What to Ask: Incorporation and Startup Tips | Matthew Abernethy, Esq.
Starting a new business? UpCounsel attorney Matthew Abernethy explains what every startup should be asking their legal team about incorporation and startup tips2 min read
Is a VCs desire to structure your startup as a Qualified Small Business ("QSB") under IRC section 1202 in conflict with your pecuniary interests as the startup's founder?
Potentially. QSBs are required to be classified as C corporations for federal income tax purposes, which would potentially subject the startup to double taxation to the extent corporate dividends are not subject to exclusion from income. Furthermore, if you do not wish to make a quick exit by selling your shares immediately after the five-year holding period required under IRC section 1202, you may forgo the tax benefits of QSB status to the benefit of VCs who are willing to cash out of the investment early on (keep in mind only the first $50MM in capital appreciation is currently subject to exclusion under IRC section 1202). Also, QSBs are not able to utilize certain S corporation strategies that seek to limit the exposure of owner-employees to payroll tax liability on their earnings. All of these tax issues, as well as certain operation control issues, must be weighed against any marginal financial growth forecasted from receiving the VC's capital infusion when determining the appropriate structure for your startup.
What is the best way a small business owner can protect personal wealth and assets from business risks?
Incorporation, maintaining business formalities, conducting annual insurance assessments, and covering any gaps in their risk management assessment with Captive Insurance.
What is the best way a small business can maximize its tax deductions?
Defined benefit plans, Captive Insurance, Employee Stock Ownership Plans (ESOPs), maxing out currently deductible capital investment opportunities not subject to Section 179 depreciation
What specifically are small business owners most confused about when you first meet with them?
The steps required to maintain limited liability in the corporate context.
How can quality legal services help a small business grow?
Helping to lower taxes, limit liability, assess and minimize risk, plan for smooth ownership transitions, plan for unencumbered acquisition and disposition of assets, plan for hiring and retention of employees, and plan for protection and preservation of proprietary business information.
How can quality legal services help small businesses save money?
Helping to lower taxes, quickly and efficiently settle disputes, and boost valuation by having your legal and financial house in order.
How can small businesses maximize the value of their legal team’s services?
By effectively communicating their needs, goals, fears, and limitations with as little personal attachment as possible.
Should business partners have the same amount of equity in a company? Why or why not?
No, the potential for stalemates in decision-making occur when business partners have the same amount of equity.
What are the top three things a small business owner should be aware of when purchasing an existing business?
Accurately determine the value, Determine why the business is for sale., A purchaser is almost always going to prefer an asset sale to a stock sale for both tax and liability purposes.
Do you have any other essential legal guidance for startups that you haven't already included in this survey?
No startup has the same needs or legal issues. Find the right team of advisors for your startup and grow together!