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

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

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

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

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

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

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.

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

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

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

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

S Corp Disadvantages Lack of flexibility of management Impractical to ever go public Same corporate formalities as an LLC but less benefits

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

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.

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.:

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

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

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.

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.

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.

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.

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

For more information, please visit: www.dcra.dc.gov http://www.irs.gov/businesses

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 2006. Over 120 small businesses have participated.

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.

Upcoming Small Business Clinics Wednesday, February 11, 2015 - DCRA 1100 4th Street SW (5:00pm - 7:30pm) Wednesday, March 18, 2015 - Carlos Rosario International Public Charter School 1100 Harvard Street, NW (5:00pm - 7:30pm) Wednesday, April 22, 2015 - DCRA 1100 4th Street SW (5:00pm - 7:30pm) For more information and registration, visit www.lawhelp.org/dc/ced

Questions Contact: Darryl Maxwell, Managing Attorney CED Project DC Bar Pro Bono Program 1101 K Street NW, Suite 200 Washington, DC 20005 202-737-4700, Ext. 3369 dmaxwell@dcbar.org www.dcbar.org www.lawhelp.org/dc/ced Twitter: @darryljmaxwell