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    Top 3 Business Formation Options

    Giving Your Start-Up a Head Start

    It’s time to commit to that great business idea you’ve been fantasizing about. This is a brave and bold move. Although you will face many challenges, watching your company grow and succeed will be extremely rewarding.

    By now, you’ve Googled how to start a business, done your research, hopefully started a business plan and financial plan. Now you’ll need to determine your business structure. This is a very important step in the process and can be a bit confusing. It is always wise to reach out to a knowledgeable business attorney who can help you select the business structure that best meets your unique needs.

    There are several business structure options to choose from. This decision will significantly impact your business profit, liability and taxes. You can always reevaluate and change your business structure as your business grows and needs change. Getting the assistance of an attorney, capable of navigating the nuances of business formation will ensure that your amazing business idea is set-up for success from day one.

    To get started deciding which business structure best fits your needs and goals, here are the 3 Top Business Formation Options.

    1. Limited Liability Company (LLC):
      • Owners of an LLC are called members rather than partners or shareholders. You can form an LLC with only one member, like a sole proprietor (without the personal Liability), or with multiple members.
      • This type of business formation carries with it similar benefits of both a Corporation and a Limited Liability Partnership (LLP), without some of the burdens those business structures may involve.
      • Similar to a corporation, an LLC is a separate entity from the owner, providing legal and financial protection. This protection allows an owner to avoid taking on the personal responsibilities for any debt or liabilities of their business.
      • Most small business start-ups will open as an LLC rather than a corporation. Forming an LLC is generally less expensive to start, has less formalities and you don’t have to pay corporate taxes on top of individual taxes. Limited Liability Companies share the same tax benefits as an LLP, where each member is taxed based on the owner’s individual income.
    2. Corporation
      • A Corporation is a company or group of people that are authorized to act as a single entity. This option is preferred by companies who are looking for outside investors or who want to take their company public.
      • Forming a corporation is essentially creating a person (legally a person). It is not a human being of course, but it is a single entity, that has a lot of the same rights and obligations of a person. This ‘person’ has a name, must pay taxes, debts and is liable for any wrongdoings.
      • Some believe that a corporation is the most advantageous business structure. A corporation is made up of individual directors (board of directors), officers and its members, called shareholders, which own a percentage of the business or stocks. This single entity is separate from the owners, providing legal and financial protection to its members, similar to an LLC.
    3. Limited Liability Partnership (LLP)
      • The main advantage of an LLP is that all partners are protected by some form of liability protection. An LLP is basically a general partnership, but it gives the partners some limited personal liability. In this jointly-owned business, two or more people agree to share in all assets, profits and financial and legal liabilities.
      • It is similar to an LLC in many aspects, including how individual owners are taxed. The structure does differ in that an LLP must have a managing partner that is liable for the actions of the partnership.
      • It is important to be aware that some states recognize LLPs formed in other states (called foreign LLPs), and some states do not. This could affect the limitation of liability in the other states, possibly treating your business as a General Partnership. With a General Partnership, owners are left unprotected. They are personally responsible for business liabilities and debts. This means that their personal assets can be seized and partners may be sued for business debts.
      • The degree of liability limitation for an LLP varies from state to state. It is crucial to do your research and/or reach out to a qualified attorney.

    Yes, these options can be confusing and there is so much more to consider when starting a business. Will you have members, partners or shareholders?  How will you divide the company? Should you have a Start-up Equity Agreement and Co-founder Equity Agreements? Fortunately there is help.

    Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30 minute consultation for guidance.

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    Non-Competes: Useful Or Futile?

    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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    Illinois Supreme Court Commission on Professionalism Lawyer Spotlight: Matthew Rossetti

    The Illinois Supreme Court Commission on Professionalism’s Lawyer Spotlight recognizes attorneys throughout the state who are admired for their professionalism and civility in the legal field. The founder of Sentient Law, Ltd., attorney Matthew Rossetti, was featured in the Lawyer Spotlight today. Read more here.

    Matthew Rossetti