Presentation on theme: "Weidner, Wegmann & Harper, LLC BUSINESS LAW BASICS DON RYAN CENTER FOR INNOVATION JAMES J. WEGMANN."— Presentation transcript:
Weidner, Wegmann & Harper, LLC BUSINESS LAW BASICS DON RYAN CENTER FOR INNOVATION JAMES J. WEGMANN
So Many Structures, So Little Time Must I Choose? Choosing the Correct Structure at the outset is important: What types of business structures exist in South Carolina? What is the number one factor cited by new business owners when choosing an “structure” type? What are some of the other “factors?”
Basic Structure Choices Choosing Correct Entity at the outset is important: Sole Proprietorship General Partnership Limited Partnership (LP) Limited Liability Company (LLC) Corporation C Corp S Corp
Sole Proprietorship Is it really a choice or simply the default? Known as the Simplest form of business ownership What makes it the “Simplest” form of business ownership?
Sole Proprietorship Pros/Cons Ease of setup Nominal Cost to set up No separate existence from its owner Not a legal entity A person who owns a business and is personally responsible/liable for the debt of the business No formalities such as bylaws, operating agreements, partnership agreements, stock certificates, meetings, minutes, corporate books, etc.
Sole Proprietorship Often have bank accounts in owner’s name May comingle “business funds/assets” with “owner’s funds/assets” Sue and be Sued in the owner’s name Report Income/Loss on 1040 Schedule C No extra tax returns to file Schedule SE – “Self Employment Tax” Unlimited Personal Liability Home Cars Personal Accounts Retirement Accounts
General Partnerships Definition: “association of two or more persons to carry on as co-owners a business for profit” Generally - think Sole Proprietorship for multiple people Business doesn’t pay taxes on Income – “pass through” to partners profits and losses IRS Form 1065 K-1 to Partners However – Personal Liability Like Sole Proprietorship
General Partnerships Determining Whether Partnership Exits: (1) Except as provided by Section 33-41-380 persons who are not partners as to each other are not partners as to third persons; (2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profit made by the use of the property; (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived; and (4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment (a) as a debt by installments or otherwise, (b) as wages of an employee or rent to a landlord, (c) as an annuity to a widow or representative of a deceased partner, (d) as interest on a loan, though the amount of payment vary with the profits of the business or (e) as the consideration for the sale of the good will of a business or other property by installments or otherwise.
General Partnerships Partner’s Acts and Agency (1) Every partner is an agent of the partnership for the purpose of its business and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter and the person with whom he is dealing has knowledge of the fact that he has no such authority. (2) An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners. (3) Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to (a) assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership, (b) dispose of the good will of the business, (c) do any other act which would make it impossible to carry on the ordinary business of a partnership, (d) confess a judgment or (e) submit a partnership claim or liability to arbitration or reference. (4) No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction.
General Partnerships So Why Did I Bore You with State Statutes: Neighbor Example Have I got a deal for you Just a little fixer upper Each Contribute Sweat Equity Sell and Split the Profits What could go wrong? Is there a Requirement of a Writing?
General Partnerships Other Issues with Partnerships: How will ownership interest be shared? How will decisions get made? If a partner withdraws, how will his/her “share” be valued? When will his/her “share” be paid? Just some of the main questions that should be answered and agreed to by the partners in a written partnership agreement!
Limited Partnerships Requires a Filing in the Office of the Secretary of State. Is formed at the time of the filing of the “certificate of limited partnership” in the Office of the Secretary of State. General Partner(s) & Limited Partners Two Classes of “owners”
Limited Partnerships General Partner(s) have essentially the same liabilities as a partner in a partnership – individually responsible for debts and obligations General Partner(s) are responsible for the day to day running and management of the Limited Partnership Limited Partners are not liable for the obligations of limited partnership unless he/she is also a general partner or he/she “takes part in the control of the business. Think “Passive Partners”
Limited Partnerships IRS 1065 K-1’s to partners Limited Partners – passive losses cannot be used to offset “active” income
Limited Liability Company Liability-shield advantages of Corporation and the flexibility and tax pass-through advantages of partnership Requires filing of Articles of Organization with Secretary of State Operating Agreement Absent Written Operating Agreement – operate under the Code
Limited Liability Company Advantage over Sole Proprietorship – Liability Protection Advantages over Limited Partnership Limited partner – passive losses LLC Member – losses offset against “active” income Limited Partner would have to take active role in management to be able to offset against “active” income but would loose liability protection.
Limited Liability Company Tax Implications Single Member LLC Disregarded Entity – IRS 1040/Schedule C – Like Sole Proprietorship Still Maintains Liability Protection Multiple Member LLC Extremely Flexible with regards to taxation Partnership S Corp C Corp
Limited Liability Company Tax Implications LLC’s can elect to be taxed as a: Partnership – 1065/K-1s S Corp – Form 2553 to elect status as S Corp and files Form1120s/K-1 for Tax Return. Pass-Through entity C Corp – 1120 No Pass Through they pay taxes at the corporate level. Can have double taxation if income is distributed to “owners” as dividends which are then taxed again at the owner level.
Limited Liability Company LLCs can be member managed or manager managed Typically no requirement of the corporate formalities required of C Corps or S Corps. No annual meetings No stock certificates Profits can be split as the members agree Members can be individuals, corporations, or partnerships (As we will see later, S Corps have only 1 “class” of stock and limited to 100 individual shareholders who must be US citizens)
Limited Liability Company In the early days, the knock on LLCs was that they didn’t have a plethora of law, they were “Too New.” Some would choose S Corp over LLC because they thought they appeared more “legitimate.” Simply isn’t the case anymore, they have been around for a significant amount of time and the Courts have no problem dealing with LLC issues.
Corporations Require filing with SCSOS Application requires Attorney Sign-off Articles of Incorporation Bylaws Formalities Annual Meetings – Shareholder and Directors Keep Corporate Minutes Stock Certificates Corporate Books
Corporations S Corporation – Single Class of Stock Pass Through Entity 1120s/K-1 Liability Protection to Shareholders Limited to 100 Shareholders Shareholders US Citizens, estates and certain exempt organizations 501(c)(3) and certain trusts Requires the filing of form 2553 to “elect” S Corp treatment – must be filed timely under the election rules
Corporations C Corporations have no restrictions on ownership File 1120 IRS form and pay taxes at the corporate level Possibility of Double Taxation Same Filing Requirements with Secretary of State Articles of Incorporation Bylaws Shareholders have liability protection
General Do’s and Don'ts LLCs, C Corps, S Corps are separate entities Don’t co-mingle funds Do have separate bank accounts Don’t pay your personal debts from your business account Restaurant Example Sign your name appropriately Piercing the Corporate Veil
The Business License Nightmare Beaufort County Every person engaged or intending to engage in any calling, business, occupation or profession whether listed in the rate classification index or not, shall register the business and make application for a business license and will be required to pay an annual license tax and obtain a business license as provided in this article. A new business shall be required to have a business license prior to operation within the county.
The Business License Nightmare Beaufort County Any persons violating any provision of this article shall be deemed guilty of an offense and subject to a fine of up to $500.00 or imprisonment for not more than 30 days or both, upon conviction. Each day of violation shall be considered a separate offense. Punishment for violation shall not relieve the offender of liability for delinquent taxes, penalties and costs provided for in this article.
The Business License Nightmare Beaufort County For nonpayment of all or any part of the correct license tax under this article, the license official shall levy and collect a late penalty of five percent of the unpaid tax for each month or portion thereof after the due date until paid. If any license tax shall remain unpaid for 60 days after its due date, the license official shall issue an execution which shall constitute a lien upon the property of the licensee for the tax, penalties and cost of collection, and shall proceed to collect in the same manner as prescribed by law for the collection of other taxes. Upon identification of a delinquent account the director of business license or his/her designee has the authority to establish payment plans, revenue procedures, and reduce or waive penalties based upon the revenue procedures as adopted with this amendment.
The Business License Nightmare City of Beaufort Any business that is located within the City of Beaufort (resident), OR out-of-city business (non- resident) who performs work within the city limits, is required by City Ordinance Section 7-10014 to purchase a business license.
The Business License Nightmare City of Beaufort For non-payment of all or any part of the correct license tax, the License Inspector shall levy and collect a late penalty of fifteen (15) percent of the unpaid tax for each of the first two (2) months or portions thereof, then ten (10) percent for each of the following two (2) months, or portions thereof, and five (5) percent for each month or portion thereof after the due date until the end of that license year. If a court summons is prepared and served for the collection of business license taxes, the cost of one hundred dollars ($100.00) will be assessed and charged to licensee in addition to license taxes and penalties. If any license tax shall remain unpaid for sixty (60) days after its due date, the License Inspector shall report it to the City Attorney for appropriate legal action, issue an execution which shall constitute a lien upon the property of the licensee for the tax, penalties and costs of collection, and shall proceed to collect in the same manner as prescribed by law for the collection of other taxes.
The Business License Nightmare City of Beaufort Any person violating any provision of this ordinance shall be deemed guilty of an offense and shall be subject a fine of up to $500.00 or imprisonment for not more than thirty (30) days or both, upon conviction. Each day of violation shall be considered a separate offense. Punishment for violation(s) shall not relieve the offender of liability for delinquent penalties and costs provided for herein.
The Business License Nightmare Town of Bluffton Any business physically located within the town of Bluffton is required to have a business license. Additionally, any business that is located outside of the town of Bluffton, but comes into the town to do business, is also required to have a business license.
The Business License Nightmare Town of Bluffton Business License renewals postmarked April 16th or later by the U.S. Postal Service will be assessed a 5% penalty. This penalty will increase 5% each month.
The Business License Nightmare Town of Hilton Head The Town of Hilton Head Island requires any business operating within the limits of the Town, including home occupations, to obtain a Business License. An individual shall be deemed to be in business if that individual owns and rents more than one (1) residential unit within the Town, and is required to obtain a business license. This applies to both short- term and long-term rentals.
The Business License Nightmare Town of Hilton Head Any business found to be operating without a valid Town Business License will be subject to punishment under the general penalty provisions of the Town Code. Fines may be assessed up to $1092.50 per day of non-compliance.
The Business License Nightmare Current State Legislation Introduced HB 3490 – amend State Law “so as to require that the tax not exceed one hundred dollars and that the tax be applied uniformly, to provide that a person is only subject to one business license tax, to require that the Department of Revenue to collect the tax, to provide that the tax is due on July first of each year and must be able to be paid online…”
The Business License Nightmare Current State Legislation Introduced Anybody think the municipalities are happy about this? Several Local legislators have their name on the bill – Erickson and Herbkersman
The Business License Nightmare Additional Licenses/Permits/Etc.? EIN – IRS.gov – simplified process SCDOR SC Business One Stop www.scbos.sc.govwww.scbos.sc.gov Retail Licenses – selling products or certain services Use Tax – tax due on purchases of goods made from outside of SC on which SC Sales Tax was not paid – internet, catalog, or mail order Business Personal Property Tax Alcohol License DHEC Retail Food Establishment Website is constantly expanding and becoming more user friendly and more comprehensive.
If IT IS NOT IN WRITING, IT DIDN’T HAPPEN Partnerships LLCs Business Contracts “You can pay me now or pay me later” “The days of a handshake are looooong gooooone” Make sure the contract is appropriate! 12 million dollar development K on a residential lot standard form K 4 Page million dollar home building K
If IT IS NOT IN WRITING, IT DIDN’T HAPPEN Statute of Frauds SECTION 32-3-10. Agreements required to be in writing and signed. No action shall be brought whereby: (1) To charge any executor or administrator upon any special promise to answer damages out of his own estate; (2) To charge the defendant upon any special promise to answer for the debt, default or miscarriage of another person; (3) To charge any person upon any agreement made upon consideration of marriage; (4) To charge any person upon any contract or sale of lands, tenements or hereditaments or any interest in or concerning them; or (5) To charge any person upon any agreement that is not to be performed within the space of one year from the making thereof;
We Have Come Full Circle Law Suits Happen Proper Business Structure or Entity Selection Own Property – Lease to Entity Insurance – Umbrella Policy, Malpractice Policy Good Business Practices No Comingling – Piercing the Veil Setting Up the Proper Team from the Beginning Help them understand your business
So You Been Sued Law Suits Happen Where do I as litigator see most of the problems for businesses? Wage Payment Act Federal and State Withholding At-will v. Contract Employee Employee v. Independent Contractor
So You Been Sued Wage Payment Act (A) Every employer shall notify each employee in writing at the time of hiring of the normal hours and wages agreed upon, the time and place of payment, and the deductions which will be made from the wages, including payments to insurance programs. The employer has the option of giving written notification by posting the terms conspicuously at or near the place of work. Any changes in these terms must be made in writing at least seven calendar days before they become effective. This section does not apply to wage increases. (B) Every employer shall keep records of names and addresses of all employees and of wages paid each payday and deductions made for three years. (C) Every employer shall furnish each employee with an itemized statement showing his gross pay and the deductions made from his wages for each pay period.
So You Been Sued Wage Payment Act When an employer separates an employee from the payroll for any reason, the employer shall pay all wages due to the employee within forty-eight hours of the time of separation or the next regular payday which may not exceed thirty days. (C) In case of any failure to pay wages due to an employee as required by Section 41-10-40 or 41-10-50 the employee may recover in a civil action an amount equal to three times the full amount of the unpaid wages, plus costs and reasonable attorney's fees as the court may allow. Any civil action for the recovery of wages must be commenced within three years after the wages become due.
So You Been Sued Wage Payment Act No provision of this chapter may be contravened or set aside by a private agreement.
We Have Come Full Circle Depends Really on the Risk? Smith & Smith, Inc. Employee Independent Contractor Employee – Hourly Sues Company and Smith Individually Piercing the Veil Motion to Dismiss Smith – Granted Smith & Smith only Defendant left and they have no assets Smith’s Personal Assets are secure