Starting your Starting your Small BusinessSmall Business

A Legal PerspectiveA Legal Perspective

PresenterPresenter::

Darryl Maxwell, Esq.Darryl Maxwell, Esq.Managing Attorney Managing Attorney

DC Bar Pro Bono ProgramDC Bar Pro Bono Program

Choosing an EntityChoosing an Entity

Types of EntitiesTypes of Entities

Sole ProprietorshipSole Proprietorship General PartnershipGeneral Partnership Limited PartnershipLimited Partnership *Nonprofit *Nonprofit

CorporationCorporation

*For the purposes of this presentation,*For the purposes of this presentation,

these entities will not be discussed.these entities will not be discussed.

Limited Liability Limited Liability CompanyCompany

C-CorpC-Corp S-CorpS-Corp *Statutory Close *Statutory Close

CorporationCorporation

Sole ProprietorshipSole Proprietorshipa business owned by a single individuala business owned by a single individual

PositivesPositives Simplest and least expensive business Simplest and least expensive business

modelmodel Must obtain licenses or permits specific Must obtain licenses or permits specific

to trade to trade No special filings with the governmentNo special filings with the government Owner has full control, reaps all benefitsOwner has full control, reaps all benefits Not req’d to pay unemployment taxesNot req’d to pay unemployment taxes

Sole ProprietorshipSole Proprietorship

DrawbacksDrawbacks Total and unlimited liability; personal assets Total and unlimited liability; personal assets

ARE NOT PROTECTEDARE NOT PROTECTED Profits are personally taxed to the ownerProfits are personally taxed to the owner Offers very few tax benefitsOffers very few tax benefits May have difficulty obtaining long term May have difficulty obtaining long term

financingfinancing No unemployment benefits if business failsNo unemployment benefits if business fails

General PartnershipGeneral PartnershipBusiness owned by 2 or more persons who have Business owned by 2 or more persons who have agreed--verbally or in writing—to operate a businessagreed--verbally or in writing—to operate a business

AdvantagesAdvantagesEasy to set upEasy to set upPartners share workloadPartners share workloadFinancing easier to obtain than in a sole Financing easier to obtain than in a sole

proprietorshipproprietorshipPartners share all profits & reap all Partners share all profits & reap all

benefitsbenefits

General PartnershipGeneral Partnership

DisadvantagesDisadvantages More expensive to start than sole proprietorship; few More expensive to start than sole proprietorship; few

tax benefitstax benefits All partners have All partners have TOTAL AND UNLIMITED LIABILITYTOTAL AND UNLIMITED LIABILITY

for business expensesfor business expenses Can take Can take personal assets from partnerspersonal assets from partners to resolve to resolve

debtsdebts Each partner is bound by the actions of the other Each partner is bound by the actions of the other

partner(s)partner(s) Loss of partner may cause business to dissolveLoss of partner may cause business to dissolve Partnership may be difficult to endPartnership may be difficult to end

Limited PartnershipLimited PartnershipPartnership with limited legal liabilitiesPartnership with limited legal liabilities

AdvantagesAdvantages Easy to set up (certificate of Limited Easy to set up (certificate of Limited

Partnership to be filed at DCRA & requires Partnership to be filed at DCRA & requires written agreementwritten agreement between partners) between partners)

Partners share expenses and profitsPartners share expenses and profits Limited Partners only risk their business Limited Partners only risk their business

investment investment not their personal assetsnot their personal assets Pass through taxation: owners report their Pass through taxation: owners report their

share of profits or losses in the company on share of profits or losses in the company on their individual tax returns. The IRS does not their individual tax returns. The IRS does not assess taxes on the partnership itself. assess taxes on the partnership itself.

Limited PartnershipLimited Partnership

DisadvantagesDisadvantages More expensive to start up because it requires written More expensive to start up because it requires written

agreementagreement Operating (general) partner has Operating (general) partner has TOTAL AND UNLIMITED TOTAL AND UNLIMITED

LIABILITYLIABILITY for business expenses; if a for business expenses; if a limited partner limited partner participates in managementparticipates in management, s/he may forfeit liability , s/he may forfeit liability shield and become personally liable in lawsuitsshield and become personally liable in lawsuits

Can take Can take personal assets from partnerspersonal assets from partners to resolve debts to resolve debts Each partner is bound by the actions of the other partner(s)Each partner is bound by the actions of the other partner(s) Loss of partner may cause business to dissolveLoss of partner may cause business to dissolve Partnership may be difficult to endPartnership may be difficult to end

C (General) CorporationC (General) CorporationA business formed by law as a separate legal entity from its A business formed by law as a separate legal entity from its owners (shareholders and stockholders)owners (shareholders and stockholders)

AdvantagesAdvantages Lifespan independent from its ownersLifespan independent from its owners Personal assets protected from business Personal assets protected from business

liabilityliability Ownership can be transferred through sale of Ownership can be transferred through sale of

stock; easy to raise capital through stock salestock; easy to raise capital through stock sale Ownership changes do not affect management Ownership changes do not affect management

of the corporationof the corporation

C (General) CorporationC (General) Corporation

DisadvantagesDisadvantages Incorporation involves considerable start-up Incorporation involves considerable start-up

expensesexpenses Subject to greater DC & federal legislationSubject to greater DC & federal legislation Corporate earnings subject to double taxation Corporate earnings subject to double taxation

(corporation taxed at entity level and (corporation taxed at entity level and shareholders taxed on income from dividends)shareholders taxed on income from dividends)

Great deal of legal formalitiesGreat deal of legal formalities

S CorpS CorpCorporation with a maximum of 75 Corporation with a maximum of 75 shareholdersshareholders

Not recognized in DC; treated as an S Corp by the federalNot recognized in DC; treated as an S Corp by the federal

government by a C Corp by the District.government by a C Corp by the District.

AdvantagesAdvantages Corporate earnings avoid double taxationCorporate earnings avoid double taxation Limited liability for shareholdersLimited liability for shareholders Ease of transfer of interestEase of transfer of interest

S CorpS Corp

DisadvantagesDisadvantages Lack of flexibility of managementLack of flexibility of management Impractical to ever go publicImpractical to ever go public Same corporate formalities as an LLC Same corporate formalities as an LLC

but less benefitsbut less benefits

Limited Liability CompanyLimited Liability Company(LLC)(LLC)an unincorporated association, with or without perpetual duration, an unincorporated association, with or without perpetual duration, having one or more member, foreign or domestichaving one or more member, foreign or domestic

Most attractive from of business entity;Most attractive from of business entity;combines the features of partnership withcombines the features of partnership withelements of the corporationelements of the corporationAdvantagesAdvantages

Personal Assets protected from liabilityPersonal Assets protected from liability No limit on the number of ownersNo limit on the number of owners Simpler to operate than a corporationSimpler to operate than a corporation Owners may participate in the management of the Owners may participate in the management of the

businessbusiness Owners receive pass-through tax benefit; only taxed Owners receive pass-through tax benefit; only taxed

at the personal level, not the entity levelat the personal level, not the entity level

Limited Liability CompanyLimited Liability Company(LLC)(LLC)

DisadvantagesDisadvantages Legal assistance may be needed to properly Legal assistance may be needed to properly

set up the LLC, including drafting the set up the LLC, including drafting the operating agreementoperating agreement

Professionals -- lawyers, doctors, Professionals -- lawyers, doctors, accountants, etc.-- are prohibited from accountants, etc.-- are prohibited from registering as an LLC.registering as an LLC.

Social Enterprise Social Enterprise a business whose primary purpose is the common good. a business whose primary purpose is the common good.

This entity uses the methods and disciplines of This entity uses the methods and disciplines of business and the power of the marketplace to business and the power of the marketplace to advance its social, environmental and human justice advance its social, environmental and human justice agendasagendas

Applicable StructuresApplicable Structures Non-profit Non-profit

Subject to 501(c)(3) or 501(c)(4) limitationsSubject to 501(c)(3) or 501(c)(4) limitations Low Profit Limited Liability Company (L3C)(not recognized Low Profit Limited Liability Company (L3C)(not recognized

in DC)in DC) a hybrid structure that combines the legal and tax flexibility of a a hybrid structure that combines the legal and tax flexibility of a

traditional LLC, the social benefits of a nonprofit organization, traditional LLC, the social benefits of a nonprofit organization, and the branding and market positioning advantages of a social and the branding and market positioning advantages of a social enterprise.enterprise.

Certified B CorporationsCertified B Corporations Required to have a public benefit purpose that is audited by a Required to have a public benefit purpose that is audited by a

third-party standard third-party standard Benefit Corporations Benefit Corporations

Social Enterprise Social Enterprise

AdvantagesAdvantages Offer legal protection to directors and officers to Offer legal protection to directors and officers to

consider the non-financial interests of their consider the non-financial interests of their workforce, community, and the environment workforce, community, and the environment when making decisions, even in liquidity/sale when making decisions, even in liquidity/sale scenariosscenarios

Institutional investors that prefer corporate Institutional investors that prefer corporate structures over LLC may be drawn to the structures over LLC may be drawn to the certified benefit corporationscertified benefit corporations

Great for marketing and attracting investorsGreat for marketing and attracting investors

Social Enterprise Social Enterprise

DisadvantagesDisadvantages Can be sued for failing to adhere to its beneficial Can be sued for failing to adhere to its beneficial

purpose, or for not adequately considering non-purpose, or for not adequately considering non-financial interests in decision makingfinancial interests in decision making

A simple LLC could incorporate benefit corporation A simple LLC could incorporate benefit corporation provision in its operating agreement without the provision in its operating agreement without the additional cost of certification additional cost of certification

Additional costs associated with getting certification Additional costs associated with getting certification Does not affect tax status Does not affect tax status Not recognized in every jurisdiction Not recognized in every jurisdiction

Personal GuaranteesPersonal Guarantees

Guarantee applies to Guarantee applies to you personally. you personally. YouYou are are declaring an individual declaring an individual pledge to make good on pledge to make good on the loan, usually without the loan, usually without exception.exception.

Depending on how your Depending on how your contract is written, you contract is written, you may be responsible for may be responsible for the loan even if your the loan even if your business is protected by business is protected by limited liability laws. limited liability laws.

You may even be You may even be responsible for the loan responsible for the loan after your business has after your business has been dissolved. When been dissolved. When you issue a personal you issue a personal guarantee, you are guarantee, you are acting as a cosigner on acting as a cosigner on the loan. As such, the loan. As such, creditors will go after you creditors will go after you in the event that the in the event that the borrower — your borrower — your business — fails to make business — fails to make the loan payments.the loan payments.

Personal GuaranteesPersonal Guarantees

Personal Guarantees Personal Guarantees are a way of life and may are a way of life and may be unavoidable.be unavoidable.

The Small Business The Small Business Administration (SBA) for Administration (SBA) for example, requires that example, requires that all loans they guarantee all loans they guarantee must also be personally must also be personally guaranteed by any guaranteed by any person with a 20 percent person with a 20 percent or larger ownership or larger ownership interest in the business. interest in the business.

When agreeing to a When agreeing to a personal guarantee, try personal guarantee, try to limit your personal to limit your personal exposure.exposure.

You may offer a limited You may offer a limited personal guarantee, say personal guarantee, say 25 percent of the loan. 25 percent of the loan.

Larger banks may leave Larger banks may leave you no room to you no room to negotiate, but smaller, negotiate, but smaller, community banks may community banks may be more understanding. be more understanding.

Forming the different Forming the different entitiesentities

Sole ProprietorshipSole Proprietorship: no paperwork; must obtain : no paperwork; must obtain any applicable licenses/permitsany applicable licenses/permits

General PartnershipGeneral Partnership: no paperwork required by : no paperwork required by a written partnership agreement is encourageda written partnership agreement is encouraged

Limited PartnershipLimited Partnership: Certificate of Limited : Certificate of Limited Partnership must be filed with DCRA; should Partnership must be filed with DCRA; should draw up a limited partnership agreement draw up a limited partnership agreement between the partners; must have a registered between the partners; must have a registered office and agent. office and agent.

Forming the different Forming the different entitiesentities

S-CorpS-Corp: Articles of Incorporation must be filed : Articles of Incorporation must be filed with DCRA; must have a registered office and with DCRA; must have a registered office and agent. agent.

C-CorpC-Corp: Articles of Incorporation must be filed : Articles of Incorporation must be filed with DCRA; must have a registered office and with DCRA; must have a registered office and agent. agent.

LLCLLC: Articles of Organization must be filed with : Articles of Organization must be filed with DCRA; Must draft a operating agreement; must DCRA; Must draft a operating agreement; must have a registered office and agent. have a registered office and agent.

Department of Consumer Department of Consumer and Regulatory Affairs and Regulatory Affairs (DCRA)(DCRA)Technical requirementsTechnical requirements Certificate of Certificate of

OccupancyOccupancy: shows that : shows that building meets correct building meets correct building & zoning building & zoning requirements for userequirements for use

DC Business Tax ID DC Business Tax ID Number Number (Form FR-500) (Form FR-500) and Certificate of and Certificate of Registration from the Registration from the Office of Tax & RevenueOffice of Tax & Revenue

Clean Hands CertificateClean Hands Certificate: : affidavit stating you do affidavit stating you do not owe DC more than not owe DC more than $100. If you do, you $100. If you do, you must resolve it before must resolve it before you can proceedyou can proceed

Basic Business Basic Business LicenseLicense

Trade Name Trade Name RegistrationRegistration

Building PermitsBuilding Permits (for (for constructing or altering a constructing or altering a buildingbuilding

For more information, For more information, please visit:please visit:

www.dcra.dc.gov http://www.irs.gov/businesses

DC Bar Pro BonoDC Bar Pro BonoProgramProgram

As part of its outreach to small As part of its outreach to small business owners, the Pro Bono business owners, the Pro Bono Program provides:Program provides: Eight-part business law course for Eight-part business law course for

small business owners starting in small business owners starting in September.September. Topics include entity formation, Topics include entity formation,

contracts, risk management, contracts, risk management, employment law, government employment law, government contracting, joint ventures and contracting, joint ventures and financial controlsfinancial controls

The course has been held each The course has been held each fall since 2006. Over 120 small fall since 2006. Over 120 small businesses have participated. businesses have participated.

Small Business ClinicsSmall Business Clinics

The CED Project co-sponsors walk-in small business The CED Project co-sponsors walk-in small business clinics at various locations around the District. clinics at various locations around the District.

The clinics are held 11 times per year. About 175 The clinics are held 11 times per year. About 175 small business owners attended the clinics in each of small business owners attended the clinics in each of the past two years.the past two years.

At the clinics, small business owners can meet one-At the clinics, small business owners can meet one-on-one with a lawyer and ask about their legal issues.on-one with a lawyer and ask about their legal issues.

Each small business is matched with a lawyer who Each small business is matched with a lawyer who has expertise in the areas of concern for the small has expertise in the areas of concern for the small business owner.business owner.

Upcoming Small Business Upcoming Small Business ClinicsClinics

Wednesday, February 11, 2015 - DCRA 1100 4th Street SW Wednesday, February 11, 2015 - DCRA 1100 4th Street SW (5:00pm - 7:30pm)(5:00pm - 7:30pm)

Wednesday, March 18, 2015 - Carlos Rosario International Public Wednesday, March 18, 2015 - Carlos Rosario International Public Charter School 1100 Harvard Street, NW (5:00pm - 7:30pm)Charter School 1100 Harvard Street, NW (5:00pm - 7:30pm)

Wednesday, April 22, 2015 - DCRA 1100 4th Street SW (5:00pm - Wednesday, April 22, 2015 - DCRA 1100 4th Street SW (5:00pm - 7:30pm)7:30pm)

For more information and registration, visit www.lawhelp.org/dc/ced

QuestionsQuestions

Contact:Contact:Darryl Maxwell, Managing AttorneyDarryl Maxwell, Managing AttorneyCED ProjectCED ProjectDC Bar Pro Bono ProgramDC Bar Pro Bono Program1101 K Street NW, Suite 2001101 K Street NW, Suite 200Washington, DC 20005Washington, DC 20005202-737-4700, Ext. 3369202-737-4700, Ext. 3369dmaxwell@dcbar.orgwww.dcbar.orgwww.dcbar.orgwww.lawhelp.org/dc/cedTwitter: @darryljmaxwellTwitter: @darryljmaxwell