Transcript COUNSELING THE MICRO ENTREPRENEUR

COUNSELING THE MICRO
ENTREPRENEUR
Legal Assistance To Microenterprises Project
Andrea Harrington
Introduction
 What is the Legal Assistance to Microenterprises Project
 Transactional legal services
 Pro bono opportunities
 Community legal education
 Short phone consultations
 Clinic project fills identified gap in services; builds trust;
introduces clients to legal services, legal community
Logistics
 Arrive at least 10 - 15 min prior to clinic opening
 Check in at check-in table
 Look through resources library (dba forms, entity information forms,
pro se answers and filing instructions)
 Client will fill out intake form to self-identify legal problem and
priorities for discussion. Will be in folder along with any documents
for review
 Use questionnaire (if needed) to identify any other legal issues,
document advice given and recommendations for further action
 Give client any forms/resources may need, and LAMP application
eligible and needs extended services. If want to take case for pro
bono representation, indicate that on attorney note sheet.
 Consultations should not exceed 20-30 min!
 Attorney notes very important; use for follow-up letters.
What is microenterprise?
 Microenterprises are companies with five or fewer employees that need
less than $50,000 to start up or expand
 Can be sole source of income, or income patching
Why Small Business Pro Bono
 1.6 million microenterprises in Texas.
 17.3% of private non-farm employment is from microenterprise!
 Nationally: 60% of microentrepreneurs are women, and 53% are people
of color or ethnic minorities.
 Association of Enterprise Opportunity
Microenterprise Works
 72% of low-wealth entrepreneurs increased their income over five
years; the average change was from $13,889 to $22,374.
 53% of low-wealth entrepreneurs moved above the poverty line,
reliance on food stamps, TANF and other forms of public assistance
dropped by an average of 61%.
 Aspen Institute
Client population
 Clients are inherently risk-takers, hard workers
 Clients may be at varying levels of readiness for legal
services/beginning business, may be established
businesses.
 Clients have wide variety of educational levels, English
proficiency and familiarity with legalese; try to stay at
10th grade reading/vocabulary level
 Clients may/may not be sophisticated/experienced in
their own field
 Big intimidation factor with legal fees/legal world, be
creative to improve accessibility
 Lots of unemployed folks starting own business
Client Population, con’t.
 Income/assets – may be judgment proof.
 Sophistication, will legal advice keep them in shadow economy
because of intimidation factor?
 Common misconceptions about legal issues.
 have to incorporate to be ‘legitimate’
 if pay someone salary no overtime requirements
 if call someone contractor, they are contractor
 entitled to take investment back if business doesn’t work out
 think having entity means will start with good credit
 Client may not be able to self-identify all or even most pressing
legal issue
 ex. Wants out of commercial lease because can’t afford it; mentions
that had to stop paying payroll tax to pay lease.
 Common issues: entity questions, contract questions, lease
questions, federal taxes, sales taxes, licensing
Legal Topics
 Likely to see questions about…
CHOICE OF ENTITY
 Liability
 Client wants to open a business with more than one owner
 Client cannot afford or cannot get adequate insurance
coverage or more likely, has not considered insurance at all
 Client’s business plan requires taking on some business
debt; however, client must know that he/she will often be
required to give a Personal Guarantee for certain debts
 Exempt v. Nonexempt property
 Client resources
 Financial
 Personal – time, organization, education
Sole Proprietorship
 Easy to start & maintain/fastest way to get started
 Questions on whether it is a “real” business
 Little to no “intimidation factor”
 Minimal filings & fees
 Business debt is not an issue if clients don’t qualify for loans without
a personal guarantee
 Sole proprietorship is community property if owner is married
 Client can deduct business expenses but MUST keep
receipts/records of business expenses
 Client should keep business expenses separate from personal
expenses and establish a separate checking account for business.
 May need to file DBA. Filing fee and form differ by county. DBA
typically must be notarized.
General Partnership

Formed by doing business with intent to share profits & losses with
another; beware of unintended partnership

PRIOR starting a business, the intended partners should first be able to
reduce their agreement to writing, understand & agree to the terms.

Any partner can take action that can legally bind the business, including
sign contracts, make purchases, open credit accounts, borrow money,
operate the business, hire & fire employees, etc.

Partners have equal rights & responsibilities to one another including the
right to full information about the affairs of the business, duty of good
faith, duty of loyalty, duty of fairness, and a fiduciary duty; cannot “lock
out” a partner

Partners are personally liable for the debts & liabilities of the business,
whether or not they agreed to the transaction or committed the offense
that resulted in the debt or liability.
 If business closes, partners need to pay outstanding obligations.

May need to file a DBA. Filing fee and form differ by county. DBA
typically must be notarized.

Limited partnerships may be option for mom/sister/friend investors
Corporation
 Corporations must observe “corporate formalities;” adopt and
abide by its by-laws
 Must keep a separate bank account & books, cannot comingle
 Must file annual state reports – public information report &
yearly franchise tax report
 Social purpose clauses
 C Corporations – default tax status by IRS:
 Corporate profits are subject to the issue of “double taxation”
 Sub-Chapter S Corporations:
 To elect Sub-Chapter S status, corporation must meet
requirements and fill out Form 2553 & file it with the IRS within
3 months of registering the corporation;
 The Sub-S Corporation is a pass-through entity
Limited Liability Company
 Offers liability protection with tax & management flexibility not
always available to a corporation
 Contribution can be cash , property, services, the promise to
provide any of these in the future
 Business is run according to an Operating Agreement- best practice
is for members to reduce their agreement to writing & agree to the
terms PRIOR to registering the company
 LLCs offer flexible management structure- terms of operation &
management are determined by owners & can be less restrictive
than corporate standards
 An LLC can elect to be taxed like a sole proprietor, partnership, C
Corp or an S Corp and offers flexible distribution of profit & lossesbusiness can be creative as to how these will be allocated
 Must file annual state reports – public information report & yearly
franchise tax report
Licenses & Permits

Possible requirements at the Federal level:

Licenses/Permits- certain business activities or products, i.e. meat
products (FDA); tobacco products or alcohol (BATF); moving company
(across state lines; DOT)

Possible requirements at the State Level:

Occupational & Professional Licenses

Licenses for certain products sold- liquor, food, lottery tickets, gasoline

Environmental - emissions, wastewater, hazardous waste

Possible requirements at the Local Level:

Business permit- more than one may apply & may need from multiple
cities

Health permits- food preparation or sales; includes inspections

Building & safety permits- required for construction & remodeling
projects

Compliance with zoning ordinances- includes home-based businesses

Cottage Foods
Insurance Considerations
 Follow state law requirements on commercial use of vehicles
 Comply with requirements in commercial lease agreements
 Home-based business: check homeowner’s insurance policy
 Property Damage Insurance
 Fire Insurance/Flood Insurance: additional coverage warranted?
 General Liability Insurance- protects from most legal claims of
injury or property damage
 Business Interruption Insurance- covers lost income while business
is closed (due to damage, destruction or disaster) , and expenses to
keep business going while the lost property is repaired or replaced
 Industry-Specific Insurance- i.e. for a manufacturing business
 Life Insurance or Key Man Insurance- especially important in
Partnerships & Partnership Agreements
Starting a home-based business

Need to pick a name, decide legal form, and register business

Apply for business license & permits, purchase insurance and pay taxes

Special tax and insurance considerations
 Standard Deduction now available

Zoning can limit use of residential space as a business, including:

Type of business or professions allowed and activities allowed

The amount of car & truck traffic, on-street parking, employees

Outside signs

Land use restrictions can limit use of residence as a business

Property deed (restrictive covenants)

Subdivision’s declaration of building & use restrictions or covenants

Planned unit development (PUD) rules and condo or co-op regulations

Title insurance policies

Leases- landlord may even have the right of eviction
Commercial Leases

Commercial leases governed by a different part of the property code
than residential leases.

For Sole Proprietor or General Partnership, signatory is personally liable
for the rent whether or not the business is making money/profits or not

For corporation or LLC, beware of ramifications of personal guarantee.

Monthly amount due may be higher than base rent advertised; utilities,
landlord’s insurance, common area maintenance, and property taxes.

Landlord can change the door locks if the tenant fails to pay rent Written notice on the tenant's front door stating the name/address or telephone
number from which the new key may be obtained. New key is required to be
provided only during regular business hours and only if delinquent rent paid.

Read and understand lease before signing and keep a copy of the lease
outside of the leased premises.

Unless the landlord has done something to make the space unusable,
client is legally responsible for the entire rent for the entire lease time,
even if the business is not making any money.
Employees
 Avoid discriminatory practices- job ads, applications, interview
questions, hiring decisions, etc.
 People “Helping Out” - unpaid internships & unintended
partnerships
 Comply with immigration laws by having all new employees
complete Form I-9, Employment Eligibility Verification & provide
proof of required identification
 Avoid negligent hiring claims- check references (with consent);
duty to protect others from injuries caused by employees
 Register with Texas Workforce Commission for unemployment
taxes and withhold, pay and report federal employment taxes
 Texas is an at-will state; workers are free to quit anytime and
can be fired at any time for any reason that isn’t illegal
 Trade secrets & unfair competition can be protected through
signed agreements with new hires: non-solicitation, nondisclosure, non-compete agreement
Discrimination
 Title VII- applies to businesses with 15 or more employees;
state laws apply to smaller businesses; can’t use race, color,
religion, gender or national origin as the basis for decisions on
any aspect of employment.
 Sexual Harassment- one form of prohibited sex discrimination
 Age Discrimination- ADEA prohibits discrimination against those
40 years and older; applies to businesses with 20+ employees;
state laws apply to smaller businesses
 Pregnancy Discrimination Act (PDA) applies to businesses with
15 or more employees
 Disability Discrimination- American with Disabilities Act (ADA)
applies to businesses with 15 or more employees
 Citizenship Status- IRCA applies to businesses with at least 4
employees; illegal to discriminate against a non-U.S. citizen or
national; forbids discrimination against persons admitted for
permanent or temporary residence as well as those who have
applied for temporary residence status.
Payment of Wages

Fair Labor Standards Act (FLSA)- minimum wage, requires premium pay
for overtime

Equal Pay Act requires equal pay for men & women doing the same work

Child Labor Law contains special rules for hiring minors

Some employees are exempt from minimum wage & overtime pay
requirements:
 Executive employees
 Administrative employees
 Professional employees
 Outside sales people
 People in certain computer related occupations

Job titles/how salary is calculated alone do not determine whether
someone is an exempt employee or not; actual work relationship is what
counts - TIMESHEETS

Texas Payday Law
Independent Contractors

Avoid misclassification; business has to pay taxes that should have been
withheld, with interest & penalties

True independent contractors are in business for themselves, have
specialized services, offer their services to a number of companies & are
responsible for paying their own taxes
 EIN, identity theft

Independent contractors differ from employees in two main ways:
 control not only the outcome of a project but also how the job gets done
 Independent contractors control their own economic destiny to a large extent,
making decisions & business investments that affect how much profit they’ll
earn & whether they’ll suffer loss

Employer must complete Form 1099-MISC at the end of the year if the
independent contractor was paid $600 or more during the year; must
send to the IRS & the contractor

If contractor creating original work: work for hire doctrine

Revisit the working arrangement; reclassify if necessary
Trademark/Servicemark

Business/Trade Name- identifies business, not the product or service it
offers. May be the same or different from the product or service name

Registering a domain name DOES NOT give a trademark or service mark
over the name or guarantee the name is not already in use as a mark

Trademark- used to market products; product name, a word phrase,
design, logo, slogan or symbol that identifies a product brand.

Service Mark- used to market service; service name; a word phrase,
design, logo, slogan or symbol that identifies a service brand.

State Trademark Register- only gives state-wide use & protection rights,
not federal. Mark must be in use for the state to accept registration

Federal Trademark Register- must be engaged in interstate commerce

First user of a distinctive name or symbol gets the exclusive right to use
it on the relevant goods or services

Registration not required, but confers additional rights & legal protection

If federally registered, use the ® symbol; if not registered, use ™ or SM
Copyright

Legal protection for the authors of “original works”

Copyright protection is secured automatically when the work is created

Should give notice to inform the public that the work is protected
 Example: © 1996 Jane Doe

Advantages of federal copyright registration Established public record
 Registration is necessary before an infringement suit may be filed in court
 If made before or within five years of publication, registration will establish
prima facie evidence in court of the validity of the copyright and of the fact
stated in the certificate
 If registration is made within three months after publication of the work or prior
to an infringement of the work, statutory damages & attorney’s fees will be
available to the copyright owner

Registration may be made at anytime during the life of the copyright
EIN

EIN is required for a partnership or corporation

EIN is required for LLC with two or more members who are not married

EIN is required for One-person LLC with employees or that is taxed as a
corporation

Need a new EIN if any of these changes occur Decide to incorporate sole proprietorship or partnership
 Convert sole proprietorship or partnership to an LLC
 Sole proprietorship decides to take in partners & operate as partnership
 Partnership is taken over by one of the partners & begins to operate as a S.P.
 Corporation changes to a partnership or to a S.P.
 Purchase or inherit an existing business that will operate as a S.P.
 Individual represents an estate that operates a business after the owner’s death
 Decide to terminate an old partnership & begin a new one
Tax Basics

Income Tax - Applies to NET income

Self-Employment Tax (FICA) - Applies to NET income from actively
working in business but not as an employee (Sole proprietors, partners &
some LLC members)

FICA- employer’s & employee’s portion of social security & medicare tax

Employer must withhold Income tax, and FICA taxes from employee’s
paychecks and pay the employer’s share of FICA taxes for each employee

Employer must report & pay State & Federal Unemployment Taxes, but
not on the owner’s compensation

Sales Tax:
 Imposed sales of tangible personal property (or providing a taxable service) at
retail within the state
 State collects sales tax through reporting system; business must file report &
pay taxes monthly, quarterly or annually
 Must file even if owe nothing/no taxable sales
Buying a business
 Are all owners in agreement to the sale?
 What information has been gathered about the business? Assets?
Liabilities?
 Why is the business for sale?
 How will client finance this purchase?
 Extensive investigation and paperwork and
attorney/accountant/appraiser expenses
 Advantages of buying assets only:
 Avoid assuming the liabilities & debts of existing business
 Avoid assuming contracts with unfavorable terms
 Gives tax advantages- can allocate the purchase price among
various assets that can be deducted, depreciated or amortized
 Avoid acquiring unwanted assets
Contracts
 Commercial Lease Agreements
 Personal Guarantee
 Loan Agreements
 Independent Contractor Agreements
 Service Agreements
 Sales Agreements
 Consulting Agreements
 Business Entity Agreements
 Mediation/Arbitration Agreements
 Clients should always put contracts in writing!
 Writing can be an exchange of letters detailing the agreement.
 A contract is only enforceable against the party whose signature
appears on the contract
Business Torts and JP Courts
 Contract Disputes
 Landlord/tenant
 Between co-owners of business; partnership
 Dispute over payment for goods/services
 JP Courts
 Jurisdictional limit of $10K
 Informality a plus, client can explain her side in own words
 No automatic discovery
 Can represent business even if its an entity
 Venue; must file in precinct where defendant resides
Opportunities
 Community legal education
 Transactional pro bono
 Entity formation, contract formation
 Creating resource materials
 “Hiring Your First Employee”
 Legal clinic volunteer attorney
Thank You!
 Questions?
END