Week 3: Ok you convinced me. But what kind of entity should I form?

Hey y'all I'm back. It's been a wash of turkey, stuffing, head colds and lots of billable work (yay) so it is what it is, but let's get to it.

OK, so now that you know whether or not you should form an entity (mostly I say yes) and why I think forming an entity is important in most cases, let’s look at what our options are for which entity to form.

Most legal issues classes spend a lot of time going through the various types of legal entities with pros and cons. While if you are a law student, another attorney or really interested this can be useful, I often think it is a waste of time for my clients for whom the LLC is almost always the appropriate structure. Of course, on an individual basis (or if I were teaching a continuing legal education series on business entities), I may delve more deeply- that's why you need your own attorney!

Ok- unless you are really far from launching your business, or you have an “industry disrupting idea” that you think will be huge like the next Facebook or Airbnb, or that will otherwise attract major dollars from venture capitalists and or angel investors relatively straight away, most likely a limited liability company (aka an LLC) will be the best option (maybe not though- remember this is not specific legal advice). 

Just so I am familiarizing you guys with the different options so that you can sound educated and feel empowered when discussing them with your attorney, here’s a basic overview:

Sole Proprietor- that is what you are if you are a single person operating a business under your name or a tradename. No filings are required to be this. You do not have any liability protection. You file your business expenses on a schedule to your personal tax return. It is simple but risky, especially when LLC’s are pretty simple too. I almost always advise against this- especially if you have any assets at all that you would not like to lose. Maybe I would agree that this was the right option if you were just selling something small to 5 close friends, or were far from actually launching your business, but otherwise probably not.

A note here- maybe you are thinking- well my business doesn’t make much money, or isn’t going to make much money. I think a) that is a self-defeating prophesy, and b) that your business plan needs some work (also your confidence could probably use a boost).

Partnership- A partnership is like two sole proprietors working together- well kind of. It would be you and your partner doing a business together. Again, without forming an LLC (or a corporation) a partnership has NO liability protection. You file a partnership tax return, so your taxes are governed by partnership tax rules and law, but you and your assets are on the hook/exposed if there’s an issue. If you are serious enough to have a business partner, you should be serious enough to protect yourself by forming a limited liability entity for your business.  There are some structures that allow some partners limited liability, and others not, but that is beyond the scope of this series.

Corporation- Back in the day, this was pretty much the only option if you wanted liability protection. Corporations can be taxed either as a C-corporation or as an S-corporation. If you want to learn more about taxation (we may talk about this in a subsequent post IDK) here is an overview (full disclosure: I don’t know this firm, but their explanation of the two forms of taxation is solid. Investors often prefer corporations, because the owners of corporations (shareholders) hold shares of stock, and that is something that investors can often wrap their heads around and are comfortable with (there are other reasons as well that are beyond the scope of this article). The thing is, it is possible to convert your LLC into a corporation prior to a round of investment if that is what your potential investors want.

And last but not least-

Limited Liability Company- When properly formed, the LLC gives its owners personal asset protection from most business creditors and most judgments (more on this another time). An LLC has members who own membership interests in the company (sometimes these membership interests are reflected as “units” to more closely approximate “shares”). A single member LLC is a “disregarded entity” for tax purposes, meaning that the owner of a single member LLC (unless they elect otherwise- more later) is taxed as a sole proprietor. A multimember LLC is taxed as a partnership, unless the members elect to be taxed as a corporation. LLC’s are relatively inexpensive to form, and easy to maintain. We will get into the steps in setting up your company in a subsequent post.

So to answer my own question: What kind of entity should I form? I’d say probably an LLC unless you have a legitimate reason not to (which is why you need your own attorney).

If you want to learn more about the different kinds of entities, here’s a great overview from the Small Business Administration.

Spotlight: FAQ- someone told me I should ____________ what did they mean?

Today's spotlight for online wellness entrepreneurs discusses a common type of question I get asked: "someone told me_______________. What does that mean?"

Ok well first off, if it's another attorney telling you something, like where to form your business entity, what kinds of agreements you need, or that you can or cannot do X, Y or Z, you 100% should follow up with them to find out what they mean. It is not stupid to not understand an attorney's (or really anyone's) recommendation. The law is a technical field like many others, and so attorneys often throw around jargon, or make recommendations without fully appreciating that the person they are talking to might not understand them.

If you are talking to another person in your industry, or who is not an attorney, you should totally ask follow up questions like or say things like: "Wow that is an interesting piece of advice. Where did you hear that from?" or "What makes you think that?" or "Did you get that advice from someone else? From whom and why?". Find out the backstory. Then you can either research on your own whether you think what their recommendations are are a good call OR you can seek out a professional in whatever discipline the question involves and get professional advice applicable specifically to you and your business.

Good luck mamas! And as always, feel free to reach out to talk more, and also know that this is not legal advice that is specific to you, because you would have to sign an engagement letter with me before I would give you that. 

Week 2: But really, why should I form an entity?

I don't mean to be boring here, but I do mean to belabor the point: 

A business entity protects your personal assets from the liabilities of your business. The most important reason small business owners should consider forming a business entity is to protect their personal assets, in the event their business gets sued or financially goes under.  Generally, as long as you follow some basic rules and don’t use the LLC to break the law, forming an LLC means that you likely will only be on the hook for the amount of money or property you put into the business.

Let’s say there are 2 people John and Mary who each operate their own business. John is a “sole proprietor”.  As sole proprietor, John operates his business under his own name. He does not have to make any legal filings, or do anything special. He reports his business income and losses on his personal income taxes. He has no liability protection.

Mary, on the other hand, operates her business under Mary, LLC. She filed her Articles of Organization (more on this later) with the Secretary of State, and makes an annual filing to maintain her status. She has entered into an Operating Agreement with the company (more on this later). She has a business bank account and a taxpayer ID number that she got from the IRS that is different than her social security number. She does not mix her personal and business money. She also reports her business income and losses on a schedule to her personal income taxes.

Both John and Mary have children and are saving for their college expenses. They have retirement accounts, and savings accounts. They each own a home and a car.

Now let’s say that both John and Mary get sued (independently of each other) and are each found to owe the person suing them $50,000.  John has no liability protection. This means that he would be required to use his personal assets (college fund, savings accounts, proceeds from selling the car, et cetera) to pay the $50,000 judgment.  Mary on the other hand, if she has properly maintained her LLC (more on this later), would likely (assuming there’s no personal liability involved) only be liable to the extent of her capital contribution and business assets (what she’s put into the business). Meaning she might have to sell everything her business owns, but she would not have to dip into her personal assets, selling her house and car and liquidating her kid’s college fund to satisfy the judgement.

The same facts would also apply to a situation where John and Mary got in over their heads and owed business creditors money. Now most lenders require business borrowers to sign a “personal guaranty” meaning that the borrowers agree that if the business cannot repay the loan, they will dip into their personal assets to pay it off. However, where no personal guaranty was required, a business operating through a properly formed limited liability entity would only be on the hook for the amount of money/assets held by the business.

In a nutshell, this is the biggest reason that having the protection of a limited liability entity is important. To me, the question isn’t how big your business is, but whether you have personal assets that you wouldn’t want to have to liquidate in the event of a lawsuit. Feel free to reach out to talk more (and as always, until you hire me via a signed engagement letter, you are not my client. This blog is educational in nature and not intended to be legal advice).

Spotlight: When will I know it's time to formalize my business?

Hi wellness mamas- today's post addresses this important question: When do I know it's time to involve an attorney and set up a formal business?

The answer to this question is pretty simple. If you are taking clients, or holding yourself out as selling something, then you should think very carefully about what you are putting at risk by not setting up an entity like an LLC to contain your business.

If you own a house, have a retirement account, savings accounts, a car and the list goes on- really if you have any assets to speak of, then you should realize that if someone were to sue you, or if you developed debts that the business couldn't pay, you would have to dip into your personal assets to satisfy the judgment (pay the settlement or whatever the judge finds you responsible for) or pay off the business creditors. 

Forming an entity is not that expensive, despite what some may say, and there are just a few rules you need to follow. More on this in a subsequent post.

Please reach out if you would like to learn more, and remember my friendly reminder from my first blog post- this is educational information designed to inform you of what you may not know you don't know. It is NOT legal advice, and you should get a local attorney to help you with your legal needs.

Week 1: Should I form an entity?

Time to get going on our agenda. Congratulations! You have a business idea. Or you are already operating. You might be a designer, a coach, a maker, a consultant, a builder, a tutor, an architect, own a restaurant, or a string of local coffee houses. No matter what your business is, the first question I will ask you as a new client (after we get the engagement letter signed), is whether you have formed an entity for the business to operate under? Today we will discuss why I think doing this is important.

With a few notable exceptions, I am a big proponent of forming a business entity that provides limited liability protection under state law. This is because (as I will go into in greater detail later) I think that business owners should take every step they can to protect their personal assets from business creditors and potential lawsuits.

The main question you should be asking yourself is: do I have personal assets (house, car, college savings, regular savings, brokerage account, etc) that I wouldn't want to have to liquidate if I were sued and lost or if my business went under? If the answer is yes, you should know that you are putting those assets at risk by operating your business as a sole proprietor (without forming an entity).

In addition, operating your business under the aegis of a business entity will legitimize your business in both the eyes of your clients and customers and yourself.

In what situations would I not form a limited liability entity of some sort?

1.     If you do not expect your business to be at all profitable I would not form an entity. I would go back to the drawing board and ask yourself exactly what you are doing and why you are looking to form a business that is going to be losing money. Of course, it’s normal for some businesses to lose money as they ramp up, but the end game and the business plan should aim for profitability.

2.     If you are in the planning phases, and you are really not ready to start operating or spending ANY money on planning expenses for the foreseeable future, I might wait until you are ready to devote resources to your business idea.

Other than these 2 reasons, I see little benefit in operating without the limited liability protection that entities provide to businesses who operate under them. A limited liability company, for example, with all its attendant parts (more on this later) costs around $500 to form with a local attorney (in Vermont)- including the filing fees. In the scheme of things, this is not a lot of money to obtain protection from business law suits and creditors.  But we will talk about that in our next post.

Spotlight: Online wellness entrepreneurs- welcome!

In the first of my Spotlight series I'll be sharing information specifically geared towards women who are building wellness-based businesses online. Hallmarks of these businesses include wanting to effect positive change (and grow their bottom line) by reaching as large an audience as possible through online classes, self-guided programs, groups and other offerings. 

Welcome! First of all, props to you for having the courage and awareness to understand the importance of educating yourself on the legal issues affecting your business. Recently, I have learned a lot about the culture and community of online wellness entrepreneurs and you mamas are amazing! So often, learning about potential legal pitfalls can feel discordant with what you are trying to do. However, learning about how to handle and avoid potential legal pitfalls is actually an empowering and powerful experience.

The blog series I am launching next week is all about what small business owners like yourselves need to be thinking about when you are starting your own business. Each Thursday I will post a special "Spotlight" post designed just for online wellness entrepreneurs.

But first let’s address some FAQs:

1. I’m just starting out, why should I work with an attorney? I answer this question with some questions of my own: Do you have a bank account? A car? A home? Kids college funds? Retirement accounts? If the answer to any of these questions is yes, then you are putting your assets and by extension your family's future at risk by operating your business without creating any liability protection for your family and your personal assets. This would have me lying in bed awake at night. Do you have a client contract you understand? If not, you risk not getting paid or having a variety of boundary and client relationship issues arise that could have been nipped in the bud. Do you know what you can and cannot say as a coach that is not a licensed dietician (or doctor for that matter)? An attorney can help you address all of these concerns.

2. Legal stuff is overwhelming. I’d just rather give it all over to the Universe. Well that’s great for you, but consider the answer to question 1. Are you really as in tune with the Universe and in control of your vibration as you think you are? It is really worth educating yourself to determine whether you are actually comfortable with the extent of the risk you are taking on (once you educate yourself, you may decide that that answer is yes, although I would still want and recommend getting an attorney’s help).

3. Aren’t lawyers pricey? Consider the cost of not hiring an attorney. I recommend that my clients form relationships with both a local accountant and a local attorney before problems crop up.  Once you are in the throes of a legal issue (or a month before your taxes are due), it will be a lot harder to find someone who is willing to work with you out of the blue. Also, revolution is afoot. Attorneys today around the country are changing their business models to help small businesses at a fair rate- that is comparable to online legal services- you should find one of those.

4. Can’t I just cut and paste someone else’s disclaimer, use someone else’s client contract? I would not advocate that approach for a few reasons, most notably the following four. First, if you just cut and paste something, you are not likely to even know what it means. You need to know what your legal documents are saying. Second, a disclaimer that is hidden away on a page a client or reader is not likely to click on is problematic and not necessarily enforceable (i.e. you can still be sued and held liable). Third, your local attorney will make sure that your documents are enforceable in your home state. Finally, is "everyone else is doing it" really a good answer?

Hopefully, these FAQs will help you form a basis of understanding that will inform your knowledge as we move through the key areas of legal issues that you should be aware of.

As always, feel free to reach out or comment below if you have any follow up questions you would like me to address.

Welcome to my blog: a resource for small businesses and entrepreneurs

Welcome to my blog! Coming soon (specifically next Tuesday)! I am super excited to introduce you to this valuable new legal resource. After an introduction, I'll be launching my first multi-part series: a weekly how-to for small business owners and entrepreneurs that will take you through the core considerations that all small business owners should have an awareness of.

In addition, we will be launching a special spotlight series for coaches, wellness professionals and other soul entrepreneurs in every phase of business development and activation. You guys may not know this, but your legal concerns are not that different from other business owners. However there are some aspects that are unique to you, and I will be taking special care to address those in the spotlight series. 

This should be fun and a great resource that for early adopters (like you) will be free. 

For you on-line mavens, I will be taking special care to highlight how important it is for you to find a local attorney to work with. This is one way that I am different from some other legal folks out there in this space. We will go in depth about this, and I will be offering a lot of support to help you get this step dialed.  

I encourage you guys to subscribe or bookmark this page so that as the content builds, you have a place to go to learn about the intersections between your business and the law so that you can steer clear of them.