Starting your
Small Business
A Legal Perspective
Presenter:
Darryl Maxwell, Esq.
Managing Attorney
DC Bar Pro Bono Program
Choosing an Entity
Types of Entities
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Sole Proprietorship
General Partnership
Limited Partnership
*Nonprofit
Corporation
*For the purposes of this presentation,
these entities will not be discussed.
 Limited Liability
Company
 C-Corp
 S-Corp
 *Statutory Close
Corporation
Sole Proprietorship
a business owned by a single individual
Positives
 Simplest and least expensive business
model
 Must obtain licenses or permits specific
to trade
 No special filings with the government
 Owner has full control, reaps all benefits
 Not req’d to pay unemployment taxes
Sole Proprietorship
Drawbacks
 Total and unlimited liability; personal assets
ARE NOT PROTECTED
 Profits are personally taxed to the owner
 Offers very few tax benefits
 May have difficulty obtaining long term
financing
 No unemployment benefits if business fails
General Partnership
Business owned by 2 or more persons who have agreed-verbally or in writing—to operate a business
Advantages
Easy to set up
Partners share workload
Financing easier to obtain than in a sole
proprietorship
Partners share all profits & reap all
benefits
General Partnership
Disadvantages
 More expensive to start than sole proprietorship; few
tax benefits
 All partners have TOTAL AND UNLIMITED LIABILITY
for business expenses
 Can take personal assets from partners to resolve
debts
 Each partner is bound by the actions of the other
partner(s)
 Loss of partner may cause business to dissolve
 Partnership may be difficult to end
Limited Partnership
Partnership with limited legal liabilities
Advantages
 Easy to set up (certificate of Limited
Partnership to be filed at DCRA & requires
written agreement between partners)
 Partners share expenses and profits
 Limited Partners only risk their business
investment not their personal assets
 Pass through taxation: owners report their
share of profits or losses in the company on
their individual tax returns. The IRS does not
assess taxes on the partnership itself.
Limited Partnership
Disadvantages
 More expensive to start up because it requires written
agreement
 Operating (general) partner has TOTAL AND
UNLIMITED LIABILITY for business expenses; if a
limited partner participates in management, s/he may
forfeit liability shield and become personally liable in
lawsuits
 Can take personal assets from partners to resolve
debts
 Each partner is bound by the actions of the other
partner(s)
 Loss of partner may cause business to dissolve
 Partnership may be difficult to end
C (General) Corporation
A business formed by law as a separate legal entity from
its owners (shareholders and stockholders)
Advantages
 Lifespan independent from its owners
 Personal assets protected from business
liability
 Ownership can be transferred through sale of
stock; easy to raise capital through stock sale
 Ownership changes do not affect management
of the corporation
C (General) Corporation
Disadvantages
 Incorporation involves considerable start-up
expenses
 Subject to greater DC & federal legislation
 Corporate earnings subject to double taxation
(corporation taxed at entity level and
shareholders taxed on income from dividends)
 Great deal of legal formalities
S Corp
Corporation with a maximum of 75 shareholders
Not recognized in DC; treated as an S Corp by the federal
government by a C Corp by the District.
Advantages
 Corporate earnings avoid double taxation
 Limited liability for shareholders
 Ease of transfer of interest
S Corp
Disadvantages
 Lack of flexibility of management
 Impractical to ever go public
 Same corporate formalities as an LLC
but less benefits
Limited Liability Company
(LLC)
an unincorporated association, with or without perpetual
duration, having one or more member, foreign or domestic
Most attractive from of business entity;
combines the features of partnership with
elements of the corporation
Advantages

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
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Personal Assets protected from liability
No limit on the number of owners
Simpler to operate than a corporation
Owners may participate in the management of the
business
 Owners receive pass-through tax benefit; only taxed
at the personal level, not the entity level
Limited Liability Company
(LLC)
Disadvantages
 Legal assistance may be needed to properly
set up the LLC, including drafting the
operating agreement
 Professionals -- lawyers, doctors,
accountants, etc.-- are prohibited from
registering as an LLC.
Social Enterprise
a business whose primary purpose is the common good.
This entity uses the methods and disciplines of
business and the power of the marketplace to advance
its social, environmental and human justice agendas
Applicable Structures
 Non-profit
 Subject to 501(c)(3) or 501(c)(4) limitations
 Low Profit Limited Liability Company (L3C)(not recognized
in DC)
 a hybrid structure that combines the legal and tax flexibility of a
traditional LLC, the social benefits of a nonprofit organization,
and the branding and market positioning advantages of a social
enterprise.
 Certified B Corporations
 Required to have a public benefit purpose that is audited by a
third-party standard
 Benefit Corporations
Social Enterprise
Advantages
 Offer legal protection to directors and officers to
consider the non-financial interests of their
workforce, community, and the environment
when making decisions, even in liquidity/sale
scenarios
 Institutional investors that prefer corporate
structures over LLC may be drawn to the
certified benefit corporations
 Great for marketing and attracting investors
Social Enterprise
Disadvantages
 Can be sued for failing to adhere to its beneficial
purpose, or for not adequately considering nonfinancial interests in decision making
 A simple LLC could incorporate benefit corporation
provision in its operating agreement without the
additional cost of certification
 Additional costs associated with getting certification
 Does not affect tax status
 Not recognized in every jurisdiction
Personal Guarantees
 Guarantee applies to
you personally. You are
declaring an individual
pledge to make good on
the loan, usually without
exception.
 Depending on how your
contract is written, you
may be responsible for
the loan even if your
business is protected by
limited liability laws.
 You may even be
responsible for the loan
after your business has
been dissolved. When
you issue a personal
guarantee, you are
acting as a cosigner on
the loan. As such,
creditors will go after you
in the event that the
borrower — your
business — fails to make
the loan payments.
Personal Guarantees
 Personal Guarantees
are a way of life and may
be unavoidable.
 The Small Business
Administration (SBA) for
example, requires that
all loans they guarantee
must also be personally
guaranteed by any
person with a 20 percent
or larger ownership
interest in the business.
 When agreeing to a
personal guarantee, try
to limit your personal
exposure.
 You may offer a limited
personal guarantee, say
25 percent of the loan.
 Larger banks may leave
you no room to
negotiate, but smaller,
community banks may
be more understanding.
Forming the different entities
 Sole Proprietorship: no paperwork; must obtain
any applicable licenses/permits
 General Partnership: no paperwork required by
a written partnership agreement is encouraged
 Limited Partnership: Certificate of Limited
Partnership must be filed with DCRA; should
draw up a limited partnership agreement
between the partners; must have a registered
office and agent.
Forming the different entities
 S-Corp: Articles of Incorporation must be filed
with DCRA; must have a registered office and
agent.
 C-Corp: Articles of Incorporation must be filed
with DCRA; must have a registered office and
agent.
 LLC: Articles of Organization must be filed with
DCRA; Must draft a operating agreement; must
have a registered office and agent.
Department of Consumer and
Regulatory Affairs (DCRA)
Technical requirements
 Certificate of
Occupancy: shows that
building meets correct
building & zoning
requirements for use
 DC Business Tax ID
Number (Form FR-500)
and Certificate of
Registration from the
Office of Tax & Revenue
 Clean Hands Certificate:
affidavit stating you do
not owe DC more than
$100. If you do, you
must resolve it before
you can proceed
 Basic Business
License
 Trade Name
Registration
 Building Permits (for
constructing or altering a
building
For more information,
please visit:
 www.dcra.dc.gov
 http://www.irs.gov/businesses
DC Bar Pro Bono
Program
As part of its outreach to small
business owners, the Pro Bono
Program provides:
 Eight-part business law course for
small business owners starting in
September.
 Topics include entity formation,
contracts, risk management,
employment law, government
contracting, joint ventures and
financial controls
 The course has been held each
fall since 2006. Over 120 small
businesses have participated.
Small Business Clinics
 The CED Project co-sponsors walk-in small
business clinics at various locations around the
District.
 The clinics are held 11 times per year. About 175
small business owners attended the clinics in each
of the past two years.
 At the clinics, small business owners can meet
one-on-one with a lawyer and ask about their legal
issues.
 Each small business is matched with a lawyer who
has expertise in the areas of concern for the small
business owner.
Upcoming Small Business
Clinics
Wednesday, February 11, 2015 - DCRA 1100 4th Street SW
(5:00pm - 7:30pm)
Wednesday, March 18, 2015 - Carlos Rosario International Public
Charter School 1100 Harvard Street, NW (5:00pm - 7:30pm)
Wednesday, April 22, 2015 - DCRA 1100 4th Street SW (5:00pm 7:30pm)
For more information and registration, visit
www.lawhelp.org/dc/ced
Questions
 Contact:
Darryl Maxwell, Managing Attorney
CED Project
DC Bar Pro Bono Program
1101 K Street NW, Suite 200
Washington, DC 20005
202-737-4700, Ext. 3369
dmaxwell@dcbar.org
www.dcbar.org
www.lawhelp.org/dc/ced
Twitter: @darryljmaxwell