Clarity Law Group - Legal Stuff for Social Entrepreneurs

Clarity Law Group
presents:
Legal Stuff forSocial Entrepreneurs
© 2011 Clarity Law Group LLC

Part 1:
What it means to start a company

A Banker and His Wife
What did people do before corporations?
Marinus van Reymerswaele, 1539

If a deal went wrong, businessmen went to debtor’s prison or, in old novels, took their own life to clear the family honor.
A Dead Banker and His Wife

A Banker, His Wife, & A Dead Company
Today, our guy doesn’t even have to declare bankruptcy. His LLC declares bankruptcy. He keeps his other assets & moves on.

Family Feud!!!
Round One

Category:
Things that natural and artificial legal persons have in common

Can sue and be sued
Can enter into contracts
Can own property
Can file for patents
Can have a bank account
Can become indebted
Can declare bankruptcy
Can make more legal persons
Is a resident of a particular jurisdiction
Can be loved and hated
Has to file taxes
Needs government licenses to do certain things
Has freedom of speech (!)
Things that natural and artificial persons have in common

4 main kinds of legal persons:
1. Natural Persons
2. Governments
3. Corporations
4. LLCs & LLPs

What is “501(c)(3)”?
A tax status that some LLCs and corporations apply for and obtain.
The first step is always to form an LLC or corporation.

Legal Persons
Question 1: Can you qualify for 501(c)(3) status?
Question 2: Do you want it?

Family Feud!!!
Round Two

Category:
Benefits of having 501(c)(3) status

Public perception and credibility
Donations are tax-deductible
Don’t have to pay income taxes
Eligible for foundation grants
Eligible for government grants
Random goodies like PSAs
Benefits of having 501(c)(3) status

Family Feud!!!
Round Three

Category:
Reasons not to want 501(c)(3) status

30-page IRS application
$300 application fee
Open yourself to accusations of conflicts of interest or betrayal of public trust
Board politics; decisions by committee
Founder upside limited to reasonable salaries
On dissolution, assets have to be given to another 501(c)(3)
Subject to public scrutiny
Very strict rules about political activities
Reasons not to want 501(c)(3) status

Food for Thought
Venture 1: Two Laptops Per Child
Sells laptops
Donates laptops
Gets foundation grants
Should it apply for 501(c)(3) status?

Food for Thought
Venture 2: Roadkill for the Hungry
No one wants to donate money
No foundation is interested
Should it apply for 501(c)(3) status?
Should it even incorporate?

Part 2:
7 steps to Setting Up an Entity

Step 1: Pick an Entity Type
Easy Button: LLC
Quick and easy to set up
Profits only get taxed once (“pass-through” taxation)
Other Button: Corporation
Has more paperwork
Preferred by institutional investors
Can make a IRS election to be an “S-Corp” & be taxed like an LLC until an actual investor comes on board

Step 2: Pick a State
Easy Button: The state where you operate
Other Button: Any other state
Hard because you will have to file at least twice: once in your state of formation, and then again in every state where you operate
Delaware preferred by institutional investors
Can form a L3C only in Vermont, Michigan, Utah, Illinois, Wyoming, Maine, North Carolina, & Louisiana, but is it worth it?

Step 3: File with the Govt
Easy (Expensive) Button: Hire an actual lawyer
Other Button: Use an online service
Will create a company very quickly
A bot-driven process
Service fee of ~$200
Other Button: Do it yourself, literally
Print out forms and submit to the Secretary of State (in DC, it’s the DCRA)
Same as the online service, but no service fee
Might lose your application fee if you do it wrong

Step 4: Create Constitutional Docs
If you used an online service, their boilerplate Articles of Incorporation, By-Laws, and Operating Agreement are garbage
Revise them yourself immediately
Regular voting and supermajority voting
Vesting schedules, benchmarks, accountability
Share transfer restrictions; partner withdrawal
Signature authority thresholds
If your venture is still alive after one year, hire a lawyer to clean the docs up for real

Step 5: Get Licensed
Federal EIN
City, state, and/or industry business licenses
Relevant permits
501(c)(3) IRS application
The IRS requires your Articles of Incorporation to contain some specific language
Citizen Media Law Project is a great resource

Step 6: Open a Bank Account
Easy & free
Makes accounting easier
Legally, assets must be separate
Even if you are the 100% owner
If you mix your money with your entity’s money, your entity will not be recognized as a legal person
If you get sued, this can torpedo you
Example: copyright infringement lawsuits are for $50,000 per violation

Step 7: Have an Annual Meeting
Have at least one shareholder meeting a year
Even if you are the 100% owner, you must “meet”
“Meeting” means a piece of paper
says “Minutes of Shareholder Meeting” on top
recites the time & place of meeting
has at least one resolution
signed by all the shareholders on the bottom

Action Items
Create an entity
Open a corporate bank account
Customize your constitutional docs
Get federal EIN and business licenses
Hold a shareholder meeting
First meeting should confirm identity of officers
Always hold at least one meeting per year, even if it’s just to confirm the previous year’s financials
Clean things up with a lawyer as soon as you decide that your venture is for real – delays can cost big money

Take Your Business Seriously
More resources online:
www.claritylawgroup.com
Twitter: @ClarityLawGroup

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Clarity Law Group - Legal Stuff for Social Entrepreneurs

by Clarity Law Group on Feb 08, 2011

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Clarity Law Group - Legal Stuff for Social Entrepreneurs — Presentation Transcript