The Wrighte Law

The unseen value for start-ups and small business owners

Posted on January 13, 2015January 17, 2015 by André Wrighte

Start-ups and small businesses could benefit from the advice of legal counsel earlier than later. Many start-ups and small businesses scoff at the idea of engaging the services of a qualified attorney when launching or operating their businesses. Often, start-up entrepreneurs and small business owners are concerned with the bottom line and may not wish to stray too far off their budgets. These are legitimate concerns but they too must be balanced by what an experienced legal advisor could bring to the table. Unfortunately, many choose to avoid attorneys and come to believe that they have avoided all the potholes on the journey. Subsequently, they discover that may be not all potholes were avoided and then realize that they now have more pressing matters at hand that will require the services of an attorney.

For instance, with regards to a start-up business, the correct entity formation can be crucial. It is of paramount concern that business owners understand some of the ideas behind the formation of their vehicle for future success. For instance, the type of documents required to effectuate a formation and operational documents are important concerns for any business that hopes to be successful. Additionally, the number of individuals involved can dictate the taxation and the choice of the entity.

Now, I will only focus on some of the basics concerning some of the more popular business entities. A business may take one of several formations such as: (a) sole proprietorships; (b) [general] partnerships; (c) limited liability companies, or (d) corporations. The ones that I will not address here are (i) limited partnerships, (ii) limited liability partnerships (“LLP”), (iii) limited liability limited partnerships -this is not a typographical error- (“LLLP”), (iv) joint ventures (which is not a per se business entity but a business or commercial arrangement between two or more parties for the purpose of accomplishing a specific goal), and (v) s-corporations (not a true entity formation but is an election that is available to corporations under the Internal Revenue Code). I will reserve these for another discussion.

Sole Proprietorships

A sole proprietorship is an unincorporated business that is owned by a single person. No legal documents are required to start one. It is important to note that sole proprietorships (and general partnerships) unlike other business entities, do not afford their owners limited liability protection. In other words, the business owner is not shielded from the liabilities of the business and may be personally responsible for its debts and liabilities. This last aspect is enough to make this formation less desirable for many start-ups. From a tax perspective, a sole proprietor is responsible paying taxes on the income earned from the sole proprietorship

General Partnerships

A general partnership (“GP”) is an association of two or more people (which in this instance could also mean other legal entities) who have joined together and agreed to engage in a common undertaking and a share of the profits. While the creation of a general partnership can be done by a partnership agreement, no writing is required and no filings are required by the state. However, where sole proprietorships and partnerships elect to use trade names or “doing business as” names, they may be required to file the appropriate documents with the applicable local jurisdiction.

Each partner pays taxes on his or her own share of income received from the partnership. Losses may not be shared equally but may be allocated between the partners, as agreed by them, not in correlation with respect to their respective shares of the profits.

Partnership taxation is a factor to take into consideration when contemplating formation of a general partnership. Whether or not the parties agree on reducing their agreement to writing, it is important to understand the tax consequences of this entity formation. Additionally, each partner could be liable for the actions of other partners that are taken in the name of the partnership. Where individuals are concerned, this may not be the most advantageous vehicle for their business enterprise if liability issues are an important concern.

Corporations

There is almost not a single person alive that is not familiar with corporations in one form or another. The corporation is a creature of statute and comes into existence when promoters file the requisite articles of incorporation with the state. Indeed, corporations are popular and widely used throughout the country and the world because of the limited liability protection afforded to its shareholders.

Under the law, corporations are “legal” persons. Corporations are infamously known for many things and one of those is the dreaded “double-taxation” concept. Corporations are owned by persons known as “shareholder” or stockholders.” One of the rights and privileges of being a shareholder is the receipt of dividends when paid by the corporation. Corporations are required to pay taxes on income earned and some of that income, after taxes, may be paid to shareholders, who in turn are required to pay taxes on those dividends. This is the double-taxation concept. This concept is an important factor when contemplating the formation of a corporation and can play a decisive factor.

Limited Liability Companies

A limited liability company, commonly abbreviated as “LLC”, is also a creature of statute and combines some of the features of a partnership and a corporation. LLC organizers are required to file the requisite legal documents with the state in order to bring the LLC into legal existence. Importantly, an LLC does provide limited liability protection to the members that constitute it. It also could provide some tax advantages but not as many as corporations.

The Internal Revenue Service (“IRS”) treats LLCs as tax pass-through entity. That is, unlike a corporation, an LLC is not a taxable entity and the tax burden falls through to its members. Additionally, single owner LLCs are disregarded and the sole member is taxed as if he or she was operating a sole proprietorship. Not to worry, the limited liability protection is still intact. Where an LLC has more than one member they may elect to be taxed as a corporation by filing with the IRS, Form 8832. If no election is made them the members of the LLC will be taxed as if they were conducting a general partnership and yes, the limited liability component is untarnished.

Conclusion

The distinctions discussed above regarding the various business entities may seem common place and easily understood. However, start-ups and small business owners rarely appreciate the intricacies of each one and how to choose the right one as a vehicle for their businesses. With the exception of sole proprietorships, many would-be business owners understand the other entities to provide them with the most important thing that they seek: limited liability protection. Limited liability protection for any business should be of primary concern but selecting the entity that is most advantageous to a successful business may appear simple but there is more than meets the eye.

Additionally, when contemplating business entities one should also take into consideration the tax implications of such an entity. By tax, I do not only mean income tax liability but payroll tax liability, as well. Each of the entities mentioned above are indeed affected in one way or another by federal and tax laws. While it may be simple for an individual to complete certain forms where necessary regarding his or her choice of entity formation, there is a lot more that should be considered before settling on a business entity choice.

About Andre Wrighte

Andre Wrighte is solo practitioner who focuses his practice on helping his clients to find solutions to problems by advising, counseling and representing them in matters concerning business planning and formation, corporate-related issues, commercial and real estate transactions. André also represent clients in commercial litigation proceedings, real estate transactions and estate planning/probate practice. For more information visit http://www.wrightelaw.com, call (773) 273-9815 or awrighte@wrightelaw.com. Find his blog at The Wrighte Law here.

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The author disclaims all liability and recommends that the reader consult with a competent attorney. Do NOT rely on this article or posting. This article or posting does NOT establish an attorney-client relationship nor does it constitute legal advice.

Wills and Trust: Estate planning tools for everyone

Posted on January 12, 2015January 17, 2015 by André Wrighte

I am frequently asked by individuals “should I have a will or a trust?” There are many who would prefer not to be bothered by the complexities of property and debts they leave behind, but there are several individuals that do care. A lifetime may have been spent acquiring and accumulating a variety of assets that an individual would very much like to pass down to his or her children and or grandchildren.

In times past, it was not uncommon for an elderly person to gather his or her family and state his or her intentions and wishes concerning the distribution of their assets so that they find their way to the rightful beneficiaries, heirs and legatees at the appointed time. If such a family strictly abided by the decedent’s last wishes it is possible all would go according to plan. Unfortunately, life is not simple and neither is the process of passing property down to loved ones.

In today’s modern society, we have the benefit of several estate planning tools. By far, wills are the most popular while trusts are not too far behind. Additionally, insurance policies and some astute business planning can be, under the right circumstances, used as effective estate planning tools.

For most individuals their estate planning needs can be satisfied by a will, a trust or a combination of the two.

While a will and or a trust can effectively assist one in meeting his or her estate planning objectives both devices are not without their respective pros and cons. At a later time, I plan on returning to this topic with more information. However, while there are no absolutes, there may be an answer to the question posed at the beginning of this article, and that is an resounding, “yes!” You should have either a will, trust or both.”

About Andre Wrighte

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Employees should resist the urge to use work e-mail for personal use

Posted on January 5, 2015January 17, 2015 by André Wrighte

Many people are employed by companies that provide them with an electronic mail (“e-mail”) account for work. Daily, many employees use their work e-mail accounts to communicate with family members, friends, physicians, dentists, florists, plumbers, etc., for what are frequently deemed non-work related and personal matters. E-mail communications sent intra-company and those that are sent from an employee’s workstation to another company or from another company to an employee may be subjected to monitoring by an employer. This includes web-based and private email accounts such as Gmail and Yahoo as well as instant messages.

Employees’ use of work e-mail accounts for personal use coincides with the simple fact that it is more convenient than using their own electronic devices. Most employers, if not all, may allow employees reasonable use of their e-mail accounts for personal matters. Even if a company does not have a policy regarding e-mail usage, it is wise to expect that a company may have the right to monitor its employees’ e-mail communications. As long as these personal uses are not abused, most employers would be hard-pressed to find issue with personal uses of employees’ work e-mail accounts. While your average employee may have a reasonable expectation of privacy with regards to the transmission and receipt of such personal e-mails over an employer’s network, an employer does own the system over which such email communication travels and has the right to monitor such communications.[1] Courts have found that employers are generally free to read employees’ email messages, as long as there’s a valid business purpose for doing so. This realization becomes very important when an employer finds itself in litigation and may need to turnover its electronic stored information a/k/a ESI to the other side.[2] Sometimes litigation does not have to be involved for personal emails to be exposed to the light of day revealing major embarrassment to the company and the particular employee(s)-author(s) of such e-mail communications.[3]

Recently, multi-national company Sony’s [4] e-mail system was the victim of an extensive and carefully planned intrusion.[5] It would appear that the Democratic People’s Republic of Korea, a/k/a North Korea, sanctioned a massive intrusion into Sony’s computer system that “tapped into a trove of hypersensitive, internal information.”[6] This intrusion was a deliberate and vehement response to Seth Rogen and Evan Goldberg’s North Korean satire The Interview. Since the intrusion into Sony’s e-mail system, a plethora of highly sensitive and embarrassing email communications between Sony executive Amy Pascal and producer Scott Rudin have seen the light of day.[7]

This incident emphatically underscores a point I frequently convey to clients, friends and family members: do not use your work e-mail for personal uses. Of course, this is quite a tall order since one may be required to communicate with family and friends concerning urgent matters while he or she is at work. Nonetheless, if one ignores the impact of the Sony story and concludes that his or her organization is not a potential target for North Korea, please pause and guess again. Your individual employer may lack the credentials of a Sony and may not be on North Korea’s radar but it is not immune from lawsuits. Armies of contract attorneys hired over the years to review ESI subject to electronic discovery for large and complex litigation could tell you stories of embarrassing details regarding the lives of ordinary people who would cringe that their private comments and exchanges were being laid bare to complete strangers. The author has experienced this firsthand by reviewing several hundred pages of sensitive and confidential documents regarding stock and trading accounts, gambling, love affairs, bored housewives, unwanted pregnancies, soft porn pictures, medical issues, family matters and entanglements, off colored jokes and more. Did the communicants understand and realize that one day their e-mail communications would be a source of soap opera-esque entertainment for hundreds of strangers? Most likely not and those same people would be embarrassed if they only knew the reactions that these communications elicited.

In light of the recent Sony story, I cannot state with any more vigor that employees should, where possible, refrain from using their work e-mail for personal matters. Also, remember even if an employee uses his or her personal email account from his or her workstation it too could be subjected to monitoring despite the employee believing that he or she has a right to privacy. While you believe it may not be a big deal what you write in your e-mails, it very well could provide enough personal information about you to detect a lifestyle pattern and make your life quite uncomfortable. Perhaps, this could take the form of sensational journalism in the tabloids but it is more likely to take the stage in electronic discovery and provide much amusement to several hundred strangers during litigation without your knowledge or awareness.

[1] See Smyth v. Pillsbury, 914 F.Supp. 97 (1996).

[2] ESI or electronically stored information, refers to all information stored in computers and storage devices. This includes any data including ESI found in e-mail, voicemail, instant and text messages, databases, metadata, digital images and any other type of file. See http://www.webopedia.com/TERM/E/ESI.html.

[3] http://abovethelaw.com/2014/12/the-sony-hack-teaches-what-document-reviewers-knew-all-along/.

[4] The actual victim of the intrusion is Sony Pictures Entertainment, the American entertainment subsidiary of Japanese multinational technology and media conglomerate Sony.

[5] http://www.vulture.com/2014/12/everything-sony-leaks-scandal.html

[6] Id.

[7] Mike Fleming, Jr., Scott Rudin Apologizes After Leak Of Sony’s Hacked Racially Insensitive E-Mails On Barack Obama, Deadline, December 11, 2014; Variety Staff, Sony’s Amy Pascal Apologizes for Obama Emails, Variety, December 11, 2014; Christopher Rosen, Scott Rudin & Amy Pascal Apologize After Racially Insensitive Emails About Obama Leak, The Huffington Post, December 11, 2014.

About Andre Wrighte

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