====== Small Business: Legal Issues ====== * Nonprofit Law and Consultation * Amy Hereford – JD, PhD * 6400 Minnesota Ave – Saint Louis, MO 63111 * 314-972-4763 – amyhereford@gmail.com * (c) www.ahereford.org ---- ===Introduction=== * Research and Planning * Assemble Resources * Establish Legal Foundations * Establish Financial Systems * Establish Compliance Systems * Establish Communications & Development * Find a Site and Begin Operations * Business Plan – Executive Summary ---- ===Entrepreneurship=== * Rewards * Profit - Freedom from the limits of standardized pay for standardized work. * Independence - Freedom from supervision and the rules of bureaucratic organizations. * Satisfying Way of Life - Freedom from routine, boring, unchallenging jobs. ---- * Risks * Uncertainty of income * Risk of losing entire investment * Long hours and hard work * Lower quality of life until the business gets established * Complete responsibility ---- * Success * Passion * Persistence * High need for achievement * Willingness to take measured risks * Confidence and self-reliance * High energy level * Desire for responsibility ---- * Routes to Small Business * Startup * Buyout * Franchising * Family Business ---- * Ideas for New Businesses * New Market: Providing customers with a product/ service that is not in their market but already exists elsewhere. * New Technology: Using a new technical process that provides the basis for new product or service ideas. * New Benefit: Performing an old function for customers but in a new and improved way. {{ ::ideas.png?400 |}} ===Business Plan=== * The Mission Statement * Important dates in beginning the business * Names and roles of founders, key employees * Location and description of site * Description of services * Funding sources * Market highlights * Strategic Development Plan for 1, 3, 5 years ----- **Business Plan - Needs Analysis** * Define Market Segment * Clearly define client/customer base * How many potential clients are there? * Where are they found? * What are their characteristics? * Identify other players * Others providing similar services * Others serving the same client base * Similar service providers in other regions ---- **Business Plan – Organization Description** * Overview of organization’s plan to meet the needs identified above * Identify goods and services and describe how they will be provided * Organization and Management * Board Roles and Responsibilities * Organizational Chart & Job Descriptions ---- **Business Plan – Communication and Development** * Communication * Create communication plan * Develop methods of maintaining contact with * Clients and potential clients * Grantors and donors and supporters * Financing * Create Financing plan * Identify sources of funding * Identify development strategies to engage the community ---- **Business Plan – Financials** * Financial Statements to Date * Budget for start-up * 3 months * 6 months * 1 year * 2 years * 3 years ---- **Business Plan – Appendices** * Resumes of key managers * List of Services * Letters of reference * Details of market studies / needs analysis * Relevant bibliography * Legal documents * Articles, Bylaws, Corporate Minutes * Copies of leases; Building permits; Contracts * Licenses, Insurance, etc. * List of business consultants and professionals ---- **Budget** ^ Account ^ Startup ^ Year I ^ Year II ^ |**Income**| . | . | . | | Personal Funds | $5000 | . | . | | Sales | $2000 | $15,000 | $30,000 | |**Expenses**| . | . | . | | Costs and Supplies | $2000 | $5000 |$7000 | | Salary | $5000 | $10,000 | $23,000 | ---- **Assemble Resources** * Based on Research and Planning * Board Members * Management * Staff * Funding & Resources * Initial * Development Plan ---- **Crowdfunding** * Internet-facilitated fundraising * Tax Laws still apply * Charitable Solicitation Laws still apply * Take account of costs and fees (3-15%) * Equity, Loan, Gift * Entrepreneur: wider exposure, risk loss of ideas or control * Investor: many ideas, lack of due diligence ==== Establish the Legal Foundations ==== * Increasing burden of inter-related legal regulation * Cost of these mistakes * An attorney familiar with nonprofit law is an indispensable help in successfully meeting all these demands * File with the State: * Articles of Incorporation * Articles of Organization * Register a Partnership * Draft operating document: * Bylaws * Operating Agreement * Partnership Agreement ===Forms of Ownership=== * Sole Proprietorship * Partnerships * General * Limited * Corporations * Regular Corporation * Subchapter S Corporation * Limited Liability Company {{ ::entities.png?400 |}} {{ ::entitiesmatrix.jpg?400 |}} ===Choosing a Form=== * Organizational costs * Limited versus unlimited liability * Continuity * Transferability of ownership * Management control * Raising new equity capital * Income taxes ===Sole Proprietor=== * A sole proprietorship is a business owned and operated by one person. * There is generally no registration or filing fee. * Liability is unlimited. * The sole proprietorship is dissolved upon the proprietor’s death. * Ownership of the company name and assets may be transferred. * Management freedom is absolute. * Capital is limited to the proprietor’s personal capital. * Income from the business is taxed as personal income to the proprietor. ==Checklist== * Business Name * Decide on a Name * Research for others using that name * Consider fictitious name or DBA * Consider Trademark Registration * Set up for * State Sales tax * Personal State and Federal tax * Estimated Tax Withholding * Set up a Finances * Accounting * Payment / Creditcard / Invoicing * Bank accounts * Arrange for pension * Obtain all necessary business licenses * Obtain apppropriate insurance * Establish relationships with professionals * Business attorney * Accountant * Develop a checklist for ongoing Legal Compliance [[https://www.sos.mo.gov/business/corporations/forms|MO Secretary of State]] [[https://www.sos.mo.gov/CMSImages/Business/Step-by-StepGuides/RegisteringaFictitiousName.pdf|Fictitious Name Registration]] == Liability == {{ ::liability3.png?400 |}} {{ ::liability.png?400 |}} {{ ::liability2.png?400 |}} ===Partnership=== * A partnership is a voluntary association of two or more persons to carry on, as co-owners, a business for profit. * There is generally no registration or filing fee. * Liability is unlimited. * Unless the partnership agreement specifies otherwise, the partnership is dissolved upon withdrawal or death of a partner. * Transferring ownership requires the consent of all partners. * A majority vote of partners is required for control. * Capital is limited by the partners’ ability and desire to contribute. * Income from the business is taxed as personal income. ==Limited Partnership== * Limited Partners invest in your business but are not otherwise active * A written certificate must be filed with proper state office. * Liability is limited to investment for limited partners. * Withdrawal or death of limited partners does not affect the continuity of the business. * Limited partners may sell their interest. * Limited partners are not permitted any involvement in management. * Limited partners’ limited liability provides a strong inducement in raising capital. * Income from the business is taxed as personal income. [[https://www.sos.mo.gov/business/corporations/forms|MO Secretary of State]] ==Checklist== * Name * Decide on a Name * Research for others using that name * Consider fictitious name or DBA * Consider Trademark Registration * Set Up Partnership * Record Partners names, ID#'s, record of ownership * Set up partnership agreements * Set up buy/sell - change in partnership interest agreements * Establish contributions, payments, accounting, taxes for partners * Establish * Federal Tax ID# * State Tax ID# * State Sales Tax ID# * State Unemployment, Withholding Tax ID# * Apply for required operating permits, licenses, bonds, etc. * Set up a Finances * Establish appropriate accounting methods (tax year, cash vs. accrual, etc.) * Set up acceptable bookkeeping system * Establish expence procedures * Set up bank / checking accounts * Purchase Insurance * Employees * Personnel procedures / manual * Establish Payroll procedures * Establish relationship with professionals * Bank * Attorney * Accountant * Consider a business pension plan * Develop a checklist for ongoing Legal Compliance ==Partnership Agreement== - Name, Business and Location - Term - Capital - Contribution and ownership. - Profit and Loss - How it is shared. - Salaries and Drawings - No salary, but can draw on partner credit. - Interest. No interest. - Management Duties, Restrictions and Decisionmaking. - Banking. - Books. Accounting, access and fiscal year. - Voluntary Termination. Distributions on termination to pay outstanding liabilities and obligations, then distribute to partners. - Death. - Disputes and Choice of Law - Any controversy or claim arising out of or relating to this Agreement, or the breach ===Corporation=== | Articles of Incorporation | Bylaws | EIN SS-4 | Licenses | ==Articles of Incorporation and Bylaws== ** Articles of Incorporation** * Gives the organization a separate legal existence * Filed with Secretary of State * Generally a fill in form, but care must be taken in drafting purpose clauses * Agreement with the state to establish and maintain the corporation: name, duration, location, registered agent, purpose, stock, amendment & dissolution * Regular filing responsibilities, often overseen by secretary or treasurer [[https://www.sos.mo.gov/CMSImages/Business/Step-by-StepGuides/For-ProfitDomesticCorpFilingGuide.pdf|Online Filing Guide]] ---- **Bylaws** * Law for the Corporation * Board Governance * Purpose * Board qualifications, terms and succession * Board powers and responsibilities, meaningful oversight of staff – purposes, activities, financials * Meetings, notice, decisionmaking * Reporting requirements * Financial structure * Officers qualifications, terms and succession * Committees * Amendment and dissolution ---- ==Subchapter S Corporation== * It is taxed as a partnership. * Eligibility requirements are as follows: * No more than 75 stockholders are allowed. * All stockholders must be individuals or qualifying estates and trusts. * Only one class of stock can be outstanding. * The corporation must be a domestic one. * No nonresident alien stockholders are permitted. * The S corporation cannot own more than 79 percent of the stock of another corporation. * Benefits * Tax Savings. No double tax * Business Expense Tax Credits. Some business expense writeoffs. * Independent Life. Keeps Business separate from life. ==Checklist== * Name * Decide on a Name * Research for others using that name * Consider fictitious name or DBA * Consider Trademark Registration * Set Up Corporation * File Articles of Incorporation * Adopt Bylaws for the Corporation * Determine who will be Directors and Officers * Set up and issue Stock * Establish Corporate Minutes books * Set up shareholder agreements (if more than one active owner) * Set up buy/sell stock redemption agreement * Arrange for any asset / liability transfers to corporation * Apply for Subchapter S, if applicable * Establish * Federal Tax ID# * State Tax ID# * State Sales Tax ID# * State Unemployment, Withholding Tax ID# * Apply for required operating permits, licenses, bonds, etc. * Set up a Finances * Establish appropriate accounting methods (tax year, cash vs. accrual, etc.) * Set up acceptable bookkeeping system * Establish expence procedures * Set up bank / checking accounts * Purchase Insurance * Employees * Personnel procedures / manual * Establish Payroll procedures * Establish relationship with professionals * Bank * Attorney * Accountant * Consider a business pension plan * Develop a checklist for ongoing Legal Compliance ---- **Develop a Corporate Record-keeping System** * Records System * Board, Management and Staff Records * Finanical records * Management * Compliance (tax, grants, etc) * Record Creation and Use * Access and confidentiality * Storage * Security * Record Retention and Destruction * Legal implications * When and How ---- **State and Local Requirements** * Income Tax (state) * Sales Tax (state and local) * Property Tax (local) * Franchise Tax, etc. (state and local) * Licenses == Missouri == * Articles of Incorporation (SOS) * Apply for sales tax ID from the state (DOR) * Annual Report (SOS) (AG) ---- **Local Regulatory Issues** * Business licenses and permits * Licensing and insurance of professionals * Business license * Check Secretary of State website * Zoning laws and municipal regulations * Check city, county, municipal offices for necessary permits, regulations, zoning issues. ---- **Employment and Payroll** * Federal Employment Laws * State Employment Laws * Industry Employment Requirements * Payroll * Exempt vs Nonexempt Employees and Overtime * Withholding Accounting and Payment * Employment Handbook ---- **Intellectual Property** * **Offensive and Defensive** * **Trademark** exclusively identifies the source or origin of products or services * **Copyright** is a set of exclusive rights regulating the use of a particular expression of an idea or information * **Patent** is a set of exclusive rights granted by a state for a fixed period of time which is new and useful ---- **Checklist for Corporate Legal Compliance** * Board Meetings and Minutes * Annual Filings * Federal Tax * State Corporate filings * State Tax * Permits, licenses * Municipal filings and tax * Financial and Audit Requirements * Employment * Contracts and Insurance ---- **Policies and Procedures** * Staff Policies and Procedures * Staff Record Management Policies and Procedures * Staff Budget and Financial Policies and Procedures * Employment Policies * Staff Training Policies * Client Services Policies and Procedures * Character of Policies and Procedures * Clear, useable and available to staff * Managerial and organizational * Drafted to anticipate and prevent legal problems. ---- **Establish Financial Systems** * Develop an accounting system and budget. * Gone are the days of shoe box accounting. * Professional help in this area is important. * Board Financial Management must ensure appropriate * Oversight, recordkeeping and reporting. ---- **Find a Site and Plan to Begin Operations** * All the hard work begins to pay off in services offered to clients. * Ensure Policy / Procedures Compliance * Ensure Recordkeeping * Regularly review operations * Update policies and procedures as required ---- **Legal Duties** * __Duty of Care__: Take reasonable care when making decisions for the organization, be competent * __Duty of Loyalty__: Act in the best interest of the organization, confidentiality * Recusal: Stand aside when there is a conflict of interest * __Duty of Obedience__: Act in accordance with the organization’s mission, public trust ---- == Board Governance == **Boards and Management** {{ ::board_mgt.png?400 |}} {{ ::npogovernance.png?400 |}} ---- ===LLC=== Limited Liability Company * Limited liability for owners * Taxed as a partnership * Easier to establish, manage and control than corporations * Now in all 50 states * Limited transfer of ownership * May be cumbersome to share or transfer ownership (unanimous written consent) ==Checklist== * Name * Decide on a Name * Research for others using that name * Consider fictitious name or DBA * Consider Trademark Registration * Set Up LLC * File Articles of Organization with the State * Adopt operating agreement * Agree on ownership, capital contribution, profit-sharing * Establish * Federal Tax ID# * State Tax ID# * State Sales Tax ID# * State Unemployment, Withholding Tax ID# * Apply for required operating permits, licenses, bonds, etc. * Set up a Finances * Establish appropriate accounting methods (tax year, cash vs. accrual, etc.) * Set up acceptable bookkeeping system * Establish expence procedures * Set up bank / checking accounts * Purchase Insurance * Employees * Personnel procedures / manual * Establish Payroll procedures * Establish relationship with professionals * Bank * Attorney * Accountant * Consider a business pension plan * Develop a checklist for ongoing Legal Compliance ==Operating Agreement== - Introductory matters: formation, regulation of internal affairs, limitation of authority of a member, power to contract debts, use of legal company name, registered office/agent, record-keeping - Start-up matters: maintenance of record book, establishment of bank accounts, reimbursement for organizational expenses, and LLC certificate - Members: initial members, capital contributions and withdrawals, membership interests, admission of additional members, certificates of membership interest, and limitations of member liability and responsibility - Management and control of the business including elections, annual/special meetings, officers, managers, and powers - Capital accounts - Allocations of net profits, net losses, and distributions - Accounting, records, and reporting - Transfer and assignment of interest - Dissolution, winding up, and disassociation events - Indemnification ====Six Agreements==== **1. Operating Agreement / Bylaws** - identification of the owners; - board of directors; - voting rights; - allocation of profits and losses; - meeting times and places, - owners' rights and obligations; - addition of new owners; - the right to sell or transfer stock or membership interests, and - amendment and dissolution ---- **2. Buy / Sell Agreement** - value of the company; - family members able and willing to succeed; - compensation of non-involved partners/family; - income for spouse/dependent children; - transfer of ownership outside partners/family; - tax planning; - funding; and - when, why, how quickly ---- **3. Contracts with vendors and customers** - goods/services, - price, - timeline, - payment terms, - breach and remedies. ---- **4. Promissory notes, guarantees, security, releases** **5. Corporate Minutes** - attendees, - reports, - elections of officers, - resolutions **6. Non-compete, Non-disclosure, Confidentiality** - subject matter, - geographic scope, - timeframe, - breach and remedies ====Dissolution & Winding Down==== - Close the Business As Required your Organizing Documents - File with the State - Notify the IRS and State and Local Tax Agencies - Plan the Closing of Operations - Cancel Business Licenses - Terminate Contracts - Notify Customers / Clients - Liquidate Stock, Supplies and Equipment - Plan staffing / severance - Notification to Creditors - Settle Creditor Claims - Collect Money Owed to the Business - Inform Other Stakeholders About the Closure - Sell and Distribute Your Assets - Meet with a Business Attorney Before You Dissolve Your Business