1. Starting your Small Business A Legal Perspective
Presenter:
Darryl Maxwell, Esq.
Managing Attorney
DC Bar Pro Bono Program

2. Choosing an Entity Types of Entities
Sole Proprietorship
General Partnership
Limited Partnership
*Nonprofit Corporation
*For the purposes of this presentation,
these entities will not be discussed.
Limited Liability Company
C-Corp
S-Corp
*Statutory Close Corporation

3. Sole Proprietorship a business owned by a single individual
Positives
Simplest and least expensive business model
Must obtain licenses or permits specific to trade
No special filings with the government
Owner has full control, reaps all benefits
Not req’d to pay unemployment taxes

4. Sole Proprietorship Drawbacks
Total and unlimited liability; personal assets ARE NOT PROTECTED
Profits are personally taxed to the owner
Offers very few tax benefits
May have difficulty obtaining long term financing
No 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 business
Advantages
Easy to set up
Partners share workload
Financing easier to obtain than in a sole proprietorship
Partners share all profits & reap all benefits

6. General Partnership Disadvantages
More expensive to start than sole proprietorship; few tax benefits
All partners have TOTAL AND UNLIMITED LIABILITY for business expenses
Can take personal assets from partners to resolve debts
Each partner is bound by the actions of the other partner(s)
Loss of partner may cause business to dissolve
Partnership may be difficult to end

7. Limited Partnership Partnership with limited legal liabilities
Advantages
Easy to set up (certificate of Limited Partnership to be filed at DCRA & requires written agreement between partners)
Partners share expenses and profits
Limited Partners only risk their business investment not their personal assets
Pass 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 agreement
Operating (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 lawsuits
Can take personal assets from partners to resolve debts
Each partner is bound by the actions of the other partner(s)
Loss of partner may cause business to dissolve
Partnership 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)
Advantages
Lifespan independent from its owners
Personal assets protected from business liability
Ownership can be transferred through sale of stock; easy to raise capital through stock sale
Ownership changes do not affect management of the corporation

10. C (General) Corporation
Disadvantages
Incorporation involves considerable start-up expenses
Subject to greater DC & federal legislation
Corporate 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 federal
government by a C Corp by the District.
Advantages
Corporate earnings avoid double taxation
Limited liability for shareholders
Ease of transfer of interest

12. S Corp Disadvantages Lack of flexibility of management
Impractical to ever go public
Same 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 domestic
Most attractive from of business entity;
combines the features of partnership with
elements of the corporation
Advantages
Personal Assets protected from liability
No limit on the number of owners
Simpler to operate than a corporation
Owners may participate in the management of the business
Owners receive pass-through tax benefit; only taxed at the personal level, not the entity level

14. Limited Liability Company (LLC)
Disadvantages
Legal assistance may be needed to properly set up the LLC, including drafting the operating agreement
Professionals -- 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 agendas
Applicable Structures
Non-profit
Subject to 501(c)(3) or 501(c)(4) limitations
Low 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 Corporations
Required to have a public benefit purpose that is audited by a third-party standard
Benefit 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 scenarios
Institutional investors that prefer corporate structures over LLC may be drawn to the certified benefit corporations
Great 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 making
A simple LLC could incorporate benefit corporation provision in its operating agreement without the additional cost of certification
Additional costs associated with getting certification
Does not affect tax status
Not recognized in every jurisdiction

18. Personal Guarantees
Guarantee 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 Guarantees
Personal 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/permits
General Partnership: no paperwork required by a written partnership agreement is encouraged
Limited 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 use
DC Business Tax ID Number (Form FR-500) and Certificate of Registration from the Office of Tax & Revenue
Clean Hands Certificate: affidavit stating you do not owe DC more than $100. If you do, you must resolve it before you can proceed
Basic Business License
Trade Name Registration
Building Permits (for constructing or altering a building

23. For more information, please visit:

24. DC Bar Pro Bono Program
As 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 controls
The 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 Program
1101 K Street NW, Suite 200
Washington, DC 20005
, Ext. 3369