Presentation on theme: "Starting your Small Business A Legal Perspective"— Presentation transcript:
1 Starting your Small Business A Legal Perspective Presenter:Darryl Maxwell, Esq.Managing AttorneyDC Bar Pro Bono Program
2 Choosing an Entity Types of Entities Sole ProprietorshipGeneral PartnershipLimited Partnership*Nonprofit Corporation*For the purposes of this presentation,these entities will not be discussed.Limited Liability CompanyC-CorpS-Corp*Statutory Close Corporation
3 Sole Proprietorship a business owned by a single individual PositivesSimplest and least expensive business modelMust obtain licenses or permits specific to tradeNo special filings with the governmentOwner has full control, reaps all benefitsNot req’d to pay unemployment taxes
4 Sole Proprietorship Drawbacks Total and unlimited liability; personal assets ARE NOT PROTECTEDProfits are personally taxed to the ownerOffers very few tax benefitsMay have difficulty obtaining long term financingNo unemployment benefits if business fails
5 General Partnership Business owned by 2 or more persons who have agreed--verbally or in writing—to operate a businessAdvantagesEasy to set upPartners share workloadFinancing easier to obtain than in a sole proprietorshipPartners share all profits & reap all benefits
6 General Partnership Disadvantages More expensive to start than sole proprietorship; few tax benefitsAll partners have TOTAL AND UNLIMITED LIABILITY for business expensesCan take personal assets from partners to resolve debtsEach partner is bound by the actions of the other partner(s)Loss of partner may cause business to dissolvePartnership may be difficult to end
7 Limited Partnership Partnership with limited legal liabilities AdvantagesEasy to set up (certificate of Limited Partnership to be filed at DCRA & requires written agreement between partners)Partners share expenses and profitsLimited Partners only risk their business investment not their personal assetsPass through taxation: owners report their share of profits or losses in the company on their individual tax returns. The IRS does not assess taxes on the partnership itself.
8 Limited Partnership Disadvantages More expensive to start up because it requires written agreementOperating (general) partner has TOTAL AND UNLIMITED LIABILITY for business expenses; if a limited partner participates in management, s/he may forfeit liability shield and become personally liable in lawsuitsCan take personal assets from partners to resolve debtsEach partner is bound by the actions of the other partner(s)Loss of partner may cause business to dissolvePartnership may be difficult to end
9 C (General) Corporation A business formed by law as a separate legal entity from its owners (shareholders and stockholders)AdvantagesLifespan independent from its ownersPersonal assets protected from business liabilityOwnership can be transferred through sale of stock; easy to raise capital through stock saleOwnership changes do not affect management of the corporation
10 C (General) Corporation DisadvantagesIncorporation involves considerable start-up expensesSubject to greater DC & federal legislationCorporate earnings subject to double taxation (corporation taxed at entity level and shareholders taxed on income from dividends)Great deal of legal formalities
11 S Corp Corporation with a maximum of 75 shareholders Not recognized in DC; treated as an S Corp by the federalgovernment by a C Corp by the District.AdvantagesCorporate earnings avoid double taxationLimited liability for shareholdersEase of transfer of interest
12 S Corp Disadvantages Lack of flexibility of management Impractical to ever go publicSame corporate formalities as an LLC but less benefits
13 Limited Liability Company (LLC) an unincorporated association, with or without perpetual duration, having one or more member, foreign or domesticMost attractive from of business entity;combines the features of partnership withelements of the corporationAdvantagesPersonal Assets protected from liabilityNo limit on the number of ownersSimpler to operate than a corporationOwners may participate in the management of the businessOwners receive pass-through tax benefit; only taxed at the personal level, not the entity level
14 Limited Liability Company (LLC) DisadvantagesLegal assistance may be needed to properly set up the LLC, including drafting the operating agreementProfessionals -- lawyers, doctors, accountants, etc.-- are prohibited from registering as an LLC.
15 Social Enterprise a business whose primary purpose is the common good. This entity uses the methods and disciplines of business and the power of the marketplace to advance its social, environmental and human justice agendasApplicable StructuresNon-profitSubject to 501(c)(3) or 501(c)(4) limitationsLow Profit Limited Liability Company (L3C)(not recognized in DC)a hybrid structure that combines the legal and tax flexibility of a traditional LLC, the social benefits of a nonprofit organization, and the branding and market positioning advantages of a social enterprise.Certified B CorporationsRequired to have a public benefit purpose that is audited by a third-party standardBenefit Corporations-L3C:-Benefit Corp.:
16 Social Enterprise Advantages Offer legal protection to directors and officers to consider the non-financial interests of their workforce, community, and the environment when making decisions, even in liquidity/sale scenariosInstitutional investors that prefer corporate structures over LLC may be drawn to the certified benefit corporationsGreat for marketing and attracting investors
17 Social Enterprise Disadvantages Can be sued for failing to adhere to its beneficial purpose, or for not adequately considering non-financial interests in decision makingA simple LLC could incorporate benefit corporation provision in its operating agreement without the additional cost of certificationAdditional costs associated with getting certificationDoes not affect tax statusNot recognized in every jurisdiction
18 Personal GuaranteesGuarantee applies to you personally. You are declaring an individual pledge to make good on the loan, usually without exception.Depending on how your contract is written, you may be responsible for the loan even if your business is protected by limited liability laws.You may even be responsible for the loan after your business has been dissolved. When you issue a personal guarantee, you are acting as a cosigner on the loan. As such, creditors will go after you in the event that the borrower — your business — fails to make the loan payments.
19 Personal GuaranteesPersonal Guarantees are a way of life and may be unavoidable.The Small Business Administration (SBA) for example, requires that all loans they guarantee must also be personally guaranteed by any person with a 20 percent or larger ownership interest in the business.When agreeing to a personal guarantee, try to limit your personal exposure.You may offer a limited personal guarantee, say 25 percent of the loan.Larger banks may leave you no room to negotiate, but smaller, community banks may be more understanding.
20 Forming the different entities Sole Proprietorship: no paperwork; must obtain any applicable licenses/permitsGeneral Partnership: no paperwork required by a written partnership agreement is encouragedLimited Partnership: Certificate of Limited Partnership must be filed with DCRA; should draw up a limited partnership agreement between the partners; must have a registered office and agent.
21 Forming the different entities S-Corp: Articles of Incorporation must be filed with DCRA; must have a registered office and agent.C-Corp: Articles of Incorporation must be filed with DCRA; must have a registered office and agent.LLC: Articles of Organization must be filed with DCRA; Must draft a operating agreement; must have a registered office and agent.
22 Department of Consumer and Regulatory Affairs (DCRA) Technical requirements Certificate of Occupancy: shows that building meets correct building & zoning requirements for useDC Business Tax ID Number (Form FR-500) and Certificate of Registration from the Office of Tax & RevenueClean Hands Certificate: affidavit stating you do not owe DC more than $100. If you do, you must resolve it before you can proceedBasic Business LicenseTrade Name RegistrationBuilding Permits (for constructing or altering a building
24 DC Bar Pro Bono ProgramAs part of its outreach to small business owners, the Pro Bono Program provides:Eight-part business law course for small business owners starting in September.Topics include entity formation, contracts, risk management, employment law, government contracting, joint ventures and financial controlsThe course has been held each fall since Over 120 small businesses have participated.
25 Small Business Clinics The CED Project co-sponsors walk-in small business clinics at various locations around the District.The clinics are held 11 times per year. About 175 small business owners attended the clinics in each of the past two years.At the clinics, small business owners can meet one-on-one with a lawyer and ask about their legal issues.Each small business is matched with a lawyer who has expertise in the areas of concern for the small business owner.
26 Upcoming Small Business Clinics Wednesday, February 11, DCRA th Street SW (5:00pm - 7:30pm)Wednesday, March 18, Carlos Rosario International Public Charter School 1100 Harvard Street, NW (5:00pm - 7:30pm)Wednesday, April 22, DCRA th Street SW (5:00pm - 7:30pm)For more information and registration, visit
27 Questions Contact: Darryl Maxwell, Managing Attorney CED Project DC Bar Pro Bono Program1101 K Street NW, Suite 200Washington, DC 20005, Ext. 3369