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Business Law

Monday, October 6, 2014

How Par Value Affects Start-Up Businesses

Many entrepreneurs are unclear about the “par value” of a stock, and what par value they should establish for their new corporation. Generally, par value (also known as nominal or face value) is the minimum price per share that shares can be issued for, in order to be fully paid. In the old days, the par value of a common stock was equal to the amount invested and represented the initial capital of the company; but today the vast majority of stocks are issued with an extremely low par value, or none at all.

A share of stock cannot be issued, sold or traded for less than the par value. Therefore, incorporators often opt for such a low – or no – par value to reduce the amount of money a company founder must invest in exchange for shares of ownership in a start-up corporation. Regardless of the par value, the company’s board of directors retain the right to sell shares in the company at a higher price.

Some online incorporation services recommend setting par value at zero, however this is not necessarily the best approach and can have unintended consequences. Many corporations want to assign a par value, so that an actual investment (money or services) is necessary in order to acquire ownership in the company. This way, the corporation can generate capital and recoup start-up costs.

Some states restrict the number of shares which may be offered at zero par value, or charge additional taxes or filing fees based on the number of zero par value shares. For example, Delaware corporations can issue up to 1,500 shares at zero par value before additional filing fees kick in.

Zero par value can pose problems at tax time in some jurisdictions. In Delaware, for example, there are two methods of calculating franchise taxes corporations must pay annually. In one example, the same corporation would owe annual tax in excess of $75,000 if the stock had zero par value, as opposed to annual taxes of just $350 with a nominal par value of $.01 per share.

Consider establishing a par value that is above zero and below $.01 per share to minimize the initial investment required from the founders and to protect against potential tax consequences associated with zero par value stock. Some also recommend issuing founder shares at a multiple of whatever par value is, to avoid future complications if the corporation needs to execute a stock split that results in a new share price that is below par value.

Par value has no bearing on the market value of a stock, but is an important decision in the formation of your new enterprise. Consultation with an experienced business or tax lawyer can help you ensure your ultimate decision serves your company well into the future, in terms of raising capital, lowering taxes and retaining control as a shareholder in your corporation.


Tuesday, September 9, 2014

Limited Liability Company (LLC): An Overview

The limited liability company (LLC) is a hybrid type of business structure, offering business owners the best of both worlds: the simplicity of a sole proprietorship or partnership, with the liability protection of a corporation. A limited liability company consists of one or more owners (called “members”) who actively manage the company’s business affairs. LLCs are relatively simple to establish and operate, with minimal annual filing requirements in most jurisdictions.

The best form of business structure depends on many factors, and must be determined according to your particular business and overall goals:

Advantages:

  • LLC members enjoy a limited liability, similar to that of a shareholder in a corporation. In general, your risk is limited to the amount of your investment in the limited liability company. Since none of the members will have personal liability and may not necessarily be required to personally perform any tasks of management, it is easier to attract investors to the limited liability company form of business than to a general partnership.

  • LLC members share in the profits and in the tax deductions of the limited liability company while limiting the potential financial risks.

  • LLCs offer a relatively flexible management structure. The business may be managed either by members or by managers. Thus, depending on needs or desires, the limited liability company can be a hands-on, owner-managed company, or a relatively hands-off operation for its members where hired managers actually operate the company.

  • Because the IRS treats the limited liability company as a pass-through entity, the profits and losses of the company pass directly to each member and are taxed only at the individual level (which may or may not be an advantage to you, depending on the profitability of the LLC and your personal income tax bracket).

  • Members of an LLC have flexibility in dividing the profits and losses. In a corporation or partnership, profits must be divided according to percentage of ownership. However, with an LLC, special allocations are permitted, so long as they have a “substantial economic effect” (e.g. they must be based upon legitimate economic circumstances, and may not be used to simply reduce one member’s tax liability).

Disadvantages

  • Limited liability companies are, generally, a more complex form of business operation than either the sole proprietorship or the general partnership. They are subject to more paperwork requirements than a simple partnership but less than a corporation. Annual filings typically include statement and nominal filing fee payable to the Secretary of State, informational returns to the IRS, and filing of a state tax return.

  • In certain jurisdictions, single member LLCs may not be afforded the same level of limited liability protection as that of an incorporated entity.

Also note that in many states, an LLC is prohibited from rendering “professional services” which can include companies providing services that require a license, registration or certification.   Such professionals typically have to establish a Professional LLC which does not offer limited liability for professional malpractice.
 


Wednesday, August 20, 2014

Employee Handbooks: Important Provisions

An employee handbook is an instrument that is widely used by employers to communicate their expectations and policies to employees.  There are many reasons to develop and distribute an employee handbook.  These written documents enable employers to clearly outline what is expected from employees and what employees can expect from the employer.  In the event of a dispute with an employee or when a claim is made with a government agency, the handbook can be invaluable in protecting employer’s position. 

When drafting an employee handbook, certain information should be included. This includes:

Wages, Salaries and Other Compensation

An employee handbook should cover how and when employees will be paid.  It should also note how time worked it to be recorded, what taxes will be taken out and explain overtime policies.

Schedules

This document should also cover daily schedules.  It should note hours to be worked, breaks, attendance, lateness, how to request time off and whether employees are entitled to paid time off and when.

Benefits

An employee handbook can also be used to give employees information about benefits. It should cover what benefits are offered and how employees can qualify for them.

Employee Conduct

This manual should also be used to let your employees know how they are expected to act while at work.  It should also detail the dress code, if one exists.  You might also want to include guidelines for behavior in common situations.

Disciplinary Matters

An employee handbook should always include a section on employee discipline in the event that an employee should violate company rules or guidelines.  This section should detail any disciplinary system that is in place, and, if one is not in place, explain that matters will be handled on a case by case basis.

Safety Concerns

Your employee handbook should also cover how to respond to any and all foreseeable safety concerns.  These might include safety issues relating to work conditions, employee disputes and inclement weather.

Employment Discrimination/ Sexual Harassment

Employment discrimination and sexual harassment in the workplace are real issues that can cost businesses a great deal of money.  By including your company’s firm stance on these matter and explaining that neither will be tolerated might help you avoid conflicts in the future. Employee handbooks differ greatly depending on business structure, size and even the industry in which it operates. Some manuals are just a few pages whereas others may be dozens.  In order to create a comprehensive employee handbook and ensure maximum protection for your business, you should consult with a business or employment law attorney to advise you on these matters.


Monday, June 30, 2014

Questions You Shouldn't Ask or Answer During an Interview

Job-seekers have to be ready to respond to any interview question asked of them, but not every question has to be answered. 

To ensure that employers do not discriminate against candidates based on age, gender, race, health and family arrangements, there are certain regulations which restrict the type of questions which are permissible during an interview. Below, we explore several topics that may be problematic and should not be asked of potential employees: 

Questionable Questions

Let’s take a look at a few topics that may be problematic. 

  • Age: Does anyone like to be asked their age unless just turning 21? Probably not. While an interviewer may ask whether a candidate is over the age of 18 or 21, he or she may not ask for a specific age.  
  • Nationality: An interviewer can ask whether a candidate is legally allowed to work in the U.S., but he or she can’t ask about the applicant’s nationality or status as a citizen. 
  • Religious beliefs: Same goes for questions that ask about religious beliefs. The interviewer may be in the right if he or she needs to know if the interviewee can work on certain holidays, but otherwise, this topic should be off limits.
  • Health: While in many states an interviewer cannot ask if a candidate smokes, he or she may inquire as to whether the applicant has ever violated any corporate policies on alcohol or tobacco. Furthermore, an employer may ask whether the person being interviewed uses illegal drugs, is able to lift a given weight, or can reach items at a specific height. They also can ask if the individual is capable of completing certain tasks associated with the job and if any reasonable accommodations might be needed.
  • Family status: Employers want to know about an applicant’s availability which may sound like a legitimate concern.   They cross the red line, however, when they try to determine if a candidate has children or plans to have children in the future. An interviewer also cannot ask about an applicant’s maiden name or marital status.
  • Criminal record: A prospective employer is allowed to ask the applicant whether or not he or she has ever been convicted of a crime that relates to the job, but may be restricted from asking whether the candidate has ever been arrested.
  • Military service: An interviewer cannot discriminate against a member of the National Guard or Reserves. He or she can, however, ask if a candidate will anticipate any extended time away from work. 

Acing the Interview Process

The interview process can be a stressful time for employers and employees alike, but it will be a smoother process if you have a basic understanding of what can and can’t be asked during these initial meetings. 

As a candidate being interviewed, remember that if you’re asked a question which you’re not comfortable answering, or you think may be illegal, be sure to keep a positive attitude and try not to focus on the negative and instead deliver an answer which showcases your ability to fulfill the requirements of the job. For example, you may be asked if you can have a babysitter in a moment’s notice if an unexpected work emergency pops up. In answering this question, you may be concerned that you will be divulging too much information about your family life and, like many mothers, you may fear that they may not hire you because of the responsibilities that come along with motherhood. Rather than answering the specific question about a babysitter, you may instead wish to say “I am very flexible and am able to travel or work late when the need arises.” This answer addresses the interviewer’s question while preserving your privacy and also keeps the conversation going in a positive direction-one which showcases why you are the best candidate for the job. 

As an employer looking to hire a new employee, it’s important that everyone in your organization from the receptionist to the hiring manager who might come in contact with the candidates have a basic understanding of what topics and questions are off limits. You might even consider having a list of approved questions and a list of questions which are prohibited, regardless of the position being filled. These procedures should be a matter of strict company policy and should be reviewed each year to ensure compliance with all discrimination laws. 


Friday, May 23, 2014

Buying an Existing Franchise

While purchasing and establishing a new franchise unit may seem easier than starting from scratch with your own business model, it is still a time consuming and expensive undertaking. Franchisees must find a location, make needed renovations and secure various licenses or permits. Of course, even after the business opens its doors, it will take more time to acquire loyal customers and generate revenue. With big expenses and minimal revenue, it should come as no surprise that most new businesses operate in the red for the first year or two. If you are an aspiring entrepreneur who is looking to hit the ground running, it might be a good idea to avoid the laborious setup process and consider buying an existing franchise, often referred to as a “resale.”

As with any business venture, buying an existing franchise can be profitable and rewarding but it doesn’t come without risks. If you are contemplating the purchase of an existing unit, consider the following:

Get to Know the Franchisor
Although you will own the unit, you will have to continuously work with the franchisor. It’s important that you take time to understand the company’s approach to business, what type of resources they will provide to you and understand any requirements that might be set forth for the businesses that bear its name. Take time to speak with other franchisees to learn about their experiences as owners and carefully review the Uniform Franchise Offering Circular (UFOC).

In some cases, the franchisor may have a right of first refusal meaning that they ultimately have a say in whether you can join the franchise group as an owner. A business law attorney can help you sort through these issues and position you for success.

Identify the Real Reason the Existing Owner is Trying to Sell
There may be many reasons why a current franchisee is looking to sell his or her unit. In some cases, it may be because the owner is planning to retire or wants to relocate. In other situations, you may find that the business isn’t profitable and the owner wants to cut his losses and try his hand at something else. Understanding the reason for sale will help you to better understand whether it makes sense for you to buy the business. If it is a failing franchise unit, you have to reasonably ask yourself if you will be able to turn it around. On the other hand, a retiring owner may have amassed a loyal customer base which will help you to be immediately profitable.

Review the Current State of the Unit
During the discovery process, it’s imperative that you carefully review all of the financials for the resale unit. You will also want to look at things like employee turnover and speak to current employees to learn whether or not they are interested in continuing on with the business once ownership is transferred. If not, you may have the burden of hiring and training a new team very early on. Another thing you will want to examine is the state of the building and equipment – has everything been serviced regularly? A repair to a machine may seem minor but it could cost you a great deal.

The sale of an existing franchise unit can be complex. Not only do you have to understand the motives and terms of the seller, but you must also understand the role and requirements of the franchisor. Due to the complicated nature of these types of transactions, it’s absolutely imperative that you consult a business law attorney who can help you perform your due diligence and make sure all of the proper legal steps are taken during the transaction.

 


Thursday, March 20, 2014

Where to Incorporate Your Small Business

Should you incorporate your business in your home state? What about Delaware or Nevada, long known as havens for corporate entities? This decision should not be taken lightly because incorporating your business in a particular state will determine, to a significant extent, the laws that will apply to your business.

Often times, the best choice for corporate jurisdiction is the home state where your business is located.  There are several reasons for this. First, filing in a different state will not absolve you of the obligation to pay corporate taxes and comply with filing requirements in the state where your corporation has its operations. For example, if the corporation is located in California it will be subject to California fees and taxes, either as a domestic California Corporationor as a “foreign corporation” doing business in California. Additionally, if you are incorporated in a state other than where you are physically located, you will likely incur another set of filing fees and expenses for a registered agent who is physically located in the state of incorporation.


Read more . . .


Wednesday, January 15, 2014

How to Avoid Piercing the Corporate Veil

How to Avoid Piercing the Corporate Veil

Many business owners establish corporations to shield themselves from personal liability for business debts and protect their personal assets from creditors of the company. When established and maintained properly, a corporation is treated under the law as an independent entity, with many of the rights afforded to individuals. Such rights include the ability to own and transfer property, enter into contracts, obtain funding and to initiate legal action. A corporation is a separate, distinct entity, apart from its shareholders; as a result, only the corporation’s assets can be seized to pay judgments or satisfy other debts owed by the company.

However, the liability protection afforded by the corporate business structure is only available if the integrity of the corporation as a separate entity is respected by the courts and taxing authorities. Certain corporate formalities must be observed in order to preserve the corporation’s status as a separate entity apart from its owners. Failure to comply with these requirements may permit creditors to “pierce the corporate veil” and seek payment from the individual shareholders directly. To ensure the corporate veil remains intact, the corporation must act like a separate and distinct entity, and the shareholders must treat it as such. If certain corporate formalities are not consistently observed, a court may find that the corporation is merely an “alter ego” of the individual owner(s), and the corporate structure may be “disregarded”. When this occurs, the corporate veil is pierced and the individual shareholders can be held personally liable for the debts of the company.

Formalities that must be observed in order to preserve the integrity of the corporation and ensure the protection afforded by the corporate veil remains intact include:

Corporate Records
The corporation’s financial and corporate records must be documented. Most states also require that the shareholders and the directors meet at least once per year. A record of these meetings, in the form of minutes or written resolutions must be properly executed and maintained by the company.

Commingling of Assets
The corporation and the shareholders must treat themselves as separate entities. The corporation should have its own bank and credit card accounts.  Business owners should clearly document and account for expenditures made from corporate accounts if they were for personal benefit.

Capitalization
The corporation must be fully capitalized, or funded. This is typically accomplished by selling shares. Even in a one-person corporation, that individual shareholder must purchase his or her shares of stock in the company.  The corporation should also avoid becoming intentionally insolvent by transferring assets to the shareholders if it is likely that such transfer will inhibit the corporation’s ability to meet its financial obligations.

Failure to Pay Dividends
Payment of dividends is neither required, nor appropriate in every situation. However, if the payment of dividends is appropriate, or required, and the corporation fails to pay them, this could suggest that the corporation is actually an alter ego and not a separate legal entity.
 


Tuesday, November 5, 2013

C-Corporation Vs. S-Corporation

C-Corporation Vs. S-Corporation: Which Structure Provides the Best Tax Advantages for Your Business?

The difference between a C-Corporation and an S-Corporation is in the way each is taxed. Under the law, a corporation is considered to be an artificial person. Shareholders who work for the corporation are employees; they are not “self-employed” as far as the tax authorities are concerned.

The C-Corporation

In theory, before a C-corporation distributes profits to shareholders, it must pay tax on the income at the corporate rate. Then, leftover profits are distributed to the shareholders as dividends, which are then treated as investment income and taxed to the shareholder. This is the “double taxation” you may have heard about.

C-Corporations enjoy many tax-related advantages :

  • Income splitting is the division of income between the corporation and its shareholders in a way that lowers overall taxes, and can avoid or significantly reduce the potential impact of “double taxation.” By working with a knowledgeable tax advisor, you can determine exactly how much money the corporation should pay you as an employee to ensure the lowest tax bill at the end of the year.
  • C-Corporations enjoy a wider range of deductible expenses such as those for healthcare and education.  
  • A shareholder can borrow up to $10,000 from a C-Corporation, interest-free. Tax-free loans are not available to sole proprietors, partners, LLC members or S-Corporation shareholders.

S-Corporation
S-Corporations pass income through to their shareholders who pay tax on it according to their individual income tax rates. To qualify for S-Corporation status, the corporation must have less than 100 shareholders; all shareholders must be individual U.S. citizens, resident aliens, other S-Corporations, or an electing small business trust; the corporation may have only one class of stock; and all shareholders must consent in writing to the S-Corporation status.

Depending on your situation, an S-Corporation may be more advantageous:

  • Electing S-Corporation tax treatment eliminates any possibility of the “double taxation” referenced above. S-Corporations pay no federal corporate income tax, but must file annual tax returns. Because losses also flow through, shareholders who are active in the business can take most business operating losses on their individual tax returns.
  • S-Corporations must still file and pay employment taxes on employees, as with a C-Corporation. An S-Corporation may not retain earnings for future growth without the shareholders paying tax on them. The taxable profits of an S-Corporation pass through to the shareholders in the year they are earned.
  • S-Corporations cannot provide the full range of fringe benefits that a C-Corporation can.

Wednesday, September 25, 2013

Exemption Requirements for Non-Profit Public Benefit Corporations

Exemption Requirements for Non-Profit Public Benefit Corporations

A public benefit corporation is a type of non-profit organization (NPO) dedicated to tax-exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code which covers: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  Public benefit NPOs may not distribute surplus funds to members, owners, shareholders; rather, these funds must be used to pursue the organization’s mission. If all requirements are met, the NPO will be exempt from paying corporate income tax, although informational tax returns must be filed.

Under the rules governing public benefit NPOs, “charitable” purposes is broadly defined, and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. These NPOs are typically referred to as “charitable organizations,” and eligible to receive tax-deductible contributions from donors.

To be organized for a charitable purpose and qualify for tax exemption, the NPO must be a corporation, association, community chest, fund or foundation; individuals do not qualify. The NPO’s organizing documents must restrict the organization’s purposes exclusively to exempt purposes. A charitable organization must not be organized or operated for the benefit of any private interests, and absolutely no part of the net earnings may inure to the benefit of any private shareholder or individual.

Additionally, the NPO may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates.

All assets of a public benefit non-profit organization must be permanently and irrevocably dedicated to an exempt purpose. If the charitable organization dissolves, its assets must be distributed for an exempt purpose, to the federal, state or local government, or another charitable organization. To establish that the NPO’s assets will be permanently dedicated to an exempt purpose, the organizing documents should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. If a specific organization is designated to receive the NPO’s assets upon dissolution, the organizing document must state that the named organization must be a section 501(c)(3) organization at the time the assets are distributed.

If a charitable organization engages in an excess benefit transaction with someone who has substantial influence over the NPO, an excise tax may be imposed on the person and any NPO managers who agreed to the transaction. An excess benefit transaction occurs when an economic benefit is provided by the NPO to a disqualified person, and the value of that benefit is greater than the consideration received by the NPO.

To apply for tax exemption under section 501(c)(3), the NPO must file Form 1023 with the IRS, along with supporting documentation, including organizational documents, details regarding proposed activities and who will carry them out, how funds will be raised, who will receive compensation from the NPO, and financial projections. If approved, the IRS will issue a Letter of Determination. Public charities must also apply for exemption from state taxing authorities, a process which varies from state to state.


Saturday, June 15, 2013

Financing and Growing Your Small Business Through Crowdfunding

Financing and Growing Your Small Business Through Crowdfunding

What is crowdfunding? Part social networking and part capital accumulation, crowdfunding is simply the collective cooperation, attention and trust by people who network and pool their financial resources together to support efforts initiated by others.

Inspired by crowdsourcing, this innovative approach to raising capital has long been used to solicit donations or support political causes. This method has also been successfully implemented to raise capital for many different types of projects, including art, fashion, music and film.

Entrepreneurs can also tap the internet as a way to raise financing from a broad base of investors without turning to venture capitalists. With crowdfunding, you can raise small amounts of capital from many different sources, while retaining control over your business venture. Crowdfunding for business ventures, however, is not without its risks, and likely requires advice of an attorney.

In the traditional crowdfunding model, donations are pledged over the internet to fund a particular project or cause. The contributors are supporting the project, but receive no ownership interest in return for their monetary donation. This type of arrangement can exist with non-profit ventures and political campaigns, as well as start-up businesses. The person or entity soliciting the funding utilizes existing social networks to leverage the crowd and raise contributions in exchange for a reward, which is typically directly related to the project being funded, such as a credit at the end of a movie. With this type of arrangement, the contributor does not receive any ownership interest in the venture in exchange for the donation.

However, when for-profit companies solicit funds from a large number of individuals to raise capital in exchange for shares of ownership in the company, care must be taken to ensure the arrangement does not run afoul of federal and state securities laws.

Various companies and websites have popped up to assist entrepreneurs in raising capital through crowdfunding. Some operate on a flat fee, others charge a percentage of funds raised.  Keep in mind that any securities in a company sold to the public at large must be registered with regulatory authorities, unless they qualify for a specific exemption from the registration requirement. Selling shares of ownership to low-net-worth individuals (“unaccredited investors”) can trigger numerous registration and disclosure obligations. Additionally, state laws may also affect the transaction. As the number of investors and states involved increases, so do the cost and complexity of obtaining this type of capital financing. The various rules can be difficult to navigate, and missteps can result in significant penalties.
 


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