SMALL BUSINESS BASICS Robert M. Avera 2013 AVERA LAW FIRM,
PLLC
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DISCLAIMER This presentation is intended for educational
purposes only. It is not intended to convey legal advice pertaining
to any particular situation and is not a substitute for legal
advice. 2013 AVERA LAW FIRM, PLLC
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THE BUSINESS PLAN A business plan provides a blueprint for your
business and highlights your ideas, strategy, and team; it will be
used by you and others, such as banks, investors, and potential
partners. A business plan is a dynamic document. 2013 AVERA LAW
FIRM, PLLC
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THE BUSINESS PLAN Other topics: 1. start-up costs 2. licensing
and certification 3. capital (financial, intellectual, and human)
4. suppliers, equipment, and space 5. technology 6. advertising 7.
banking relationships 2013 AVERA LAW FIRM, PLLC
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THE BUSINESS PLAN Other topics: 8. insurance 9. taxes 10.
governance and compliance 11. growth 12. alternative strategies and
opportunities, and 13 strategy 2013 AVERA LAW FIRM, PLLC
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CHOOSING THE RIGHT BUSINESS 1. Starting a New Business: Is your
idea new or novel? 2. Purchase an Existing Business: Many
entrepreneurs start as franchisees in proven businesses, thus
avoiding some of the risks and challenges inherent with starting a
new business from scratch. 2013 AVERA LAW FIRM, PLLC
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CHOICE OF BUSINESS ENTITY Texas law (and most states)
recognizes several business structures. 1. Sole Proprietorship 2.
General Partnership 3. Corporation 4. Limited Liability Companies
5. Limited Partnerships 2013 AVERA LAW FIRM, PLLC
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BUSINESS ENTITY: SOLE PROPRIETORSHIP An individual person (if
there is more than one owner then it is a partnership as described
below) is doing business under his own name (or even under an
assumed name). No formal organizational requirement There is no
limit to liability - your personal assets are at stake! You can
only transfer the interests in your business by selling the assets
themselves which could mean more tax liability. Access to capital
can be limited. No entity taxation at either the federal or state
level because there is no entity to tax. 2013 AVERA LAW FIRM,
PLLC
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BUSINESS ENTITY: GENERAL PARTNERSHIP Two or more individuals
(or entities) have shared ownership of the business. No formal
organizational requirements to be formed nor does it have any
formal management or governance requirements Any partner of the
partnership can bind or obligate the partnership There is no limit
to liability for the partners Full flow through taxation - taxes
are paid at the individual partners level general partners
(individuals) may also be subjected to self- employment taxes. 2013
AVERA LAW FIRM, PLLC
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BUSINESS ENTITY: CORPORATION Under most state laws, there is
one kind of corporation. However, from a federal tax perspective
there are two: 1. a C-Corporation and 2. an S-Corporation 2013
AVERA LAW FIRM, PLLC
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BUSINESS ENTITY: CORPORATION Both types of corporations have:
rigorous management/governance structures a certificate of
formation must be filed with the Secretary of State a registered
office and agent for service of process in Texas at least one
director who is in charge of overseeing the corporations business
at least a president and a secretary as officers one annual meeting
of the directors and the shareholders of the corporation must take
place to elect directors and officers 2013 AVERA LAW FIRM,
PLLC
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BUSINESS ENTITY: CORPORATION Both types of corporations have
the following benefits: corporations provide for continuity of life
regardless of whether you are still around or not free
transferability of interests (with the exception of some
restrictions applicable to S-Corporations as discussed below)
Formalities such as annual meetings, holding corporate assets
separate and having arms-length transactions between corporations
and shareholders/directors must be followed to maintain limited
liability of the shareholders. 2013 AVERA LAW FIRM, PLLC
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BUSINESS ENTITY: CORPORATION C-Corporation: More flexible type
of corporations in that there is no limit in the amount of
shareholders they may have Shares of a corporation can be sold to
anyone whether a corporation, individual person or different
entities Double taxation o as a separate legal entity, pays federal
and state taxes and then individual shareholders also pay taxes on
whatever dividends (distributions of earnings) are paid to
shareholders. 2013 AVERA LAW FIRM, PLLC
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BUSINESS ENTITY: CORPORATION C-Corporation: If sold, there is a
single tax to shareholders if the interests (shares) are sold but
there is double taxation if assets are sold as it is deemed income
to the entity and then a distribution to shareholders Because of
the double taxation feature of a C-Corporation, it is generally not
a desirable business structure for small businesses 2013 AVERA LAW
FIRM, PLLC
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BUSINESS ENTITY: CORPORATION S-Corporation: Named as such
because of Subchapter S of the Internal Revenue Code From a
governance and state law perspective, S- Corporations are
essentially the same as C-Corporations. Form 2553 is filed, an
S-Corporation is viewed as a partnership or sole proprietorship for
taxation purposes, depending on the number of shareholders o This
means that the corporation itself is not taxed, as C- Corporations
are; rather the S-Corporations profits are passed on to its
shareholders, who pay income tax on that money. 2013 AVERA LAW
FIRM, PLLC
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LIMITED LIABILITY COMPANIES LLCs in most cases may be organized
in two ways: (i) member managed; or more like a partnership. (ii)
manager managed more like a corporation. manager (or managers) is
in charge of running the business, very much the same way directors
are tasked in corporations, and members do not have an active role
in running the business (like shareholders). 2013 AVERA LAW FIRM,
PLLC
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LIMITED LIABILITY COMPANIES LLC is formed when a certificate of
formation is filed with and accepted by the Secretary of State. LLC
certificate of formation is required to state whether the LLC will
be manager or member managed and sets forth the names of each
initial manager (if manager managed) or initial member (if member
managed). LLCs have a continuity of life and are very flexible as
far as transferability of interests with the exception that LLC
interests can not be publicly traded 2013 AVERA LAW FIRM, PLLC
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LIMITED LIABILITY COMPANIES No limitation on the number or type
of members If an LLC is owned by a single member, for taxation
purposes it is treated as a disregarded entity. If the owner is a
corporation or another LLC, it is treated as a division or branch
of that entity. An LLC with multiple members is treated for tax
purposes as a partnership. Can elect to be taxed as a S-Corporation
2013 AVERA LAW FIRM, PLLC
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PROFESSIONAL LIMITED LIABILITY COMPANIES The company must be
organized for providing professional service and services ancillary
to its provision. No unrelated business operations are permissible
Protects the members from personal liability for company contracts
but does not shield personal liability for acts of the member Used
by lawyers, engineers, CPAs and other professionals. 2013 AVERA LAW
FIRM, PLLC
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SERIES LIMITED LIABILITY COMPANIES Records of Series
Established by the LLC. All records of any series must be
maintained so that the account of the assets of the series can be
reasonably and objectively determined separately from the other
assets of the LLC or assets of other series. This may be done by
identifying assets by specific listing, category, type, quantity,
or computational or allocational formula or procedure, including a
percentage or share of any assets or any other objective method.
This entity is ideal for holding several real estate investments
within one entity. If properly maintained, other real estate
properties will not be subject to liability arising out of an
incident on or relating to a separate property within the series
LLC. 2013 AVERA LAW FIRM, PLLC
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LIMITED PARTNERSHIP Limited partnerships (LPs) are partnerships
where certain partners have limited liability (limited partners)
and at least one partner (general partner) has unlimited liability.
LPs are formed by filing a certificate of formation with the
Secretary of State. LPs provide limited liability for the limited
partners and continuity of life. A general partner is usually an
LLC or a corporation in order to provide limited liability to those
forming it. Federal taxation perspective, LPs, are taxed similarly
to LLCs. 2013 AVERA LAW FIRM, PLLC
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WHICH ENTITY DO I CHOOSE? Consider: (i) there is a large
possibility you will go public, (ii) you have foreign investors
interested in investing in your business, or (iii) you are in an
industry which corporations are the preferable or most commonly
used business entity Remember, S-Corporations are a possibility,
but not if scenarios (i) or (ii) apply. 2013 AVERA LAW FIRM,
PLLC
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WHICH ENTITY DO I CHOOSE? The Limited Liability Company is the
most common choice of entity now with the added professional
limited liability provisions and the new series limited liability
company rules. Other entities may be desirable based on the needs
of the owners. 2013 AVERA LAW FIRM, PLLC
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OWNERSHIP ISSUES Ownership Interests Management and Control
Employment Matters Buy-Sell Agreements 2013 AVERA LAW FIRM,
PLLC
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OWNERSHIP INTERESTS (a)What percentage of the ownership
interests will be held by each founder? Will it be necessary to
commission a valuation of non-cash assets which the founders might
contribute to the business? (b)Should the agreement provide for
preemptive rights for the founders with respect to future issuances
of ownership interests? 2013 AVERA LAW FIRM, PLLC
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MANAGEMENT AND CONTROL (a)What procedures should be included
for insuring that the founders will cooperate regarding the
election of the managers of the business? Among the issues to be
considered are the following: (1)Number of persons serving on the
managing board of the entity; (2)Persons to be elected as members
of the managing board; (3)Functions of managing board;
(4)Resolution of disputes among members of the managing board;
(5)Persons to be elected as officers (including titles); and
(6)Managers' and owners' meetings. 2013 AVERA LAW FIRM, PLLC
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MANAGEMENT AND CONTROL (b) What instructions should be included
regarding protection and disbursements of the fund of the business?
Consider language regarding location of bank accounts and signature
requirements for checks. (c)How will the founders select
accountants and auditors for the corporation? What financial
reports should be prepared for the owners? 2013 AVERA LAW FIRM,
PLLC
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MANAGEMENT AND CONTROL (d)What matters should require the
consent of all the founders? Consider: (1) Issuances of additional
ownership interests; (2)Sales of significant assets; (3)Execution
of contracts which impose material financial obligations from the
business; (4)Significant increases in salaries; (5)Mergers and
consolidations; and/or (6)Changes in the business of the entity
2013 AVERA LAW FIRM, PLLC
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MANAGEMENT AND CONTROL (e)Should the agreement include
provisions regarding the payment of dividends or other
distributions of profits? Consider either allowing the directors to
determine the timing of dividends or requiring payment of some
minimum dividend amount (subject to any restrictions on dividends
or distributions included in applicable state law). (f)What books
and records should be maintained by the business? 2013 AVERA LAW
FIRM, PLLC
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EMPLOYMENT MATTERS (a)Should the agreement include provisions
relating to employment of the founders by the corporation? If so,
consider the following issues: (1)Duties of each founder in his or
her capacity as an employee and the amount of time that each
founder will spend on the activities of the business; (2)The amount
of compensation to be paid to each employee- founder (including
benefits); and (3)The circumstances under which employment of a
founder may be terminated. 2013 AVERA LAW FIRM, PLLC
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EMPLOYMENT MATTERS (b)Should the agreement include restrictions
on the ability of the founders to engage in competitive activities?
(c)Should the entity be required to purchase health and/or life
insurance and/or disability insurance with respect to any of the
founders? (d)What types of obligations should be imposed on the
founders regarding protection of the confidential information of
the business? A definition of confidential information should be
included in the text of the agreement. The agreement should also
provide for assignment of the founders' company-related inventions
to the corporation. 2013 AVERA LAW FIRM, PLLC
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BUY-SELL PROVISIONS Should the agreement include restrictions
on transfers of ownership interests? In many cases, the transfer of
interests may be subject to a right of first offer or refusal in
favor of the entity and/or the other owners. (1) Transfers should
be broadly defined to include all possible voluntary and
involuntary means of transfer including gift, pledge,
hypothecation, operation of law (e.g., dissolution of marriage),
and intestate succession. (2) Restriction should apply to the
founders, personal representatives of deceased or incompetent
founders, founders' spouses, and permitted transferees. 2013 AVERA
LAW FIRM, PLLC
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BUY-SELL PROVISIONS (b)Should the agreement grant one or more
of the founders the right to compel the entity to purchase the
interests of other specified founders? Such a provision may be
helpful in the case of a deadlock among the ownership group.
(c)Should the agreement provide for optional/mandatory purchase of
ownership interests upon disability of a founder? If so, how should
disability be defined? (d)Should the agreement provide for
optional/mandatory purchase of shares upon the termination of
employment of a founder? If so, what events should constitute
termination of employment? (e)Should the agreement provide for
mandatory purchase of the ownership interests of a deceased
founder? 2013 AVERA LAW FIRM, PLLC
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BUY-SELL PROVISIONS (f)Should the agreement provide for
optional/mandatory purchase of ownership interests which become
subject to transfer to a third party in an involuntary transfer
(e.g., a transfer pursuant to a judicial order or enforcement of
pledge)? 2013 AVERA LAW FIRM, PLLC
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BUY-SELL PROVISIONS (g)How is the purchase price for ownership
interests subject to buy-sell provisions to be determined? For
example, the parties may agree that the value of the interests will
be the sum of the book value of the interests as reflected in the
financial statements of the entity plus an amount equal to the
value of the goodwill associated with the interests. The price may
vary depending on the event that triggers the buy-sell provision,
such as when interests subject to involuntary transfers are
purchased at the lower of the price determined pursuant to the
above formula or the price actually paid by the third party for the
interests. 2013 AVERA LAW FIRM, PLLC
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BUY-SELL PROVISIONS (h)What provisions should be included for
payment of the purchase price for ownership interests bought and
sold under the buy-sell agreement? For example, a portion of the
price may be paid immediately in cash and the balance may be paid
out in installment payments under a promissory note. Consider the
need to purchase insurance to finance purchases. 2013 AVERA LAW
FIRM, PLLC
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EMPLOYMENT ISSUES Employment Manuals Independent Contractor
Agreements Course and Scope of Employment 2013 AVERA LAW FIRM,
PLLC
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DEALING WITH VENDORS Actual Authority Maintaining Corporate
Formality Liability for Entity Debts 2013 AVERA LAW FIRM, PLLC
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THANK YOU Robert M. Avera 13062 Hwy 290 West. Austin TX 78737
(512) 615-3578 Fax (512) 615-3583 [email protected]
www.AveraLaw.com 2013 AVERA LAW FIRM, PLLC