by the business? 2013 AVERA LAW FIRM, PLLC

EMPLOYMENT MATTERS (a)Should the agreement include provisions relating to employment of the founders by the corporation? If so, consider the following issues: (1)Duties of each founder in his or her capacity as an employee and the amount of time that each founder will spend on the activities of the business; (2)The amount of compensation to be paid to each employee- founder (including benefits); and (3)The circumstances under which employment of a founder may be terminated. 2013 AVERA LAW FIRM, PLLC

EMPLOYMENT MATTERS (b)Should the agreement include restrictions on the ability of the founders to engage in competitive activities? (c)Should the entity be required to purchase health and/or life insurance and/or disability insurance with respect to any of the founders? (d)What types of obligations should be imposed on the founders regarding protection of the confidential information of the business? A definition of confidential information should be included in the text of the agreement. The agreement should also provide for assignment of the founders' company-related inventions to the corporation. 2013 AVERA LAW FIRM, PLLC

BUY-SELL PROVISIONS Should the agreement include restrictions on transfers of ownership interests? In many cases, the transfer of interests may be subject to a right of first offer or refusal in favor of the entity and/or the other owners. (1) Transfers should be broadly defined to include all possible voluntary and involuntary means of transfer including gift, pledge, hypothecation, operation of law (e.g., dissolution of marriage), and intestate succession. (2) Restriction should apply to the founders, personal representatives of deceased or incompetent founders, founders' spouses, and permitted transferees. 2013 AVERA LAW FIRM, PLLC

BUY-SELL PROVISIONS (b)Should the agreement grant one or more of the founders the right to compel the entity to purchase the interests of other specified founders? Such a provision may be helpful in the case of a deadlock among the ownership group. (c)Should the agreement provide for optional/mandatory purchase of ownership interests upon disability of a founder? If so, how should disability be defined? (d)Should the agreement provide for optional/mandatory purchase of shares upon the termination of employment of a founder? If so, what events should constitute termination of employment? (e)Should the agreement provide for mandatory purchase of the ownership interests of a deceased founder? 2013 AVERA LAW FIRM, PLLC

BUY-SELL PROVISIONS (f)Should the agreement provide for optional/mandatory purchase of ownership interests which become subject to transfer to a third party in an involuntary transfer (e.g., a transfer pursuant to a judicial order or enforcement of pledge)? 2013 AVERA LAW FIRM, PLLC

BUY-SELL PROVISIONS (g)How is the purchase price for ownership interests subject to buy-sell provisions to be determined? For example, the parties may agree that the value of the interests will be the sum of the book value of the interests as reflected in the financial statements of the entity plus an amount equal to the value of the goodwill associated with the interests. The price may vary depending on the event that triggers the buy-sell provision, such as when interests subject to involuntary transfers are purchased at the lower of the price determined pursuant to the above formula or the price actually paid by the third party for the interests. 2013 AVERA LAW FIRM, PLLC

BUY-SELL PROVISIONS (h)What provisions should be included for payment of the purchase price for ownership interests bought and sold under the buy-sell agreement? For example, a portion of the price may be paid immediately in cash and the balance may be paid out in installment payments under a promissory note. Consider the need to purchase insurance to finance purchases. 2013 AVERA LAW FIRM, PLLC

EMPLOYMENT ISSUES Employment Manuals Independent Contractor Agreements Course and Scope of Employment 2013 AVERA LAW FIRM, PLLC

DEALING WITH VENDORS Actual Authority Maintaining Corporate Formality Liability for Entity Debts 2013 AVERA LAW FIRM, PLLC

THANK YOU Robert M. Avera 13062 Hwy 290 West. Austin TX 78737 (512) 615-3578 Fax (512) 615-3583 [email protected] www.AveraLaw.com 2013 AVERA LAW FIRM, PLLC

SMALL BUSINESS BASICS Robert M. Avera © 2013 AVERA LAW FIRM, PLLC.

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Transcript of SMALL BUSINESS BASICS Robert M. Avera © 2013 AVERA LAW FIRM, PLLC.