P1100451

  1. Not understanding the tax consequences.

It is important for you to understand the pros and cons related to the different types of business entities. If you do not already understand them, check out (include link to previous newsletter).

  1. Not Establishing a Formal Business Entity.

If your business is a sole proprietorship, you and your business are one and the same. That means that your personal assets are at risk if your business is sued or can’t pay its debts.

If you form a business entity such as a corporation, LLC, or limited liability partnership (LLP), your business becomes legally separate from you. If there is a judgment against your business, you may lose the money you have invested in it, but you won’t lose your house, car, or personal bank account. Not forming a business entity can be a big mistake if you have partners or have a solo business with significant financial obligations or legal exposure.

  1. Assuming Your Personal Assets Are Not At Risk.

One of the main reasons for forming a business entity is to protect your personal assets in the event that there’s a lawsuit or judgment against your business. A business entity does offer important safeguards, but it won’t protect you against everything.

A business entity won’t protect you if you are sued and accused of being negligent or intentionally doing something wrong. It won’t help you if your business suffers because of a fire or storm. That’s why it’s important to have business insurance in addition to forming a business entity.

  1. Not having an agreement between you and your business partners.

In the early days of a business, the owners tend to get along with each other and assume that, no matter what, they will be able to work things out. But it’s a mistake to think that things will always be that way. Businesses evolve, and so do their owners’ goals, visions, and relationships with one another. Eventually, there will be conflict and, without an agreement between the owners, that conflict can be very expensive and emotionally draining.

  • Sole Proprietorship:
    • The owners of these businesses report business income and expenses on their personal tax returns, and pay tax on any profit.
  • Corporations:
    • ‘C’ Corporation: A ‘C’ corporation pays corporate income tax on its profits. If a C corp. pays dividends to its owners (shareholders), they report those dividends on their personal tax returns, and pay taxes on them. Many small businesses end up paying more taxes under this “double taxation” system.
    • ‘S’ Corporation: You may be able to avoid double taxation by being taxed as an ‘S’ corporation. An S corp. does not have to pay corporate income tax. All of its profits “pass through” to the shareholders’ personal tax returns, and the shareholders pay personal income tax on them.
  • Limited Liability Company: A limited liability company is taxed the same as a sole proprietor (if there is one owner) or a partnership (if there are multiple owners). However, an LLC can choose to be taxed as a C corporation or an S corporation. This can sometimes allow LLC’s owners to minimize self-employment taxes, or to deduct expenses that would not otherwise be deductible.

Need help with your taxes? Do you already have your business entity established and need help understanding what expenses are considered tax write-offs? We can help. Ask us, and we can refer you to one of our recommended tax accountants. Some of the things they can help you with are:

  • Explaining deductible start up costs
  • Organizational deductions
  • How much you can deduct
  • What is considered the “start-up” phase
  • How to claim your deduction

1) Making your business name so obscure, customers won’t know what it is.

It is important to keep the name of your business simple and straightforward.  It is also important to be creative and unique with your new business name, so that it stands out.  However, this doesn’t mean that the name should be so obscure people won’t be able to tell what type of business you have – or know how to pronounce it.  As a rule of thumb, if your business name requires you to explain what it is (or means), it is too obscure.

2) “Creative Spelling.”

It can be challenging to find a business name that has an available domain name.  As a result, many businesses purposefully misspell the businesses name.  Although staying up night after night searching for available domain names can be daunting, try not to solve this problem by replacing the letter “K” with a “Q”.  Misspelling your business name will make it that much harder for customers to find your website down the road.

3) Being “Cliché.” 

You want to avoid choosing overly cliché words for your business name such as peak, summit, and apex. Clichés often go hand in hand with pop culture, and can easily date your company name. Make sure to avoid them and choose a name that is timeless.

4) Using a Name that is Already Being Used.

It seems obvious, but you want to make sure you choose a name that no one else is currently using in your area of business.  Do not get your heart so set on a name that you overlook how critical being different is.  You do not want to end up driving customers to someone else’s business.  Stand out and choose a name that is unique to your business.

5) Putting the “Secret Sauce” in Your Name.

You want to avoid putting your area of focus into your name.  An example of this is RadioShack.  As the market changed and MP3 players became available, RadioShack had difficulty rebranding and adapting because the name of the company became outdated. Give yourself the flexibility to grow and expand your company by choosing a name that isn’t too narrowly focused to a specific offering.

Step 1: Register the Business with the State.

The first thing you will need to do is to register your business with the state. You have many options, but most new ventures start out as either a corporation, limited liability company (LLC), partnership, or sole proprietorship (with a DBA) — and the decision is often based on a variety of factors we can help you understand.

Step 2:  Get a Tax ID Number.

A Tax Identification Number (TIN) or Federal Employer Identification Number (EIN) is a number that the IRS uses to track your company’s transactions. It is similar to your social security number, but for your business. You will need these ID numbers to open a business bank account.

Step 3: Research any Necessary Licenses or Permits, and Apply.

After you have registered your business with the state, you need to research and determine whether your business needs to apply for any licenses or permits you might need to operate the business in the state and city you intend to operate.

The types of permits you need will vary based on where you’re located and what type of business you’re starting. You can find out which licenses and permits will be necessary by using an online search tool, or by asking us!

  • Every city has a database with a list of addresses that fall within that municipality. Search online for your city’s name + its business license division to find the correct webpage.
  • You can also find the right information by way of the US Small Business Administration (SBA)’s website. Their page on permits offers information about where to get licensed, with details specific to your locale and your industry.

Step 4: Know your Business Code.

Different business types have different codes, and require specific application processes which vary based on the city your business resides in. Check your city’s business license site for information or check the SBA website for a list of necessary forms and useful information.

Step 5:  Get help from a Professional.

It may be a good idea to have a professional help you with the license and permit process, as the requirements vary by the city and the type of business you are operating.  The worst thing you can do is not do your homework, and begin operations without the required documents.

Carbon Law Group excels at helping small businesses identify and obtain the correct tax permits and licenses.  Need help?  Ask us how we can simplify the process and work with you to file and complete the right forms. Click here to schedule an appointment.

Naming your business can be both stressful and fun! Here are some tips to make sure your new company name both stands out in the crowd and is protected!

  1. Be creative.

Make sure your name is unique. Using a literal name to describe your goods or services may warrant a rejection.

2. Avoid hard-to-spell names.

You don’t want potential customers getting confused about how to find your business online. Keep it simple.

  1. Do competitive research.

Make sure to investigate what competitive companies in your field are named, and avoid any names that are too similar.

4. Think about the future.

Avoid picking names that include words or phrases that could go out of date.  In addition, you should also avoid picking a name that is too narrowly focused that may cause you problems down the road.

5. Conduct a thorough Internet search.

Once you have a name you like, the first thing you should do is conduct an internet search for your name. Most of the time, you will find that someone is already using it as a business name.  While that doesn’t necessarily mean you can’t use it, the conflicting result should caution you to investigate further.

  1. Search for and secure the domain name.

If it is possible, we recommend you try and secure the “.com” domain name for your business, rather than alternatives such as “.net”, “.org”, “.biz”, or other possible domain extensions. People tend to associate a “.com” domain with a more established business. Many times, you will find that someone already owns your desired “.com” name, but those domain owners may be willing to sell their domain for the right price.

Also, make sure to secure your desired business name on popular social media sites such as LinkedIn, Facebook, Twitter, and Instagram.

7. Conduct a trademark search.

Trademark infringement can be costly for your business.  Before you choose a name, conduct a search on USPTO.gov to see if a familiar name, or variations of it, are trademarked. Once you choose your name, look into whether you can get a trademark or service mark for the name. Need help?

8. Conduct a Secretary of State search.

Since you will likely want to structure your business as a limited liability entity, you should search the Secretary of State’s online records to make sure your name won’t be confusingly similar to a business name that’s already registered. If it is too similar to an existing name, the Secretary of State may not allow you to register it.

  1. Register your business name.

After you confirm your business name, you need to create a legal business entity in your state. By registering your new business, you’ll have the legal foundation to move on to the next steps. You have a number of choices when it comes to your business formation; some of the most popular are: corporation, LLC, partnership, or sole proprietorship (with a DBA). Each business structure has its own advantages and disadvantages depending on your specific circumstances.

 

  1. File with your state if you plan to incorporate.

If you intend to incorporate your business, you’ll need to contact your state filing office to check whether your intended business name has already been claimed and is in use. If you find a business operating under your proposed name, you may still be able to use it, provided your business and the existing business offer different goods or services, or are located in different regions. Need help? We offer timely, cost-effective company registration services, including helping you manage your new business entity. Click here to schedule an appointment to find out how we can help you.

❑ Business Name(s) and Purpose

❑ Decide which Partner is going to be responsible for different parts of business

❑ Are partners expected to work set hours?

❑ Does one partner plan on working more or less than the other partners?

❑ How much vacation is allowed?

❑ Will this be a full time role for each partner or are partners allowed to conduct other types of business?

❑ If so then what types of business are they allowed to conduct?

❑ List partner cash contributed to business:

❑ List partner property (both physical and intellectual) contributed:

❑ How can this property be used by the business?

❑ Will partners receive a salary? If so how much and when.

❑ If a partner is taking less salary will this be made up in the future?

❑ Do you plan on reinvesting profits back into the business?

❑ If so at what point do you plan on taking out profits?

❑ How and when will profits be divided up amongst the owners?

❑ How will losses be handled?

❑ Decide on ownership splits

❑ Does the partner have the ability to sign contracts?

❑ Can the partner make purchases without consulting the other partners?

❑ What happens if a partner dies or becomes disabled?

❑ What happens if a partner wants to leave the partnership and pursue other interests?

❑ Under what circumstances can a partner be forced to leave the business?

❑ If the partners do not agree how is the final say handled?

❑ Process for bringing on new partners?

❑ Selling the business?

In recent years, there has been a lot of talk about SAFEs and KISSes as alternatives to convertible notes in the start-up and technology community. But what is the difference?  We have put together a simplified comparator to help get you up to speed on the differences between them, so you can better understand your financing options.

 

What is a SAFE?

SAFE, created by Y-combination, stands for a “Simple Agreement for Future Equity”. In practice a SAFE enables a startup company and an investor to accomplish the same general goal as a convertible note, though a SAFE is not a debt instrument.

A SAFE is an agreement that can be used between a company and an investor. The investors, invest money in the company using a SAFE. In exchange for the money, with a SAFE, the investor receives the right to purchase stock in a future equity round (when one occurs) subject to certain parameters set in advance in the SAFE.

Founders love SAFEs, particularly at the pre-revenue stage due to the fact that they are simple and easy to understand, and there is no need for an initial valuation or share price, which is determined at a later date when the company presumably has more revenue

Unlike convertible notes, there is no debt with a SAFE. There is no maturity date either, which means investors have to wait an unspecified amount of time before they can get their hands on the equity they bought, if that ever happens.

Many in the start-up and investment community support SAFEs, particularly in seed rounds. However, many institutional investors and corporate partners are weary of SAFEs due to both their untested legal standing and the lack of security they offer.

 

What is a KISS?

As a response to the perception that SAFEs are biased towards the company vs. the investor, a hybrid has been introduced by 500 Startups called KISS (Keep it Simple Security).

This new hybrid integrates the SAFE with certain elements of a more investor-friendly convertible debt mechanism.

There are two types of KISSes, the first is a convertible debt structure.  This option accrues interest at a rate of 5% that can be paid back by the company in cash, and has a maturity date of 18-months. It provides an automatic conversion to stock if the company raises a qualifying price round ($1M). At the point of maturity, the holder may convert the underlying investment amount, plus accrued interest, into a newly created series of preferred stock of the company.

The second type is an equity financing structure. This is option does not accrue interest, but does have a maturity date of 18-months.  It is more of a middle ground between the SAFE and Convertible Debt. Just like the KISS convertible notes, they automatically convert into equity at the next round of equity financing, but only if the financing is for $1 million or more.

Have questions, or need help navigating your financing options?  Give us a call and set an appointment up, we are happy to help you further explain your options and guide you in the right direction.

❒ Get it in writing.

In business it is important to get all agreements in writing that clearly spells out each party’s rights and obligations upfront. This ensures there is no confusion or disagreement later on down the line.

❒ Keep it simple.

A contract does not need to be filled with legal jargon. Instead, create clear and concise sentences. Use numbers and headers to alert the reader what contents are in each section.

❒ Deal with the right person.

Make sure the person you negotiate with has the authority to bind the business and has a vested interest in making sure the business performs its obligations under the agreement.

❒ Identify each party correctly.

You need to include the correct legal names of the parties to the contract so it’s clear who is responsible for performing the obligations under the agreement.

❒ Spell out all of the details.

The body of the agreement should spell out the rights and obligations of each party in detail.

❒ Specify payment obligations.

Specify payment terms including when each payment will be due, on what terms, and what method of payment will be used.

❒ Agree on circumstances that terminate the contract.

It makes sense to set out the circumstances under which the parties can terminate the contract. For instance, if one party misses too many important deadlines, the other party should have the right to terminate the contract without being held legally responsible for breaching the contract.

❒ Agree on a way to resolve disputes.

Write into your agreement what you and the other party will do if something goes wrong. You can decide that you will handle your dispute through arbitration or mediation instead of going to court, which takes up a lot of time and money.

❒ Pick a state law to govern the contract.

If your business is located in more than one state, you will want to specify which state you will be dissolving the business, and ensure you are adhering to all of the laws that apply to that state.

❒ Have a Lawyer Assist You:

It is a good idea during to consult a lawyer when you have questions about contracts.  At Carbon Law Group we are here to assist you with any questions you may have and get your contracts on track.

Practical tips for avoiding breach of contracts

Typically, most business people do not want to be in a situation where they feel compelled to get out of a contract before the end of the contract term. However, sometimes there are situations that force parties to an agreement to terminate a contract. If it becomes necessary to do so, the following precautions should be taken:

 

Review the Contract

It seems obvious, but reading and understanding the contract is a must!

Review the contract, including any amendments, letters or emails. Pay particular attention to whether the contract contains any provisions that specify whether a penalty may be assessed for a breach or early termination, and whether early termination entitles the other party to recover damages.

 

Take the Direct Approach

Approach the other party to the agreement to see if a settlement can be negotiated. Being up front with the other party may relieve you from liability for bad faith or malicious dealing, and it may prevent having to settle the matter through legal means.

 

Discuss your Dilemma with Legal Counsel

Usually the language of a contract is difficult to understand or interpret. Proper legal counsel can help ensure you take the right course of action for dealing with next steps.

We see many bright eyed, intelligent entrepreneurs come through our office. Each of them is equipped with a new idea that will revolutionize an industry. However, many do not realize that the biggest factor that will dictate their success may not be how great the product is or how smart they are. It may come down to correctly timing the market.

Bill Gross speaks on this fascinating conclusion in this short, must-watch, Ted Talk.

 

Call Now Button
Skip to content