Category: Issues

Dynamic Equity/entrepreneurship/Issues/startup/Uncategorized
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3 Ways to structure multiple businesses

by Sentient

Multiple Business Structures

It’s very rare to come across an entrepreneur that has only one great business idea. Most, have a list of business ideas hiding away in some random notebook or in a forgotten computer file, who knows where. If you are able to locate that list of wonderful money-making ideas, there’s good news, you’re not limited to implementing just one. There is no limit to the number of companies one can form. Whether this is your first startup, you’re thinking about starting a second business, or perhaps you are already currently in the process of running multiple businesses; diversifying your income is a wonderful strategy for growing your brand and financial success. 

Let’s examine multiple business structures a little so that we can help you in choosing a structure that works best for you and your business. Generally speaking, there are three different ways to structure multiple businesses: one can create individual corporations/LLCs/partnerships for each business, create fictitious names/DBAs under one corporation/LLC, or a holding company can be formed in which all businesses operate under. There are advantages and disadvantages to each approach. Here, we will explain and offer some general knowledge for you to consider. You should always discuss your specific needs, the details of your business, and its goals with a qualified attorney.

1.  Creating Individual Corporations

Since there is no limit to the number of corporations/LLCs a person can legally form, many business owners choose to file articles of incorporation for each individual business venture. However, having separate business entities can prove to be an expensive undertaking. Each business is responsible for paying its own incorporation fees, will be required to pay state maintenance fees, and the individual corporations will file separate taxes and pay a CPA per business for its tax filings. If that doesn’t put one off, the paperwork alone may do the trick. You will be bombarded with forms of incorporation, annual maintenance forms, business licenses, and EINs, as well as tax forms for each one of your companies. As overwhelming as all of that may seem, the additional fees and paperwork are well worthwhile to many entrepreneurs who value the protections that come with keeping their business entities separate from one another. This separation isolates the risk to the individual businesses, shielding each from financial losses, lawsuits, and other liabilities, protecting the individual corporations’ assets. 

2. Fictional Names Or Doing Business As (DBA)

Another, and quite possibly more simple, way of structuring multiple business entities is to file one corporation/LLC and then set up multiple fictional names or DBAs. When a corporation/ LLC/partnership files for a DBA, the state gives permission to the business to use a different name. A fictitious name is not the same as an LLP it simply allows a business owner to legally operate under a trade name, rather than the business entity’s legal name. Using DBAs has the advantages of having the protection of the main corporation/LLC or partnership, privacy protection, simplified fees, and paperwork, a shared EIN, and at tax time you’ll only need a single tax filing under the main corporation/ LLC/ partnership. While this structure model may offer great ease and simplicity, it is important to consider its disadvantages as well. DBAs lack exclusive rights to their business name, have less liability and legal protections, selling one of the lines of business may be challenging – especially if the business books were not kept separate from one another, and no LLC member shares or corporate stocks can be sold.

3. Holding Company

A holding company – sometimes called an “umbrella” or “parent” company – is usually a corporation that owns a controlling interest in one or more companies. Its sole purpose of existence is to manage the companies under its umbrella, called subsidiaries. Another option for structuring multiple businesses is to create individual corporations/LLCs for each of your businesses and put them under one main holding corporation/LLC. The holding company can fund new ventures and protect the assets of each individual business. When a holding company controls several companies, each of the subsidiaries is considered an independent legal entity. This is hugely beneficial in that, if one of the subsidiaries were facing a lawsuit, there would be no rights to claim the assets of the other subsidiaries. Furthermore, if the subsidiary being sued acted independently, the parent company would not be held liable either. It is important to consider, the workings of a holding company can have extremely complex tax and legal challenges, so it is always best to work with a knowledgeable attorney to determine the best way to structure a holding company and its subsidiaries.

Sifting Through The Muck With An Expert

Having multiple business ventures can be both exciting and overwhelming. Attorney Matthew Rossetti is an expert when it comes to entity planning, selection, and formation, contracts and agreements, dynamic equity agreements, arbitration, and mediation, as well as Chicago’s own Slicing Pie authority. Helping you sift through the complex nuances of entrepreneurship is a task he performs with skill, precision, and one that he does not take lightly. Having a clear understanding of your business needs and goals, Rossetti is prepared to assist and advise you. He will cover all of the bases ensuring the protection of your and your businesses. Working together, you will create a solid strategy that will bring your visions of success to fruition. 

Set up an Appointment with Matt on Calendly.com
Dynamic Equity/entrepreneurship/Issues/startup/Uncategorized
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Does my Start-Up need an EIN?

by Sentient

The long and the short of it.

Many entrepreneurs waver on the decision to obtain an Employer Identification Number (EIN). With the seemingly insurmountable research and paperwork that a new business owner will undoubtedly face; it is understandable that the thought of applying for an EIN is something one might want to put off until a later date. If you are one of the several entrepreneurs wondering if you need an EIN for your startup, let this article be your guide.

It is always wise to work with a savvy and knowledgeable attorney from the very beginning of your startup endeavors. Setting forth a plan, that takes into consideration not only your current circumstances but your short and long-term business goals, with an expert in startups, will be the bedrock on which your company is built. Entity planning, selection, and formation will be one of the main determining factors in deciding if your business will need an EIN. Although certain business formations do not require an EIN, it is highly recommended to have one. This nine-digit number is much like a social security number, which identifies your business and allows organizations to safely perform many tasks. Whether you make the decision to file for an EIN or the decision is determined for you, based on the type of entity your business requires, having an attorney will ease the burden of the decision making and application process.

Who doesn’t need an EIN? 

Like a lot of bootstrap startups, you may hit the ground running as a sole proprietor or an individual owner with a limited liability company (LLC). LLCs and sole proprietorships are not required to have an EIN. Using your social security number to set up a business bank account, complete the paperwork necessary to work for clients, and file your business taxes is perfectly acceptable. While using your social security number may seem like a more simple method for getting one’s business off of the ground, there are many other factors to take into consideration when opting not to obtain an EIN. 

It is inevitable that unexpected circumstances will arise, no matter how well you try to prepare. Having the foresight to plan for complications, that may interrupt business, will shore up the success of your company. It is important to think about the direction in which you would like to take your organization. Future plans to take on partners or hire employees will require an EIN. Furthermore, doing business under your name and social security number may leave you vulnerable to identity theft, and a poor credit rating due to criminal activity. There are also benefits to take into account. Having an EIN can make you more appealing to potential clients by establishing an independent contractor status. Companies often rather hire an independent contractor versus an employee. This saves companies money and minimizes their liability. Additionally, an EIN legitimizes your business helping potential clients trust your commitment to any possible project.

It is important to keep in mind, whilst having an EIN has its benefits by validating your credentials, making doing business easier, and protecting your personal identity and credit, a sole proprietorship EIN will still be tied to your social security number. This means that your personal credit will be taken into account when applying for a business loan or credit card, in the same regard, the IRS will tax any revenue as personal income. 

Who does need an EIN?

As a business owner you are legally obligated to use either your social security number or business EIN as an identification source for tax authorities, potential lenders, and creditors. Any business formation, that is not a sole proprietorship or an LLC operated by one individual, is required to create an entity separate from the individual owner(s). Even so, there are certain circumstances that will call for an LLC or sole proprietor to procure an EIN. Similar to a person having a social security number, an EIN works in the same manner, in that it is an identifier for that entity. This separates the organization from the entrepreneur.

There is no getting around having an EIN if your company is a partnership, corporation, or an LLC that is taxed as a partnership or corporation, If your business has employees, is involved with certain types of trusts, estates, real estate mortgage investment channels, nonprofits, farmers’ cooperatives, provides a 401(k) and other nuances which should be sorted through with a knowledgeable startup attorney. 

How do I obtain an EIN?

There are multiple ways of applying for an EIN, by mail, phone, fax, or with today’s technology many entrepreneurs opt to apply online. The process is fairly simple if you are well-prepared. It is crucial that you are equipped with all of the details needed to fill out each form completely and properly. The applicant must be an owner, principal, or officer of the business, and have a social security number. Have at the ready, the founding date, legal name of your business entity, and the trade name if any, provide the complete address including the street number and name, county, and state where your business is located. We understand that the application process can easily become complicated and time-consuming process if your paperwork is not in order. Not only are we here to assist and guide you in your entrepreneurial endeavors, Sentient Law is here to help you make sense of the startup process and build a cohesive plan for the success of your organization.

Set up an Appointment with Matt on Calendly.com
entrepreneurship/Issues/law/Uncategorized
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Non-Competes: Useful Or Futile?

by Sentient

By Matt Rossetti

Originally Published on Forbes.com here.

Bound by a Non-Compete?

At least half of the founders who contact me are contractually bound by some sort of covenant not to compete with a current or former employer. A covenant not to compete is a contract between an employer and employee or contractor in which the employee or contractor agrees not to work for competitors of the employer for a specific amount of time after the employee or contractor completes their service to the employer. Whether you are an employee, contractor or employer, there are three basic issues to think about when analyzing your non-compete: purpose, restrictions and enforceability.

Purpose

Non-compete agreements protect proprietary information and restrict where an employee or contractor may work during the contract — and sometimes after they complete their service to an employer.

The first purpose of a non-compete is tantamount to a non-disclosure agreement, as its goal is to keep a current or former employee or contractor from disclosing proprietary information to a third party. Proprietary information includes more than just intellectual property and can be anything from financial plans to marketing strategies and data.

The second purpose is a work restriction on the current or former employee or contractor. Work restrictions contractually limit a current or former employee or contractor from working for a competitor in the same market or geographical area for a set amount of time.

Restrictions

Non-competes are a severe restriction on commerce and an individual’s ability to make a living. Because of this, the prevailing trend is to limit or bar the enforceability of non-competes. This enforceability, however, varies greatly by state.

In states like California, non-competes are unenforceable as a matter of law if they restrict an employee or contractor’s activities after the term of the contract. There is a common misconception that non-compete clauses are still enforceable against California contractors (they are not). The relevant provision of CA’s Business and Professions Code Section 16600 states: “16600. Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Other states like Georgia provide employers specific guidelines for the enforceability of restrictive covenants Ga. Code Ann. § 13-8-53 (May 11, 2011).

When reviewing your non-compete, you should have an attorney check the laws of the state where both the employer and the employee/contractor are located for restrictions.

Enforceability

For a covenant not to compete to be enforceable, there must be some form of consideration. Consideration may come in the form of payment with something of value or money. If an agreement containing a non-compete is signed at the outset of an employee or contractor’s employment, most courts will find that continuing employment is adequate consideration for the non-compete. However, if an employer tenders a non-compete to a current or former employee or contractor without consideration, then most courts will find that non-compete invalid for want of consideration.

Because a non-compete may severely restrict an individual’s ability to make a living, the restrictions must be reasonable in scope. I recently had a software engineer present me with an independent contractor agreement that would have restricted him from performing any services as an engineer, whether indirectly or directly competitive with his employer, for five calendar years post-employment and without a geographic limitation. If enforceable, this agreement would have prevented the contractor from working as a software engineer in any capacity for five years.

While proprietary information protected by a non-compete may be broadly interpreted and include more than just intellectual property, work restrictions must be reasonable in duration and geographic location. Generally speaking, a covenant not to compete should only last for one to two years maximum. The geographic limitation should also be reasonable in light of the circumstances. While a software engineer might be restricted from working in a certain market, it is probably not fair to ask a fast food worker not to work for a competitor globally.

In many states, the employer bears the burden of showing that restrictions are both reasonable and necessary to protect against unfair competition. While some states might enforce this agreement, a state’s courts often are allowed to “blue pencil” non-compete provisions to those aspects that are absolutely necessary to prevent a competitor from gaining an unfair advantage.

Restrictive covenants like non-competes can be unenforceable as a matter of law or cause all involved significant hardship in the future. I highly encourage employers, contractors and employees to avoid using form or stock agreements that contain non-competes without a licensed attorney’s review. An ounce of prevention is worth a pound of cure.

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