Disclaimer: Every situation is different. Contact us to discuss your particular situation. This is not intended to be relied upon nor is it intended as legal advice. You should assume that all statements herein are merely the author’s opinions and not statements of facts or correct statements of law.

1. What’s the single best source of information for budding entrepreneurs in Texas?

http://www.tded.state.tx.us/guide/
1-800-888-0511

2. Are my assets exempt from levy if I get sued or need to file bankruptcy?

To protect money from both business and personal creditors, pour it into:

• Your home (paying down mortgage, improvements, furnishings)
• Qualified retirement plans - IRA's, 401k's, etc.
• Pay down car loan
• Personal property (but watch out for limits on jewelry and guns)
• Tools of the trade
• Clothing
• Spend it on medical expenses, education, meals or vacations
• Put it in an irrevocable trust for your parents or your kids
• Donate to charity, political campaign, etc.

3. How do I avoid getting overwhelmed and spending a ton on legal expenses?

Unless you have a lot of personal assets that you want to protect that can’t be stashed in exempt buckets like IRA’s, home equity and the like, you probably don't need to incorporate and hire a lawyer before you rent office space, get a phone line, print business cards, and offer, say, consulting services. Just do it.

Unless you are going into a regulated industry such as food service, child care or the like, forget about the legal stuff and just make sure there's really a business opportunity and that you can close deals. If not, you don't need to mess with the legal stuff anyway. Once you've sold something, you'll have revenue, energy and a reason to get the legal stuff right. Don't let the legal stuff become a distraction.

When you do start working on the legal stuff, don’t try to jump through every legal hoop at once. If your full time job becomes filling out forms, your business will fail. Do only the bare minimum, worry only about the things that will really hurt you. Hint - unless you have a lot of assets sitting in the bank or are making a lot of taxable income, very few things will really expose you to much risk in the first year.

Wait to hire employees as long as possible. Hiring employees makes the legal side much more complicated. Note: contractors can come in and do project work for you any time.

Find a lawyer who will answer basic questions for free. You shouldn’t have to pay $100 to get a simple question answered. You want a lawyer who doesn’t start the clock unless he has to draft docs or do research, and who is willing to give you a low hourly rate (under $200/hour) and bill his time conservatively until you get on your feet.

If you have some free cycles, ask your lawyer to point you in the right direction and let you do things yourself to keep costs down. For example, you can probably figure out how to incorporate yourself and modifying a form of NDA isn’t rocket science.

4. At what point do I need to spend some money and bring in a lawyer?

Short answer - when you can afford it.

Once you have money and business, a lot of things happen that make hiring a lawyer a good idea:

• you suddenly have assets that need protecting
• you owe taxes and need to file returns
• you start thinking about hiring
• you are probably seeing drafts of contracts from vendors or clients
• you may be raising a round of financing
• you may need to patent an invention
• you may find yourself in a dispute with someone

5. Do I need a separate bank account for the business? Even if it is not going to be incorporated?

Yes! Put all revenues into that account. Pay yourself out of that account in round numbers, no more often than weekly. Do NOT make daily withdrawals of specific amounts for personal/household items.

Eventually, you should pay all business expenses out of this account also, but at first it's ok to pay for things using your personal credit card. Just save receipts so you can expense them.

Why? If you have incorporated, you need to keep the books separate to prevent creditors from arguing that the corporation is your “alter ego” and “piercing the corporate veil.”

Even if you haven't incorporated, you will find it much easier to do your tax return, track how well you are doing, fill out your information form for the Comptroller's office, protect personal assets in case of bankruptcy or lawsuit, etc.

6. Do I need a license for this?

You should start this process early on because it can take some time.
Ex.s restaurant, day care center, general contractor

7. Will I need to charge sales tax?

Depends on what you are selling and where your customers are. For example, if you only sell to out of state customers, then you don’t need to worry about this.

If you do need to get a sales tax i.d. and collect sales tax, the Comptroller's office can walk you through it. You will probably want to buy software to calculate the sales tax for each situation.

8. Do I need to incorporate?

Yes if you have assets to protect and you have employees. It's hard to protect yourself from liability for your own malfeasance, but if an employee makes a costly mistake, incorporation can protect your personal assets.

Usually, people incorporate to keep their personal assets safe from
creditors of the business. However, it can also be used to protect the
business assets from your personal creditors. LP's are especially good for this because creditors can not step into your shoes and become a limited partner. They just become assignees of the LP's share of profits, even if those profits are not distributed. So the creditors can end up owing taxes on money they haven't received.

9. If I do incorporate, what form - LLC, LLP, corporation, etc. - should I choose?

Depends on many factors:

• whether investors will also be active managers (if so, LP is not an option)
• whether you are hellbent on avoiding the 4.5% Texas franchise tax (if so, LLC and Corporation are not good options)
• whether you plan to be listed on a stock market
• whether you plan to have multiple classes of investors, etc.

For most mom and pop startups, LLC is a good option because it’s a simple filing with the Secretary of State, all of the investors can be as involved in management of the company as they want to be, minimal formalities are required, there’s no state franchise tax until you get to $150k/year. Once you start making $150k/year, hire an attorney and go through your options carefully. You can always change form.

10. If I do decide to make my company a corporation, should I incorporate in Delaware? Nevada? Texas?

Unless you have VC backing and plans for an IPO, I’d just make it a Texas corporation. If you are a foreign corp doing business in Texas, you’ll have to file here anyway, and you may be subject to Texas franchise tax. Also, if you file in Delaware or Nevada, you’ll be subject to suit there. Large corporations prefer Delaware for its low franchise taxes and well developed (and generally lenient) body of corporate law (ex. poison pills). Those issues probably aren’t going to be your biggest concerns for several years.

11. How does incorporation affect my taxes? Will I have to pay double taxes?

It depends. Per se corporations (those filed as corporations and not LLC’s or LLP’s etc.) are generally taxed as C corp.s unless an S election is made.

If your company is not a per se corporation, whether the IRS views your company as a “corporation” and thus taxable at the entity level or as a “partnership” and thus not taxable at the entity level does not depend directly upon the form you chose. (Form here means the form you chose when you filed with the Secretary of State - LLC vs. corporation vs. LLP etc.) Rather, it depends on a four factor test that the courts have created.

If an entity has 3 or more of the following "corporate characteristics" then it is deemed a corporation for tax purposes and must pay entity level tax: (i) limited liability for its owners; (ii) unlimited life for the entity; (iii) free transferability of the ownership interests in the entity; and (iv) centralization of management of the entity.

LLC’s can be structured to provide limited liability but also qualify as a partnership for U.S. federal income tax purposes by giving up transferability of interests and unlimited life.

But remember, the key point is that until you are making money, taxes are not an issue. Once you are making money, you can hire an attorney to help you sort this out. You can always change your corporate form later.

Final note: If your LLC has one owner (you) and no employees (other than you), it is disregarded for federal income tax purposes, even if you don’t file an S election. This is one of many reasons to wait as long as possible to hire employees.

12. If I do incorporate, what must I do or not do to preserve my limited liability status and avoid “piercing of the corporate veil?” How important are corporate formalities such as annual meetings, minutes, drafting formal corporate resolutions, adopting and maintaining bylaws, etc.

The formalities required depends upon what business form you choose. LLC’s require fewer formalities than corporations. Generally speaking, the corporate formalities are not hugely important but should be observed just to be safe. Why risk it?

The main way that veil piercings occur are:

• you commit a wanton crime or grossly negligent tort and then try to hide behind the corporate veil to protect a large amount of assets from being reached by a deserving claimant, and/or
• you completely fail to treat the corporation as a separate entity: i.e. you observe no corporate formalities, you pay your personal bills out of the corporate bank account on a daily basis, you deposit checks payable to you in the corporate account and checks payable to the corporation into your personal account, and/or
• you fail to use Inc, Corp, Ltd, LLC, LP, or any such term to indicate on your business cards, letterhead, website, signage, and so forth that your company has limited liability

13. What should I think about when raising money?

Unsecured debt is best because you keep 100% control and have little downside:

• Unsecured debt such as credit cards and personal loans are your best bet because they are dischargeable in bankruptcy.
• Loans secured by “the assets of the business” are ok. If the business fails, who cares who gets the “assets?” Unless you are contributing a valuable asset to the business at the time of formation, this is still essentially an unsecured loan.
• Borrowing against equity in your home is ok, but only if you don't mind losing your home.
• If you are going to sign a loan agreement, get a lawyer involved, even if just to do a quick review.
• Taking money out of retirement accounts generally should not be done.

If you can’t raise the money through an unsecured loan, then you’ll have to give up some equity:

• When raising money this way, you are essentially selling equity. Thus, valuation is the key.
• Always bring in a lawyer for this.

Business lawyers have seen plenty of debt and equity financings, so they can usually offer advice, but don’t let your lawyer become a business negotiator. That’s your job. He should just offer you legal advice and let you fight out the business terms with the investors.

14. What are the main things I'll need a lawyer to do once the business is up and running?

• Review all legal docs and make sure everything is kosher with the articles of incorporation, contracts, leases, etc.
• Negotiate contracts with employees, landlords, vendors, customers, etc.
• Handle disagreements and lawsuits with employees, landlords, vendors, customers, etc.
• Handle financings and all the docs associated with them.
• Sit in on board meetings to answer legal questions and stop legal problems before they start (ex. antitrust, employment matters, etc.)
• Manage specialist lawyers that you've hired to handle a particular matter such as an environmental or patent dispute, make sure other lawyer's fees are reasonable, work is done satisfactorily, etc.
• Be involved with audits and tax returns.
• General guidance, answering of questions, etc.

15. What are the legal issues with hiring? How do I comply with them?

Where do I begin? “At least speak with a lawyer” is the short answer here.

All employees must fill out the appropriate immigration and income tax withholding forms.

You should use a payroll service or an experienced bookkeeper to get on top of salary payments and withholding of workers comp, social security, federal income tax, etc. A good part-time bookkeeper that knows how to use Quickbooks can usually be hired for about $50/hour, and you'll probably only need about two hours per month.

You’ll probably want your employees to sign NDA’s and non-competes.

You’ll probably need to provide your employees with basic health insurance and you might as well throw in some term life and accidental disability since they are cheap and can be hugely helpful to an employee’s family. Since you are paying for this stuff, you should make sure you can deduct it. A good lawyer, accountant, insurance agent or financial consultant can help you set up a 401k, buy deductible health and life insurance, etc.

You should start an HR file for each employee and document any problems in case you need to fire them later. You shouldn’t be afraid to fire people for cause, but you should always keep good records. If you are firing someone without cause, that’s ok too, but I’d talk to a lawyer first.

You’ll need to observe all sorts of other laws about minimum wage, non-discrimination, overtime pay, posting of notices, jobsite safety, accessibility by disabled persons, etc. You may also need to worry about drug testing laws, data reporting requirements, and more.

16. Anything else?

There are endless numbers of things to fear. Some companies need to worry about building codes, certain industry specific restrictions on advertising, import and export laws and duties, patent infringement, and an endless list of other gotchas.

It’s worth hiring a good lawyer once you can afford it.