Tag: startups

Estate Planning for Founders

Founders and entrepreneurs face many pressure points while building their company into their vision. Important decisions must be made relating to the choice of a business entity, how to fund the business, what sort of regulations impact the business, how to protect intellectual property, how to manage employees, and what to do if sued. Most of these points focus on the business.

As Founders are busy building their business and working towards success, they often overlook their personal estate planning. Founders are not alone in avoiding this topic – as few people enjoy considering what happens to their assets upon incapacity or death. Founders have unique needs that necessitate proactive estate planning as early in a company’s existence as possible in order to minimize tax consequences and maximize liquidity options. In order to simplify estate planning and encourage Founders to focus, estate planning for Founders should be broken down into the following segments:

  • Segment I: Core Planning.
  • Segment II: Business Continuity and Liquidity.
  • Segment III: Advanced Wealth and Transfer Strategies.

This article will detail each of the segments that all Founders should consider. Although presented in numerical order, we find that Founders are often driven into a particular segment that meets their personal situation. We note that once a Founder starts a segment, it almost always makes sense to consider the other segments as well.

Segment I: Core Planning

Core estate planning answers the question of what happens to the business and your other assets at death – including who controls those assets (the fiduciaries), who receives the assets (the beneficiaries), and how much tax is paid. Core estate planning involves putting together a well-constructed set of wills and revocable trust agreements that capture the available exemptions from state and federal estate taxes, protect your children’s inheritances from “creditors and predators” and name appropriate individuals or institutions to manage your estate after your death. This phase also includes setting up simple documents that appoint individuals to manage your financial and personal affairs in the event of your incapacity, including a living will and power of attorney.

Under current law, everything you own is subject to federal estate tax, and potentially state estate tax as well. Every person is entitled to an exemption from federal estate tax – that exemption is currently $11,180,000 (note that the exemption increases every year). The federal estate tax rate is currently 40 percent on the assets in excess of the federal exemption (reduced by any taxable gifts made during your life).

Even though the tax exemptions seem large, it is important for Founders to engage in estate planning that minimizes the taxes’ impact, especially since a startup’s value can grow rapidly over a short period of time. A married Founder’s estate plan can be carefully crafted to delay tax until the death of the survivor of the Founder and the Founder’s spouse.

Segment I planning also includes incapacity planning. If you become incapacitated and no planning has been done, your family may be forced to go to court to obtain the appointment of a guardian or conservator to manage your financial and personal affairs. This result can be avoided in almost all cases through power of attorney and health care proxy naming your spouse or other individual to make financial and health care decisions in the event of your incapacity.

Upon completion of Core Planning, a Founder will have created tax efficient wills and revocable trusts, considered asset protection planning for a spouse and children, and appointed fiduciaries to administer your estate and continuing trusts.

To us, Core Planning is the minimum amount of estate planning a Founder should complete. The Core Plan helps educate Founders on the planning, taxes and asset protection. The Core Plan ensures that the Founder is able to select the correct fiduciaries to manage his/her estate upon death and that the intended beneficiaries benefit from the Founder’s success. The Core Plan can, and should, change with time.

Segment II: Business Continuity and Liquidity

While Segment I planning is essential for everyone, Segment II planning addresses the unique needs that Founders have regarding business continuity and liquidity. With regard to continuity, it is often appropriate for Founders to consider a buy-sell agreement, which is a contractual arrangement providing for the mandatory purchase (or right of first refusal) of a shareholder’s interest upon the occurrence of certain events described in the agreement (the so-called “triggering events”). The buy-sell agreement’s primary objective is to provide for the stability and continuity of the startup in a time of transition through the use of ownership transfer restrictions. Typically, such agreements prohibit the transfer of ownership to unwanted third parties by setting forth how, and to whom, shares may be transferred. The agreements also usually provide a mechanism for determining the sale price for the shares and how the purchase will be funded.

Because a startup is built from nothing, it is often important to a Founder to maintain control while providing for a smooth transition to his chosen successors upon his death or disability. Structuring a buy-sell agreement provides a nonthreatening forum for the Founder to begin thinking about who should manage the startup in the future. By specifically carrying out the Founder’s intent, a properly structured buy-sell agreement avoids the inevitable disputes between people with competing interests. If the Founder becomes disabled or retires, a buy-sell can provide him with the security that his case flow won’t disappear, as the agreement can provide for the corporation and/or the other shareholders to purchase the shares, at a predetermined price, either in a lump sum or installments, typically at preferable capital gains rates.

Funding a buy-sell agreement is essential to its success, but that requires liquidity. Life insurance is an extremely common and effective funding choice. Whether owned by the business in a redemption agreement or by the other shareholders in a cross-purchase agreement, it provides the purchasers with the ability to guarantee a certain amount of money will be there when the Founder dies—as long as premiums are paid. The type of life insurance typically purchased in the startup context is some form of permanent insurance (such as whole life, universal life, or variable life) rather than term insurance, which gets more expensive as the insured ages and may not be able to be renewed beyond a certain age (usually between 60 and 70 years of age).

There are downsides in certain circumstances to using life insurance in this manner. As mentioned, if a cross-purchase agreement is chosen and there are more than two shareholders, each shareholder will need to purchase a life insurance policy on every other shareholder (unless a partnership is established to own the insurance). Additionally, life insurance doesn’t solve the funding problem for transfers while the Founder is still alive.

In addition to providing liquidity to the business, liquidity may also be important for the Founder’s beneficiaries. If significant wealth is tied to the business, the Founder’s beneficiaries may have little to no access to liquid funds upon the death of a Founder. The most common strategy to deal with this lack of liquidity is to purchase life insurance. As noted above, there are several types of life insurance available. In addition to the type of insurance, a Founder should consider whether it is recommend to own the life insurance policy inside an irrevocable life insurance trust in order to remove the proceeds of such policy from the Founder’s estate for tax purposes.

Aspects of Business Continuity and Liquidity are often addressed in the business’ governing documents. However, as the business grows, partners enter the business and investors come and go – these documents should be reviewed on a regular basis. The liquidity concerns of the Founder should also be regularly reviewed.

Segment III: Advanced Wealth and Transfer Strategies

Generally, Segment III planning involves the transfer of assets out of your estate to shelter them from estate tax. Although we often encourage clients to at least consider Segment I planning first, often a business is about to “pop” in value – this “pop” offers a great opportunity for tax planning. In those circumstances, Advanced Wealth and Transfer Strategies is often the initial introduction to estate planning.

If an individual attempts to transfer assets during life in order to avoid an estate tax, the transfer will generally instead be subject to a federal gift tax. Since the gift tax and the estate tax apply at the same rates and generally have the same exemptions, there should be no incentive for an individual to transfer wealth during life as opposed to waiting to transfer it at death. In effect, by enacting the gift tax as companion to the estate tax, Congress created an “airtight” transfer tax system. There are, however, leaks in that system. The three primary examples of the leaks in the system are: removing value from the system; freezing value within the system; and discounting values within the system.

Removing value from the transfer tax system is hard to do and takes time. In most cases, if an individual makes a gift during lifetime, that gift is brought back into the taxable estate at death. However, there are two exceptions to this general rule, which are the annual gift tax exclusion and the “med/ed” exclusion. If an individual makes a gift using his or her $15,000 annual gift tax exclusion, the gifted property is entirely removed from the taxable estate. Individuals are also permitted to make gifts of unlimited amounts for tuition and certain medical expenses, as long as the payment is made directly to the provider of services. Such med/ed gifts are entirely excluded from the taxable estate.

Removing value is done over-time and is a consistent theme for Founders in their estate planning. However, the real benefit of a business “popping” in value is in the freeze and
discount strategies. Freezing value within the system usually connotes the individual making a gift using some or all of his or her lifetime exemption from federal gift tax. For example, you might make a gift of $5 million worth of stock to a child. Upon your death, the $5 million gift is actually brought back into your estate for purposes of calculating your estate tax. However, it is only brought back into the estate at its value at the time the gift was made and is sheltered from tax at that time via the use of your $5 million estate tax exemption. Accordingly, if the value of the gifted property increases between the date of the gift and the date of your death, the appreciation avoids transfer tax. In other words, you succeed in “freezing” the value of the gifted property at its date-of-gift value.

A holy grail of estate planners has been to find a way of freezing the value of an asset at some number lower than what it is actually “worth” to the gift-giver’s family, also known as “discounting” values. Suppose an individual owns all of the stock in a business with a total value of $10 million. If the individual gives all of the stock to her child, she will have made a taxable gift of $10 million. On the other hand, suppose that the individual gives 10% of the business to five people. An appraiser is likely to opine that the interests received by the individuals are subject to lack of control and lack of marketability discounts, since none of the recipients can easily control or transfer the entity. If the appraiser applies, say, a 30 percent discount for the lack of marketability and control, the value of the gift would be reduced to $3,500,000.

Accordingly, the Founder succeeds in freezing values at something less than the entity value of the business in the eyes of the family as a whole.

Founders generally use one of two strategies when planning for a “pop” in value – both strategies utilize both the freeze and discounting tactics discussed above – Grantor Retained Annuity Trusts (GRATs) and Sales to Intentionally Defective Grantor Trusts (IDIT Sale).

Grantor Retained Annuity Trust

A GRAT allows an individual to give assets to a trust and retain a set annual payment (an “annuity”) from that property for a set period of years. At the end of that period of years,
ownership of the property passes to the individual’s children or trusts for their benefit. The value of the individual’s taxable gift is the value of the property contributed to the trust minus the value of his right to receive the annuity for the set period of years, which is valued using interest rate assumptions provided by the IRS each month. If the GRAT is structured properly, the value of the individual’s retained annuity interest will be equal or nearly equal to the value of the property contributed to the trust, with the result that his taxable gift to the trust is zero or near zero.

How does this benefit the children? If the assets contributed to the GRAT appreciate and/or produce income at exactly the same rate as that assumed by the IRS in valuing the individual’s retained annuity payment, the children do not benefit, because the property contributed to the trust will be just sufficient to pay the individual his annuity for the set period of years. However, if the assets contributed to the trust appreciate and/or produce income at a rate greater than that assumed by the IRS, there will be property “left over” in the trust at the end of the set period of years, and the children will receive that property–yet the creator of the trust would have paid no gift tax on it. The GRAT is particularly popular for gifts of hard to value assets such as business interests, private equity and hedge fund interests because the risk of an additional taxable gift upon an audit of the gift can be minimized. If the value of the transferred assets is increased on audit, the GRAT can be drafted to provide that the size of the individual’s retained annuity payment is correspondingly increased, with the result that the taxable gift always stays near zero IDIT Sale

A GRAT is often compared with a somewhat similar technique, known as the IDIT Sale. The general IDIT Sale concept is best understood by means of a simple example. An individual makes a gift to an irrevocable trust of, say, $100,000. Sometime later, the individual sells assets to the trust in return for the trust’s promissory note. The note provides for interest only to be paid for a period of, say, 9 years. At the end of the 9th year a balloon payment of principal is due. There is no gift because the transaction is a sale of assets. The interest rate on the note is set at the lowest rate permitted by IRS regulations.

How does this benefit the individual’s children? If the property sold to the trust appreciates and/or produces income at exactly the same rate as the interest rate on the note, the children do not benefit, because the property contributed to the trust will be just sufficient to service the interest and principal payments on the note. However, if the property contributed to the trust appreciates and/or produces income at a rate greater than the interest rate on the note, there will be property left over in the trust at the end of the note, and the children will receive that property, gift tax free.

Economically, the GRAT and IDIT Sale are very similar techniques. In both instances, an individual transfers assets to a trust in return for a stream of payments, hoping that the  income and/or appreciation on the transferred property will outpace the rate of return needed to service the payments returned to the individual. Why, then, do some clients choose GRATs and others choose IDIT Sales?

The GRAT is generally regarded as a more conservative technique than the IDIT Sale. It does not present a risk of a taxable gift in the event the property is revalued on audit. In addition, it is a technique that is specifically sanctioned by the Internal Revenue Code. The IDIT Sale, on the other hand, has no specific statute warranting the safety of the technique. Unlike the GRAT, the IDIT Sale presents a risk of a taxable gift if the property is revalued on audit and there is even a small chance the IRS could successfully assert that the taxable gift is the entire value of the property sold rather than merely the difference between the reported value and the audited value of the transferred property. Moreover, if the trust to which assets are sold in the IDIT Sale does not have sufficient assets of its own, the IRS could argue that all of the trust assets should be brought back into the grantor’s estate at death.

Although the IDIT Sale is generally regarded as posing more valuation and tax risk than the GRAT, the GRAT presents more risk in at least one area in that the grantor must survive the term of the GRAT in order for the GRAT to be successful; this is not true of the IDIT Sale. In addition, the IDIT Sale is a far better technique for clients interested in generation skipping planning. The IDIT trust can be established as a Dynasty Trust that escapes estate and gift tax forever. Although somewhat of an oversimplification, the GRAT generally is not a good vehicle through which to do generation skipping planning.

Spousal Lifetime Access Trust

When using either a GRAT or an IDIT Sale, we encourage our clients to also consider a Spousal Lifetime Access Trust (SLAT). In addition, the SLAT is often the remainder beneficiary of the GRAT or IDIT transaction. A SLAT can remove, freeze, and discount values all in one fell swoop. In a typical SLAT, an individual creates an irrevocable trust, naming her spouse or some other trusted individual or institution as trustee. During the life of the individual and her spouse, the trustee is authorized to sprinkle income and principal among a class consisting of her spouse and descendants. Upon the death of the survivor of the individual and her spouse, the remaining trust assets are divided into shares for descendants and held in further trust. The SLAT provides several benefits. The individual’s gifts can qualify for the gift tax annual exclusion if the trust is designed properly. This removes value from the owner’s estate. If desired, the owner could use the trust as a repository for a larger gift utilizing her lifetime gift tax exemption, thereby freezing values for transfer tax purposes. Moreover, depending on the type of asset gifted to the trust, it may be possible to apply valuation discounts as well.

Beyond being a good vehicle through which to remove, freeze, and/or discount values for tax purposes, the SLAT provides a number of other benefits. The trust includes the grantor’s spouse as a beneficiary. Although the grantor can never have any legal right to the assets held in the SLAT, and neither can there be any prearrangement or understanding between the grantor and her spouse that the grantor can use assets in the trust, if the grantor is in a happy marriage, it nonetheless can be comforting to know that her spouse will have access to the property in the trust even after the gift. As an additional benefit, the SLAT would be established as a “grantor trust” for income tax purposes. This means that the creator of the trust would pay income tax on the income and gains earned by the trust. This depletes the creator’s estate, and enhances the value of the trust, but is not treated as a taxable gift, in effect providing a very powerful additional means of removing value from the transfer tax system. Finally, the SLAT can be structured as a “generation skipping transfer tax exempt trust” (also known as a “Dynasty Trust”), thereby removing the gifted assets from the transfer tax system for multiple generations.

Conclusion.

Although a Founders’ personal and business life can be complicated and stressful, we find that breaking a Founders’ personal estate planning into three key segments allows the Founder to focus on what is important to them and take strong steps towards successful estate planning.

 

© 1998-2018 Wiggin and Dana LLP
This post was written by Erin Nicholls and Michael T. Clear of Wiggin and Dana LLP.

Founder’s Stock – a Legal Fiction

In common usage, a founder is an individual who creates or helps create a company, but in legal terms, there is no such thing as a “founder” or “founder’s stock,” only early participants in a company’s organization and ownership of its initial equity capital. Why is this so? Because, for all practical purposes (from a startup’s point of view), there are two types of stock – common stock and preferred stock – and “founders” are just the initial holders of the company’s common stock, usually before any financing, in-licensing, or contribution of assets. It should be noted that common stock and preferred stock can be divided further into subclasses or series (e.g., Class A common stock, or Series B preferred stock) that further differentiate the rights and privileges of the holders, and additional side agreements can be put into place to further restrict or grant rights to a particular holder of equity, but those topics are beyond the scope of this post.

As background, to create a corporation an individual (the incorporator) needs to file a certificate of incorporation with the Secretary of State of the state of organization (e.g., Massachusetts, Delaware, California, New York). Immediately thereafter, the incorporator will execute an organizational action where they will appoint the initial director(s) of the corporation and resign from their position as the incorporator. The director(s) will then have an organizational meeting where the director(s), among other things, will adopt by-laws, appoint officers, and issue stock to the initial stockholders, typically common stock. The price of that stock initially issued is very low and is normally equal to the par value per share (e.g., $0.0001/share) because the company has just been created and does not have any real value at this point in time.  This initial equity is what is referred to as “founder’s stock”.  And founder’s stock can be issued outright or can be subject to a vesting schedule with unvested shares forfeited back to the company in certain circumstances, usually related to termination of employment.

Why does any of this matter? From an organizational standpoint, it doesn’t matter – up until the point that the company contemplates issuing stock to employees, investors, or other individuals or acquiring or licensing assets.  Often the early employees and individuals will either (i) want to receive common stock at the same price that the founder(s) paid or (ii) want to ensure their interests are protected. For more information on the latter, please read A Balanced Approach to Founder’s Equity.

If an individual wants to receive common stock at the same price paid by the founder(s) and the individual is a service provider, the individual will be deemed to have received compensation equal to the difference between the (i) fair market value of the stock received and (ii) the amount paid by the recipient; this amount can become significant depending on the then current value of the company. Note, the founders did not have to deal with this “compensation” issue because when the founders purchased their shares of the company at the organizational meeting, the fair market value of the company’s shares at such time was almost nothing (as the company had yet to conduct any business). To avoid this recognition of income, service providers will typically accept options with a purchase price per share equal to the current fair market value. Options provide the service provider with the ability to receive equity in the future without the initial upfront cost of the equity and the income tax issue does not present itself here because the exercise price of the option equals the current exercise price of the share. It should be noted that options do not provide the option holder with any rights as a stockholder. There are advantages and disadvantages of owning options in comparison to stock, and a discussion of those issues is beyond the scope of this post.  But it’s also worth noting that, if six months or so after the issuance of founder’s stock there have been no activities that have created value (financing, assets, activities, etc.), it may be possible to still fairly conclude that the company is still nearly worthless, and thus still have an opportunity to issue “founder’s stock” to a new key member joining the team.  You should consult your attorney when such matters arise.

 

©1994-2018 Mintz. All Rights Reserved.
This post was written by Michael Bill of Mintz.

You’ve Been Sued: How to Avoid Early Missteps

Litigation doesn’t have to be catastrophic for a growing company, but it can quickly spiral out of control if not handled properly.  This article will explore issues to consider when your company is faced with a lawsuit

 

Stop All Communications

Most lawsuits don’t come out of the blue.  They usually are preceded by a back-and-forth with the other person or company, sometimes through counsel but often without.  Emerging companies understandably need to keep costs in check, so it is not uncommon for a company to try to deal with a brewing dispute on its own.  But once litigation hits, it is important to put pens down and consult counsel immediately.  Everything you write or say – internally, to the other side, or to anyone else (except your attorney) – can be obtained by the other side during the lawsuit’s discovery process.  You don’t want anyone to write or say something in the early hours of the lawsuit that unnecessarily pins the company down or hurts it later in the litigation.

Preserve Documents and Files

Although it sounds mundane, it is crucial that the company preserve all documents and files that may be relevant to the dispute.  In a nutshell, the company will need to preserve every document that relates to the issues raised in the lawsuit.  And “document” includes both hard copy documents as well as emails, text messages, voicemails, electronic files, and everything else that contains relevant information.  It encompasses more than just the important documents or communications.  It includes anything that bears on the claims asserted in the complaint and your potential defenses to those claims.

Preserving evidence includes obvious things, like not deleting emails, text messages, or electronic files, and not throwing away hardcopy files.  But it also includes less obvious steps, like turning off any settings in your email system that automatically purge messages after a set period of time or after the mailbox reaches a certain size.  It also includes preserving data and files on individual laptops, desktops, and other devices, if that data isn’t saved on a company server or other system.  There are potential landmines everywhere, and failing to preserve relevant evidence – called spoliation – can dramatically affect a case.

Gather the Facts and Understand the Law

It is important to gather and understand the underlying facts as soon as possible.  This involves not only reviewing relevant documents, but also talking to key players who were involved in the matter.  While the process doesn’t have to be exhaustive at this early step, it must be deep enough for the company to be able to make a reasonable assessment of the case.

If there are good facts, you want to know them.  If there are bad facts, you need to know them early, so you can factor them into your decision about how to proceed.  You will need to assess the facts, good and bad, in light of the relevant law and begin to assess the strengths and weaknesses of the plaintiff’s claims, as well as your likely defenses and any potential counterclaims you may have against the plaintiff.

Other things you and counsel should consider at the outset are: whether the company has insurance that may cover the lawsuit and any potential settlement or judgment that results; whether someone else has an obligation to indemnify the company in connection with the lawsuit; whether the lawsuit was filed in the right court; whether the plaintiff was required to bring the claim in arbitration rather than court; whether the plaintiff waited too long to sue such that one or more claims may be barred by a statute of limitations; and whether the company has any counterclaims it could assert against the plaintiff.

Establish a Plan

Armed with an understanding of the facts and the relevant law, you should establish a plan for how to proceed with the lawsuit.  Should you fight to the end?  Is it better to settle early?  There’s no one-size-fits-all answer to those questions.  The answer will be unique to your company, the lawsuit you’re facing, and the opposing party with whom you’re dealing.  You should weigh each potential outcome, including the cost to reach that outcome, and assess how it will impact your company.  Be wary of sacrificing business goals for the sake of litigation.

Your plan for the case does not have to be static.  It can change over time, as the litigation unfolds.  Even when you have thoroughly analyzed the available facts at the outset of a case, the landscape almost always changes as the case proceeds and additional evidence comes to light.  Your strategy can evolve with the landscape.

Prepare for the Long Haul

Litigation can be painfully slow.  Few things in litigation happen quickly, and it usually takes more than a year to get to trial, and sometimes two or three years depending on the type of case.  After the Complaint is filed and served, there typically will be motions practice, additional pleadings, and an extended period of discovery where the parties gather and produce relevant documents, depose fact witnesses, and retain expert witnesses to provide reports and give testimony.  It is a long process, and parties should be prepared for the possibility that it could take years for the case to wind its way through it and get to trial.

Settlement Considerations

Although you need to prepare your case as though it will go to trial, the reality is that almost all cases eventually settle.  Some cases are resolved through direct discussions between the parties (typically through counsel).  Others are settled through the use of a mediator, who serves as an independent third party to foster settlement discussions and attempt to resolve the dispute.  Mediation is voluntary, and the mediator cannot force either party to settle.  But an effective mediator can bring a fresh perspective to a lawsuit, giving each side an unvarnished view of how a judge and jury may see their case.  That alone can serve as a useful reality check to parties who have been living with a case for months or years and may have difficulty viewing it dispassionately.

Conclusion

No company wants to be sued.  But the odds are that your company will face at least one lawsuit in its lifetime.  By knowing what to expect and being proactive when it happens, you can avoid some of the pitfalls that strike less prepared companies.  And by approaching it with a clear plan and developed strategy, you can put your company in the best position to prevail in the lawsuit or resolve it on favorable terms.

Read more about Legal Issues for High-Growth Technology Companies: The Series.

© 1998-2018 Wiggin and Dana LLP
This post was written by Joseph C. Merschman of Wiggin and Dana LLP.

Entrepreneur’s Spotlight: South Loop Strength and Conditioning (Chicago, Illinois)

South LoopWelcome to the latest installment of Entrepreneur’s Spotlight on the Health and Fitness Law Blog.  In this series, we look at successful startups and ventures in the health and fitness industry and interview the hard-working entrepreneurs behind these companies to discuss how they did it and what they learned along the way.

Today, the spotlight is on South Loop Strength and Conditioning (“SLSC”).  SLSC is one of the most popular CrossFit gyms in the greater Chicago area, and is located at 645 S. Clark Street in Chicago, Illinois. For more information on what sets SLCS apart from other gyms in Chicago (and nationwide), please check out its website at http://southloopsc.com/.

SLCS is co-owned and operated by four individuals.  We met with one of the original founders, Todd Nief, to listen to his story.  As you will read below, Todd originally did not have a background in fitness, but he has gone on to obtain a wide variety of certifications, including the following:

  • Certified CrossFit Trainer (CrossFit Level 3)
  • CrossFit Specialty: Movement & Mobility, Running, Powerlifting, Kettlebell
  • DNS “A” Course (Dynamic Neuromuscular Stabilization)
  • DNS Exercise Level 2 (Dynamic Neuromuscular Stabilization)
  • FMS Level 2 (Functional Movement Systems)
  • OPEX CCP Level 2 (Formerly OPT)
  • Poliquin BioSignature Level 2
  • POSE Running Coach
  • Precision Nutrition Level 1
  • SFMA Level 2 (Selective Functional Movement Assessment)
  • USA Weightlifting Level 2

Due to the abundance of information Todd was willing to share, we have decided to break this interview into a two part series.  This is Part I of II.  Part II of II will be posted next week.  If you want to learn more or have questions for Todd, he can be reached at todd@southloopsc.com.

Enjoy!

South Loop

H&F Law Blog: You made the transition to CrossFit owner a few years ago.  Could you please tell us a little bit more about how you made the transition from Environmental Consultant to Gym Owner?

Todd Nief:  This was an entirely accidental transition. I had been doing CrossFit on my own for a few years – mostly training out of a Bally’s. So, I was the weird guy doing weird stuff that I should not have been doing and attempting to lift weights that I had no business lifting. I mostly followed workouts from www.crossfit.com but I also had gone in to CrossFit Chicago to receive a bit of instruction.

I had started going in to Atlas CrossFit on occasion so that I would be able to do workouts with a lot of weight dropping (they did not like that at Bally’s) as well as things like ring muscle-ups. I was not expecting to coach there, but, after being around a bit, I started working with some of the beginner classes there right around the time that I was laid off from my consulting gig.

After spending about a year at Atlas, I wanted to run a facility based upon what I considered to be best practices in coaching and training. So, I started looking into what it would take to open a gym and began heading down that path. Within the CrossFit community, there is a lot of glorification of the gym owner (which makes sense from a business model perspective as well…), so it never seemed that impossible to get into the gym business – especially after seeing some of the back-end of what a successful gym looked like

H&F Law Blog: What was the hardest part of going into business for yourself?  Who did you look to for advice when you first started out?

Todd Nief: Well I certainly had absolutely no understanding of business, sales or marketing. I was a coach and a musician with a chemical engineering degree – as well as a negative attitude towards business based upon a youth spent in punk, metal and hardcore.  So, the most consistently challenging thing for me has been overcoming my own negative and maladjusted thoughts surrounding what it means to own a business and what it means to promote yourself, take money from people, and hold others accountable to your principles (employees, clients, business partners, investors, etc).

We also opened probably about 9 months too late to really reap the benefit of “early adopters” to the CrossFit program. The gyms that opened about a year before us basically had to do nothing to attract clients, since they were some of the first gyms in the city and all they had to do was open up and put “CrossFit” on the door. There was a whole city of people learning about CrossFit and searching out gyms. By the time we opened, there was a certain level of saturation and a lot of the early adopters had already found a home.  So, we were in a position where – to have success out the gate – we would have needed to open at scale and have an understanding of marketing, positioning, sales funnels, and customer experience. Instead, we opened in a little hallway on the second floor of another gym with an attitude towards sales and marketing that resembled a depressed vegan sixteen-year-old talking shit about McDonald’s (I was that teenager).

And, man, we also really got kicked around on the real estate market quite a bit (leases falling through, leases not being countersigned, lack of respect from landlords, etc.)

H&F Law Blog: What was one thing you expected would be easy in owning or managing the business that was actually much more difficult than anticipated?

Todd Nief: I do not know if “easy” is the right word, but the CrossFit community has a lot of cultural push towards a meritocracy of marketing that I think is, at best, misguided and, at worst, disingenuous and pandering.  The assumption is that, by providing a great service to your clients and getting them results, they will do all the marketing for you and you can focus on coaching. This may work in an early adopter environment, but, as soon as the market reaches a certain level of saturation, this is an impossible way to exist and grow a business.

So, I got into the business to coach, and now my main role is understanding how to grow the business – by understanding how to communicate with potential clients and how to reach them.  I do not think I ever thought that marketing was easy, but I also underestimated how much marketing I would be doing.

H&F Law Blog: Conversely, is there anything that you expected would be difficult that turned out to be very easy to manage or figure out?

Todd Nief: This is a tough question for me, since I think that I generally assume that most things will be “difficult” but that I also trust myself to be able to figure them out.

I think that a lot of businesses have a lot of challenges around hiring, finding the right people, and raising cash when they need it. We have certainly had some frustrating, bizarre, and sketchy endeavors in all of these arenas, but we have also had some insanely fortuitous occurrences here as well – one employee leaving and another walking in the door within a few days, one investor flaking out and another reaching out within a few weeks, one lease falling through and another falling into our lap, etc..

Picture--Crossfit Gym

H&F Law Blog: It is my understanding that there are a few different owners of SLSC, and these owners have slightly changed over time without any hiccups in the business.  Speaking from our experience as outside general counsel to gyms with multiple owners, conflicts come up all the time between owners of gyms and we are often asked to interpret poorly drafted or virtually non-existent Operating Agreements or Shareholder Agreements (drafted by other attorneys, of course!).  How has South Loop Strength and Conditioning managed to have multiple owners (including some transition of owners), while running one of the elite CrossFit facilities in Chicago?

Todd Nief: Fortunately, one of my partners is a mergers and acquisitions lawyer, so he was able to get us set up with a pretty sturdy operating agreement when we started the business.  The business started as three of us, and there are now four; over four years we have removed one partner from the operating agreement and added two.

While the operating agreement did make these processes pretty clear in terms of what removal and addition of partners looks like, I think one of the biggest things here has been maintaining a level of respect between partners.  Even when one of our original partners was dissociating (which does not tend to happen if things are going swimmingly), there was never any bad blood and things never became unprofessional in that process. The operating agreement pretty clearly stated that we would buy out his shares for an agreed upon fair market value, so we crunched some numbers, went back and forth on a few things, and came to an agreement pretty quickly.  In terms of adding partners, it was a situation where two people came along at the right time that had an interest in the business and the right skillset to jump in and move us forward, so – similarly – we hashed out agreements that we thought were fair and amended our then-existing agreements.

[Note from Aaron Werner (Health and Fitness Attorney/Interviewer): Be sure you have a very clear and enforceable Operating Agreement (LLCs) or Shareholders’ Agreement (Corporations) when starting or buying a business with other people.  If you are raising outside capital, you need to be very careful about the securities laws involved concerning fundraising and documenting the business deal with your investors.  Be sure to work with an attorney well-versed in Operating Agreements/Shareholders’ Agreements/Other Fundraising Documents.]

H&F Law Blog: What advice do you have for other people that are going to go into business with other co-owners of a gym or studio?  What characteristics in your own business partners makes your partnership work so well?

Todd Nief: This is a somewhat challenging question since I think that this is somewhat similar to hiring – and there are many books and courses and videos and seminars and masterminds on this topic.

There are all kinds of things you can do to vet people, but the only consistent thing that works seems to be working with them to see what happens. Sometimes you make good calls, and sometimes you make bad calls.  And, similarly to hiring, sometimes you meet the right person at the right time, and then you can end up starting some gym together and having to figure out a bunch of stuff that no one ever told you before.

People say all kinds of corny stuff about vision and mission and whatnot, but that is all kind of inspirational quote fodder as far as I am concerned. I think there are basic understandings of how human beings should relate to each other that are essential for an effective partnership – most important is honestly probably generally treating other people with respect, whether that is clients, employees, or your other partners. Once contempt, deceit or manipulation enter a relationship, it can be impossible to salvage.

So, my advice would be to work with people before you enter into a partnership with them so that you know what you are getting into.

To be continued next week…

Article By Aaron D. Werner of Horwood Marcus & Berk Chartered
© Horwood Marcus & Berk Chartered 2016. All Rights Reserved.

2016’s TechBridge Challenge Focuses on Advanced Surfaces

Are you working on or interested in advanced surface technologies? Look no further than the TechBridge Challenge on Advanced Industrial Surfaces! In collaboration with ExxonMobil Research and Engineering Company, Fraunhofer TechBridge is using this Challenge to accelerate the development of new material formulations, manufacturing methods, deposition techniques, and other innovations to improve energy efficiency in the petroleum and chemical processing industries. Winners will be awarded up to $100,000 in prototyping, demonstration, and/or validation services from the Fraunhofer R&D network. To learn more about TechBridge, the TechBridge Challenge on Advanced Industrial Surfaces, and how to apply, read on!

Founded in 2010 at the Fraunhofer Center for Sustainable Energy Systems CSE, the TechBridge program aims to advance cleantech startups by evaluating and preparing innovative early-stage companies to demonstrate the value of their promising technologies to investors and the industry. Unlike traditional accelerators, TechBridge provides R&D and prototyping services to its clients, thereby helping to de-risk technologies and increase the chance for private investment.

TechBridge oversees several industry and government-sponsored programs each year, focusing on specific cleantech innovation areas and concluding with the selection of top startups to receive Fraunhofer’s services. For this TechBridge Challenge on Advanced Industrial Surfaces, improvement examples include:

– Improved performance of surface-enhanced features (e.g., improved heat exchange, reduced frictional losses, fouling, or adhesion)
– Improved thermal, mechanical, and chemical stability of equipment surfaces
– Improved deployment of surface modifications in retrofit applications and hard-to-reach locations
– Increased affordability and ease of adoption at scale
– Optimization for process fluids other than water

Completed proposals can be submitted at www.FhTechBridgeChallenge.org/surfaces. Applications are due February 17th so get started today!

Article By Katy E. Ward of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

©1994-2016 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Part Two: Tips and Considerations (#6 – 10) before Opening a Fitness Studio or Gym

This article is the second in a three part series on tips and considerations before opening a fitness studio or gym.  For the first article Tips 1-5, please click here.  Without further ado, here are tips 6 – 10:

6. Location, location, location.  In my experience, poor location choice is the #1 mistake that people make when opening a fitness studio.  “Right” location consists of not only a great geographic location (i.e. high foot traffic, lots of public transportation and/or parking, ancillary businesses like Lululemon, but also the right cost per square foot.  The perfect geographic location is no longer perfect if the price per square foot is too high – especially in the first few months of operations.  Conversely, going a bit off the beaten path to secure a much cheaper cost per square foot is also crippling to a business.  You may have lower rent, but you will also have lower membership.  Working with a broker that is knowledgeable about fitness studios in the targeted area is highly recommended.  Remember, the broker is paid by the landlord, so this is virtually a free service for a prospective studio or gym owner.

7. Negotiate (do not just sign) your lease.  You have found the perfect location at a rent that works for your business model – GREAT.  The next step is the landlord (or their attorney) sending you its form Lease Agreement.  I have personally come across Lease Agreements for studios and gyms ranging from 6 pages all the way to 60 pages.  In sum, the form that is presented to you is going to be extremely one-sided in favor of the landlord and will likely need to be negotiated in a few key areas.  Some (but not all) of these key areas:

1.            Term: What is the initial term of the lease?
2.            Renewal: What are your renewal options?
3.            Rent Increases: Will the renewal terms be subject to rent increases?
4.            Condition of Space: What condition will the space be delivered in?
5.            Repairs: Who is responsible for repairs?
6.            Pass Through Expenses/Taxes: Who is responsible for these additional costs?
7.            Breach/Cure: If you breach the lease, do you get notice and time to fix?
8.            Use Provisions: Can you legally operate a gym in the space?
9.            Noise: How are noise issues and remediation options addressed in the lease?
10.          Personal Guaranty: Will the landlord require a personal guaranty?

Be sure to work with a competent attorney well-versed in leasing when reviewing and negotiating your lease.

8. Price your membership options in a way that sets your studio apart.  Get away from the mindset that you should be priced similarly with other studios in the area.  If you price like your geographic competitors (i.e. other studios charge $40-60/monthly and you price at $50/month), you are bound to get lost in the shuffle. Consumers, especially millennials, crave deals and new (disruptive) gym/studio membership pricing.  A great example of the changing dynamic of studio pricing can be seen through the business model of ClassPass, which has an easy to use app for your smartphone (more on ClassPass in Tip #10 below).  Millennials love variety and ClassPass caters to the segment of the population.  Another example is My Time Fitness in Chicago, which charges members a very low monthly fee and additional charges per daily use.  Be sure to brainstorm membership models that reward fitness and encourage members to participate in the studio or fitness community at your location.

9. Get the right kind of insurance.  Some types of insurance will be required to operate your business, while others are of the optional variety.   The hard part is determining what kinds and how much insurance to carry.  Some general categories of insurance to consider are the following:

1.            Property Insurance
2.            General Liability Insurance
3.            Crime Coverage
4.            Hired & Non-Owned Automobile
5.            Umbrella Liability Insurance
6.            Directors & Officers Liability
7.            Accident & Health Insurance
8.            Employment-related/Workers Compensation

Be sure to work with an insurance agent that is knowledgeable about the proper insurance required for the type of studio or facility you are operating.  Ask a potential insurance agent for a list of previous gym or studio clients that they have worked with, and be sure to call 1 or 2 of these clients to confirm they actually know the insurance agent and like working with him or her.

10. Run your business….like a business.  When starting a studio or a gym, it is completely natural to worry about whether or not people will actually show up and pay for a membership.  These feelings of worry often lead owners (especially first time gym and studio owners) to second guess the cost/value analysis of their membership pricing.  Owners tend to be scared of an empty gym and the message it sends to the paying members and general public, and consequently owners give away free 2 week or 1 month memberships to get people in the door.  While this is somewhat acceptable in the first month or two of operations as part of your opening marketing strategy, continuing to give away free memberships is not a sustainable business model.  Once people get something for free for an extended period of time, they often cannot bring themselves to pay for it when the free period ends.  Further, paying members will eventually leave the gym because non-paying members are taking up all of the spots in a group fitness class or on the treadmills.  Fitness Formula Clubs (FFC) in Chicago charges $20 for a daily pass; other gyms charge as much as $40/day.  People often balk at the cost to use the gym for just one day, since the monthly membership fee is generally $60-90/month.  However, when you are confident in your brand and pricing, there is no need to give things away.  To become confident in your pricing, be sure to conduct market research (i.e. talk to potential members about pricing and options).

An alternative and relatively new option for gym owners to consider is joining the ClassPass network (previously mentioned in Tip #8 above), which will increase your daily visit numbers while still being compensated for those visits.  For $79 – $99 a month (paid to ClassPass), ClassPass members get unlimited classes to dozens of studios in the ClassPass network. While ClassPass members can take as many classes per month as they would like, they can only visit the same studio up to 3 times per month. This allows potential new members to explore your gym or studio (while paying ClassPass), and if they like what they see, they may ultimately end their ClassPass membership and join your studio or gym directly.  If they do not end up joining your gym or studio, you will still receive a portion of the monthly membership proceeds from ClassPass.

ARTICLE BY Aaron D. Werner of Horwood Marcus & Berk Chartered

© Horwood Marcus & Berk Chartered 2015. All Rights Reserved.

Crowdfunding? Really? Crowdfunding Rule under the JOBS Act

Lewis Roca Rothgerber LLP

Count me a Luddite when it comes to social media in general, and more specifically, the supposed potential for crowdfunding and raising capital for start-ups and small businesses. My skepticism about crowdfunding admittedly has its roots in the resistance to public solicitation of non-public offerings that 20 years in state securities regulation embedded in me. Publicly solicited “private placements” before the advent of Rule 506(c) were all but certainly fraudulent. But, times (and exemptions) change.

Now, the word on the street is that the SEC has dragged its feet too long on promulgating its Congressionally mandated rule on crowdfunding under the JOBS Act, so the Republican House is going to take matters into its own hands and legislate a more rational crowdfunding exemption than the provision in the JOBS Act and proposed rule, without the need for SEC action. I can’t wait to see that hummer!

Since the subject of allowing crowdfunding for investments first arose in the initial rumblings that preceded the JOBS Act, there have been literally hundreds of articles, blogs and other commentaries tooting crowdfunding as the panacea for raising capital for start-ups and small businesses with the result that all sorts of new jobs would be created (a claim based more in hyperbole than empirical evidence.) Jobs? Perhaps some, but enough to make a national economic difference? Really? There has been at least one University of Colorado law review article on comparable legislation in Great Britain, and I have assisted a former securities law student of mine at the James E. Rogers College of Law, University of Arizona, in preparing her own article on crowdfunding that includes a review of British as well as other European capital raising crowdfunding regimes.

Most of these articles on crowdfunding appear to have been written by people who hope to profit providing services to general public crowdfunding principals once it’s lawful. A good share of them have been observations and opinions written by lawyers who regularly critique federal and state regulations, proposals and market developments. To one extent or another, the articles focus on Congress versus the SEC, or the needs for capital raising versus securities regulations.

These proselytizers and commentators have all but ignored what is truly the other side of the investment equation—the investors. I’m not talking about fraudsters. That dirty element will worm its way into whatever system is finally implemented, to one extent or another. I’m focusing here on the people who send their money to hopeful, legal crowdfunding issuers.

If the proponents of investment crowdfunding can run the “start-up businesses create jobs” pennant up the rhetorical flagpole, it’s only fair to allow me to hoist the “most start-up enterprises fail within five years” banner up right along next to it.

The unfortunate reality is that start-up businesses make horrible investments. Few of them survive at all, let alone turn a profit any time soon, let alone provide a return to investors. Investing in start-ups is like hunting ducks with a rifle, and few investors have enough “bullets” to fire.

Entrepreneurs are eternally enthusiastic, energetic and optimistic. They have to be. For many years, the dreamers (and their counsel) urged Congress and the SEC that “if only the ban on public solicitation and advertising were lifted, we could all fund our private placements.” Now that that cat is out of the bag with Rule 506(c), at least for accredited investors, the chant has shifted (predictably) to, “if only we could use crowdfunding to publicly solicit and advertise to reach non-accredited investors.”

If a start-up entrepreneur—I’ll call him “Fred”—is ready to turn to looking for funding from strangers, I think it fair to draw an inference or three about what has happened to date. First, Fred is tapped out on his own funds. Second, the bank has said or would say “no” to a loan, based on Fred’s lack of collateral or some other deficiency. Third, anyone Fred knows (and he may not know anyone) who might invest in his business—those people and businesses with whom he has a “pre-existing business or personal relationship”—have either invested as much as they are going to, or have found ways to be “on vacation in the Australian outback and hard to reach” when Fred has come calling for money the first time or for more later.

At this point, many entrepreneurs would keep working until they had saved up enough money of their own, or grew to qualify for that bank loan. A lot of business owners I’ve encountered have no interest in selling equity in their businesses to investors. But there are certainly those who are willing to do so. Whatever, at this point, “Fred” has now gone through all his own cash. His business and personal profile are insufficient to qualify for a bank loan, even if government subsidized. In other words, the professional lenders won’t touch him. Further, anyone who knows him and/or his business who might invest have either done so or won’t. With investment crowdfunding, Congress and several state legislatures and regulators have made the public policy decision to let Fred now turn to perfect strangers, the general public. So, the smallest, riskiest, least sophisticated, most poorly funded, most likely to fail business owners can turn now to the general public for investments when all the professionals and close-in people, those in the best position to know Fred and evaluate his company’s investment potential, have said “no” or “no more.”

To me, this is a public policy that makes no sense. If Congress wants to promote investment in start-ups and small businesses to create jobs, let them direct the Small Business Administration to ease their guarantee standards for SBA loans. Oh, we can’t do that because the SBA would go broke guaranteeing bad loans, thus requiring more federal funding? What’s wrong with this picture?

“Investing” in start-ups is akin to a parent “lending” money to her 24 year old. Good luck ever seeing that money again! At least she’ll get a Mother’s Day card. The non-investment crowdfunding successes to date have usually involved donors getting a sample product, a discount, or a souvenir tee shirt, baseball cap or the like in exchange for their donation. Perhaps Congress should take a hint from these crowdfunding success stories in fashioning its investment crowdfunding legislation, and mandate that investment crowdfunders distribute a commemorative sweatshirt along with their securities. That would at least give the investors something tangible to remember their investment by, and would create jobs by increasing demand for commemorative sweatshirts! Oh, wait, those are made in Malaysia.

ARTICLE BY

Philip A Feigin
Lewis Roca Rothgerber LLP

Jumpstart Your Startup: Entity Selection and Formation

vonBriesen

When starting a business, you must decide what form of business entity to establish. The “choice of entity” decision is one of the most important decisions facing new business owners. There are several forms of business to choose from, each of which generates different legal and tax consequences. That said, there is no single form of entity that is appropriate for every type of business owner.

The most common forms of business are the sole proprietorship, partnership, C corporation, S corporation, and limited liability company.

Sole Proprietorship

A sole proprietorship is the simplest business structure. It is an unincorporated entity owned and run by one individual with no distinction between the business and the individual owner. The owner is entitled to all profits and is personally responsible for all the business’ debts, losses, and liabilities.

A sole proprietorship needs to obtain the necessary licenses and permits for the industry in which the sole proprietorship does business. If the business operates under a name different than the individual, registering that name (e.g., DBA name, short for “doing business as”) with a state agency may be required.

Because the business and the owner are one and the same, the business itself is not taxed separately. The owner is responsible for and reports income, losses and expenses for income tax purposes.

Partnership

A partnership is the relationship between two or more persons who join to carry on a trade or business. Each partner may contribute money, property, labor, and/or skill, and, in return, each partner shares in the profits and losses of the business.

Because partnerships involve more than one person, it is important to develop a partnership agreement. The partnership agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (i.e., bring in new partners or buy out current partners) and under what circumstances the partnership would be dissolved. In addition, owners of a partnership should determine which type of partnership to establish. The three most common types of partnership arrangements are:

  • General Partnership: Profits, liability, and management duties are presumed to be divided equally among all partners. If an unequal ownership distribution is preferred, the partnership agreement must document that preference. A general partnership ordinarily owns its assets and is responsible for its debts. It is important to note that in a general partnership, the individual partners are personally liable for all partnership debt, obligations and liabilities. No formal state registration and/or filing is required to form a general partnership.
  • Limited Partnership: A limited partnership requires at least one general partner and one limited partner. Limited partners are generally not liable for the debts and obligations of the limited partnership (though the general partners will be liable), but they must have restricted participation in management decisions. Limited partnerships ordinarily must be filed with a state.
  • Limited Liability Partnership: A limited liability partnership generally operates and is governed by the same rules as a general partnership, except: (1) its partners have limited liability for partnership debt, (2) it can choose to be taxed as a corporation or a partnership, and (3) it is formed by filing the appropriate documentation with a state.

Generally, a partnership must file an annual information return to report income, deductions, gains, and losses from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership income or loss on his or her individual tax return.

C Corporation

A C corporation is an independent legal entity incorporated in a single state, although it may do business in other states. Because a corporation is an independent legal entity, its existence continues until formally dissolved under the laws of the state in which it is incorporated. Ownership of a corporation is in the form of shares of stock, there is no limit to the number of stockholders, and there is no limit on the number of classes of stock a C corporation can issue. Additionally, the corporation itself, not the stockholders, is generally liable for the debts and obligations of the business.

For corporate governance, a corporation generally has a board of directors and bylaws. The initial directors may be named in the articles of incorporation or elected shortly after filing the articles of incorporation. Thereafter, directors are elected as set out in the articles of incorporation or bylaws.

For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. The profit of a C corporation is taxed to the corporation when earned, and then is taxed to the stockholders if and when distributed as dividends. This creates a double tax. The corporation does not receive a tax deduction when it distributes dividends to stockholders and stockholders cannot deduct any loss of the corporation.

S Corporation

An S corporation is similar to a C corporation, except that an S corporation passes income, losses, deductions, and credits through to its stockholders for federal tax purposes. Stockholders of an S corporation report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. Thus, an S corporation generally avoids double taxation on corporate income.

In order to become an S corporation, the corporation must make appropriate filings with the IRS. To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation;
  • Have only allowable stockholders, which are individuals, certain trusts and estates, and may not include partnerships, corporations (unless owned as a qualified subchapter S subsidiary), or non-resident aliens;
  • Have no more than 100 stockholders;
  • Have only one class of stock; and
  • Not be an ineligible corporation (e.g., certain financial institutions and insurance companies).

S corporations file specific tax returns and tax forms with the IRS.

Limited Liability Company

A limited liability company (“LLC”) is a hybrid entity that is treated like a corporation for limited liability purposes, but for tax purposes can choose to be taxed either as a corporation, partnership, or, in some cases, a disregarded entity (i.e., single-member LLC). A limited liability company is created under state law by filing articles of organization with a state. The owners of an LLC are referred to as “members” and generally may include individuals, corporations, other LLCs and other types of entities. There typically is no maximum number of members.

LLCs with more than one owner should have an operating agreement. An operating agreement usually includes provisions that address ownership interests, allocation of profits and losses, and members’ rights and responsibilities, among others.

Since the federal government does not consider an LLC a separate legal entity, an LLC with at least two members is, by default, classified as a partnership for federal tax purposes unless it files with the IRS and affirmatively elects to be treated as a corporation for tax purposes. An LLC with only one member is referred to as a single-member LLC and is treated as one and the same as its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it affirmatively elects to be treated as a corporation. An LLC may also elect to be taxed as an S corporation.

The business structure you choose will have significant legal and tax implications. In order to identify the best structure for you, it is important to understand your business goals and how the characteristics of each type of business entity can help you achieve those goals.

Article By:

Patrick J. Cannon
Of:
von Briesen & Roper, S.C.