Forming a New Business: Corporations vs LLCs

Whether you are starting a small business or running an established company, it is vital to understand business laws and regulations. But that is easier said than done. My goal is to provide business-related legal services so that you can spend more time dealing with the actual business and less time with legal intricacies of operating your business. My services include:

Business formation

You have a new and innovative product or service and you are interested in forming a new business. You may have concerns about liability, taxes, investors and other considerations. As your small business lawyers, we will assist you in deciding whether your startup business should organize as a limited liability company (LLC), partnership, S corporation or C corporation. We will form the most appropriate business organization for your new business and register the business in all jurisdictions in which it will conduct business.

Mergers and acquisitions

If your business is fortunate to thrive and become a merger or acquisition target, we can represent you as the seller; or if you are on the other side and looking to acquire a business, we can assist with the due diligence in purchasing a business. We will review various approaches in purchasing a business through merger or acquisition. We will discuss with you various structures in purchasing the stock or purchasing the assets of an acquisition target. In either case, your business will need thoughtful and comprehensive representation in all aspects of a merger or acquisition.

Government contracting

Government contractors face numerous issues when contracting with the government. And with a hands-on approach and substantial experience, we will help you navigate those legal issues. We prepare teaming agreements, subcontracts and joint venture agreements and can handle a variety of other government contract matters. As government contract lawyers for your small business, we can assist you in applying for programs for HUBZones, service-disabled veteran-owned small businesses or women-owned businesses. If your company is facing debarment or suspension because of allegations of corruption or bribery, we can assist in your defense before the U.S. government or the World Bank.

Business transactions

Once you have an ongoing business, however organized, you will have a host of various commercial transactions. We prepare agreements with lenders, lessors, partners, customers, employees, and consultants. We provide business legal services for your company, preparing confidentiality agreements, nondisclosure agreements, licensing agreements, distribution, employment agreements, independent contractor agreements, lease agreements, and many others. We will help you understand what each part of these agreements require and make sure that these agreements provide protection to you and your business.

Corporate law

Once your startup business has been created, your company will have ongoing requirements to maintain its separate status. We will assist in guiding you on how to prepare corporate minutes or resolutions of the company to maintain the corporate form and other steps to protect the limited liability of your company. You will also have to make sure that your bylaws or operating agreement continues to reflect the needs of the business organization. We are available to assist you in addressing these issues. And once your company is ready to raise additional capital from investors, we can work with you to determine whether you are subject to securities laws or fall within one of the exemptions.

Business disputes

Few businesses are immune to business disputes. If your small business was well-advised, you have an agreement that will provide guideposts on how to resolve your business dispute. If you are unable to settle your dispute, you may have a dispute resolution mechanism such as mediation or arbitration in the agreement. An alternative dispute resolution mechanism such as arbitration or mediation generally can provide a relatively quick resolution of your business dispute. If not, then you may have to consider litigation. We handle business disputes, including pre-litigation matters, mediation, arbitration and litigation.

Anti-corruption compliance

Every company should have procedures and policies to minimize its exposure to allegations of corruption or bribery. An integrity compliance program (ICP) is essential for businesses doing work internationally for the United States government or work financed through one of the development banks. We can assist in reviewing or preparing an ICP to assure that is consistent with the anti-bribery and anti-corruption guidelines from the World Bank. If your company is facing debarment or suspension because of allegations of corruption or bribery, we can assist in your defense before the U.S. government or the World Bank.

Non-profit law

We work with organizations to obtain their tax exempt status under Section 501(c)(3) of the Internal Revenue Code. There have been recent changes to obtaining 501(c)(3) status and we have worked with organizations in submitting successful applications on the simplified track by filing a 1023-EZ and the more rigorous 1023 application for larger organizations. Nonprofits also face similar legal challenges to assure that they comply with business requirements and additional requirements to assure that they do not jeopardize their tax exempt status. As a law firm for nonprofits, we work with nonprofit organizations to guide them through these issues.

FAQ Small Business Attorney in DC

What is considered a small business?

Almost all our clients fall within the definition of small business/startup as determined by the Office of Advocacy of the U.S. Small Business Administration. Under this definition, a small business has fewer than 500 employees. Small businesses encompass about 99.9% of all business organizations in the United States.

Which industries do you serve as a small business attorney?

Most of our clients are service providers such as consulting companies, law firms, accounting and bookkeeping services, cybersecurity consultants, video production companies, and lobbyists, just to name a few. We also represent foreign and domestic manufacturers and software developers.

As a small business lawyer in DC, we represent some retail operations, such as bookstores and restaurants. We also represent numerous nonprofits with varying missions. Our government contractors clients hold various IDIQs (Indefinite Delivery, Indefinite quantity Contracts) and GSA schedules.

In which areas of the law does a small business or startup need legal assistance?

Most times, small businesses/startups need the services of outside general counsel. As outside general counsel for small businesses, we can handle most matters as a small business attorney that small businesses generally encounter. Usually, anything with the word agreement or contract is within our practice areas. This includes operating and shareholder agreements, which are used for small businesses and startups that are formalizing their relationships with their owners. Once a business is formed, then we prepare and review a host of other agreements, such as service agreements (which may be referred to as client agreements or consulting agreements), independent contractor agreements (which may be referred to as subcontracting agreements), employment agreements, teaming agreements, purchase and sale agreements, merger agreements, option agreements, license agreements, lease agreements, and the list goes on.

What factors should a small business and startup look for in retaining the services of a lawyer for small businesses?

With our extensive experience of working as a small business attorney in DC for decades now, background and experience should come right at the top of the list when looking for a small business lawyer. We think that accessibility and communication are essential for a successful relationship between an attorney and a client. Hourly rate is important but not as important as quality of service.

What kind of experience do you have in advising small businesses as an attorney?

Keith Rosten has not only legal experience but also business and practical experience that allows him to relate to the trials and tribulations of a small business owner. Keith has BigLaw experience before working for small and medium-sized businesses, first at his own law firm focused on small businesses and then with Berliner Corcoran & Rowe LLP.

Keith has substantial business experience. He received an MBA from the Tuck School at Dartmouth College. During his business studies, he worked on several group projects with small businesses, including a furniture manufacturer, a manufacturer of leak location precision equipment, real estate developer. After business school, Keith operated a successful real estate business in California and overcame numerous issues, such as asbestos abatement and underground storage tank remediation.

Keith worked as a legal adviser to a government contractor and was a legal adviser to a major initiative in Russia. Keith ran another small business, selling and marketing solar energy equipment. The business had an e-tailer component, hosted the largest solar energy forum online, and sold solar energy equipment to the government. Keith negotiated two GSA schedules for the business and obtained HUBZone certification for the business. Keith was also president of the Dartmouth Entrepreneurial Network – Washington, a networking organization for small businesses in the greater Washington, DC community.

Keith has also volunteered for Compass Pro Bono, working with local business professionals to conduct long-term consulting engagements for local nonprofits in fundraising, governance, and strategy.

With this breadth of legal and business experience, Keith is attuned to some of the challenges facing small businesses, which allows him to provide effective advice and guidance.

As a small business lawyer, do you take in-person meetings only?

Yes. We are located in downtown Washington DC and host many of our clients. For those clients who cannot come into our offices, we usually meet over Zoom or by telephone.

How do you charge for your services as a small business attorney?

We charge our clients based on hourly fees. We usually provide a budget of how much certain matters cost so that startups and small businesses know in advance the ballpark cost of the matter.

What if a client does not like our services?

Clients can terminate our services anytime if they don’t find it satisfactory.

Should my small business lawyer or startup lawyer be in the same state as me?

No, not always necessary and may depend on multiple factors. For example, though we are an expert small business lawyer in DC, we have also provided consultation to other cities’ clients.

Benefits of LLC vs Corporation

You have now readied your team to tackle the issues of starting your new company. You have found a small business attorney to help guide you through some of the legal issues your startup is going to face. You have a dynamite name and you have commanded your startup attorney to file the papers to register your new business. But just hold on there. Your attorney has to go over with you the various corporate forms that are available and particularly corporations vs. LLCs (limited liability companies). There are numerous considerations for choosing the corporate form for your new business. They generally fall into four major categories:

1. Protecting personal assets: the business owner wants to assure that the new business’ creditors can only get at the assets of the business, not those of the individual owners;

2. Transferring interests in the business: whatever form you have, you want to be able to transfer stock, or ownership interests in your business;

3. Admitting new investors: you want to make sure that you have a mechanism to admit or restrict new investors in the business;

4. Taxes: which corporate form allows you to pay the least amount of taxes.

In this blog post, I am going to focus on two of the most common forms available for small businesses: S corporations named after subchapter S in the tax code, and limited liability companies (LLCs). Your startup attorney may suggest that you look at the S corporation and LLC as the two most attractive options. I will first explain why other forms of doing business are not generally as attractive to the small business owner as a LLC or S corporation.

Related articles:

Checklist for Starting a Business

Finding a Name for Your New Business

Other less attractive forms of business for the startup business

When you are deciding forming your business as a LLC or corporation, you will also consider other forms of business. In this section, I outline some of these other forms of business and discuss whey generally startups opt of a LLC or corporation.

Sole proprietorship exposes your personal assets to the small business’ creditors. If you are conducting business as a sole proprietorship, you are exposing your personal assets to the creditors of your business. It is not likely that this form of conducting business will be the most appropriate form for your startup. You may want to own real property in your own name so that you can obtain more favorable terms for a loan or because of the transfer taxes to put the property into a LLC. If you make a decision to own your business as a sole proprietorship, you should be advised to purchase higher limits on the liability policy and obtain an umbrella policy.

C corporations generally required for outside investors. For most startups, a C corporation is not an attractive option because of the double taxation at the corporate and individual level. The corporation pays taxes on the net profit and the shareholders pay taxes on dividends. There are certain benefits such as the deductibility of certain expenses, but for the most part a startup is not going to organize as a C corporation, unless its investors require an investment in a C corporation. If you are planning on going public (you can hope), then a C corporation may be one of the forms of doing business that you want to look at. Remember that even if you choose a limited liability company or S corporation, you can convert to a C corporation if you need to later on.

Partnerships rarely used. Limited or general partnerships used to be the form of choice in the 1970s and 1980s before the advent of the limited liability company. They still survive from those days although it is rare that a startup would want to use a partnership as a form of business. Whether it is a general or limited partnership, one partner is on the hook for the liabilities of the business. In a general partnership, all of the partners are liable for the debts of the company and in a limited partnership, the general partner is liable for the debts of the company. An LLC can provide better protection than a partnership and still take the benefit of partnership taxation.

Organizational considerations for S corporation

The discussion with your startup attorney may be very quick once you learn that there are restrictions on whether you can organize as a S corporation or whether you can elect to have your LLC taxed as a S corporation. The first questions is whether your startup is eligible to be taxed as a S corporation. You may not be able to get off of first base if you are intent in forming a business that may be ineligible for treatment as a S corporation. The major impediments are as follows:

1. No more than 100 shareholders. If you have many shareholders, then you will not be eligible for sub S treatment.

2. Non-resident aliens. At Rosten Law located in Washington, DC, we have clients who are not U.S. citizens or do not live permanently in the United States. There may be some lawyers who would recommend limiting the members of sub S corporations to citizens, although not technically required, under the rationale of what happens if your stockholder, a French national with a green card, decides that she is disgusted with the horrible cuisine in the United States and decides to return to France, or threatens to leave the country to leverage her bargaining position in the company.

3. Only one class of stock. Suppose that you want two classes of stock, one for those who received a preferred distribution ahead of other members, and those who do not receive a preferred distribution. Since the members have unequal rights to distributions, your company is ineligible for treatment as a subchapter S corporation.

4. No corporate shareholders. Another show-stopper is if you want a corporation or partnership to own the business. S corporations require ownership to be held by individuals, estates, certain trusts or charitable organizations.

If you can overcome these constraints, then you have some further options that you may want to explore. If you are the sole owner of the startup business, and want to take advantage of the corporate form, you can organize as LLC and be taxed as a sole proprietorship. Your LLC will be considered a “disregarded entity” and the profits and losses will be reported on your individual tax return. You can also elect to be taxed as a S corporation if you meet the criteria. There may be some tax reasons that you may want to be taxed as a S corporation. I will discuss those tax reasons in the next blog post.

If you have multiple owners, then you can organize as a S corporation or a LLC. If you decide that you want the LLC, then you need to decide whether the LLC will be taxed as a S corporation, assuming you meet the requirements, or a partnership.

Corporate formalities: limited liability companies more flexible

In general, from a tax perspective, there is no difference if you organize your small business as a S corporation or as a LLC and then elect (by filing IRS Form 2253) and “check the box” to have the LLC taxed as a S corporation. There is a difference if you organize your startup as a subchapter S versus a LLC. A sub S is still a corporation and you will need to comply with the corporate formalities such as board meetings, minutes, resolutions.

If you have a corporation, regardless of whether it is a S corporation or a C corporation your company still needs to comply the formalities of a corporation according to the law of the state in which the company is incorporated. That means that the shareholders elect the board of directors, who in turn appoint the executives or officers of the company. The company officers are in charge of the corporation’s daily activities.

There are certain procedures spelled out in the bylaws that govern shareholder and director meetings. The corporation must maintain books, records of account and minutes. In a limited liability company, there are few legal requirements other than what is provided for in the LLC operating agreement. If the new business is organized as a subchapter S corporation, then it must comply with these formalities. If it is organized as LLC and then elects to be taxed as a S corporation, then the procedures are enumerated in the LLC operating agreement.

Some companies like the discipline imposed on the managers to have a corporate structure. For others, the less formal requirements of a LLC suit their needs. Also, remember that it is easier to convert a sub S to a C corporation once you have investors who are willing to invest and may require a C corporate structure. A S corporation issues stock that is freely transferable if there are no shareholder agreements in place. Usually a LLC operating agreement places restrictions on the transferability of the membership interests in the LLC.

New business owners generally like the flexibility of the limited liability company over a corporation. In the next blog post, I will discuss the major considerations of deciding between whether your new limited liability company should be taxed as a S corporation or a partnership.