Sigman Law Office, P.C.

1. Sigman Law Office, P.C. Best Business Practices

2. Disclaimer • This document is intended to be used only to provide our clients with background information on this subject. It is not legal advice to you from us. • Only after a full and complete discussion between all parties involved and us will we make specific recommendations for individual clients. • We are not tax professionals and therefore we cannot give you tax advice on the best type of entity for your business. Consult with a CPA before you make your decision.

3. Topics • Business Entities • Corporate Maintenance • Contract Provisions • Independent Contractor v. Employee

4. Why Should I Create an Entity for my Business? • The most common reason for creating a corporation or LLC is Limited Liability. • If you are not operating your business under a corporation or LLC, you risk a total loss of all your personal assets for any uninsured business debt. • An LLC or corporation is not an absolute protection.

5. Why Should I Create an Entity for my Business? • There are four major ways to organize your business: • Corporation • Limited Liability Company • Partnership (Limited/General) • Sole Proprietorship (just a fancy name)

6. The Corporation • A corporation is a legal entity that exists separately from its owners. • A corporation’s ownership interest lies in shares of stock. • Shareholders = Owners • Board of Directors = Elected by Shareolders to Run Business • It is important to note that a shareholder may serve on the board of directors and as an officer. In fact, in most states one person is enough to form a corporation.

7. Corporations – C Corp. • Default corporate form • No pass-through taxation • Primary Characteristics: • Limited Liability Protection • Extensive Formalities • Unlimited number of owners/classes of owners • Any person or entity may own stock in a C Corporation

8. Corporations – S Corp. • Provides “Pass-Through Taxation” • SH’s of a corporation can pass the profits and losses of a corporation through to their personal tax returns • Ownership requirements: • US Citizens • No more than 100 SH’s • Shares cannot be held by other entities • Restrictions on Subsidiaries

9. The Limited Liability Company • The LLC is not a partnership or a corporation. It is a distinct business entity that offers an alternative to partnerships and corporations by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation. • The LLC is owned by its members. The members can serve all of the roles in the LLC. They are analogous to partners in a partnership or shareholders in a corporation, depending on the how the LLC is managed. • The members can also choose to select managers to run the LLC’s affairs. A member will more closely resemble shareholders if the LLC utilizes a manager or managers because then the members will not participate in management.

10. LLC’s The Good News: • FLEXIBILITY!! • Can choose how you want to be taxed (pass-through as of right) • Can choose management and equity structure • Opt out of many default laws via the operating agreement

11. LLC’s The Bad News: • No perpetual existence as of right (Makes LLC’s good for holding RE) • Some states LLC’s expire after a certain number of years • Membership interests less easily transferrable (Corp better for companies trying to raise capital through investors) • Self-Employment Tax: member can’t be an employee of the LLC (Can with a corporation).

12. Corporation A corporation has limited liability based on the separation of ownership and management. Shareholders, directors and officers are generally not liable for the debts and obligations of the corporation. A creditor or shareholder may “pierce the corporate veil” and attack the directors/officers personally for the debts and obligations of the corporation if the corporate formalities are not followed LLC An LLC has statutorily prescribed limited liability A creditor or shareholder may also “pierce the corporate veil” although the law is less clear in this area. M.G.L. c156D does not statutorily prescribe ways to get to the managers personally. Some jurisdictions and courts have applied corporate law to LLC’s by analogy. The LLC owner's liability is generally limited to the amount of money which the person has invested in the LLC Limited Liability

13. Taxation • Corporation • Profits of a corporation are taxed twice when the profits are distributed to shareholders as dividends. • They are taxed first as income to the corporation, then as income to the shareholder. • All reasonable business expenses such as salaries are deductions against corporate income and can minimize the double tax • However, a corporation may make an S Corporation election with the IRS which allows the shareholders to pass the corporate earnings through to their personal tax returns. Please refer to your CPA regarding the implications of making an S Corp. election. • While the S corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners

14. Taxation • LLC • By definition, an LLC possesses the advantage of pass-through taxation. You can obtain this tax advantage without making an additional election. • A single-owner LLC is treated the same as a sole proprietorship. • Multiple owner LLC’s are treated the same as a partnership. • An LLC may elect to forego the pass-through taxation. Please consult your CPA regarding the implications of such an election

15. Corporation Corporations must keep extensive and detailed financial and operating records These are outlined in M.G.L. c.156D Annual Reports LLC The records requirements of an LLC are far less extensive than that of a corporation. Annual Reports Record Keeping Requirements

16. Contract Provisions • A contract is an agreement between two parties supported by consideration • Consideration: something of value exchanged between two parties forming the basis of a contract. • Email? • Oral Contracts can exist in certain situations! • Not real estate or sale of goods over $500.00

17. Common Traps • Liquidated Damages Clause • Warranties • Can I get out of the contract? • Choice of Law • Arbitration

18. Independent Contractors • MGL c. 149 s. 148B • Three Prong Test: • Freedom From Control • Service Outside the Course of the Employer’s Business • Independent Trade, Occupation, Profession or Business

19. Why the IC Preferable? • No payroll taxes/withholdings • No need for worker’s compensation • An “employer” is not liable for the acts of an independent contractor

20. Freedom From Control • Free from control and direction in contract and in fact • It isn’t enough to have a contract that states that someone is an independent contractor. • Worker’s actual duties should be carried out with minimal direction from employer

21. Outside of Ordinary Course • Do the services “form a regular and continuing part of the employer’s business”? • Examples: • Laywer • CPA • Bookkeeper

22. Independent Trade or Business • Customarily engaged in an independent trade or business • Is the worker able to perform the same service for another company?

23. Implications of Misclassification • Violations of several MA statutes including: • Wage & Hour Laws • Worker’s comp laws • Overtime • Civil & Criminal Penalties • Coverall Case