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
• © www.ahereford.org

• 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

• 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.

• 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

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

• 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

• Sole Proprietorship
• Partnerships
  • General
  • Limited
• Corporations
  • Regular Corporation
  • Subchapter S Corporation
• Limited Liability Company

• Organizational costs
• Limited versus unlimited liability
• Continuity
• Transferability of ownership
• Management control
• Raising new equity capital
• Income taxes

• 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.

• 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

MO Secretary of State Fictitious Name Registration

• 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 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.

MO Secretary of State

• 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

1. Name, Business and Location
2. Term
3. Capital - Contribution and ownership.
4. Profit and Loss - How it is shared.
5. Salaries and Drawings - No salary, but can draw on partner credit.
6. Interest. No interest.
7. Management Duties, Restrictions and Decisionmaking.
8. Banking.
9. Books. Accounting, access and fiscal year.
10. Voluntary Termination. Distributions on termination to pay outstanding liabilities and obligations, then distribute to partners.
11. Death.
12. Disputes and Choice of Law - Any controversy or claim arising out of or relating to this Agreement, or the breach

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

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

• 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.

• 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

• 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

Boards and Management

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)

• 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

1. 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
2. Start-up matters: maintenance of record book, establishment of bank accounts, reimbursement for organizational expenses, and LLC certificate
3. Members: initial members, capital contributions and withdrawals, membership interests, admission of additional members, certificates of membership interest, and limitations of member liability and responsibility
4. Management and control of the business including elections, annual/special meetings, officers, managers, and powers
5. Capital accounts
6. Allocations of net profits, net losses, and distributions
7. Accounting, records, and reporting
8. Transfer and assignment of interest
9. Dissolution, winding up, and disassociation events
10. Indemnification

1. Operating Agreement / Bylaws

1. identification of the owners;
2. board of directors;
3. voting rights;
4. allocation of profits and losses;
5. meeting times and places,
6. owners' rights and obligations;
7. addition of new owners;
8. the right to sell or transfer stock or membership interests, and
9. amendment and dissolution

2. Buy / Sell Agreement

1. value of the company;
2. family members able and willing to succeed;
3. compensation of non-involved partners/family;
4. income for spouse/dependent children;
5. transfer of ownership outside partners/family;
6. tax planning;
7. funding; and
8. when, why, how quickly

3. Contracts with vendors and customers

1. goods/services,
2. price,
3. timeline,
4. payment terms,
5. breach and remedies.

4. Promissory notes, guarantees, security, releases

5. Corporate Minutes

1. attendees,
2. reports,
3. elections of officers,
4. resolutions

6. Non-compete, Non-disclosure, Confidentiality

1. subject matter,
2. geographic scope,
3. timeframe,
4. breach and remedies

1. Close the Business As Required your Organizing Documents
2. File with the State
3. Notify the IRS and State and Local Tax Agencies
4. Plan the Closing of Operations
   1. Cancel Business Licenses
   2. Terminate Contracts
   3. Notify Customers / Clients
   4. Liquidate Stock, Supplies and Equipment
   5. Plan staffing / severance
5. Notification to Creditors
6. Settle Creditor Claims
7. Collect Money Owed to the Business
8. Inform Other Stakeholders About the Closure
9. Sell and Distribute Your Assets
10. Meet with a Business Attorney Before You Dissolve Your Business