Legal Issues
Our class was lecture by Wayne State Alumni Attorney Group
They spoke about starting a business and the legal things one needs to run a good business.
I will post the things they spoke about by copying them from a class I had a couple of years ago, which we had to do as a project. I will start listing them after the video and pictures I took from the lecture today. I think anyone who read the information will fine many things they can use.
Our class was lecture by Wayne State Alumni Attorney Group
They spoke about starting a business and the legal things one needs to run a good business.
I will post the things they spoke about by copying them from a class I had a couple of years ago, which we had to do as a project. I will start listing them after the video and pictures I took from the lecture today. I think anyone who read the information will fine many things they can use.
Name your business
Nominate a registered agent
File an article of organization
Create an operating agreement (recommended)
Obtain an Employer Identification Number
State tax registration (depends on the business type)
Business license (depends on the business type)
Local permits (depends on the business type)
Employee requirements (depends on the business type)
Insurance (optional)
A business bank account
Obtain an Employer Identification Number
State tax registration (depends on the business type)
Business license (depends on the business type)
Local permits (depends on the business type)
Employee requirements (depends on the business type)
Insurance (optional)
A business bank account
Sole Proprietorship
Description
Company owned and operated by one person Company formed the minute you start doing…m…tuff
Only permits and licensesTaxed as your income tax
Advantages
I RUN THIS, SON!
Much cheaper to start than corporations, much simpler paperwork
Unlimited personal liability means creditors more willing to extend credit
No need to file for your business separate from yourself
You keep all the profit!!! (after paying all of your staff and operating expenses. Results may vary. Offer not valid in Egypt.)
Disadvantages
I RUN THIS, SON!
Much cheaper to start than corporations, much simpler paperwork
Unlimited personal liability means creditors more willing to extend credit
No need to file for your business separate from yourself
You keep all the profit!!! (after paying all of your staff and operating expenses. Results may vary. Offer not valid in Egypt.)
Disadvantages
UNLIMITED. PERSONAL. LIABILITY.
Hard to get loans
Hard to get funding otherwise
Risky business
Hard to get loans
Hard to get funding otherwise
Risky business
Partnerships
A partnership is a single business where two or more people share ownership.
Each partner contributes to all aspects of the business, including money, property, labor
or skill. In return, each partner shares in the profits and losses of the business.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Partnerships
Because partnerships entail more than one person in the decision-making process, it’s
important to discuss a wide variety of issues up front and develop a legal partnership
agreement. This agreement should document how future business decisions will be
made, including how the partners will divide profits, resolve disputes, change ownership
(bring in new partners or buy out current partners) and how to dissolve the partnership.
Although partnership agreements are not legally required, they are strongly
recommended and it is considered extremely risky to operate without one.
Types of Partnerships
There are three general types of partnership arrangements:
• General Partnerships assume that profits, liability and management duties are
divided equally among partners. If you opt for an unequal distribution, the
percentages assigned to each partner must be documented in the partnership
agreement.
• Limited Partnerships (also known as a partnership with limited liability) are
more complex than general partnerships. Limited partnerships allow partners to
have limited liability as well as limited input with management decisions. These
limits depend on the extent of each partner’s investment percentage. Limited
partnerships are attractive to investors of short-term projects.
• Joint Ventures act as general partnership, but for only a limited period of time or
for a single project. Partners in a joint venture can be recognized as an ongoing
partnership if they continue the venture, but they must file as such.
Forming a Partnership
To form a partnership, you must register your business with your state, a process
generally done through your Secretary of State’s office.
You’ll also need to establish your business name. For partnerships, your legal name is
the name given in your partnership agreement or the last names of the partners. If you
choose to operate under a name different than the officially registered name, you will
most likely have to file a fictitious name (also known as an assumed name, trade name,
or DBA name, short for "doing business as").
Once your business is registered, you must obtain business licenses and permits.
Regulations vary by industry, state and locality. Use our Licensing & Permits tool to find
a listing of federal, state and local permits, licenses and registrations you'll need to run a
business.
If you are hiring employees, read more about federal and state regulations for
employers.
Advantages of a Partnership
• Easy and Inexpensive. Partnerships are generally an inexpensive and easily
formed business structure. The majority of time spent starting a partnership often
focuses on developing the partnership agreement.
• Shared Financial Commitment. In a partnership, each partner is equally
invested in the success of the business. Partnerships have the advantage of
pooling resources to obtain capital. This could be beneficial in terms of securing
credit, or by simply doubling your seed money.
• Complementary Skills. A good partnership should reap the benefits of being
able to utilize the strengths, resources and expertise of each partner.
• Partnership Incentives for Employees.
Partnerships have an employment
advantage over other entities if they offer employees the opportunity to become a
partner. Partnership incentives often attract highly motivated and qualified
employees.
Disadvantages of a Partnership
• Joint and Individual Liability. Similar to sole proprietorships, partnerships
retain full, shared liability among the owners. Partners are not only liable for their
own actions, but also for the business debts and decisions made by other
partners. In addition, the personal assets of all partners can be used to satisfy
the partnership’s debt.
• Disagreements Among Partners. With multiple partners, there are bound to be
disagreements Partners should consult each other on all decisions, make
compromises, and resolve disputes as amicably as possible.
• Shared Profits.
Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners.
An unequal contribution of time, effort, or resources can cause discord among partners.
Limited liability Company
A Limited Liability Company is pass through tax entity: The profits and losses of the business pass through to its owners, who report them on their personal tax returns.
L.L.C. owners are protected from personal liability from business debts and claims. (this means that if the business itself can’t pay the creditor--such as a suppler, lender or a landlord--the creditor cannot legally come after an LLC’s member’s house, car, or other personal possessions.)
Because only LLC business assets are used to pay off business debtor, LLC owners stand to loose only the money that they invested in the LLC. (This feature is often called "limited liability.")
An LLC owner can be held liable is he or she:
◦personally and directly injures someone
◦personally guarantees a bank loan or a business debt on which the LLC defaults
◦fails to deposit taxes withheld from employee’s wages
◦intentionally does something fraudulent, illegal or reckless that causes harm to the company or someone else, or
◦treats an LLC as an extension of his or her personal affairs rather than a legal separate entity.
If owners don't treat an LLC as a separate business, a court might decide that the LLC doesn't really exit and find that its owners are doing business as individuals who are personally liable for their acts.
To keep this from happening, make sure you and your co-owners:
◦Act Fairly and Legally
◦Fund your LLC adequately
◦Keep LLC and personal business separate
◦Create an operating agreement
◦Act Fairly and Legally
◦Fund your LLC adequately
◦Keep LLC and personal business separate
◦Create an operating agreement
LLC is consider separate from its owner for tax purposes
It’s is what the IRS calls "pass-though entity." (This means that business income passes through the business to the LLC members, who report their share of profits or losses in their individual income tax returns.)
LLC’s must file an annuals statement reporting profits or losses. ($25.00 Fee)
Co-owners must file form 1065 (an information return which confirms each members profits or losses, which the IRS reviews to make sure members are correctly reporting their income.)
It’s is what the IRS calls "pass-though entity." (This means that business income passes through the business to the LLC members, who report their share of profits or losses in their individual income tax returns.)
LLC’s must file an annuals statement reporting profits or losses. ($25.00 Fee)
Co-owners must file form 1065 (an information return which confirms each members profits or losses, which the IRS reviews to make sure members are correctly reporting their income.)
What is a "C Corp"
In short it’s a corporation.
Capitol Stock is derived from the infusion of money, property or both into the business entity by potential shareholders.
Legally the corporation is an independent entity owned by its shareholders. As such the corporation itself is legally responsible for for its actions not the the shareholders.
Defined as
Establishing the business
Laws vary from state in the establishment of corporations however the following need consideration.
Need to establish the business name which, as well as aliases, are registered with the state.
Although state laws vary a Corporate designation is required (Corporation, Incorporated, Limited)
File "articles of incorporation" with Secretary of State.
Establish Directors and issue stock certificates.
Finally obtain licenses and permits relevant on the type of business.
C Corps typically calculate tax deductions the same way a proprietorship do.
Tax Responsibilities Business Tax Responsibilities employee
Withholding Federal Income Tax
FUTA) Federal Unemployment tax
Social Security
Medicare
Advantages
Method of choice for publicly traded Companies
rowd-funding (2012 JOBS act)
Healthcare insurance
Non-resident shareholders.
Different classes of stock.
Shareholder-employee loophole
Disadvantages
Double Taxation
Formalities
Incomes in excess of $75,000 incur high taxes.
S-Corp
An "S-Corporation" is a regular corporation that has between 1 and 100 shareholders and that passes-through net income or losses to shareholders under in accordance with Internal Revenue Code, Chapter 1, Subchapter S. Corporations must meet specific eligibility criteria, and they must notify the IRS of their choice to be taxed as an S-Corporation within a certain period of time.
Example: The general rule for S corporation taxation works like this. An S corporation calculates its income just like a regular corporation. However, rather than taxing the corporation on those profits, the corporation's owners get taxed on their shares of the corporation's profit.
Suppose, for example, that Tom, Dick and Harry equally own an S corporation. Each shareholder owns one-third of the corporation's stock. In this case, if the corporation makes $300,000 in profit, the corporation doesn't pay the income tax on this profit. Instead, each shareholder includes his share of the corporation profit--$100,000 per person—in his or her taxable income. The shareholders pay the taxes owed on the $100,000 of corporate profit on their individual income tax returns.
Taxation of S-Corporations An S-Corporation is not subject to corporate tax rates. "Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income," according to the Internal Revenue Service.
Instead, an S-Corporation passes-through profit (or net losses) to shareholders. The business profits are taxed at individual tax rates on each shareholder's Form 1040. The pass-through (sometimes called flow-through) nature of the income means that the corporation's profits are only taxed once – at the shareholder level. The IRS explains it this way: "On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share ." of nonseparately stated income or loss
S-Corporations therefore avoid the so-called "double taxation" of bonuses.
S-Corporations, like regular C Corporations, can decide to retain their net profits as operating capital. However, all profits are considered as-if they were distributed to shareholders. Thus an S-Corporation shareholder might be taxed on income they never received. (Whereas a shareholder of C-corporation is taxed on bonuses only when those dividends are actually paid out.)
Instead, an S-Corporation passes-through profit (or net losses) to shareholders. The business profits are taxed at individual tax rates on each shareholder's Form 1040. The pass-through (sometimes called flow-through) nature of the income means that the corporation's profits are only taxed once – at the shareholder level. The IRS explains it this way: "On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share ." of nonseparately stated income or loss
S-Corporations therefore avoid the so-called "double taxation" of bonuses.
S-Corporations, like regular C Corporations, can decide to retain their net profits as operating capital. However, all profits are considered as-if they were distributed to shareholders. Thus an S-Corporation shareholder might be taxed on income they never received. (Whereas a shareholder of C-corporation is taxed on bonuses only when those dividends are actually paid out.)
Eligibility Criteria for S-Corporations A corporation may choose to be taxed as an S-Corporation if it meets the following criteria.
1. The company is (a) a domestic corporation, or (b) a domestic entity eligible to elect to be treated as a corporation that timely files Form 2553 and meets all the other tests listed below. If Form 2553 is not timely filed, see Rev. Proc. 2004-48, 2004-32 I.R.B. 172.
2. The company has no more than 100 shareholders. (A husband and wife and their estates are treated as one shareholder for this test. A member of a family can choose to treat all members of the family as one shareholder for this test. All other persons are treated as separate shareholders.) 3. The only shareholders are individuals, estates, certain exempt organizations, or certain trusts.
4. The company has no nonresident alien shareholders. (That is, the only shareholders are US citizens and resident aliens.)
5. The company has only one class of stock. Generally, a corporation is treated as having only one class of stock if all outstanding shares of the corporation's stock confer identical rights to distribution and liquidation proceeds.
1. The company is (a) a domestic corporation, or (b) a domestic entity eligible to elect to be treated as a corporation that timely files Form 2553 and meets all the other tests listed below. If Form 2553 is not timely filed, see Rev. Proc. 2004-48, 2004-32 I.R.B. 172.
2. The company has no more than 100 shareholders. (A husband and wife and their estates are treated as one shareholder for this test. A member of a family can choose to treat all members of the family as one shareholder for this test. All other persons are treated as separate shareholders.) 3. The only shareholders are individuals, estates, certain exempt organizations, or certain trusts.
4. The company has no nonresident alien shareholders. (That is, the only shareholders are US citizens and resident aliens.)
5. The company has only one class of stock. Generally, a corporation is treated as having only one class of stock if all outstanding shares of the corporation's stock confer identical rights to distribution and liquidation proceeds.
6. It is not one of the following ineligible corporations:
A bank or thrift institution that uses the reserve method of accounting for bad debts under section 585.
An insurance company subject to tax under subchapter L of the Code.
A corporation that has elected to be treated as a possessions corporation under section 936.
A domestic international sales corporation (DISC) or former DISC.
7. It has or will adopt or change to one of the following tax years.
A tax year ending December 31.
A natural business year.
An ownership tax year.
A tax year elected under section 444.
A 52-53-week tax year ending with reference to a year listed above.
Any other tax year (including a 52-53-week tax year) for which the corporation establishes a business purpose.
Each shareholder consents to the S-Corporation election.
A bank or thrift institution that uses the reserve method of accounting for bad debts under section 585.
An insurance company subject to tax under subchapter L of the Code.
A corporation that has elected to be treated as a possessions corporation under section 936.
A domestic international sales corporation (DISC) or former DISC.
7. It has or will adopt or change to one of the following tax years.
A tax year ending December 31.
A natural business year.
An ownership tax year.
A tax year elected under section 444.
A 52-53-week tax year ending with reference to a year listed above.
Any other tax year (including a 52-53-week tax year) for which the corporation establishes a business purpose.
Each shareholder consents to the S-Corporation election.
S corporation advantages
The advantages of an S corporation often outweigh any perceived disadvantages. The S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business. These advantages are typically unavailable to sole proprietorships and general partnerships. S corporation advantages include:
Protected assets.
An S corporation protects the personal assets of its shareholders. Absent an express personal guarantee, a shareholder is not personally responsible for the business debts and liabilities of the corporation. Creditors cannot pursue the personal assets (house, bank accounts, etc.) of the shareholders to pay business debts. In a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving personal assets
vulnerable. Pass-through taxation. An S corporation does not pay federal taxes at the corporate level. (Most—but not all—states follow the federal rules. View the Ongoing Corporation Requirements page of our state guides to see if your state recognizes the federal S corporation election.) Any business income or loss is "passed through" to shareholders who report it on their personal income tax returns. This means that business losses can offset other income on the shareholders’ tax returns. This can be extremely helpful in the startup phase of a new business.
Tax-favorable characterization of income. S corporation shareholders can be employees of the business and draw salaries as employees. They can also receive dividends from the corporation, as well as other distributions that are tax-free to the extent of their investment in the corporation. A reasonable characterization of distributions as salary or dividends can help the owner-operator reduce self-employment tax liability, while still generating business-expense and wages-paid deductions for the corporation.
Straightforward transfer of ownership. Interests in an S corporation can be freely transferred without triggering adverse tax consequences. (In a partnership or an LLC, the transfer of more than a 50-percent interest can trigger the termination of the entity.) The S corporation does not need to make adjustments to property basis or comply with complicated accounting rules when an ownership interest is transferred.
Heightened credibility. Operating as an S corporation may help a new business establish credibility with potential customers, employees, vendors and partners because they see the owners have made a formal commitment to their business.
S corporation disadvantages An S corporation may have some potential disadvantages, including: Formation and ongoing expenses. To operate as an S corporation, it is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtain a registered agent for your company, and pay the appropriate fees. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Although these fees usually are not expensive, and can be deducted as a cost of doing business, they are expenses that a sole proprietor or general partnership will not incur.
Tax qualification obligations. Mistakes regarding the various election, consent, notification, stock ownership and filing requirements can accidentally result in the termination of S corporation status. Although this is relatively rare, and usually can be remedied easily, it is still an issue that is not a factor with other business forms.
Stock ownership restrictions. An S corporation can have only one class of stock, although it can have both voting and non-voting shares. Therefore, there can’t be different classes of investors who are entitled to different dividends or distribution rights. Also, there cannot be more than 100 shareholders. Foreign ownership is prohibited, as is ownership by certain types of trusts and other entities.
Closer IRS scrutiny. Because amounts distributed to a shareholder can be dividends or salary, the IRS scrutinizes payments to make sure the characterization conforms to reality. As a result, wages may be recharacterized as dividends, costing the corporation a deduction for compensation paid. Conversely, dividends may be recharacterized as wages, which subjects the corporation to employment tax liability.
vulnerable. Pass-through taxation. An S corporation does not pay federal taxes at the corporate level. (Most—but not all—states follow the federal rules. View the Ongoing Corporation Requirements page of our state guides to see if your state recognizes the federal S corporation election.) Any business income or loss is "passed through" to shareholders who report it on their personal income tax returns. This means that business losses can offset other income on the shareholders’ tax returns. This can be extremely helpful in the startup phase of a new business.
Tax-favorable characterization of income. S corporation shareholders can be employees of the business and draw salaries as employees. They can also receive dividends from the corporation, as well as other distributions that are tax-free to the extent of their investment in the corporation. A reasonable characterization of distributions as salary or dividends can help the owner-operator reduce self-employment tax liability, while still generating business-expense and wages-paid deductions for the corporation.
Straightforward transfer of ownership. Interests in an S corporation can be freely transferred without triggering adverse tax consequences. (In a partnership or an LLC, the transfer of more than a 50-percent interest can trigger the termination of the entity.) The S corporation does not need to make adjustments to property basis or comply with complicated accounting rules when an ownership interest is transferred.
Heightened credibility. Operating as an S corporation may help a new business establish credibility with potential customers, employees, vendors and partners because they see the owners have made a formal commitment to their business.
S corporation disadvantages An S corporation may have some potential disadvantages, including: Formation and ongoing expenses. To operate as an S corporation, it is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation, obtain a registered agent for your company, and pay the appropriate fees. Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Although these fees usually are not expensive, and can be deducted as a cost of doing business, they are expenses that a sole proprietor or general partnership will not incur.
Tax qualification obligations. Mistakes regarding the various election, consent, notification, stock ownership and filing requirements can accidentally result in the termination of S corporation status. Although this is relatively rare, and usually can be remedied easily, it is still an issue that is not a factor with other business forms.
Stock ownership restrictions. An S corporation can have only one class of stock, although it can have both voting and non-voting shares. Therefore, there can’t be different classes of investors who are entitled to different dividends or distribution rights. Also, there cannot be more than 100 shareholders. Foreign ownership is prohibited, as is ownership by certain types of trusts and other entities.
Closer IRS scrutiny. Because amounts distributed to a shareholder can be dividends or salary, the IRS scrutinizes payments to make sure the characterization conforms to reality. As a result, wages may be recharacterized as dividends, costing the corporation a deduction for compensation paid. Conversely, dividends may be recharacterized as wages, which subjects the corporation to employment tax liability.
Less flexibility in allocating income and loss. Because of the one-class-of-stock restriction, an S corporation cannot easily allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike a partnership or LLC where the allocation can be set in the operating agreement. Also, the necessary accumulated adjustment account can be cumbersome to maintain, requiring input from an accounting professional.
Information taken from:
http://www.bizfilings.com/learn/s-corporation-advantages-and-disadvantages.aspx
http://taxes.about.com/od/scorporations/qt/scorp_criteria.htm
Information taken from:
http://www.bizfilings.com/learn/s-corporation-advantages-and-disadvantages.aspx
http://taxes.about.com/od/scorporations/qt/scorp_criteria.htm
Non Profit
What is a Non Profit
•Corporation / business does not pay income taxes
•Contributions to a charitable corporation are
tax deductible
•Benefits can deduct as a business expense
For filing taxes
•Long form (reg tax form)
Making over $50,000 amount of money
–Right away
•Short form (e-postcard 990-N)
–Short form can only be filled if you have made
under $50,000
–Based upon your first 5 years
Types that you are granted
•Charitable (private and public)
•Scientific
•Educational
•Religion
•Scientific
•Educational
•Religion
Applicat
•Articles of Incorporation by domestic nonprofit corporations
(find form on IRS)
•Articles
•1 – Name
•2 – Purpose
•3 – Stockholders
•4 – Address of business
•5 – Name and Address of incorporators
•6 – (To Add) if you plan on running your nonprofit as a 501
(c)3 or filing for one
Filing 501(c)3
•IRS Docs
•fee depending on the levels you file for
•You are not automatically granted 501(c)3 status
•You have to file a 1023 form Application for Recognition of
Exemption
•Some of the points in addition to the 1023 that need to be expounded on are such things as by-laws, paid
employees, financial data, property and itemized budget for your first 3
to 5 years depending on filing status
What is 501(c)3?
•A 501(c)3 is a federal income exempt from
federal income tax and all contributions are
deductible under 170 which qualifies you to
receive gifts and money.
•Must keep very detailed records
permanently
Fiduciary - Advantage
•If you are a 501(c)3 then you can become a
Fiduciary to another company for a
percentage of their grant
Must know...
•If you dissolve your non profit then all
assets must go to another non profit
