Your Entity

Do I Need An Entity For My Business?

Posted by on Sep 9, 2013 in Practice Pointers, Your Entity

(*Note: this discussion presupposes a basic understanding of limited liability entities and alternatives, which have been discussed before and which we will discuss more in the future.) Many people starting a business often wonder if they need to set their business up as a corporation, LLC or some other entity. It is also common to encounter entrepreneurs who just automatically assume that they’ll structure their business as an LLC without really questioning whether they need to do so. By default, if you do not have an entity for your business, you will be considered to operate your business as a sole proprietorship, essentially meaning that the debts and obligations of the business will be considered to be your personal debts and obligations. Again, while this may be scary-sounding, it isn’t always that big of a deal for some people. While having the limited liability offered by a corporation, LLC or some other entity may be a good baseline, there are some individuals who will have businesses that could actually be operated as a sole proprietorship without any entity structure at all. How Do You Know If A Sole Proprietorship Is Okay For You? First and foremost, if you have partners or other individuals with whom you work closely on your business, you will more than likely need to be another type of entity (maybe even a general partnership, but probably another type of entity). Therefore, you really should only be considering a sole proprietorship if you operate your business alone. Whether you need an entity at all will depend on a number of other things, including (but by no means limited to): The kind of service or product you are providing. The degree to which you expect to make or lose money in the beginning. Whether your business is or will be open to the public (i.e. a place or portal where the public can access physically or digitally). Whether you plan to have employees or independent contractors. The degree to which you will borrow money or seek investors. How many assets you own in your name (home, stocks, etc.). Your personal risk tolerance. While we will discuss these issues in more detail over the next couple of weeks, it is important that you seek advice from legal counsel if you are starting a business or operating a business and have questions concerning your...

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Social Entrepreneurship—Too soon?

Posted by on Jun 20, 2013 in Your Entity

Many entrepreneurs are intrigued by the new buzzwords sweeping the community – “social entrepreneurship.”  Social entrepreneurship seeks to combine the most popular features of for profit entities (namely, eh, profit) with the best features of typical non-profit entities (the charitable or socially beneficial mission). One particular advantage that proponents of social entrepreneurship suggest is that these hybrid models will be able to seek more investment than traditional non-profit ventures while simultaneously continuing the public benefit mission of non-profit entities.  However, it is important for startups to stop and really do their research when it comes to social entrepreneurship and what it really means. The most popular social entrepreneurship entities are the L3C and the B Corp. The L3C is a “limited profit limited liability company,” while the B Corp is a “Benefit Corporation.” Both are new structures which strive to combine the public benefit mission of non-profit entities while allowing some amount of profit. This hybrid model is designed to attract more investors to entities whose mission is to benefit the community by enticing them with profit incentives. However, while L3Cs and B Corps sound great in theory, it is important to consider some of the legal issues surrounding such entities: Both L3C’s and B Corps have rather uncertain legal implications; Both L3C’s and B Corps are only recognized in a minority of states; The IRS has not provided significant guidance on either entity yet, and it is unclear what position the IRS will take–meaning there is a lot of gray area when it comes to the tax aspects of such entities; Further, it does not appear that there are any significant tax advantages to either entity. In addition to all this uncertainty, there remain concerns as to how the need for profit can successfully be balanced with social mission on such a broad scale. So, before you start working on a business model that is based on an L3C or B Corp structure, we suggest you contact an attorney (and, probably, an accountant) to discuss whether this structure is the most appropriate for your business and charitable...

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What’s with Delaware?

Posted by on Jun 11, 2013 in Your Entity

As a startup who’s in the initial stages of forming an entity, or as a current business owner with an entity already in place, you may wonder at some point why so many people decide to incorporate or form their LLC’s in Delaware, rather than their home state. So, what is it with Delaware?  What makes Delaware so attractive from a business owner’s standpoint?  There are many answers to this, many of which are too complicated or boring to get into in a forum such as this, but there are many reasons why you may want to consider incorporating your company or forming your LLC in Delaware.  While we highly suggest you discuss your business plans with an attorney before making the decision, we thought we would at least highlight some of the reasons why people choose to use Delaware, rather than–say–Tennessee where we are located, to form their LLC’s.  Given the breadth of the topic, we will stick with LLC’s for now and address Corporations later. A recent study in the Oregon Law Review** discusses the top reasons cited by attorneys who recently chose Delaware as their state for forming an LLC. Chief among the reasons for choosing Delaware are: 1) Judicial infrastructure: development of LLC case law and perceived judicial expertise; 2) Freedom of contract and the ability to waive fiduciary duties in Delaware; 3) Limitations on the rights of creditors of members; 4) Limitations on the rights of transferees of membership interests; 5) Less of a liklihood for “piercing the corporate veil” and losing limited liability; 6) Less rights given to minority interests. *Note: Please understand that just because we cited these reasons for choosing Delaware does not mean that these features are not also present in Tennessee’s or some other state’s LLC statute.  We list them only because these were the results of the survey discussed in the Oregon Law Review.  Again, if you’re curious about how your current LLC structure may fit in or relate to the Delaware structure, please contact an attorney. **The name of the article is “Why Delware LLC’s?,” Franklin A. Gevurtz.  91...

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