SMALL BUSINESS BASICS
Robert M. Avera
© 2013 AVERA LAW FIRM, PLLC
DISCLAIMER
 This presentation is intended for educational
purposes only. It is not intended to convey legal
advice pertaining to any particular situation and is
not a substitute for legal advice.
© 2013 AVERA LAW FIRM, PLLC
THE BUSINESS PLAN
A business plan provides a blueprint for your business and
highlights your ideas, strategy, and team; it will be used by you
and others, such as banks, investors, and potential partners.
A business plan is a dynamic document.
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THE BUSINESS PLAN
Other topics:
1. start-up costs
2. licensing and certification
3. capital (financial, intellectual, and human)
4. suppliers, equipment, and space
5. technology
6. advertising
7. banking relationships
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THE BUSINESS PLAN
Other topics:
8. insurance
9. taxes
10. governance and compliance
11. growth
12. alternative strategies and opportunities, and
13 strategy
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CHOOSING THE RIGHT BUSINESS
1. Starting a New Business: Is your idea new or novel?
2. Purchase an Existing Business: Many entrepreneurs start as
franchisees in proven businesses, thus avoiding some of the
risks and challenges inherent with starting a new business from
scratch.
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CHOICE OF BUSINESS ENTITY
Texas law (and most states) recognizes several business
structures.
1. Sole Proprietorship
2. General Partnership
3. Corporation
4. Limited Liability Companies
5. Limited Partnerships
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BUSINESS ENTITY: SOLE
PROPRIETORSHIP
• An individual person (if there is more than one owner then it
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is a partnership as described below) is doing business
under his own name (or even under an assumed name).
No formal organizational requirement
There is no limit to liability - your personal assets are at
stake!
You can only transfer the interests in your business by
selling the assets themselves which could mean more tax
liability.
Access to capital can be limited.
No entity taxation at either the federal or state level because
there is no entity to tax.
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BUSINESS ENTITY: GENERAL
PARTNERSHIP
• Two or more individuals (or entities) have shared ownership
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of the business.
No formal organizational requirements to be formed nor
does it have any formal management or governance
requirements
Any partner of the partnership can bind or obligate the
partnership
There is no limit to liability for the partners
Full flow through taxation - taxes are paid at the individual
partners’ level
general partners (individuals) may also be subjected to selfemployment taxes.
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BUSINESS ENTITY: CORPORATION
Under most state laws, there is one kind of corporation.
However, from a federal tax perspective there are two:
1. a C-Corporation and
2. an S-Corporation
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BUSINESS ENTITY: CORPORATION
Both types of corporations have:
• rigorous management/governance structures
• a certificate of formation must be filed with the Secretary of
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State
a registered office and agent for service of process in Texas
at least one director who is in charge of overseeing the
corporation’s business
at least a president and a secretary as officers
one annual meeting of the directors and the shareholders of
the corporation must take place to elect directors and
officers
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BUSINESS ENTITY: CORPORATION
Both types of corporations have the following benefits:
• corporations provide for continuity of life regardless of
whether you are still around or not
• free transferability of interests (with the exception of some
restrictions applicable to S-Corporations as discussed
below)
Formalities such as annual meetings, holding corporate assets
separate and having arms-length transactions between corporations
and shareholders/directors must be followed to maintain limited liability
of the shareholders.
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BUSINESS ENTITY: CORPORATION
C-Corporation:
• More flexible type of corporations in that there is no limit in
the amount of shareholders they may have
• Shares of a corporation can be sold to anyone whether a
corporation, individual person or different entities
• Double taxation
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as a separate legal entity, pays federal and state taxes
and then individual shareholders also pay taxes on
whatever dividends (distributions of earnings) are paid
to shareholders.
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BUSINESS ENTITY: CORPORATION
C-Corporation:
• If sold, there is a single tax to shareholders if the interests
(shares) are sold but there is double taxation if assets are
sold as it is deemed income to the entity and then a
distribution to shareholders
• Because of the double taxation feature of a C-Corporation, it
is generally not a desirable business structure for small
businesses
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BUSINESS ENTITY: CORPORATION
S-Corporation:
• Named as such because of Subchapter S of the Internal
Revenue Code
• From a governance and state law perspective, SCorporations are essentially the same as C-Corporations.
• Form 2553 is filed, an S-Corporation is viewed as a
partnership or sole proprietorship for taxation purposes,
depending on the number of shareholders
o This means that the corporation itself is not taxed, as CCorporations are; rather the S-Corporation’s profits are
passed on to its shareholders, who pay income tax on that
money.
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LIMITED LIABILITY COMPANIES
LLCs in most cases may be organized in two ways:
(i) member managed; or
 more like a partnership.
(ii) manager managed
 more like a corporation.
 manager (or managers) is in charge of running the
business, very much the same way directors are tasked
in corporations, and members do not have an active
role in running the business (like shareholders).
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LIMITED LIABILITY COMPANIES
LLC is formed when a certificate of formation is filed with and
accepted by the Secretary of State.
LLC certificate of formation is required to state whether the LLC
will be manager or member managed and sets forth the names
of each initial manager (if manager managed) or initial member
(if member managed).
LLCs have a continuity of life and are very flexible as far as
transferability of interests with the exception that LLC interests
can not be publicly traded
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LIMITED LIABILITY COMPANIES
No limitation on the number or type of members
If an LLC is owned by a single member, for taxation purposes it
is treated as a disregarded entity.
If the owner is a corporation or another LLC, it is treated as a
division or branch of that entity.
An LLC with multiple members is treated for tax purposes as a
partnership. Can elect to be taxed as a S-Corporation
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PROFESSIONAL
LIMITED LIABILITY COMPANIES
The company must be organized for providing
professional service and services ancillary to its
provision.
No unrelated business operations are permissible
Protects the members from personal liability for
company contracts but does not shield personal
liability for acts of the member
Used by lawyers, engineers, CPAs and other
professionals.
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SERIES
LIMITED LIABILITY COMPANIES
Records of Series Established by the LLC. All records of
any series must be maintained so that the account of the
assets of the series can be reasonably and objectively
determined separately from the other assets of the LLC or
assets of other series. This may be done by identifying assets
by specific listing, category, type, quantity, or computational or
allocational formula or procedure, including a percentage or
share of any assets or any other objective method.
This entity is ideal for holding several real estate investments
within one entity. If properly maintained, other real estate
properties will not be subject to liability arising out of an
incident on or relating to a separate property within the series
LLC.
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LIMITED PARTNERSHIP
Limited partnerships (LPs) are partnerships where certain
partners have limited liability (limited partners) and at least one
partner (general partner) has unlimited liability.
LPs are formed by filing a certificate of formation with the
Secretary of State.
LPs provide limited liability for the limited partners and
continuity of life.
A general partner is usually an LLC or a corporation in order to
provide limited liability to those forming it.
Federal taxation perspective, LPs, are taxed similarly to LLCs.
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WHICH ENTITY DO I CHOOSE?
Consider:
(i) there is a large possibility you will go public,
(ii) you have foreign investors interested in investing in your
business, or
(iii) you are in an industry which corporations are the
preferable or most commonly used business entity
Remember, S-Corporations are a possibility, but not if
scenarios (i) or (ii) apply.
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WHICH ENTITY DO I CHOOSE?
The Limited Liability Company is the most common choice of
entity now with the added professional limited liability
provisions and the new series limited liability company rules.
Other entities may be desirable based on the needs of the
owners.
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OWNERSHIP ISSUES
Ownership Interests
Management and Control
Employment Matters
Buy-Sell Agreements
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OWNERSHIP INTERESTS
 (a)
What percentage of the ownership interests will be held by each
founder? Will it be necessary to commission a valuation of non-cash
assets which the founders might contribute to the business?
 (b)
Should the agreement provide for preemptive rights for the
founders with respect to future issuances of ownership interests?
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MANAGEMENT AND CONTROL
(a)
What procedures should be included for insuring that the founders
will cooperate regarding the election of the managers of the business?
Among the issues to be considered are the following:
(1)
Number of persons serving on the managing board of the entity;
(2)
Persons to be elected as members of the managing board;
(3)
Functions of managing board;
(4)
Resolution of disputes among members of the managing board;
(5)
Persons to be elected as officers (including titles); and
(6)
Managers' and owners' meetings.
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MANAGEMENT AND CONTROL
(b) What instructions should be included regarding protection and
disbursements of the fund of the business? Consider language
regarding location of bank accounts and signature requirements
for checks.
(c)
How will the founders select accountants and auditors for
the corporation? What financial reports should be prepared for the
owners?
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MANAGEMENT AND CONTROL
(d)
What matters should require the consent of all the founders?
Consider:
(1)
Issuances of additional ownership interests;
(2)
Sales of significant assets;
(3)
Execution of contracts which impose material
financial obligations from the business;
(4)
Significant increases in salaries;
(5)
Mergers and consolidations; and/or
(6)
Changes in the business of the entity
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MANAGEMENT AND CONTROL
(e)
Should the agreement include provisions regarding the
payment of dividends or other distributions of profits? Consider
either allowing the directors to determine the timing of dividends or
requiring payment of some minimum dividend amount (subject to any
restrictions on dividends or distributions included in applicable state
law).
(f)
What books and records should be maintained by the
business?
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EMPLOYMENT MATTERS
(a)
Should the agreement include provisions relating to employment of the
founders by the corporation? If so, consider the following issues:
(1)
Duties of each founder in his or her capacity as an employee
and the amount of time that each founder will spend on the activities of the
business;
(2)
The amount of compensation to be paid to each employeefounder (including benefits); and
(3)
be terminated.
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The circumstances under which employment of a founder may
EMPLOYMENT MATTERS
(b)
Should the agreement include restrictions on the ability of
the founders to engage in competitive activities?
(c)
Should the entity be required to purchase health and/or life
insurance and/or disability insurance with respect to any of the
founders?
(d)
What types of obligations should be imposed on the
founders regarding protection of the confidential information of the
business? A definition of confidential information should be included
in the text of the agreement. The agreement should also provide for
assignment of the founders' company-related inventions to the
corporation.
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BUY-SELL PROVISIONS
Should the agreement include restrictions on transfers of ownership
interests? In many cases, the transfer of interests may be subject to a
right of first offer or refusal in favor of the entity and/or the other
owners.
(1) Transfers should be broadly defined to include all possible
voluntary and involuntary means of transfer including gift, pledge,
hypothecation, operation of law (e.g., dissolution of marriage), and
intestate succession.
(2) Restriction should apply to the founders, personal representatives
of deceased or incompetent founders, founders' spouses, and
permitted transferees.
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BUY-SELL PROVISIONS
(b)
Should the agreement grant one or more of the founders the right
to compel the entity to purchase the interests of other specified founders?
Such a provision may be helpful in the case of a deadlock among the
ownership group.
(c)
Should the agreement provide for optional/mandatory purchase of
ownership interests upon disability of a founder? If so, how should disability
be defined?
(d)
Should the agreement provide for optional/mandatory purchase of
shares upon the termination of employment of a founder? If so, what events
should constitute termination of employment?
(e)
Should the agreement provide for mandatory purchase of the
ownership interests of a deceased founder?
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BUY-SELL PROVISIONS
(f)
Should the agreement provide for optional/mandatory
purchase of ownership interests which become subject to transfer to
a third party in an involuntary transfer (e.g., a transfer pursuant to a
judicial order or enforcement of pledge)?
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BUY-SELL PROVISIONS
(g)
How is the purchase price for ownership interests subject to
buy-sell provisions to be determined? For example, the parties may
agree that the value of the interests will be the sum of the book value
of the interests as reflected in the financial statements of the entity
plus an amount equal to the value of the goodwill associated with the
interests. The price may vary depending on the event that triggers
the buy-sell provision, such as when interests subject to involuntary
transfers are purchased at the lower of the price determined
pursuant to the above formula or the price actually paid by the third
party for the interests.
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BUY-SELL PROVISIONS
(h)
What provisions should be included for payment of the
purchase price for ownership interests bought and sold under the
buy-sell agreement? For example, a portion of the price may be paid
immediately in cash and the balance may be paid out in installment
payments under a promissory note. Consider the need to purchase
insurance to finance purchases.
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EMPLOYMENT ISSUES
Employment Manuals
Independent Contractor Agreements
Course and Scope of Employment
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DEALING WITH VENDORS
Actual Authority
Maintaining Corporate Formality
Liability for Entity Debts
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THANK YOU
 Robert M. Avera
 13062 Hwy 290 West. Austin TX 78737
 (512) 615-3578
 Fax (512) 615-3583
 Robert@AveraLaw.com
 www.AveraLaw.com
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