Formation of For Profit and Not for Profit Entities

Presented by

Leslie S. Maclellan Maclellan Law PLLC 615-838-9670 [email protected]

Special Thanks To

Kirby Yost

Chambliss, Bahner & Stophel, P.C.

(423) 757-0254 [email protected]

© 2012 Chambliss, Bahner & Stophel, P.C.

All Rights Reserved

For Profit Business: Major Issues

• Choice of Entity • Taxation • Employment Law • Protecting Products/Ideas • Financing 2

Formation of Business Entity

• Things to consider: tax treatment, flexibility, liability • Types of entities – Sole Proprietorship – Partnership – Corporation – Limited Liability Company (LLC) 3

Sole Proprietorship

• Default form of business entity • No filing necessary: occurs when business carried on for profit • Pros: simple to start and operate; single level of income tax • Cons: unlimited liability for sole proprietor; generally only one owner • IRS Publication 334 4

Partnership

• Association of two or more co-owners carrying on business for profit (Husband/Wife venture) • General Limited Partnership • Pros: pass-through taxation • Cons: general partners have unlimited joint and several personal liability; any general partner can bind partnership; limits on transferability; limited partners may not participate in management • IRS Publication 541 5

Corporations

• • C Corporation – Double taxation: both corporation and shareholders taxed – Pros: limited liability; ability to be public; special tax deductions; venture capital funding – Cons: taxation; complexity; corporate formalities – IRS Publication 542 S Corporation – One class of stock – No more than 100 shareholders – must be TN citizens or legal residents, no entities – Pros: limited liability; pass thru taxation – Cons: limit on number of shareholders; increased complexity relative to LLCs and LLPs – IRS Publication 11205; Form 2553 6

Limited Liability Company

• Limited liability for all members • Pass through taxation • No corporate formalities for certain management structure • Subject to TN franchise and excise tax • Utilized for real estate ownership • Pro: limited liability; pass-through taxation; management flexibility; may have one member, may have classes of membership • Con: venture capital funding 7

LLC Management Types

• Member-managed – All powers of LLC exercised by members; equal management rights; each an agent of company • Manager-managed – All powers of LLC designated to managers; elected/removed by majority vote of members; only managers are agents of company • Board-managed – Business affairs controlled by Board of Directors, by majority vote; only authorized officers of board are agents of LLC.; Directors appointed by majority vote of members; operating agreement required 8

Taxation

• All business forms require taxpayer ID – SSN – FEIN (Form SS-4) • Taxation often depends on business form • Federal taxation – Income tax – Self-employment tax – Employment tax – Excise tax • IRS publication 583 (Rev. December 2011) 9

Taxation cont’d

• State tax: – Franchise/excise tax – Sales and use tax – See Tax Guide for New Businesses (www.tn.gov/revenue) • Franchise and excise applies to (almost) all business forms in TN – Some exemptions (general partnership, sole proprietor and other limited forms) – Franchise: based on > net worth or book value of real or tangible property – Excise: based on net earnings from “conduct within Tennessee” 10

Taxation cont’d

• Sales and use tax – Imposed on manufacture, distribution or retail sale of goods – All businesses that sell, lease or rent tangible personable property – Register with state to receive sales tax certificate • Local taxes – “Privilege Tax” or business license tax – Payable to city/county in which business operates – All businesses – some exceptions – Local property tax 11

Employment Law

• Issues to consider when starting – Employee vs. independent contractor – Policies, handbooks and postings – Federal and State employment laws 12

At-Will Employment

• Default employment type • Termination – Can be any time, for any reason – With cause vs. without cause – Notice • Important to emphasize – Written acknowledgement – Employment Agreement • Still certain limitations on termination 13

• • •

Independent Contractor v. Employee

Important distinction in employment law Tax implications for employer – – – – Wages Overtime Withholding taxes Workers’ compensation Factors: (just a few) – Control of workers’ behavior (degree of instruction) – Location of work – Financial control – Unreimbursed expenses – Method of payment 14

Federal/State Employment Laws

• Many federal employment laws – FSLA – ADA – ADEA – COBRA – FMLA – Title VII • Don’t forget state employment laws – TN Human Rights Act – TN Workers Compensation Act 15

Intellectual Property

• Domain names: lock them down; avoid names/marks already in use • Assignment of existing intellectual property rights to entity – Specific assignment language required • Consider registration of (1) copyright, (2) Trademark or (3) patents 16

Copyright

• A right in an original work of authorship • Common law rights attach upon creation of the work of authorship • Register copyrights with U.S. Copyright Office to ensure full protection • Work for Hire Agreements 17

Trademarks

• Trademarks: – word, phrase, logo, etc. used by business to distinguish its products • Common law rights exist automatically • Enhance common law rights by filing for U.S. and/or International registration 18

Patents and Trade Secrets

• Formulas, processes, devices, etc.

• Difference between patents and trade secrets: novelty • Take steps to protect trade secrets from misappropriation • Consider filing patent application in U.S. or abroad • In U.S., patent protection is based on first-to invent (first to file in 2013) 19

Financing

• Common forms of financing – Personal financing (max out that credit card) – Loans (e.g. SBA/banks/grants) – Investors • Friends and family • Angel investors • Institutional or venture capital funding • Crowd funding (JOBS Act) 20

Securities Laws Issues

• All sales of securities governed by federal and state securities laws • All securities must be registered with the state securities commission and the SEC unless subject to an exemption • State registration depends upon the location of the investor not just the company 21

Securities Laws cont’d.

• Federal Exemption – Section 4(2) of the Securities Act • Reg. A or Reg. D • Federal exemption requirements include provisions related to: – Limitations on capital raised, – Limitations on number of investors – Limitation on ‘sophistication’ of investors, and – Required disclosure.

• JOBS Act: Crowd funding provisions 22

Venture Capital Funding

• Focus on young, high-growth companies • Invest equity and debt capital • Assume more risks in exchange for potential higher returns • Have a longer investment horizon than traditional financing • Generally require management and oversight • Generally Series A 23

Forming a Non-profit Entity: Organization and Tax Exempt Status

© 2012 Chambliss, Bahner & Stophel, P.C.

All Rights Reserved

Two Layers of Government Regulation: State and Federal

• State Regulation – – – – Oversight of nonprofit corporations Annual reporting Charitable solicitations Exemption from state taxation – Contract Laws governing contracts/employees • Federal Regulation – – Federal tax exemption Form 1023 25

State Regulation

• Tennessee Nonprofit Corporation Act • Board Governance • Charter must include specific statutory language • Annual reporting required • $100 filing fee • File with the Secretary of State 26

Federal Tax-exemption

• File Form 1023 with the IRS • Operate almost exclusively for one or more exempt purposes • File within 15 months of incorporation • Most private foundations require • Annual Form 990 reporting (990N) • $800 fee 27

Form 1023

• 10 page form with schedules • Independent Board members • Insider compensation – Conflict of interest policy • Mission statement/statement of tax exempt purpose • 3-6 month process 28

State Charitable Solicitation Acts:

1. Register in the State in which you are located – TN uses the Uniform Registration Statement 2. Identify additional states in which you will be soliciting 3. Identify available exemptions 29

Exemptions

• • • • • State specific Fire departments, community fairs, etc.

Churches and “bona fide” religious organizations Educational institutions – – – De minimis exemptions gross contributions less than $_____ loose interpretation of “contributions” TN has $30,000 exemption 30

What is Soliciting Contributions?

• State specific definitions • Oral - TV, radio, commercials • Written - mail, public posting, or communicated by any media, including news articles • Email • Offer or sale of goods at fair market – Books, tapes, membership – Conference invites if fee paid – Benefit concerts – “Commercial co-venturer” 31

Internet Solicitations

• In many states, officials view the "Donate Now" link on your website as a solicitation 32

Internet Solicitations

• Registration required if: – The entity solicits contributions through an interactive website and either • Targets a person in the state, or • Receives contributions on a “repeated and ongoing basis”; or • Specifically invites further offline activity; or • Establishes other contacts with the state (such as sending an email promoting the website) 33

Trends – Responding to Social Media

• Social media permits nonprofits to raise money in different ways than charity-run websites and poses significant problems that charity regulators are trying to resolve • Questions that arise – How to monitor "daily-deal" websites that encourage online donations – How websites that charge fees for collecting donations should disclose those fees – How to respond to "friends" soliciting via Facebook – How to prevent bogus charities from social network abuse 34

Social Enterprises: Alternative Legal Forms

• Social Enterprise: business with a purpose • Trends: both for-profit and not-for-profit models • New hybrid legal forms – Corporate Flexibility Act of 2011 (CA) – Benefit Corporation (CA, MD, VT, NJ, VA, HA) – L3C (VT, NY) 35

Questions?

• What is the social enterprise activity?

– Will enterprises’ activity be difficult to obtain tax exemption?

– Will exemption limit activities?

• Where will the funding come from and how much is needed?

– Private foundation grants?

– Private investors seeking ROI?

– On-going revenues?

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For more information contact:

Leslie S. Maclellan

Chambliss, Bahner & Stophel, P.C.

3200 West End Avenue, Suite 500 Nashville, Tennessee 37203 (615) 457-8460 [email protected]

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Disclaimer

This presentation is provided with the understanding that the presenter is not rendering legal advice or services with respect to specific facts or circumstances. Laws are constantly changing, and each federal law, state law, and regulation should be checked for the most current version. 38