Start Your Dream Business During a Downturn

Slicing Pie and Dynamic Equity: The Best Way to Start Your Dream Business During a Downturn

Many potential clients and current clients have been asking us whether they should pursue their dreams and start their new business despite challenging economic conditions or put their plans on hold. While we understand that it is exceedingly difficult to raise capital and the cost of capital is increasing, we advise everyone to follow their dreams. In fact, in our opinion, challenging economic conditions are the perfect time to start a new business (I have done it) if you are using the right equity allocation model.

What is the right model?

If you are on a limited budget, plan to bootstrap your venture, and are seeking a fair method of sharing equity with your cofounders, dynamic equity is the answer. Mike Moyer, the author of The Slicing Pie Handbook and Will Work For Pie, lays the foundation for perfectly fair equity splits for bootstrapped startups. We have developed a legal framework for limited liability companies that will allow you to start your business with minimal cash investment and fairly and proportionately distribute equity.

How does the model work?

Slicing Pie or dynamic equity provides for both an equity allocation framework as well as a recovery framework. We contractually set initial specific goals for the venture at the outset. Upon founding of the business all uncompensated time, cash contributions, etc. (we call these “Inputs”) that go into the venture are tracked. When the initial specific goals are accomplished we “bake the pie” and enter into a new agreement under which each member’s ownership stake is based on their Inputs as compared to the Inputs provided by everyone.

For example, if Alex and I start a business today and our initial specific goal is to achieve $10k in monthly revenue. Upon reaching said goal, we look at our relative contributions to the venture and determine what percentage of the venture each of us should own at that time.

In other words, instead of the founders of a venture attempting to predict the future (wouldn’t that be nice!), Slicing Pie or dynamic equity provides for a quantitative algorithmic method of equity distribution. This model also provides for a recovery framework in the instance that one of the founders of the venture decides to quit for good reason or no reason at all or is terminated for cause.

Conclusion

There is no time like the present! Slicing Pie and dynamic equity will allow you to follow your dreams and start a new business with a limited amount of cash capital. Click here to schedule a free consultation with us today to discuss how we can help you make the most of challenging times.

 

 
 

How important is it that the governing law be of Country X, as opposed to Country Y?

Choosing which laws govern a contract and where contract disputes, should they arise, will be handled is an important part of contract negotiations. The choice of law and/or forum can present significant advantages to one or both parties. They can also create significant disadvantages, especially when parties and legal systems from different countries are involved. The post below is based on a recent question we answered for a client regarding these exact issues.

For context, the client was based in Country X, and they were negotiating an agreement with a party based in Country Y. The other party required that the laws of their (the other party’s) country, Country Y, will be the laws that govern the contract. As a result, our client wanted to understand what this meant from a legal perspective and how to best proceed. Our client’s question and our answer explaining the issue are below.

While it is not something that would be considered “make or break”, having Country X law as the governing law would be advantageous to you. As a person and a business that are domiciled in Country X, Country X clearly has a much stronger interest in protecting you and your business if something were to happen. Conversely, Country Y law would present the same advantage to the other party since that is where they are based. Another advantage that using Country X’s law creates for you is that you (and any Country X-based legal counsel) are much more familiar with Country X’s laws and how the legal system works in Country X. Thus, if there are ever any issues or you have any future questions, it will be much easier for your legal counsel to research the issue(s), provide you with advice, and, if necessary, represent you in court. While it is not impossible for Country X-based lawyers to research and understand Country Y law, it will likely take significantly more time and work (will need to find out where to look, possibly need to translate from Language Y to Language X, need to familiarize themselves with the court system and legal precedents, likely required to work with local counsel from Country Y if litigation is involved, etc.), which means higher legal fees.

Another aspect to consider when evaluating your choice of law is whether or not you would be able to recover any damages if something were to happen. If you were to choose Country X law, it would likely be very difficult to recover any damages in a Country Y court. The issue here is whether or not a court in Country Y would be able and/or willing to recognize the laws of a foreign country. If they are unwilling and/or unable to recognize Country X law in Country Y, which is definitely a possibility, then you would not have any way to enforce your contract against the other party. If that were the case, you could try to bring suit against them in Country X, but that is also likely to be unsuccessful because it would require them to voluntarily submit to Country X’s jurisdiction. If they refuse to submit to Country X’s jurisdiction, then there isn’t much, if anything (depends on the situation), that could be done.

While Country X law would generally be more advantageous to you, in this situation, Country Y law may be a better bet. If the contract is governed by Country Y law, then you know that the courts in Country Y will be willing and able to adjudicate an issue (as long all of the requirements for litigation are satisfied) if something were to happen. Also, since it is highly unlikely that a foreign entity who is generally not subject to Country X’s laws would submit to Country X’s jurisdiction, using Country Y law could provide a potential pathway for recovering damages through Country Y’s legal system if something were to happen.

In sum, although it is common practice for parties to choose the type of law that governs a contract, international agreements are unique because they usually involve completely separate systems of law. Choosing the law of your home jurisdiction will usually be more beneficial to you because your home jurisdiction (whether it is your country and/or state) will have a greater incentive to protect you and your interests than those of a party from another country or state. However, especially when entering into international agreements, you should consider the potential willingness and ability of a foreign jurisdiction to enforce the law selected in a choice of law provision. This is where local counsel or an attorney with expertise in that particular jurisdiction can really help clarify and explain the nuances of the local legal system in question. Here, although not ideal, we think using Country Y law would be your best option. If something were to happen it would give you a better chance at successfully bringing an action, not necessarily winning (that is dependent on the situation and circumstances), in court than Country X law. Additionally, as we mentioned above, the other party would have to be willing to submit to jurisdiction in a Country X court if Country Y doesn’t recognize Country X law, which we would not expect them to do.

 

 
 

Cortando el Queque

Cortando el Queque

  1. Justicia es divertida
    1. Todos comienzan en la misma página
    2. La transparencia genera confianza
    3. Creación de equipos
    4. Motivación derivada de la igualdad de capacidad para obtener equidad

Ejemplo: La fundadora y líder de los Grunts, Jane Egon, es e

mpleada a tiempo completo en Big Tech Corp. Un día, una gran idea se ocurre a Egon para una nueva aplicación de widgets tecnológicos para compartir fotos que cambiará el mundo de las aplicaciones para siempre.  Egon pasa aproximadamente 1 hora por día hábil durante un año investigando su mercado y finalmente decide organizar una nueva empresa.  Egon es sola una gerente intermedia, por lo que no puede permitirse contratar empleados o contratos independientespara hacer realidad su sueño.  Egon busca formas de recaudar fondos y justo cuando está a punto de perder la esperanza se encuentra con el libro Slicing Pie. “¡Finalmente una solución! Esto es brillante”, piensa Egon.

Egon es muy apasionada y persuasiva sobre su visión y por eso no tiene problemas para comunicar su idea de manera efectiva a cuatro empresarios tecnológicos experimentados a quienes convence para que se unan al equipo como Grunts A, B, C y D. Debido a que a Egon se le ocurrió la idea, Egon optó por aislar 51% del capital para sí misma para mantener una participación mayoritaria en la nueva empresa y no participar en el Fondo Grunt. Los cuatro grunts trabajan por una tarifa de recursos por hora de Grunt de $150 / h.

Debido a que su trabajo se volvió estresante y ya posee el 51% de la empresa, Egon dedica aproximadamente 1 hora por semana durante el año a recaudar una ronda semilla de capital.  Egon convence a un amigo rico para que contribuya con $500,000 por el 20% de la compañía y se produce la división del Fondo Grunt.  Egon y los Grunts comparte del capital de la compañía en el momento de la división del fondo Grunt que se desglosa de la siguiente manera:

Egoísta

Tarifa de recursos por hora de Grunt:            N/A

Entradas individuales:                                     N/A (honorarios legales pagados y tarifa de organización llc)

Cuota de miembros:                                       51%

Grunts A, B, C y D

Tarifa de recursos por hora de Grunt =          $150/h ($75/h x 2)

Aportes de los miembros:                              1043.5 horas ($156,525.00 valor por Grunt)

Total de entradas:                                          4,174 = ($626,100.00)

Cada acción de miembro:                               12.25% (Nota: 49% de la compañía está sujeta al Fondo Grunt)

 

En el ejemplo anterior, cada uno de los Grunts tendría derecho a un pago de Renuncia por Buena Razón de $156,525.00. Debido a que Egon solo recaudó $500k, la compañía no puede pagar el valor Renuncia por Buena Razón de cada Grunt. Si cada Grunt hubiera recibido una compensación durante la existencia del Fondo Grunt en lugar de participar en el Fondo Grunt, cada Grunt habría recibido $75/h o $78,262.50 en total. Debido a que Egon aisló el 51% de la propiedad para sí misma, cada Grunt recibe una participación diluida del 10% en la compañía recién financiada y la propiedad se desglosa de la siguiente manera:

 

Valoración post-dinero:                                  $2.5 millones ($500,000.00 / 20%)

Valoración pre-dinero:                                    $2 millones

Valor de las acciones del inversor:                 $500k o 20%

Valor de las acciones de Egon:                        $ 1.02 millones o 41%

Valor de propiedad de Grunt:                         $240k o 10%

Aunque el ejemplo anterior podría no verse tan mal a primera vista, recuerde que Egon apenas contribuyó a la construcción de la empresa, sin embargo, todavía posee un interés mayoritario después de una inversión de $500,000 y 4,174 horas de trabajo de Grunt.  Para obtener una mejor imagen, considere este escenario con Egon haciendo un GHRR alto sin las garantías de capital. En el siguiente ejemplo, Egon está contribuyendo al pastel en la cantidad de 261 horas por año a un GHRR de $350/h.

Egoísta

Tarifa de recursos por hora de Grunt:            $350/h

Aportes de los miembros:                              522 horas ($182,700)               

Gruñido A, B, C y D

Tarifa de recursos por hora de Grunt =          $150/h ($75 / h x 2)

Aportes de los miembros:                              1043.5 horas ($156,525.00 valor por Grunt)

Totales a partir de la división de Grunt Fund

Total de entradas:                                           $808,800 (4,696 horas)

 Participación de Egon:                                    22.6% ($182,700 / $808,800)            

Grunt Shares:                                                  19.4% ($156,525.00/$808,800)

Valoración pre-dinero:                                   $2 millones

 

Después de la división de Grunt Fund

Valoración post-dinero:                                  $2.5 millones ($500,000.00/20%)

Valor de las acciones del inversor:                 20% ($ 500k)

Valor de las acciones de Egon:                        18.0% ($450k)

Valor de propiedad de Grunt:                        15.5% ($ 387.5k cada uno)

  1. Atracción de talento
    1. Rendimientos decrecientes
    2. Incapacidad para ampliar el equipo

El impacto financiero solo comienza a contar la historia de cómo Egon ha afectado negativamente a la empresa.

En las semanas antes de la inversión de $500,000, la motivación de los Grunts comenzó a calmarse. A pesar del arduo trabajo constante de los Grunts, el interés protegido de Egon creó un techo verdadero. Cada uno de los Grunts se opuso a trabajar largas semanas por poca ganancia, mientras que Egon solo trabajaba una hora a la semana para mantener su interés.  Egon fue muy afortunada de recibir fondos cuando lo hizo porque los Grunts probablemente habrían dejado de trabajar, o solicitado una enmienda del Fondo Grunt, si sus contribuciones hubieran seguido perdiendo valor.

Además de los problemas de contribución de los Grunts, el capital de Egon impidío que la compañía creciera. Las demandas de la compañía se expandieron y Egon necesitaba adquirir más capital humano. Idealmente, Egon quería traer a otro Grunt; sin embargo, no podía traer un nuevo Grunt sin lastimar a los Grunts en su conjunto. Un nuevo Grunt significaría que cinco Grunts, no cuatro, estarían dividiendo el 61% del capital de la compañía, como máximo. Basándose en el egoísmo inicial de Egon, ahora debe elegir entre el crecimiento de la compañía y la moral de los Grunts.

  1. Posibles consecuencias comerciales
    1. Responsabilidad legal por actuar de mala fe
    2. Caracterización de los empleados
    3. Daño irreparable para mantener el equipo en el futuro

Los líderes de los Grunts que alteran el modelo de fondo grunt para aislar porciones significativas de capital de la participación en el Fondo potencialmente se exponen a responsabilidad legal. Cuando un Líder Grunt confiere beneficios a expensas de los Grunts, un tribunal puede exigir al Líder Grunt que haga una restitución a los Grunts para evitar un enriquecimiento injusto del Grunt Leader.

Las alteraciones al modelo del Fondo de los Grunts que hacen que la relación Grunt Leader-Grunt se caracterice como una relación empleador-empleado puede ser una violacion de la ley laboral. La falta de pago del salario mínimo y las horas extraordinarias son las violaciones más probables a las que se enfrenta un líder de los Grunts en estas circunstancias. Las sanciones por estas violaciones incluyen: pagos atrasados, daños liquidados, multas de $1,000 por cada violación y honorarios de abogados y costos judiciales.

En resumen, el modelo del Fondo de los Grunts fomenta la creación de equipos saludables y la colaboración a través de los principios de equidad incorporados en el modelo. Cuando el Líder de los Grunts se reserva grandes porciones de capital para sí mismo, compensa injustamente al Líder a la expensa de los Grunts. Este desequilibrio erosiona la moral del equipo y crea los mismos problemas que el modelo del Fondo de los Grunts se busca evitar, es decir, el conflicto entre los fundadores sobre las divisiones de capital. Este conflicto tiene el potencial de destruir el desarrollo de la compañía y/o causar un colapso del negocio por completo.

Starting a Business Aged 50 Plus

Setting up a business when you are older can seem like a crazy idea. Friends and family might even tell you that. But there are some real pros to being an older person and setting up a business, as long as you have the dedication to keep going with it. Here we will give you the lowdown on starting a business aged fifty plus.

That One Big Idea

If you have that one big idea that you have been considering for years, why not just go for it? Chances are your idea is brilliant and people will love it. Make sure to check that someone else hasn’t beat you to it. Also don’t worry if they have, adapt it a little give it a new spin and see what you can come up with. It is likely if you have had that idea in your head for many years, it is a good one and what is the harm in giving it a go?

Get Help

A great way to be as savvy as possible is to get some external help you can trust. Come at it from a business perspective. Do not just employ your niece as she made a great PowerPoint once, ensure that you are getting professional help. When it comes to business you know your strengths, but it can be difficult to see your own weaknesses, especially if you don’t know what you are meant to be strong or weak at! On freelancer sites like Fiverr and UpWork, you can hire freelancers to help you write a business plan. This is a great start. Ensure you read over their reviews before entering a contract. You can also get mentored with online business support and coaching, which can be very helpful for new entrepreneurs.

DIY Business

Once you have a plan and know where you are going, you can start to look around for free to use resources to help you set up your business. A brilliant example of this is to create your logo. A business logo does not need to come from an expensive designer nowadays but can come from an online logo creator tool just as easily and without the hefty price tag.

Social networks are a must-have for new businesses. Sign up to them and fill your pages with your branding. There are many socials that when you sign up to them as a business that you can use for free to market yourself to your chosen demographic.

Starting a business when you are fifty plus is a great chance to renew your life, live your dreams and enjoy yourself. It’s also a great way to earn more money before you retire. However, it does not always work out so make sure you are cautious while having fun and don’t invest too much money before you know it is already working!

Should My Company Issue Stock Appreciation Rights (SAR)?

Why Should I Offer Stock Appreciation Rights?

Two of the most common benefit plans companies offer their employees are employee stock option plans (ESOP) and stock appreciation rights (SAR). While both have unique benefits, for the employer and its employees, there are differences and financial considerations that must be addressed before choosing the right benefit incentive plan for your company. Whichever plan you choose, each method motivates employees to increase shareholder wealth and offers compensation for their hard work and commitment. In this article, we will focus on SAR. Read our article on ESOP to compare options and follow up with business startup expert, attorney, Matthew Rossetti. 

In the know – key terms

  • Grant date is the date that the employer and employee agree to the terms and conditions of a stock option, or equity-based award. Once agreed upon the stock appreciation right is granted to the employee and the date is recorded as such. The grant date also determines the exercise price.
  • Vesting date is the date an employee is eligible to exercise a specific number of options. Typically, starting on the date of vesting to the ending on the SAR’s expiration date, a vested SAR may be exercised, in whole or partially. Prior to this date, no payout will be granted. Note, exercising your rights may be dependent on how long an employee works for the company, employee performance, or based on the overall performance of the company.
  • Expiration date refers to the last day an employee can exercise stock appreciation rights, and only if the market price exceeds the exercise price. However, if the SAR’s market price is below the exercise price, the shares are worth nothing and can never be exercised. Furthermore, If the terms and conditions of the bonus agreement are not met by this date, the employee will lose the SAR.
  • Exercise price is the market price of the stock on the grant date, and the price an employee is able to purchase shares, once options are vested. There is also an exercise period, which is the time in between the vested rights and the expiration date, wherein the employee may exercise their appreciation rights. 

Unpacking SARs

Offering a SAR is a great benefits plan for startups, especially if you are an S-Corp, LLC, partnership, or other business entity that is unable to award stock. A SAR allows a business to reward its employees without exhausting any cash reserves or giving up any equity and they can usually fund the rights through the organization’s payroll system.

Stock appreciation rights are essentially a bonus – usually paid out in cash, sometimes stock, or a combination of the two – to a company’s employees. These bonuses are issued with a grant date, an exercise price, a vesting date, and an expiration date. This type of benefit plan enables an employee to cash-in on appreciating stock prices, after a specified vesting period, between the grant date and the exercise date. However, this payout is only accomplished if the employer’s stock price rises. 

Planning is key

The ability to create a customized benefits plan, structured for the betterment of a business and its employees, is what makes SARs a popular option amongst many businesses looking to incentivize their employees. Depending on how a company is set up, employers have a lot of flexibility when planning because there are few to no restrictions. 

  • Employers have the ability to offer their employees options to exercise their SAR when they choose to.
  • Vesting schedules provide a performance-based retention tool, structured in a way that bonuses are only paid out if an employee lives up to the original terms and conditions agreed to on the grant date. 
  • Predetermined plans can be agreed upon as to what an employee will receive if he/she resigns or is terminated, if anything at all.
  • Non-compete clauses can be implemented into the employer/employee agreement in order to ensure employee loyalty.  
  • Employers can further incentivize top performers by offering some of the net proceeds if the company is sold.
  • Companies that already have an ESOP in place can offer SAR as an additional incentive for its employees.
Caveat

While stock appreciation rights do have their advantages, such as tax deductions for corporations, and no upfront cost to employees to exercise rights, there are a few things to understand in advance. 

  • An employer is required to withhold taxes, either by withholding cash or shares.
  • Publicly traded companies may require shareholder approval when issuing stock appreciation rights.
  • A company may need to follow retirement plan rules if it wishes to cover all employees and offer benefits after termination.
  • Employees will not receive dividends or voting rights.
  • Upon exercising rights, employees must report any income on the fair market value of the amount of the right received at vesting – even if it is a share and is not sold.
  • If employees receive cash upon the sale of the company, it will be taxed as ordinary income tax

When planning, many decisions must be made carefully and strategically. Employers must consider vesting rules, liquidity concerns, eligibility, rights to interim distributions of earnings, tax implications and so much more. It is always advisable to discuss any plan to issue SARs with a knowledgeable attorney. Sentient Law is here to assist you.

Is An ESOP Right For My Company?

Win-win

An Employee Stock Ownership Plan (ESOP), is the most popular form of employee ownership in the U.S. ESOPs helps businesses establish a transition plan by creating a market for their company’s stock. This method of ownership transfer or sale can be a sound strategic move for business owners to ease the burden of retirement and to sell in a way that is advantageous for tax purposes. The benefits of an ESOP are not mutually exclusive, it is also a great way to spread the wealth amongst dedicated employees and promotes an ownership culture within a company, making this a win-win benefit plan. After all, giving employees a sense of ownership can make them feel like an important part of the company, incentivizing them to work harder and fostering loyalty and productivity.

The implementation of an ESOP can be extremely complicated, Matthew Rossetti is an expert in this area of practice and will confidently guide you through the process. Let’s take a deeper look into it to determine if an ESOP is the best option for your company.

ESOP simplified

Stock options give employees the opportunity to own parts of the company they work for. In an employee stock option plan a company sets up a trust and this trust can acquire, hold, and sell the company’s stock. An ESOP (employee stock ownership or employee share ownership) is a kind of employee benefit plan offered by employers. In most cases, ESOPs are a contribution made from the company to the employee, rather than an employee purchase. It is a defined-contribution (employees do not pay income tax on the amount contributed by their employer until they withdraw money from the plan) similar to profit-sharing or a 401(k) employee benefit retirement plan. Company shares are allocated to individual employees’ accounts annually. Upon retirement, disability, termination, or death the employer must buy back the stock at fair market value from the employee unless there is a public market for the shares. 

With an ESOP an owner of a company can sell parts or all of its shares and continue to maintain control of the company and its business operations. It is important to note, while this plan is referred to as employee stock ownership, the employees don’t actually own stock in the company. The ESOP is an organized retirement account, held by a trustee for the benefit of the employee. That person, or trust company, will negotiate a closing deal on behalf of the employees and hold the sold stock in trust. Although employees have an ownership stake in the company, they don’t actually have a right to vote the shares, to elect the board of directors, or any say as to how the company should or will be operated. When the employees retire, then, they reap the rewards and get a payment based on what the shares are worth.

Why is it advantageous to an employer?

Choosing to sell a business to an ESOP requires much consideration for a business owner. While establishing an ESOP has its advantages, an ESOP is not the proper course of action for all corporations, and particular entity formations do not meet the requirements for this type of employee benefit plan. For example, an S corporation and a C Corporation have the ability to establish an ESOP. However, an LLC is not permitted to have an ESOP because it does not have stock, it has memberships or units, therefore it can not offer ESOP stock options. That being said, an LLC that is taxed as an S corporation does qualify for an ESOP. Rather than stock, the unit shares will have the same rights to distribution, dividends, and liquidation proceeds.

For those companies that do qualify and opt for an employee stock option plan, there are substantial tax advantages. Not only is it a tax-exempt trust, transferring to an ESOP allows a business owner to defer or bypass capital gains taxes. Moreover, contributions of stock and cash are tax-deductible, and when an ESOP is used to borrow money both the loan repayments and interest are tax-deductible. The benefits of an ESOP will vary depending on the type of entity a business owner chooses for their company. Many companies choose to convert LLC taxed partnerships into an LLC taxed as a corporation, S corporations into C corporations, and C corporations into S corporations after having more clarity as to the benefits of each. A popular choice of entity selection for businesses aiming to offer an ESOP is choosing an S corporation, due to its significant tax advantages.

If the ESOP holds shares in an S corporation, the earnings from the ESOP shares are not taxable. Furthermore, an S corporation can avoid tax distributions all together and hold on to the cash in the company, for reinvestment into the business, if the ESOP owns 100 percent of the company. This is because S corps don’t pay tax on their profits, their profits and losses are passed through to their shareholders based on the percentage of their ownership. If an ESOP owns the company, there is no federal tax due because the ESOP is in a trust, which is tax exempt, allowing companies to retain more of its earnings. With the increase of cash flow, corporations are able to quickly reduce debt, enhance employee benefits, and have funds for greater capital investments and acquisitions. This is a huge tax advantage for S corporations. Do keep in mind,  Any changes that are to be made to your business entity should be done after consulting a qualified attorney, due to possible adverse consequences. 

3 Ways to structure multiple businesses

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. 

Does my Start-Up need an EIN?

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.

The Best Way to Fund a Startup

Put in the work

Many factors play a role in the ability to create and run a business, and the road to entrepreneurial success can be quite daunting. Having enough capital to get your organization off of the ground and maintain momentum during challenging times is critical. After several months of creating a solid business plan, many entrepreneur’s enthusiasm will quickly wane upon being confronted with the bottom line. Don’t store your plans away in your desk drawer – in the abyss of other long-forgotten dreams – just yet. Good news, there are excellent resources that can help you meet your goals and establish a solid foundation for your business. You just have to be willing to put in the work. The return on the time invested will pay off big, considering startup funding can transform your business plans into an achievable reality. 

Multiple funding options are available for you to choose from. Preparation and research will be essential in finding the right method for your business. Ultimately, your best choice for funding will depend on the needs of your organization. Some determining factors that may help to narrow down your selection will include: whether or not you qualify for particular sources of funding, if you prefer to acquire debt- allowing you to maintain full control of your company, alternatively you may rather exchange capital or services for equity.

Real talk

Before you begin your campaign to raise capital, the first thing you will want to do is revisit your business plan. Get a realistic idea of how much money you will need to pull together on your own and/or how much you will need to request from outside resources. Aim to cut any unnecessary costs. Your goal should be to acquire enough capital to start and maintain your organization, not to luxuriate with all of the bells and whistles. You will earn that in time. There are benefits to keeping startup costs low: it may inspire you to invest your own personal savings, perhaps it will make you a more favorable candidate for a business loan, and it will certainly appeal to any potential investors. Also, be sure that your financial projections are pragmatic; idealistic financial projections can easily halt your company’s growth down the line, if not bankrupt your business. 

Choose your method

Once you have a firm grasp on a viable dollar amount, it’s time to consider sources of capital to pursue. Essentially, there are two types of funding options: debt and equity, unless you will be using your own personal funds. Of course, there are advantages and disadvantages to each method.

  • Debt: An advance of funds is a great way to ensure that all profits and assets remain with you and your business. Although you will initially go into debt, once your debt is paid all profits go directly to you and you will remain in full control of your business. However, the inability to repay your debt could cost you your business, reputation and more. In addition, not everyone has the ability to obtain a loan, whether that be via a financial institution or from friends and family. If obtaining a loan appeals to you, try reaching out to these potential sources.
    • Friends and Family
    • Financial Institutions
    • Angel Investors
    • Venture Capitalists
    • SBA: matching small businesses with lenders
  • Equity: Selling shares in your company in exchange for capital or services is a popular method for raising funds. In lieu of qualifying for a loan, an innovative idea and well laid out business plan can get you the financial resources needed to accelerate the momentum of your startup. Avoiding debt helps to reduce personal risk and increases peace of mind. Note, some may consider sharing in profits and ideas on how the business should be managed, to be a drawback when choosing this approach. The amount of resources available to you are numerous. Here is a list of potential investors that could believe in your vision so much, they want a piece of the action.
    • Friends and Family
    • Crowdfunding
    • Angel Investors
    • Venture Capitalist
    • Business Partner(s)
    • Other companies or individuals willing to trade their services for a stake in your company
  • Personal savings: If you are fortunate enough to have personal savings that will allow you to successfully create, run and sustain your business, this is a wonderful option. Not only will you avoid accruing any debt, you will also be able to solely reap the rewards of your time and financial investment. Many entrepreneurs enjoy the full control that comes with using their own financial resources to fund their business. Keep in mind, with this method the control is yours but the personal risk is yours as well. Many startups do not make it to the fifth year of business. It is quite possible to lose your nestegg. 

Don’t go it alone

The search for funding can be extremely competitive and you will face rejection, many times. Don’t give up. The funds are out there, all you will need to do is figure out how to get them. Whether you decide to use your personal savings, secure a loan, exchange equity or utilize multiple methods of raising capital for your business, bringing in the right attorney for your startup is paramount. Sentient Law is your resource for all startup legal services. Matthew Rossetti is here to guide you though taking the proper steps and precautions that will ensure your business is built on a solid foundation and is prepared to withstand any internal shifts and external pressures.

  • Entity Planning, Selection, and Formation
  • Contracts and Agreements
  • Dynamic Equity Agreements
  • Deferred Compensation Plans (Employee Stock Ownership Plans, Stock Appreciation Rights, etc.)
  • Alternative Dispute Resolution (Arbitration and Mediation)
  • Labor and Employment
  • Slicing Pie Lawyer 
  • Executive Estate Planning
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