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ADVISING STARTUPS AND
ENTREPRENEURS
Sponsored by T. Joshua Wu
www.jwlawdc.com
ADVISING STARTUPS AND
ENTREPRENEURS
T. Joshua Wu
www.jwlawdc.com
2
OVERVIEW
• Starting a new business venture
● Choosing the business form
● Basic compliance and governance
● Financing a new business
• Dealing with common tax issues
• Hiring and compensating employees
• Identifying tax issues during an investment,
acquisition, merger, or wind down
• Unique ethical issues for representing startups
and entrepreneurs
3
POLL QUESTION #1
• How often to you advise clients with respect to
starting a new business?
4
BASIC ENTITY CHART
Sole
Proprietor
C Corp S Corp Partnership LLC
Ownership Individuals 1+
shareholders
Limit of 100
shareholders
2+ partners 1+ members
(2+ for
partnership
tax)
Control Proprietor Board of
Directors
Board of
Directors
Per
partnership
agreement
Per LLC
agreement
Allocation of
Income
100% to
proprietor
100% to C
Corp entity
Pro-rata based
on shares
Agreement
controls if has
economic
reality
Depends on
tax election
Liability No limit Limited to
capital
invested
Limited to
capital
invested
No limit for
GPs. Limited
for LPs.
Limited to
capital
investment
Ease of
Funding
Difficult.
Based on
owner’s credit.
Easy. Can sell
interests.
Easy. Can sell
interests.
Moderate.
Can sell
partnership
interests.
Moderate.
Can sell
membership
interests.
5
BASIC ENTITY CHART
Sole
Proprietor
C Corp S Corp Partnership LLC
Losses Normal
individual
rules
At corporate
level
Passed to
shareholders
Passed to
partners
Depends on
tax election
SE Tax Yes No, wages. No, wages. Yes if GP Depends on
tax election
Double tax No Yes No No Depends on
tax election
Income
Character
Depends on
income
Dividend to
shareholder
Passed to
shareholders
Passed to
shareholders
Depends on
tax election
Admin.
Obligations
Low High Moderate Moderate Moderate
Tax
Compliance
Burden
Low Moderate High High Depends on
tax election
6
THE SOLE PROPRIETORSHIP
• Most basic business form
• Owned and operated by one individual
• Control rests with owner
• No legal entity required
• Not recognized as a taxable entity
• May need state and local licenses and permits
• Self-employment taxes
• No limited liability for owner
• Difficult to raise funding
7
THE PARTNERSHIP
• Default when two or more persons go into
business for profit, as co-owners, sharing profits
and losses
• Written agreement normally not required, but
highly recommended
• Third parties may generally rely on authority of
any partner to bind partnership
• General partners have no limited liability
• Partnership must file annual return
8
C CORPORATION
• Created under state law
• Controlled by stockholders, board of directors,
and officers
• No liability for shareholders unless “pierce the
corporate veil” (e.g., thin cap or alter ago)
• Double tax
● Corporate tax
● Dividend tax
• But, no “phantom income”
• More conducive to equity funding
9
S CORPORATION
• Variation of C Corporation
● Still must observe corporate formalities
• Ownership
● No more than 100 shareholders
● All must be U.S. citizens or permanent residents
(with small exception for certain trusts)
● All shareholders must have same class of stock (can
be voting and non-voting)
• Potential employment tax savings
10
THE LIMITED LIABILITY COMPANY
• All states have LLC laws
● Must file with Secretary of State and pay fees
● Should adopt operating agreement
• Owned by members who may run business or
appoint managers.
• Ownership
● Individuals or other entities
• Fewer corporate formalities than C Corporation
• Flexible profit/loss allocations
• Profits taxed once
• Self-employment taxes 11
GOVERNANCE AND CONTROL ISSUES
• Control● Voting
● Share classes
• Transferability of interests● Restricted shares
● Re-purchase rights
• Anti-Dilution protections
• Tag Along or Drag Along rights
• Confidentiality agreements
• Noncompete
• Assignment of Invention
• Governing law 12
FINANCING A NEW BUSINESS
• Debt or Equity
• Founder’s contributions
• Friends and family offerings
• Preferred Equity
● Voting or nonvoting
● Dividend participation
● Liquidation preference
• Convertible Securities
● Conversion ratio
• Equity Crowdfunding
13
POLL QUESTION #2
• What is the most flexible legal business entity?
14
HIRING AND COMPENSATING EMPLOYEES
• Stock (equity) as compensation ● Ordinary income
● Deductions
• Stock in C corporations
• Stock in S corporations
• Equity in partnerships
• Section 83(b) election
• Section 409A
• Executive compensation● Bonuses
● Deferred compensation
● Stock options
15
HIRING AND COMPENSATING EMPLOYEES
• Reasonable compensation (C Corps & S Corps)
● If compensation unreasonable might be reclassified
as a dividend
● IRS scrutinizes owner compensation in small
businesses
● In S Corp context IRS may try to recharacterize
distributions as compensation
• Employee versus Independent Contractor
● Right to control and direct as to result and means
● Statutory employees and statutory non-employees
● IRS 20-factor test
16
DEALING WITH COMMON TAX ISSUES
• Recordkeeping
• Start-up expenditures
• Expanding existing business
• Travel and Entertainment Expenses
• Car and Truck Expenses
• Advertising Expenses
17
• Time Tracking and Scheduling
• Payroll time management, Billing
and Invoicing, Labor Visibility
• Simple clock in/out functionality
• Full job tracking, dept., location,
service item, etc.
• GPS capabilities
TSheets: Modern Time Tracking
TAX ISSUES IN TRANSACTIONS
• Due Diligence
• Stock Acquisitions
• Asset Acquisitions
• Deductible Expenses
• Winding Down a Business
19
DUE DILIGENCE
• Legal entity chart ● Identify jurisdiction of tax residency for all entities
• Review previously-filed returns (state and
federal)● Filed timely?
● Items accurately reported?
● Elections?
● Disclosures?
● Information reporting?
• Written analysis/documentation of positions
and completed transactions
• Information pertaining to audits or agreements
with various tax authorities
• Compensation agreements and qualified plans 20
STOCK ACQUISITION
• Target corporation● Shareholders have capital gain or loss on the sale
(long-term if held for more than 1 year)
● Not subject to tax
• Acquiring corporation ● Obtain a cost basis in the stock
● Tax basis in Target’s assets will remain unchanged
(unfavorable if value in excess of their tax basis)
• 338(h)(10) election ● T is either S corporation or has 80% U.S. corporate
shareholders
● Parties elect to treat stock acquisition as an asset
sale for tax purposes
21
ASSET ACQUISITION
• Target corporation● Recognizes gain or loss on the sale of its assets at
the corporate tax rate
● If it liquidates, shareholders recognize gain
• Acquiring corporation ● Tax basis in Target’s assets equal to the purchase
price including assumed liabilities
● Step-up in basis allows Acquirer to obtain greater
depreciation and amortization deductions
• Report on Form 8594
22
DEDUCTIBLE AND CAPITALIZED EXPENSES
• Cost related to an acquisition or restructuring
must be capitalized if the costs “facilitated” the
transaction
• “Bright-line date”: earlier of● date parties execute letter of intent, exclusivity
agreement, or similar written communication
(other than a confidentiality agreement) ; or
● date on which the material terms of the
transaction are authorized or approved by the
taxpayer’s board of directors
• Capitalized costs
• Success-based transaction fees
• Start-up expenditures23
WINDING DOWN A BUSINESS
• Dissolving the company under state law
• S corporation
●Recognize gain/loss at FMV (exceptions)
•C corporation
●Two separate levels of tax
●Liquidation of subsidiaries
• Partnerships/LLCs
• Employment taxes
24
POLL QUESTION #3
• When a business closes any unpaid employment
taxes that the business cannot pay are
discharged (True or False)?
25
UNIQUE ETHICAL ISSUES
• Fees paid as equity
● Circular 230, Section 10.27
• Practitioner may not charge an unconscionable fee.
• Practitioner may not charge a contingent fee for services in
connection with any matter before the IRS.
• Relationships with funding sources
• Circular 230, Section 10.29
● A conflict of interest exists if there is a significant
risk that the representation of a client will be
materially limited by the practitioner’s personal
interests.
26
UNIQUE ETHICAL ISSUES
• Tax/legal advice versus business advice
● IRC 7525 – With respect to “tax advice,” the same
common law protections of the attorney-client
privilege apply to taxpayer and federally authorized
tax practitioner.
• Who is the client?
● Entity versus founder
● Founder conflicts
27
POLL QUESTION #4
• What was the most important thing you learned
on today’s webinar?
28
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Poll Question #5
•Would you like to become a TSheetsPRO
•Yes, thank you
•No, thank you
•I need more information
•I already am a TSheetsPRO
31
QUESTIONS?
32
The information contained in this presentation provides background information about certain legal issues and
should not be regarded as rendering legal advice to any person or entity. As such, the information is not
privileged and does not create an attorney-client relationship with JW Law PLLC, or any of the firm’s lawyers.
This presentation does not constitute an offer to represent you, and you should not act, or refrain from acting,
based upon any information so provided. In addition, the information contained in this presentation is not specific
to any particular case or situation and may not reflect the most current legal developments, verdicts, or
settlements. In the event that you have questions about and are seeking legal advice concerning your particular
situation in light of the matters discussed in the presentation, please contact us so that we can take the necessary
steps to form an attorney-client relationship if that is warranted.
Copyright
© 2017 JW Law PLLC
All Rights Reserved.
SPEAKERS
33
T. Joshua Wu
(571) 294-3850
@jwlawdc