Business Law Update


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Colorado business law update presented to SCORE March 24, 2010.

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Business Law Update

  1. 1. Business Law Update Elizabeth Lewis, Esq. Law Office of E.C. Lewis, P.C. 720-530-3405 [email_address]
  2. 2. Outline of Today’s Topics <ul><li>Business Entities </li></ul><ul><li>Tax Entities </li></ul><ul><li>Legislative and Judicial Updates </li></ul><ul><ul><li>Contracts </li></ul></ul><ul><ul><li>Employment </li></ul></ul><ul><ul><li>Taxes </li></ul></ul><ul><ul><li>Bankruptcy </li></ul></ul><ul><li>Secretary of State changes </li></ul><ul><li>Trends </li></ul>
  3. 3. Business Entities <ul><li>State level </li></ul><ul><ul><li>Sole Proprietorship </li></ul></ul><ul><ul><li>Partnership (P, LP, LLP, LLLP) </li></ul></ul><ul><ul><li>Corporation (for-profit, professional corporation, non-profit) </li></ul></ul><ul><ul><li>LLC </li></ul></ul><ul><li>State level </li></ul><ul><ul><li>How company is treated under the law (lawsuits, contracts, employment, etc) </li></ul></ul>
  4. 4. Business Entities <ul><li>IRS/CDOR level </li></ul><ul><ul><li>Sole proprietorship/Disregarded Entity </li></ul></ul><ul><ul><li>Partnership </li></ul></ul><ul><ul><li>C-corporation </li></ul></ul><ul><ul><li>S-corporation </li></ul></ul><ul><li>IRS/CDOR level </li></ul><ul><ul><li>How the company is taxed and, in some cases, unemployment insurance </li></ul></ul>
  5. 5. State entity selection <ul><li>State selection depends on many factors including: </li></ul><ul><ul><li>Who owns company? </li></ul></ul><ul><ul><li>What does the company sell? </li></ul></ul><ul><ul><li>How much will it make? </li></ul></ul><ul><ul><li>What type of liability does it have? </li></ul></ul><ul><ul><li>Who will operate company and make day-to-day decisions? </li></ul></ul><ul><ul><li>What is the exit strategy? </li></ul></ul>
  6. 6. Sole Proprietorship <ul><li>Ownership: one person </li></ul><ul><li>Liability: no limited liability </li></ul><ul><li>Control: owner </li></ul><ul><li>Documents: no company documents needed </li></ul><ul><li>Taxation: passed-through </li></ul><ul><li>Default entity if only one person </li></ul>
  7. 7. Partnership <ul><li>Ownership: at least two individuals </li></ul><ul><li>Liability: typically no limited liability </li></ul><ul><li>Management: typically the partners </li></ul><ul><li>Documents: partnership agreement </li></ul><ul><li>Taxation: typically pass-through entity </li></ul><ul><li>Default if more than one person and nothing else chosen </li></ul><ul><li>Can be decided that partnership exists if in best interest of public even if no agreement! </li></ul>
  8. 8. Corporation <ul><li>Ownership: one or more individuals </li></ul><ul><li>Liability: limited liability </li></ul><ul><li>Management: Board of Directors </li></ul><ul><li>Documents: by-laws </li></ul><ul><li>Taxation: double taxation or s-corporation </li></ul><ul><li>Must follow corporate formalities </li></ul>
  9. 9. LLC <ul><li>Ownership: one or more individuals </li></ul><ul><li>Liability: limited liability </li></ul><ul><li>Management: managers or members </li></ul><ul><li>Documents: operating agreement </li></ul><ul><li>Taxation: default is pass-through </li></ul><ul><li>Fewer formalities than corporation </li></ul>
  10. 10. IRS/CDOR entity types <ul><li>Default rules for entity types </li></ul><ul><li>Can sometimes be changed by “check the box” rules </li></ul><ul><li>Choice depends on many factors </li></ul><ul><ul><li>Who owns company? </li></ul></ul><ul><ul><li>How much does company make? </li></ul></ul><ul><ul><li>What is the exit strategy? </li></ul></ul>
  11. 11. IRS Basics <ul><li>Two types of structures </li></ul><ul><ul><li>Pass-through entity </li></ul></ul><ul><ul><ul><li>Sole Proprietorship/Disregarded Entity </li></ul></ul></ul><ul><ul><ul><li>Partnership </li></ul></ul></ul><ul><ul><ul><li>S-corporation </li></ul></ul></ul><ul><ul><li>Double taxation entity </li></ul></ul><ul><ul><ul><li>C-corporation </li></ul></ul></ul>
  12. 12. Sole Proprietors/Disregarded Entity <ul><li>Sole Proprietors: </li></ul><ul><ul><li>Files Schedule C with 1040 </li></ul></ul><ul><ul><li>All income reported by individual </li></ul></ul><ul><ul><li>Files estimated tax payments </li></ul></ul><ul><ul><li>Default for sole proprietors on state level </li></ul></ul><ul><li>Single Member LLC </li></ul><ul><ul><li>Same as Sole Proprietorship except called Disregarded Entity </li></ul></ul><ul><ul><li>New rules regarding employment taxes </li></ul></ul>
  13. 13. Partnerships <ul><li>Two or more individuals </li></ul><ul><li>Files 1065 </li></ul><ul><li>All income reported by individuals </li></ul><ul><li>Files estimated tax payments </li></ul><ul><li>Default for partnerships and multi-member LLCs </li></ul>
  14. 14. S-Corporations <ul><li>Limitations </li></ul><ul><ul><li>One to one hundred owners </li></ul></ul><ul><ul><li>Must be US residents/citizens </li></ul></ul><ul><ul><li>One class of stock </li></ul></ul><ul><li>Files 1120S </li></ul><ul><li>Owners take income and dividends </li></ul><ul><li>Files 941/940s for individual owner’s income </li></ul><ul><li>Files unemployment taxes </li></ul><ul><li>Must do a Form 2553 to elect status </li></ul>
  15. 15. C-corporations <ul><li>One or more individuals </li></ul><ul><li>Double taxation </li></ul><ul><li>Files 1120 </li></ul><ul><li>Owners take income and dividends </li></ul><ul><li>Files 941/940s for individual owner’s income </li></ul><ul><li>Files unemployment taxes </li></ul><ul><li>Default for corporations </li></ul>
  16. 16. Recent issues with Business Entities <ul><li>Beneficial Ownership </li></ul><ul><ul><li>Push to make companies identify each person with control of a company </li></ul></ul><ul><ul><li>Would require person setting up company to confirm identity of each owner </li></ul></ul><ul><ul><li>Questionable outcome since criminals and terrorists probably aren’t going to adhere to this law anymore than any others </li></ul></ul><ul><ul><li>Cost would increase for formation </li></ul></ul>
  17. 17. Operating Agreements <ul><li>LLC operating agreements must be carefully drafted </li></ul><ul><ul><li>Handling of deadlock votes </li></ul></ul><ul><ul><li>Unanimity of votes </li></ul></ul><ul><ul><li>Oral agreements may be void </li></ul></ul>
  18. 18. Legislative and Judicial Updates <ul><li>Contractual Issues </li></ul><ul><li>Employment Issues </li></ul><ul><li>Taxes </li></ul><ul><li>Bankruptcy </li></ul>
  19. 19. Contractual Issues <ul><li>Notice issue: If you receive notice, even if not given in the contractually stated way, you have to honor that notice. </li></ul><ul><li>Defaults: More defaults on agreements so need to make sure everything is in writing. </li></ul>
  20. 20. Employment Issues <ul><li>Independent contractor misclassification </li></ul><ul><ul><li>CDLE pursuing misclassified individuals </li></ul></ul><ul><ul><li>HB 1310 has fines of 5000/25000 for misclassification </li></ul></ul><ul><li>Misuse of company info </li></ul><ul><ul><li>Cannot use company secrets to setup new company (Harris Group, Inc. v. Robinson) </li></ul></ul><ul><li>Non-competes </li></ul><ul><ul><li>Non-competes not enforceable if signed after employment begins with no additional compensation (Lucht’s Concrete Pumping v. Horner) </li></ul></ul>
  21. 21. Taxes - Federal <ul><li>American Recovery and Reinvestment Act of 2009 </li></ul><ul><ul><li>Work Opportunity Tax Credit – credit for hiring unemployed veterans and disconnected youths </li></ul></ul><ul><ul><li>Cancellation of Debt – may defer COD income from reacquisition of business debt for 2009 and 2010 </li></ul></ul><ul><ul><li>S-corps that converted from C-corp status have new rules for disposition of appreciated assets </li></ul></ul><ul><ul><li>Exclusion on Gain of Sale of Some small business stock </li></ul></ul><ul><li>Single Member LLCs that have employment tax requirement must file under EIN of company (can no longer file under SSN of owner) </li></ul>
  22. 22. Taxes - State <ul><li>Direct Mailings </li></ul><ul><li>Candy and soft drinks </li></ul><ul><li>Standardized computer software </li></ul><ul><li>Online sales tax </li></ul>
  23. 23. Bankruptcy <ul><li>Prior to filing, important to talk to bankruptcy attorney to figure out what type of bankruptcy is best. </li></ul><ul><li>New debt limits go into affect April 1 st </li></ul><ul><ul><li>May affect whether someone file chapter 13 or chapter 11 </li></ul></ul><ul><ul><ul><li>Chapter 7 – discharge of all debt (may not be preferred for businesses) </li></ul></ul></ul><ul><ul><ul><li>Chapter 13 – repayment plan (typically works for smaller businesses) </li></ul></ul></ul><ul><ul><ul><li>Chapter 11 – business reorganization (typically for larger businesses or high net worth individuals) </li></ul></ul></ul>
  24. 24. Secretary of State <ul><li>Mandatory Filings starting May 1st </li></ul><ul><ul><li>Annual Reports </li></ul></ul><ul><ul><li>Statement Curing Delinquency </li></ul></ul><ul><ul><li>Articles of Reinstatement </li></ul></ul><ul><ul><li>Restated Constituent Filed Document </li></ul></ul><ul><ul><li>Statement of Reservation of Name </li></ul></ul><ul><ul><li>Statement of Renewal of Reservation of Name </li></ul></ul><ul><ul><li>Transfer of Reserved Name </li></ul></ul><ul><ul><li>Most Articles of Amendment </li></ul></ul><ul><ul><li>Most Dissolution documents </li></ul></ul>
  25. 25. Trends <ul><li>Sale of businesses </li></ul><ul><li>Home based businesses </li></ul><ul><li>Online marketing </li></ul><ul><li>Funding of companies </li></ul>
  26. 26. Sale of Businesses <ul><li>Prior to finalizing contract, need to go over following details </li></ul><ul><ul><li>Seller – Are there going to be capital gains issues? </li></ul></ul><ul><ul><li>Both – What property is being conveyed? </li></ul></ul><ul><ul><li>Both – What percentage of sell is for good will verses property? </li></ul></ul><ul><ul><li>Buyer – Can contracts be transferred? </li></ul></ul>
  27. 27. Home based businesses <ul><li>Insurance issues </li></ul><ul><ul><li>Need to notify insurance business operating in home </li></ul></ul><ul><ul><li>Need to determine where to meet clients (higher insurance if meeting them at home) </li></ul></ul><ul><ul><li>Security issues if storing personal information </li></ul></ul><ul><li>Tax issues </li></ul><ul><ul><li>Keep good tax records to differentiate between business and personal expenses </li></ul></ul><ul><ul><li>Maintain separate area just for business </li></ul></ul>
  28. 28. Online marketing <ul><li>More companies leveraging web to advertise </li></ul><ul><ul><li>Truth in advertising </li></ul></ul><ul><ul><li>FTC rules </li></ul></ul><ul><ul><ul><li>Must disclose if paid for advertisement/endorsement </li></ul></ul></ul><ul><ul><li>Privacy </li></ul></ul><ul><ul><ul><li>Can-spam </li></ul></ul></ul>
  29. 29. Funding of Companies <ul><li>Underfunding of companies </li></ul><ul><ul><li>Possibly piercing of corporate veil issues </li></ul></ul><ul><li>SEC issues </li></ul><ul><ul><li>Are owners selling securities? </li></ul></ul><ul><ul><li>Are any filings required? </li></ul></ul>
  30. 30. More Information <ul><li>Elizabeth Lewis, Esq. </li></ul><ul><li>Law Office of E.C. Lewis, P.C. </li></ul><ul><li> </li></ul><ul><li>Phone: 720-530-3405 </li></ul><ul><li>Blog: </li></ul><ul><li>Facebook: </li></ul><ul><li>Email: </li></ul>