Is the business entity I have the correct one for my business? Sole Proprietor, LLC, or Corporation? Can an established business change entities?
A strong foundation is essential to surviving change and applies when working through a pandemic. We’ll cover the basics on entity types and build your confidence in your business formation. Pivots and new service/goods offerings are covered; as well as common risks and adding and removing subtracting partners.
Business Entity Formation and Updating.
Good afternoon and welcome.
My name is Kiki Levy.
And I am the administrative specialist at Temple Small Business Development Center here at Temple SBDC.
We help businesses start and grow.
We provide a series of low to no cost webinars as well as no cost one on one counseling service. If you’re interested in getting connected with one of our consultants, I will put our email address in the chat here shortly and then that way we can get you set up to speak with someone.
Today you have joined us for our legal considerations business entities webinar, just to let everyone know materials will be sent to you all three to five business days after this webinar.
Also, all attendees have been muted. We encourage everyone to post any questions that you may have in the Q&A.
Please refrain from posting questions in the chat if you would like to make comments and things of that nature, feel free to post that information in the chat, but questions we are asking that you post in the Q&A at this time I will turn the floor over to Miss Janelle Peyton. Janelle, we welcome you today and we look forward to all the information you are going to share with us today.
Well, thank you so much for having me first of all, and I’m going to go ahead and start sharing my screen if I can do that.
Let me just get this going.
Alright, can you guys see my screen?
Okay, so this is just a little bit about me and since we’re talking about foundations today I figured I’d just quickly point out to you a little bit about my foundations. So the the place I’m coming from when I’m talking today and to my clients anytime is actually I have a four pronged foundation to me in my business.
And it comes from first starting in the practice of law in estate and succession planning.
So I learned how to look at the future for my clients and figure out where they are and where they need to be.
From there I moved on to business law and learned a lot about, you know business law in general, but really learned what kind of documents need to be in place.
What are the foundations?
What are the protections that are necessary for small and medium sized businesses?
And then I went on to intellectual property. And there it all came together and I understood how the brand of the business and the proprietary methods and the secrets of the business really play into the documents of the business and then also play into the succession planning and what is going to happen to the business in the future, whether it’s going to be sold or passed on to children.
So that’s three.
The fourth prong or foundation to where I’m coming from is that I was a business owner first. So I owned a construction company and millwork company actually, before I went out and opened my law firm so where I come from is from a place of knowing where you stood.
I know what it’s like to start a company.
I know what it’s like to grow a company and I know what it’s like to deal with the common things that come up when you’re running a small medium sized business.
So just so you know that’s where I’m coming from when we talk today.
Here we go today we’re talking about business entities and this is called the foundation to business success, and it’s really focused on what happened.
What just happened?
We were just in a pandemic.
You know, we’re sort of working our way out of it right now, but where you know what happened?
Where are we?
Are we starting new businesses?
Are we starting offshoots of current businesses?
Have we pivoted in the business and moved things around?
So we’re going to talk with the three main pieces of business entities and the foundation of your business.
We’re going to talk about entity types.
We’re going to talk about your federal employee identification number, and we’re going to talk about governing documents.
So let’s get into it.
First is entity types and I have a little test your knowledge here for you guys and I know I can’t really this — there’s no chat or there’s no ability to really have a conversation around this.
But think to yourself, a sole proprietorship gives its owners protection from personal liability.
Is that true?
Is that false?
Give you guys a second to think about it here.
So the answer here is false, and I guess that a lot of you guys knew this.
But what I want to talk about is really when you’re thinking about forming a business, or if you’re considering whether or not you’re in the right type of entity for your business.
You first want to think about separating out yourself from your business. And when I talk to clients, I’m a lot of times I talk about buckets, but what we’re really talking about is you’re separating your assets so that you can develop some liability protection.
And the reason we want this is something goes wrong in your business, God forbid you know something goes wrong and you get sued, right?
You do not want that suit to touch your house, your car, your 401K your husband or wife’s car.
Any of that.
You want it so you want a line drawn in the sand and you want to say look, you don’t want anything bad to happen in your business, you can still live your life.
You can still buy your groceries, you’re fine.
On the other hand, if something happens in your personal life, God forbid you get in a car accident or something and you get sued. You don’t want that to go into your business.
So you have your business to lean on in that situation, if something happens there.
So what we need to do is we need to make sure that you have a separate entity that’s separate from yourself, and that’s a lot of what we’re talking about today is how do we establish that?
So the first thing to know is that a sole proprietorship does not give you protection from liability, a sole proprietorship means that you and your business are in the same bucket.
You are the same thing.
You use the same Social Security number.
For all legal purposes you are the same
So this in my mind this is a hobby.
This is not a business.
As soon as your hobby starts to make you some money or starts to put you in a situation where if something goes wrong, your personal assets would be at risk, that’s when you need to separate it out and you need to form an entity.
So what does that mean really?
We’re forming an entity with this state.
So this is a state level thing we’re talking about right now.
And what we need to do is we need to go to your state and it depends on a couple of different things what state you’re even going to file your entity in.
Part of it of course has to do with where you live and where your business operates, but part of that question it could also be are you going to have investors, investors really like entities formed in Delaware because they have very good laws that protect the investors.
So one thing we need to think about is where.
Where is it best?
And the great thing about what I do is that I can help you with that, even though I’m based in Pennsylvania and I am licensed in Pennsylvania, New Jersey.
I can help you with any state in the nation as long as I’m comfortable with the laws in that state.
So we can really take a look at this and see what’s going to work best for you.
I know I have a couple clients that just moved to Florida.
So now we’re figuring that out for them.
So this is a state level filing that we’re looking at making for you.
So we’re thinking about what state we’re filing it in. And then, and I’m going to speak generally to this because state laws are a little bit different, so there are some different options for different types of entities, but pretty much every state has a limited liability company option, and that’s where a lot of people go automatically.
They’re easy to file.
They’re easy to keep track of, and the great thing about them is that you can actually file your taxes in a couple of different ways but not have to change your entity type so.
If you’re an LLC, you can choose to file as an individual person and it just kind of passes through on your taxes.
You could file as an S Corp.
You can file as a partnership, so you have a lot of different options.
So that’s that’s a good start for many business startups.
The other great thing is that well, good and bad, there’s not a lot in the laws about limited liability companies, so the positive thing there is that you really get to decide what it’s going to run, how it’s going to — who is going to be the members.
What does it mean to be a member?
What are the different duties?
You get to figure all of that out.
On the negative side though, if you don’t figure that out ahead of time, there’s no. laws to fall back on.
So that means that if you didn’t figure it out ahead of time and now you’re faced with the problem, unfortunately you’re probably going to end up in court and a judge is going to decide for you so that can get very expensive, so you don’t want to end up there.
Corporations, on the other hand, are much more structure than an LLC, so if you think about a corporation, usually think of a bigger entity, but not necessarily t doesn’t have to be, and even around here, Delaware has a close corporation which is a corporation that is closely held, so it’s only so many members are so many stockholders are allowed to be had. So a lot of family businesses will use a close corporation and even some businesses that no, they’re not going to have a lot of owners or investors will also do something like that as well.
So there’s options.
Corporation, you have to have bylaws.
You have to have an annual meeting.
You have shareholders.
You have stocks.
There’s a lot more that goes on with a corporation.
But the benefit there is that it’s very hard to mix a corporation with your personal assets.
There’s also some great tax benefits depending upon what kind of company you are and what level you are with the corporation.
And then from the point of view of more established businesses, you may have formed as an LLC, or you may have already formed as a corporation.
But there are times in the life cycle of a business where you want to change the entity type that you are.
Or like I mentioned, I have a couple clients that just moved to Florida.
They want to move the state in which they’re filing because they want to file taxes in that state, not in Pennsylvania, New Jersey, wherever they moved from.
So as an established business, it’s also good to take a look at what is your entity type and is it still working for you.
It’s very common to start out as an LLC, but then realize, oh, I would be better served if I was a corporation.
I would pay less in taxes if I was a corporation or I want to start bringing investors on and investors don’t want to be a member of my LLC, they want to own stock in a corporation.
So there is a period of time in most businesses where they do sit down and really have a conversation about you know we formed as this, but maybe we want to become this or maybe this will give us some benefits, either in running the business itself or from a tax perspective.
And on that note, I always tell my clients if you’re starting up, or if you’re having this conversation, it is a conversation with you the business owner with me as the attorney and then with your CPA or accountant because the other side of this is the tax side and I don’t know your tax situation.
I mean, I don’t know any of your tax situations today, but I generally won’t know my client’s tax situation, your account and your CPA knows that, and then the answer is going to be different for every person in every person’s situation.
So one part of this is what’s going to work best for you from a liability protection point of view, but also what’s going to work best for you from a tax point of view, and that’s your accountant or CPA.
So when we have this meeting to discuss, you know what type of entity you should be in or you should consider changing to it really is a conversation with me, your CPA or accountant and yourself.
So it sounds like you guys aren’t going to get the materials for a couple of days after but you are going to get all of the slides that you see here.
And you’re also going to get a worksheet, and the worksheet is called the business Entity Accountability Checklist.
And on this worksheet I have a couple of different things for you to work through to figure out if it’s time for you to consider any of these things.
So number one on this worksheet.
Actually, it’s not number one.
It’s a little check Mark Box that you can use.
It says I formed or will form this type of entity.
So it’s you expressing what type of entity your business is and then underneath I have homework and your homework is to locate your formation documents and I’ll tell a quick story because we’re talking about, you know, the foundation of business in a pandemic type of situation.
I can tell you that my clients, who had their entity documentation, they knew where it was, they had it updated, they had everything ready to go.
Those were the clients that got the PPP funding the first time around.
So I know a lot of people complain that big businesses took it all first time around.
Honestly, the businesses that had all of their documents in order were the first to get paid, and I saw this because I had a lot of people calling me up at that time, saying, hey, the PPP loan is requiring me to have formation documents, and I don’t I lost them, or I don’t have them anymore.
I’ve been in business for 30 tears, who knows where that is.
Or I haven’t formed yet. I didn’t form.
I have been running this business as a sole proprietorship, and I didn’t form and I didn’t do that yet.
What can I do now?
So that’s why we’re talking about this is is not only to prepare you for the future, but also to just let you know, like how valuable it is to have these things in order to know where they are, to have them ready to go because a lot of people missed an opportunity with that first PPP funding because they didn’t have this stuff in order.
So that’s the first thing on the checklist that you’re going to see and what I’m going to do is check in with Kiki and see if we have any questions about the entity types before we move on to the next thing.
So yes, we do have two questions.
One of the questions re do you still have to file in a state if your business is Internet based?
The answer to that is yes.
To be a formal business structure, you have to file an entity type.
In that situation it usually ends up being the state in which you personally live and work and do business, but yes.
Just because you’re an Internet business does not mean that you don’t want an entity to separate you from your business.
Awesome and the second question, could you talk about forming an LLC and Delaware?
Could a home-based business in Philadelphia Register in Delaware to take advantage of tax benefits?
So that is a question I get commonly and the answer to that is sort of and again I am not the tax person so I can’t give you the definitive answer.
But if you if you file in Delaware, you can take advantage of things in Delaware.
Unfortunately, if you are doing business in other states, you should be filing the fact that you are doing business in other states with that state.
So when it comes to tax time, if most of your revenues are generated within one state, it’s that state that’s going to want to tax you over another state.
Now, if you are pretty much doing all your business in Delaware and you just happened to, you know, all of your clients are in Delaware, for example but you just happen to run the business out of your home in Pennsylvania snd then it might be really beneficial to file it in Delaware.
You’ll have to have some sort of Delaware address, but it can be a registered agent address those you know are about $100 a year to maintain, but that might be a really good option for you.
So I like how you’re thinking.
You’re thinking strategically.
The answer is going to be you’re going to have to sit down with your attorney and your CPA to really find out what’s going to work best for you there.
Alright, we’ll do one more Luann she would like to know what’s involved in changing from a sole proprietorship to an LLC in the State of PA.
So it doesn’t take too much to change, we would file your limited liability company name with the state, and there we just need to make sure that the name is different from any other company that has prior registration in this state.
We file it and then we would go ahead and do the next two things we’re going to talk about.
Which is establish the Federal EIN number and then go ahead with your corporate documents. So pay attention and we’ll get into those in a minute.
Awesome yeah, we’re good.
All right, so we’re going to move on to the federal employer identification number. Some people call this FEIN. Most people say EIN, but if anyone says FEIN, EIN number or federal employer identification number. They’re talking about the same thing.
So the question here, test your knowledge. A federal employer identification number EIN is required to open a business bank account. What do you guys think?
True or false?
So that is true and move on here.
So what does this do?
So this is a federal level document that we are filing, so the state controls what your entity type is.
But the federal government needs your employer identification number.
Officially, you don’t need this.
You don’t need this until you have employees.
However, most companies go ahead and file for it right away.
Because this is another tick on that box of you and your business are two separate things in two separate buckets, and we’re going to keep them separated for the liability reasons we talked about before.
So what this is, it’s actually very easy to file a federal identification number.
It doesn’t take long at all.
We do need some information about you when we file one for you because it is linked to your Social Security number and the reason for this is just, God forbid if anything goes really wrong in the business and they need to find out who started this business?
You know, think like really bad security stuff which I know none of you guys will get into.
But they do need to be able to trace it back to a human being.
So we will need your Social Security number and it does connect to your federal employer identification number, but only if necessary.
So for example, no one can pull up your Social Security number.
No one can even pull up your federal employer identification number, so these are these are kind of kept at the same level of secrecy when it comes.
To your personal information and your banking information.
But what this does for you besides, you know, putting another check mark as to you and your business or two separate things, but this is how the federal government knows what business you are and whether or not you’re paying your taxes.
Essentially what this comes down to is making sure that you know you’re paying your taxes, that’s what they want.
So the EIN you’ll file taxes under this number.
And you need this to open your business bank account.
So when you go to come to your bank to open up your you know to deposit your first check, what they’re going to need from you is some sort of state document, which is that entity and those are called articles of organization or articles of incorporation.
Depending upon if you’re, you know, starting an LLC or starting a company itself, a corporation.
But that’s like a usually a two page document. You’ll have to take that in with you.
You have to take in your federal employer identification number, which is usually a one or two page letter as well, and then you’ll need what we’re talking about next, which is your operating agreement, but this is how the bank identifies your business.
This is like a Social Security number for your business, essentially.
So this is how the Federal government is going to keep track of you.
This is how your bank is going to keep track of you if you’re applying for a loan, f you apply for PPP, all of that goes under this number, this EIN. And it’s the same amount of digits as your Social Security number, so most people just think of it as your businesses Social Security number.
So you and your business are two different things.
Two separate things.
Your business is filing its taxes.
You file yours.
Your business applies for its loan.
You file your own.
You know if you’re mortgaging your house or something, that’s your Social Security number, not your federal identification number.
But if you’re, you know, trying to get a line of credit or something from the bank that’s going to be your.
Federal identification number not your Social Security number.
Saying these words a lot.
So that’s an important piece to this as well.
It’s it’s pretty straightforward to file for it, but it is an important piece.
So on the business entity Accountability Checklist, the second thing I have on there is that you have you have filed or you’re going to file for your employer identification number.
Has a line there for you to write it in, so you have quick, easy reference to it.
And and you want to hold on to the paperwork you get from the IRS.
So as I said, it’s usually a one to two page letter, just depending on if it signature page pushes to the second page of it, but that letter is very important if you lose that letter, you can get it replaced, but it is not an easy task.
To get it replaced because it is like your Social Security number.
They don’t give it out to just anyone, so you have to go through a whole.
Verification process so that they know that they’re giving it to the right person.
But again, this happened with the PPP money came out.
People lost that letter they didn’t have that letter anymore.
And what they needed to do was go and call the IRS at a time when the IRS wasn’t there because they sent everybody home and they were trying to figure out how to forward calls.
And you know, if you dealt with it, you know what I’m talking about.
But essentially it was hard to get a human on the phone if you could get a human on the phone.
They didn’t even know how to generate the letters working from home.
So it was it was a mess, so this is part of your foundation, this is why we’re talking about this now.
God forbid you know hopefully we don’t have another pandemic or anything any other disaster like it.
But if you have this stuff handy and you know where it is and you’ve got it together and you’re organized, I promise you you will be able to jump on opportunities faster and better and you’ll be a stronger business at the end.
And while I’m talking about it just because I’m working on this for another client.
When I put together formation documents for my clients, I give them a binder.
It’s nothing super fancy, it’s just a little binder.
I put their name on the front, but I have tabs inside and I have a copy of everything in there for them so that they keep it organized so I have a tab for the articles of organization.
I have a tab for the federal employer identification letter we just talked about.
I have a tab for the operating agreement and I will you know we’ll talk about that in a minute, and then I have a tab for their trademark registration and any important contracts and agreements
So that they keep it you know it’s a good start, it keeps it all in one place for them.
And really, that’s if it’s if it’s electronic, that’s fine.
If it’s in a physical binder, that’s fine.
Just make sure you know where it is.
That’s like if you walk away with nothing today it’s make sure you know where your foundational documents exist.
So I’ll take a break, take asip of water and are there any questions?
About the federal employer identification number.
Yep, so we have four questions here, Melissa.
She would like to know.
I registered as an LLC in PA.
Could I register the same business in Delaware?
So you don’t need to, you don’t need to register a separate entity.
What it’s a called like a doing business in that state.
And if you’re, it depends on what your goals are, so I’m not totally sure what I guess I’m not sure exactly what you’re asking with this question, but once you have your entity formed in one state, you don’t have to form a brand new entity in any other state.
But there is a way for you to register in other States and it just kind of like connects to your registration in whatever state is your original state of registration?
Hopefully that made sense.
Next question, are there any other risk to your personal assets when you link your personal Social Security number with your EIN?
So there are no risks as long as you do it the right way.
Th reason why you need a Social Security number attached to the EIN is in that odd situation where like I said you did some kind of fraud or securities something or other and they need to eventually figure out who you are, but generally speaking there’s no other reason why they would need to go and find out who you are or what your Social Security number is personally.
Awesome, next question. If you decide to not run your business anymore, how do you shut down your EIN?
Oh, that’s a whole process.
There are steps to closing a business.
You have to let at the state level you have to let the state know some states let you go easier than others. I know I’m in Pennsylvania so I obviously do a lot of work in Pennsylvania.
Pennsylvania wants a lot of documentation to be able to close, and it all revolves around making sure that you have paid all and any taxes that might be due to the state of Pennsylvania, so, but it takes them a long time to kind of rubber stamp whatever it is we submit to them.
When it comes to the EIN, what you do to kind of finalize that is on your last tax return there’s a box somewhere on there that says this is the final return.
Check that and then that’s how the IRS knows that this is the final return and that this company EIN, it’ll still be connected to you.
I don’t know how long it takes for them to like kind of clean it and then recycle it. So it will still be linked to you for quite some time, but that lets them know that no more taxes are coming, that the business is essentially nonfunctioning anymore.
So I hope that’s clear.
Awesome Louann, I would like to know if you have an EIN as a sole proprietorship and change to an LLC, do you amend the EIN number you already have, or pull a new number and do what you and do what with your old number?
So you usually can keep the same number.
There are situations and there’s a ruling on this of when you need to ask for a new number.
If there is a change in ownership like a large change in ownership like you sell your company to somebody new. They will ask for a new EIN in that situation. And that’s good for you because if you sold your company, you don’t want anything coming back to you, so you want that new owner to get a new EIN and kind of start it fresh again.
So there are some situations where you would need a new one.
Right now it’s kind of back and forth on if you move to a new state and are filing a new entity in a new state.
If you need a new one, it depends on the state right now, so that’s a little fuzzy.
But we can figure that out for tour specific situation
But generally speaking, you do not need a new EIN, we can usually keep it, keep it going because on honestly, your history is linked to that. Your businesses history is linked to that in.
So if you’ve been in business for 10 years and you ask for a loan, they’re like they can look back and see that you’ve been in business for 10 years and they’re going to give you the loan.
Whereas if you get a new EIN and they’re not going to see that history anymore, so it’s kind of like you’re starting from scratch from a financial and banking point of view.
All right, and Ashley Clark she would like to know what are the negatives and positives of having an EIN without employees?
And then she asked, I closed a business about a month before COVID in PA.
Would I be able to open the business again and use COVID relief benefits?
The first question about the EIN, and if there’s any benefits or negatives with employees.
Basically you have to have one if you have employees just because you’re filing employee payroll taxes and things like that.
To not have one and not have employees, I would still have one.
If you have a business, if you have any kind of income coming in that’ not specifically coming directly to you as a W2 or as a 1099 employee then I would go ahead and get the EIN like I said in the beginning it just helps separate you from your business and you have that much more protection.
The second question I do not have a specific answer to. We’d have to talk probably offline and get some more information to be able to answer that.
Because if you were closed during when most of the relief was offered I don’t know if you can go back in time and I don’t know if I would even know that that might be a better question for an accountant or CPA who’s very familiar wiith the relief efforts.
Sorry about that.
Alrighty, that was the last question.
Well let us move on to the governing documents and of course another question for you guys to think about.
Operating agreements and bylaws are just templates.
True or false?
And I’m guessing you are going to think, hey an attorney probably would say false, and yes, that is the answer.
You can obviously and definitely use a template.
There’s no law against using templates.
But templates are they can be a very good starting place, but they need to be adjusted, updated, revised for you and your business.
If there’s anything I’ve learned working with business owners over the last seven years, it’s that there are so many different types of businesses, so many and there’s businesses that like I didn’t even — I couldn’t even comprehend existed.
I have a client who makes millions of dollars and all his business is is cutting tubes to a certain length and then he sells them on the Internet and they have different ends on them.
And he makes millions of dollars doing it. I couldn’t have imagined that.
And I, you know, obviously wish I had because I’d be a millionaire right now.
But every business is different.
Every business has a different reason for why they do what they do and how they do it is different and that’s what keeps my job so interesting. There are no two businesses that are exactly the same or run by the same person.
So operating agreements and bylaws are what we’re going to talk about next.
And there are a lot of templates out there.
There are a lot of places to get them, but what you really need to do is make sure that they are adjusted for your business.
And so let’s get a little bit more specific here.
If you have an LLC, what you have go along with that is called an operating agreement.
And essentially this is a contract between you as the member of the LLC and the LLC as the company.
And this contract says how the LLC is going to be governed.
What’s going to happen?
How are the decisions going to be made and who makes them?
So essentially this document goes through and gives you the person the member of the LLC permission to open a bank account.
Permission to write checks from that bank account.
Permission to make important decisions for the company.
Permission to hire employees.
And in return it gives you there’s a statement at least a one paragraph statement in there, but maybe more stating that you are working on behalf of the company on behalf of that LLC.
And so the LLC will indemnify you.
And that’s that liability piece that separates you from the company.
So it’s an agreement between you and the company where the company is asking you to do things on behalf of the company, but in return, the company says if anything happens, it’s on me it’s not on you as the person as the member.
So this is a very important document to have should anything go wrong.
It’s also very important to have if you have partners, because this explains what the different partners are responsible for and what they get out of this.
What is their ownership interest?
Are they are you 50/50 partners do you have three partners? Are you 33, 33, and 33?
Or are you — you know one is 50, one is 20, one is 30.
What does that look like?
What does that mean?
And then what happens if one partner wants to leave?
Are they allowed to leave?
If they leave, do you have to give them money?
If they leave, do you get their shares?
Does the other member get their shares or does the company get their shares and you have to find another member?
So there’s a lot of pieces in this operating agreement that are different and are tweaked and are really focused on how you want to run your company.
And earlier if you remember I said that if you form an LLC, there’s some great pros and some great cons and it’s that the law doesn’t say much about LLC’s.
So the pro there remember is that you can have this operating agreement run however you want it to.
It’s up to you.
How do we want this company to run?
Who’s making the decisions?
What level of decision is made by who?
But on the other hand, there is not much in the law on this.
So if you don’t have an operating agreement, if you don’t write it and you have partners and you can’t agree on something there’s no law to go to that says, well, what do we do in this situation?
It just doesn’t exist.
It’s up to you, so that’s the situation where you find yourself fighting and you might find yourself in court in front of a judge, which is not where I want any of my clients to be because between you and me, the only one that wins in that situation is the attorney.
That’s my goal. I don’t do litigation.
I don’t want my clients to go there.
I’m looking for the win win situation in everything.
So that’s the operating agreement.
When you have a company or a company like structure, that’s where you hear about the bylaws, the minutes, the resolutions, the annual meetings, the stocks, the shareholders, all of that.
So it is much more complicated, but essentially the bylaws are the same as the operating agreement.
That’s the list of how does this company run?
Who is how many votes does so and so have?
How many voting classes are there?
You can have member or you can have shareholders that have no voting privileges.
They just take dividends and then you can have shareholders that have more voting.
There’s a thousand different ways to slice it.
So what happens?
When does that annual meeting happen?
Is there a board of directors?
How many sit on the board of directors?
How many people do you need?
What if a board of directors leaves?
How do they leave?
Do they have to resign?
Do they have to get voted off?
How does that work?
If we need a new one who votes them on?
Do the shareholders vote?
Do the directors vote?
So tere’s a million little questions in there that are customizable to your company and what you need it to read what you need it to be like.
And some of those are, you know, decisions that you want to make based on maybe you have a closely held corporation you know, and it’s really about keeping it tight.
Keeping it for your family, not letting outsiders in.
Or you could be trying to attract investors so you know what you want to attract people in and you wanna make it easy as pie for them to buy into your company.
So depending upon what tour goals are these bylaws can look very different, so if you pick up a template for one situation and you’re trying to use it, it might not. apply to what you’re trying to do, and it might you know it might actually make your business grow slower.
It might stop you up and we don’t want that to happen.
So the minutes and resolutions piece they become sort of like the law of your company like the bylaws, but they happen over time.
So for example, you want to hire A new a new president or a new CEO or something you will have a meeting with your board of directors.
Let’s say that’s who’s given the the job of electing this officer.
You’ll have that meeting.
They will make a resolution.
And they’ll vote on it, whatever.
If it’s majority or supermajority, whatever you decide has to agree.
Once they agree that’s the resolution is written, it’s sealed with your corporate seal and put in your records.
So now it is sort of like the laws of your company.
And they can be, you know, changed and tweaked along the road as you need, but know that both of these documents, the bigger decisions have to be made upfront.
And the bigger decisions are the voting.
Are what happens if an important player in this passes away or becomes unable to serve anymore, so those things you can’t decide at the time of the event.
You can’t figure out how to vote when you’re trying to vote on something, you have to already know that you already have to have agreed to that.
So it’s a very important up front to figure that out with you with your partners with whoever is running this company, so that it doesn’t become an argument later on.
Essentially, we’re just trying to avoid any arguments later on.
If it’s clear, then we can proceed exactly as we intended to.
So as you are growing your company and making changes an operating agreement can be revised.
They’re often revised when a new partner comes in.
You know, sometimes it’s just you and you want to have a partner come in.
Okay. That’s a good time to revise your operating agreement.
Or you, you know you are a partnership with a couple people, but you want to let some more in.
Okay, well now you might want to tweak somethings because now how are you going to vote?
If there’s five people, whereas before there was three and it was easy to agree, now it’s five and we have to, you know, assign everybody.
Do they vote?
Does each of the five have one vote, and then it’s you know majority wins?
3 versus 2?
Or does it depend on the percentages?
You know I own 50%, so my vote means more than you who will only own 10%.
Maybe I don’t know it depends on how we wrote the operating agreement.
So sometimes changes have to be made as time goes on.
The problem is if you have that situation that I was just talking about where you have three partners and you’re updating your operating agreement to have more partners come in.
You know getting those three to decide on what those changes are going to be is hard, and it gets harder the more people you have, the more fingers in the pot so to speak.
It will get more and more difficult to change the important parts.
So that’s why it’s so important to get that right up front.
So on your business accountability checklist, the third thing I have there is that you can check off that you have a complete and signed.
Can’t tell you how many of these I’ve seen that are not signed, not dated, so they never were really formally put into action.
So you have a signed copy of your operating agreement for LLC’s or your corporate bylaws and minutes for corporations.
And then your homework with that one is to make sure you’ve got them in a good location, you know where they are and review them to make sure they they are up to date and reflect your company’s current structure.
And don’t be shy, it’s okay, I have clients all the time that come to me.
You know they printed out a template, they didn’t sign i.
I have a client right now who’s trying to add on two partners, their corporation. They formed the entity they got the EIN, but they didn’t do this step, so we’re now writing the bylaws, and then we’re immediately amending them to make them up to date for now.
So you’re going to have to do it sooner or later.
You might as well do it, you know, do it now.
Do it while you’re starting or you know, pick up the pieces now and just get it done because you’re going to have to do it at some point or other in the future when you want to make changes, so just get it done now and then you know it’ll be done and it’ll be something off your mind.
So I’ll take a break there and see what you guys have as far as questions about the governing documents.
All right, so Christian would like to know can I form a partnership business between myself and an existing business I created?
Probably, but that depends on your state.
A business can be a partner generally speaking in other businesses.
And that’s how people make like holding companies and then there’s multiple companies underneath, so a business is sort of treated as its own person in that sense.
Awesome. Angelique would like to know when first opening up is it better to start with a sole proprietorship or an LLC?
Probably an LLC in that situation.
When you’re starting, you want to start immediately. If you know you’re running a business and it’s not just a hobby you want to create that entity and separate yourself from the business.
So I would say in that situation, yes, you want to form an LLC sooner than later.
Awesome, last one. Is it possible to form a for profit subsidiary or a nonprofit entity?
I don’t know that I understand that question, but you can form for profits and you can form not for profits.
Not for profits.
I didn’t really touch on here, but that’s a corporation type.
There are no not for profit limited liability companies.
All right and that’s the questions.
So I know we’re getting close to the end here.
So the last thing I just want to touch on is when to review.
Because as your business grows, you know these things need to be looked at to make sure that they are keeping up with the growth of your business.
So our last question is, business owners should evaluate foundational documents and entity formation every year, true or false?
And because I sort of just said it.
Yes, it’s true.
And maybe even more often.
So the last question, the last two checkboxes I have on the business entity Accountability Checklist for you guys is that you’ve reviewed everything with your CPA and you’ve reviewed everything with your attorney.
And what I say is in the last year or if I have had a change or pivot in my business which we’ve seen a lot of changes on a lot of pivots because of COVID.
Within two weeks of that change or pivot.
It’s good to like keep that in your mind.
If it’s a little longer than two weeks, it’s fine, but try to reach out to your CPA and your attorney within a few weeks of any major changes because your attorney can help you make sure that you’re protecting whatever it is you came up with.
And your accountant and CPA can make sure that there isn’t going to be any tax surprises at the end of the year.
Or maybe there’s an opportunity that you can now take advantage of that you couldn’t before.
So you really want to keep your you want to keep your core team up and keep them knowing of any changes that are going on.
And then here on this slide, I just have every year ask yourself, and this is just kind of like to jog your memory, did you change locations?
Did you start operating under a new name?
Do you have a different way of doing operations?
Any new ventures?
Any new collaborations with people, new products, new services, or even tweaking of current products and services?
So this is just kind if a little list that you’ll have to jog your memory at the.
End of each year.
So that’s all I have for you guys, if there’s any more questions, I’m happy to answer them, but I appreciate you coming and hopefully I’ve given you guys some good information today if you want any more information about working with me, I do offer what we call our strategic legal solutions, which is our proprietary method of taking clients from kind of this unknown unsure up to being very protected and very secure and able to sleep at night because they know everything is being taken care of.
And we include all of the privileged attorney client communications and we also include work time, so it’s a quarterly subscription program that we have that’s pretty affordable, and our clients seem to love it to really get from point A to point B in a very organized way.
So if you have any questions, feel free to have a consultation with me.
And if there’s any other questions Iguess let me know Kiki.
Awesome, awesome, awesome.
What a great presentation Janelle. Thank you so much for providing all that knowledgeable information to us today.
I think everyone found that very useful and helpful as you all start to put your questions in the Q&A for Janelle, I just posted a link to our one minute survey in the chat.
We ask that you guys provide us with feedback so we can continue to offer these webinars to you all at no cost.
I also posted a list of some of our upcoming events.
We have a wonderful business resiliency series starting up on June 3rd, so make sure you grab those links and get registered for that event and and we’ll wait around for a second to see if anyone has questions.
Janelle she just posted her email address in the chat, so if you want to reach out to Janelle about consulting services, please make sure you grab her information.
We will send out her information to you all three to five business days after today’s event.
Looks like we just Oh well, you’re welcome, Luanne.
Yeah, well it doesn’t look like anyone has any questions.
I can’t believe no one has questions.
I have s question when does the holiday weekend start?
It starts tomorrow at 1:00 o’clock.
I am super excited.
You know it’s like the first weekend that we’ve really had you know with people being vaccinated and you know just kind of just being able to get back outside and like enjoy the weather.
And maybe like the beach and stuff like that.
So I’m looking forward to this weekend.
It looks like Ashley has a question.
If you have several businesses you want to open, what should you do?
Well, go ahead and open them Ashley.
It really depends on the business types that you’re opening.
If they’re all similar or fall in a similar industry, then maybe we want to have a holding company with all of the separate branches in it.
If it’s completely different industries, we might want to break it up and just have it be very separate companies, but can definitely sit down and talk you through that.
That’s also again another conversation where we’d have to bring the CPA be counting in to know what the tax consequences are going to look like with that as well.
She made a comment.
She says she wants to learn all the business lingo.
Well Angelique, if you send Janelle an email or if you send Temple SBDC an email or even fill out a application on our website.
We’ll be able to teach you all of the lingo that you will need in order to be a successful entrepreneur.
Ashley, she wanted to know should you open one name with several fictitious names.
Maybe one business with several fictitious names?
It really just depends on what your goals are with marketing because the fictitious names are more brand names, so if it applies in your situation that you would have you know, like, think of like a snack company.
The company is whatever the company is, but then they have brands and different names for each of their types of snacks like they might have chips and they have different names for their different types of chips.
And then they might have, I don’t know cookies or something else.
So keep that in mind when you’re thinking this through, but I think you’re asking very good questions.
The next anonymous attendee they would like to know.
I registered a business with the state of PA as an LLC, but I never started working the business.
What should I do?
We can get you -well, go ahead Janelle.
Yeah, I was just going to say if it’s in the state of Pennsylvania.
I think it’s five years.
If it hasn’t been five years, then it’s very easy to just close it down if that’s what you’re looking to do.
But after five years is when it gets a little bit more complicated.
Like I said before, there’s multiple steps.
But the SBDC is a great resource.
I use them all the time.
Even as an established business, so they have a lot of these answers for you guys as well.
So don’t hesitate to use them.
And if you look through the chat, I posted up our email address as well as links to our application.
So if you want to get connected with the consultant, we’re here.
You just got to get the application in and then we’ll get you connected with someone.
Angelique, she would like to know I am new to opening up and don’t know all the legal terms and how do I file what I need to express legally?
You probably need to hire an attorney to help you.
I went through three years of law school to understand the legal terms.
And I can tell you that it takes awhile to understand everything.
I am not from a family of attorneys.
I am not.
I was the first person in my family to go to college so I didn’t come from a place of already knowing pretty much anything.
So it took a while to really wrap my head around this.
And that’s why I started out in the beginning talking about the four different kind of pillars that I’ve built my business on.
And it really, it really all comes together because I was also an entrepreneur, so I understand the questions that you’re asking and I know that you feel like you should be able to understand this and it’s your business and you should really, you should know all of these aspects and you know what you can know all of these aspects, but it just takes so much time.
So what I’ve learned as a business owner is that if I can delegate some of the stuff that I have on my plate to people who can do it better, faster, you know, whatever than me and I trust those people, then that is really the best way to grow my business.
So I would encourage you to don’t worry about learning all of the nitty gritty of legal and find someone that you trust to work with and hand it over to them because they if they’re a good person and part of building trust is going to be, they’re going to explain it to you without legal terms.
So I you know I’m trained in this, so I use them, but I try not to.
I try to keep it as simple and straightforward as possible.
And what you need to do is more than anything else and the people that are going to help you grow.
And you know what?
They’ll growwith you.
And that’s part of this business community and what it’s all about.
That was great advice, Janelle.
That was absolutely wonderful advice because I know a lot of people they tend to feel overwhelmed in the beginning stages of starting up a business.
So that was that was really awesome.
Thank you for that.
Sean, he has a question or she I’m so sorry I forgot your pronoun wrong.
Do you recommend keeping the business entity separate when working with the government as a contractor?
I don’t know what the business entities are that you’re mentioning, whether it’s just working with the government versus working with B to B or B to C.
But sometimes, yes, it makes sense to keep them separate.
Sometimes it doesn’t matter, so I would I’d have to explore that a little bit more with you.
And again, I know I keep saying this over and over again, but there might be a tax piece to that as well that you want to think about.
I know hat a lot of companies right now are splitting off their software if they have software or any kind of digital products, they tend to separate that off from services because those pieces of the company will sell for a much higher multiple than services companies will.
So another way to look at this is as you you know, as you’re growing something, what is the what is the end goal?
What is the end game?
Because if you’re getting ready to sell something, you can look at it and say, well, you know if it’s, you know all mixed together under one company name, maybe if I break it apart, maybe if I break this piece off, that piece is going to sell for a lot more.
So another way to look at things, and I know I’m not giving you guys very specific answers but I don’t know your specific situations.
So I’m just trying to be helpful.
You are very helpful.
Sean. I just sent over Janelle’s email address to you. It may be easier for you all to reach out to her one on one.
We are running up on that one o’clock hour, so for any additional questions that you all have, please reach out to Janelle one on one she will be glad to answer any other additional questions.
That you may have, I just posted her email address in the chat as well as reach out to Temple SBDC.
Like Janelle said we’re here, we’re here to help.
We offer no cost consulting services.
We have a ton of webinars, legal webinars on our YouTube channel you can check out some of the information there as well.
You may get a little bit more clarification there as well, but yep, at this time I am going to make the executive decision to say we are going to end this webinar right here.
We thank you all for all your questions.
We thank you for your participation, Janelle.
Any last minute words of advice to our attendees.
Just thank you and you guys have a great Memorial Day weekend. Know that you guys are the backbone of this nation with your small business and your medium sized businesses.
And I’m here to support you and root you on and if there’s anything I can do, let me know.
Awesome, thank you, Janelle again and we look forward to you doing future webinars for in the future.
Absolutely, take care.
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*Janelle Peyton is the CEO and Managing Partner of Peyton Law, a leading boutique law firm designed to provide the highest quality branding, business, and legal services to companies via quarterly subscription called Strategic Legal Solution. Peyton Law offers brand building strategies through corporate and intellectual property law, including business entity formation, buy+sell, contracts, joint ventures, trademarks, patents, licensing, and other growth-related transactions.