COUNSELING THE
MICROENTREPRENEUR
© Texas RioGrande Legal Aid, 2011
About the Legal Assistance to Microenterprises Project (LAMP)
LAMP is a project of Texas C-BAR and Texas RioGrande Legal Aid that is focused on providing free legal assistance to low-income self-employed persons and microbusinesses. LAMP promotes the advancement and sustainability of microenterprises as a foundation of community economic development by providing free transactional business legal services, legal counsel and advice, and related educational services to low-income entrepreneurs who wish to start and sustain their businesses. LAMP enhances the chances of microentrepreneurs’ success by moving them out of the informal economy and into the mainstream economy through the provision of free legal services ranging from one-on-one legal advice to educational workshops and seminars on relevant topics for starting, successfully maintaining, or expanding a microenterprise.
LAMP offers a full range of business transactional legal services for small business owners including: legal assistance in selecting the ideal business organization, including assistance in filing incorporation documents, drafting and reviewing contracts such as leases, loan documents, and vendor and supply agreements, assistance in negotiating contracts, legal advice regarding business permits and licenses, and other applicable laws and regulations. LAMP also engages in community outreach and provides legal education trainings in both English and Spanish.
LAMP is grateful for the hours donated by Ana Estrada to create this guide. We hope you find it helpful and welcome any suggestions for its improvement.
You can contact us at:
Texas RioGrande Legal Aid
Legal Assistance to Microenterprises Project
4920 N. IH-35
Austin, Texas 78751
Phone: 512-374-2700
Fax: 512-447-3940
TABLE OF CONTENTS
Legal Issue Spotting Questionnaire …………………………………..…………..3
Choice of Entities & Registering a Business ……………………………………..4
Licenses & Permits………………………………………………………………...8
Insurance Considerations…………………………………………………………9
Starting a Home-Based Business ………………………………………………..10
Commercial Lease Agreements …………………………………………………12
Employees, Workplace Matters & Independent Contractors ………………...14
Trade Secrets, Trademarks & Copyrights…………………………………...…17
Tax Basics for Small Businesses ………………………………………………...19
Buying a Business ……………………………………………………………...... 21
Small Business Contracts, Generally …………………………………………...23
Business Torts & JP Courts……………………………………………………...23
Legal Issue Spotting Questionnaire
1. What type of business do you run or do you want to start?
2. Is it a service business, a retail business or both?
3. Do you have prior experience in this type of business, as an employee or otherwise?
4. Do you have a name for the business? Are you already conducting business under this name?
5. Is the business name already registered with a government entity? When/where did you register it?
6. Did you register a name only, or did you register a Corporation or LLC?
7. Does the business have its own EIN (employer identification number)? Does it have its own bank account?
8. How many people run or will run the business?
9. How many of the people running the business are also owners of the business? Are these the only owners?
10. Do you have insurance for the business?
11. Do you/will you run this business from home or another location?
12. Will your business be primarily conducted in one county, multiple counties or the entire state/country?
13. Do you own property such as a home, a vehicle, land, stocks, bonds, mutual funds, etc.?
14. How much money do you have to run or start the business right now? How much do you plan on investing initially?
15. Do you plan to borrow money for the business right away? How much? From where? What do you plan to do with the money you borrow?
16. Have you written a business plan?
17. Have you applied for or received any licenses or permits? Which ones? From where?
18. Do you have or will you have any employees? How many? How soon?
19. Are you or will you be working with any independent contractors? Which ones? For what services?
20. What are your particular legal questions or concerns about running your small business?
CHOICE OF ENTITIES & REGISTERING A BUSINESS
SOLE PROPRIETORSHIPS:
· Easy to start & maintain/fastest way to get started
· Little to no “intimidation factor”
· Minimal filings & fees
· Personal liability may not be an issue if clients do not own any non-exempt property and/or judgment proof; insurance is good idea
· Business debt is not an issue if business wouldn’t qualify for loans without a personal guarantee from owner
· Sole proprietorship and its assets is community property if owner is married
For income tax purposes, the owner of a sole proprietorship must keep in mind the following:
· Business income is reported on Schedule C of Form 1040
· Profits are taxed at the personal income level
· Client can deduct business expenses but MUST keep receipts/records of business expenses
· Client should keep business expenses separate from personal expenses and establish a separate checking account for business.
To Register a Sole Proprietorship:
· If the business is conducted under an assumed name (a name other than the surname of the individual), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
· Filing fee and form differ by county. DBA typically must be notarized.
GENERAL PARTNERSHIPS:
· Formed by doing business with intent to share profits & losses with another; beware of unintended partnership
· PRIOR starting a business, the intended partners should first be able to reduce their agreement to writing, understand & agree to the terms.
· The Partnership Agreement should spell out at a minimum:
Ø The monetary contribution of each partner to the business,
Ø The labor contribution of each partner to the business,
Ø How the profits will be divided amongst the partners,
Ø When and if the contributed assets can be withdrawn,
Ø The management powers of each partner,
Ø The work responsibilities of each partner,
Ø How & when a partner can be removed,
Ø How & when new partners can be added,
Ø What should happen in the event of death of disability,
Ø How to determine the value of a departing partner’s interest and method of payment,
Ø The method of settling disputes through mediation or arbitration,
Ø The duration of the agreement and the terms of dissolution.
Warnings to Give:
· Any partner can take action that can legally bind the business, including sign contracts, make purchases, open credit accounts, borrow money, operate the business, hire & fire employees, etc.
· Partners have equal rights & responsibilities to one another including the right to full information about the affairs of the business, duty of good faith, duty of loyalty, duty of fairness, and a fiduciary duty; cannot “lock out” a partner
· Partners are personally liable for the debts & liabilities of the business, whether or not they agreed to the transaction or committed the offense that resulted in the debt or liability.
To Register a Partnership:
· If the business is conducted under an assumed name (a name that does not include the surname of all the partners), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
· Filing fee and form differ by county. DBA typically must be notarized.
CORPORATIONS & LIMITED LIABILITY COMPANIES:
At times, start-ups & entrepreneurs can benefit from forming a formal entity in order to engage in business.
· Client owns non-exempt property available to suit
· Client will have employees
· Client wants to open a business with more than one owner,
· Client engages in a type of business with liability risks
· Client cannot afford or cannot get adequate insurance coverage
· Client’s business plan requires taking on some business debt (i.e. supplies, equipment, utilities) & client would benefit from signing for these debts in the capacity of a corporate officer rather than personally
Ø However, client must know that he/she will often be required to give a Personal Guarantee for certain debts, especially on leases & loans
Ø If client gives a personal guarantee, client is Personally Liable for said debts regardless of the fact that he/she is incorporated & signed as an officer
· If the business is profitable, doing business as a corporation or LLC allows a degree of flexibility in planning & controlling federal income taxes that is unavailable to partnerships & sole proprietorships.
o Client will need to get tax advice from a tax professional
Corporations, Generally:
· Corporations need EIN to transact business
· Owners are called shareholders, they select the board of directors, who are the decision makers, and they in turn select the corporate officers, who run the day-to-day business
· Corporations must observe “corporate formalities” to maintain liability protection for owners
· Must adopt by-laws & operate according to the rules laid out in the by-laws
· Must keep a separate bank account & books, cannot comingle with owners
· File Certificate of Formation and submit filing fee with Secretary of State of Texas
· Must name a Registered Agent with a valid Texas address
· Must file annual state reports – public information report & yearly franchise tax report
· Social purpose corporations: provisions included into formation documents allow directors to take social purpose into consideration
Corporate Book should contain the following:
Ø Certificate of Formation
Ø By-laws
Ø Stock certificates or stubs
Ø Ledger sheet showing who received stock & when
Ø Minutes of meetings or board resolutions showing the consent of the board
ü Authorizing opening corporate bank accounts
ü Designating who is eligible to sign checks & withdraw funds
ü Determining salaries & bonuses of officers
ü Contributing to pensions & profit sharing plans
ü Acquiring another business
ü Borrowing money
ü Selling stock
ü Entering into major contracts
ü Buying, selling or leasing real estate
ü Adopting or amending employee fringe benefits plans
ü Applying for trademark registration
C Corporations – default tax status by IRS:
· C corporation must file its own income tax return & pay taxes on any income left after expenses; owners report their earnings separately
· Corporate profits are subject to the issue of “double taxation”
Ø Corporation pays taxes on its profits
Ø If the corporation distributes dividends, the shareholders will also have to pay taxes on the profits when they report the dividends on their own tax return
Sub-Chapter S Corporations:
· This is a corporation that has elected to be taxed under the Sub Chapter S provisions of the Code
· To elect Sub-Chapter S status, corporation must meet requirements and fill out Form 2553 & file it with the IRS within 3 months of registering the corporation;
· If there are multiple owners/shareholders, all owners must elect the S status
· Owners/shareholders report their income from the corporation on their own personal tax return, like sole proprietorship or a general partnership
· The Sub-S Corporation is a pass-through entity
Limited Liability Companies, Generally:
· LLCs offer liability protection (like a corporation) with tax & management flexibility (not always available to a corporation)
· Owners are called members, make an initial capital contribution, receive membership interests in exchange & select the manager(s) to run the day-to-day business
· Contribution can be-
Ø Cash
Ø Property
Ø Services
Ø The promise to provide any of these in the future
· Managers can be-
Ø Members (member-managed) or
Ø Non-members (manager managed)
· Business is run according to an Operating Agreement- best practice is for members to reduce their agreement to writing & agree to the terms PRIOR to registering the company
· LLCs offer flexible management structure- terms of operation & management are generally determined by owners entirely & can be less restrictive than corporate standards
· An LLC can elect to be taxed like a sole proprietor, partnership, C corp or an S Corp
· LLCs offer flexible distribution of profit & losses- business can be creative as to how these will be allocated
· Requires its own EIN unless it is owned by a husband & wife or is a single-member LLC (in which cases, LLC can use the social security number of the owner for tax purposes)
· File Certificate of Formation and submit filing fee with Secretary of State of Texas
· Must determine if it will be member-managed or manager-managed
· Must name a Registered Agent with valid Texas address
· Must keep a separate bank account & books from its owner(s)
· Must keep a company book
· Must inform IRS within 75 days of formation of the company if it elects to be taxed like a corporation- IRS Form 8832 (otherwise will have to wait until the next tax year)
· Must file annual state reports – public information report & yearly franchise tax report
Operating Agreement should include at least the following provisions:
Ø Capital contributions
Ø How a member’s percentage interest is determined
Ø Type of management
Ø Membership voting
Ø Profits & losses
Ø Distribution of money
Ø Tax election
Ø Transfer of membership interest
Ø Addition of new members
Ø Buyout provisions
Ø Conflict of interest
Company/LLC Book:
· Company/LLC book should contain major documents, activities & decisions made:
Ø Certificate of Formation
Ø Company Agreement
Ø Membership register listing names & addressed of members
Ø A membership transfer ledger
Ø Minutes of meetings
Ø Written consent forms (if required by operating agreement)
· At a minimum, company book should contain a record of the members’ approval of significant actions such as: