Frequently Asked Questions
Explain why your firm is a good fit for someone starting a business to utilize?
Our law firm has close to 40 years of experience in both business and law. We see situations not just from a legal standpoint, but as importantly, from a business standpoint. Anyone who is coming to our firm for the purpose of discussing how to “start” their business will benefit substantially from the perspective we bring into the conversation from all aspects of incubating the business, operating the business, and accelerating the business, all with appropriate legal structures and business conventions.
What steps must I take to incorporate my business?
The process of incorporating a business is not very difficult nowadays. With online filing, anyone can simply go online and form a corporation themselves without legal assistance.
The real issue, however, is whether to incorporate at all and, looked at differently, what is the best structure for the type of business that an individual or company should be using. That’s the real question and, of course, it is an area where we can excel as a law firm for you.
What are the main differences between LLC, C Corp, and an S Corp?
The real question here is what is the difference between a limited liability company and a corporation. A limited liability company operates with all of the same protections as a corporation and substantially more benefits, particularly in the State of Florida which is extremely generous in protecting LLC membership interests both statutorily and in case law. As a result, there are only a few instances in which a corporation is more beneficial than a limited liability company and those are restricted primarily to management service companies whose revenue tends to equal its expenses.
The difference between a “C” corporation and an “S” corporation is a tax question only. They are both the same type of corporation formed under state law. The only difference is that an “S” corporation has elected to be treated as a pass-through so that its revenue is taxed at just the individual shareholder level rather than at both the corporate and shareholder level, which is what a “C” corporation does.
With that said, recognize that an LLC can be treated as either a taxed entity such as a “C” corporation, or a pass-through entity such as an “S” corporation. Therefore, there are few benefits to a corporation as against an LLC.
Can I change my corporation status or convert to an LLC in the future?
Yes, legally a corporation can convert its status to an LLC at any time. Whether or not there is a tax consequence to this depends upon whether the corporation is a “C” corporation and either has taxable income or a net operating loss carry-over.
Do I really need a PPM offering document?
The question is not really about the PPM or Private Placement Memorandum, Offering Document, it is really about compliance with the securities regulations. So, the best answer would simply be this. If you are raising money from friends, individuals you have had relationships with in the past, or more importantly, strangers, you do have to comply with securities regulations. Almost always those securities regulations require a Private Offering Memorandum, Subscription Agreement, and Qualification Profile, among other documents. In addition, you need to make sure that the structure of the offering, not just the documentation, is in order.
Do I need a PPM for a startup?
Most companies tend to start a business with some savings, money they’ve accumulated in the bank, credit card debt, vendor credit terms, some advances from friends and family, and occasionally 401k or self-directed IRA distributions. It is rare for a start-up to use a PPM or, said differently, Offering Documents, unless it is the type of start-up that you read about in the newspaper, such as a technology play or something of that nature. There is no real rule of thumb that I can offer, but generally speaking, if the amount of start-up capital is less than $50,000 and the individuals that are putting up the money tend to be the entrepreneur or the entrepreneur’s friends and family, a PPM is probably not required. When you start upping the ante from there, the discussion starts getting more interesting.
What is a “Disclosure”?
While there is a technical definition of a disclosure under securities laws, the best way to think about a disclosure is information which would be relevant or material for an investor to hear, listen to, discuss, or think about before making an investment.
The one thing you don’t ever want is to have an investor at a later time come back and say, as they certainly have done in situations like this, “hey, that is something you should have told me.” By being very clear, complete and direct in the information you communicate in your offering documents that should never happen.
What if I have multiple investors for a business? What type of legal documents should I use?
The documents would fall into three primary categories.
- There are the entity documents, such as Articles of Formation for the type of entity you would be using, such as an LLC or a Corporation, Operating Agreements or Shareholders Agreements, as the case may be, and By-Laws if it is a Corporation, and so forth.
- The second category of documents are the transactional documents which relate to the type of business which you will be doing.
- And the third category would be the securities documents if you are in fact raising money from individual investors.
Which types of offering documents would be used will depend on not only who those investors are, but how those investors were communicated to or contacted.
What if I have multiple investors for a real estate rehab? What type of legal documents should I use?
Again, there are the legal documents which relate to the formation of the entity which owns the real estate. So, for example, I would always use a separate LLC for each separate piece of property in a rehab project. That would consist of the Articles of Formation for the LLC, as well as an Operating Agreement for the LLC.
Secondly, with respect to the multiple investors, the documents you use will depend upon what the relationship is with the investors. So, for example, if the investors are coming in with a loan, then you would use a Promissory Note secured by a Mortgage Deed. If, on the other hand, the investors are coming in as equity partners, then the documents you use will depend on who those investors are and the manner in which they were contacted. If it’s a small project, a simple Subscription Agreement could be sufficient. On the other hand, if it’s a more complex commercial project, then a full-blown Offering package would probably be required.
Can I advertise the sale of my security?
In the securities world, for someone to advertise, securities have to be registered or exempt from registration. There is an exemption for Offerings which are private Offerings and are covered by different regulations. The most popular of those is a Regulation D Offering.
Regulation D has any number of Offerings, but one of which has been extremely popular is the 506(b) regulation. That regulation allows an entrepreneur or Fund Manager to raise money exempt from registering the securities so long as the entrepreneur or promoter puts together a set of Offering Documents which can be made available to an unlimited number of accredited investors and up to 35 non-accredited investors. An accredited investor is an investor that has more than one million dollars ($1,000,000) in net assets excluding their residence or has made two hundred thousand dollars ($200,000) of income over the prior two years or three hundred thousand dollars ($300,000) over the prior two years jointly. The 506(b) Offering, however, requires a prior relationship with the investor. Therefore, that type of exemption does not permit advertising for the sale of that security.
On the other hand, because of the Jobs Act, a new regulation was passed and the rules have now been promulgated by the Securities and Exchange Commission on it. It’s called a Rule 506(c) Offering. On the 506(c) Offering, which continues to remain an exempt Offering, the promoter/Entrepreneur has the opportunity to advertise the security and it does not require a prior relationship with the investor. So, the advertising can be full and complete in any number of ways that individuals market and advertise.
In exchange for that privilege or right, depending upon your point of view, there are two additional restrictions, however. In a 506(c), you are not permitted to market to or accept non-accredited investors as you can with a 506(b) and you are required to obtain independent verification or validation from the accredited investor that he or she is actually accredited. Other than that, however, 506(c) is a tremendous benefit because it now allows individuals to have access to the capital markets in an exempt fashion.
How long does the process of setting up a PPM take?
The process of putting together a full Offering package takes anywhere from four to six weeks, depending upon the responsiveness of our clients to the information needs we request from time to time.
Is there a better time of year to raise capital?
The answer to that question is primarily local. So, for example, if you are attempting to raise capital in the Sunshine State, which has northerners come down at certain parts of the year, then the answer is yes, it is easier when the northerners are here as opposed to being up north. In addition, of course, it is very difficult to compete against holidays. Otherwise, there is no particular better time to raise capital.
Do I need a local attorney to set up an asset protection plan for me?
The answer to that depends to a large extent on whether you have assets to protect or whether you plan on having assets to protect. The best time to protect assets is, of course, when you don’t need to protect the assets. In the event your assets are being challenged, then there are restrictions on what you can do in protecting those assets. However, if an individual has or intends to have assets to protect, the best possibility is to put together a comprehensive Asset Protection & Estate Plan to make sure that all assets will be covered now and into the future regardless of what could possibly happen to that individual, the individual’s family, or in the economy.
What is offshore asset protection planning? And is it better than setting up locally?
Offshore asset protection planning was popular at one point in time and it may still be popular at some level. However, from the vantage point of what’s available on a domestic basis, not only in the United States but very specifically in Florida, our law firm does not do offshore asset protection planning.
What are Family Limited Partnerships?
Family Limited Partnerships have been popular from time to time over the past three decades. They go in and out of favor, depending primarily upon the most recent theory about asset protection and estate planning. Currently, there are far more effective methods of putting together a structure to protect the entire family as well as to cogently and deliberately provide for optimization of asset accumulation which represents a combination of limited liability companies, trusts, and corporations.
Should I set up in Nevada?
If you are conducting a local business, then it is always best to form your legal structure in the state in which you are operating. If you are operating a national company, then, of course, you have a decision to make as to where it is best to form your business entity or entities. New York had been in the past a state which was recognized as advantageous in some ways. Delaware, of course, is advantageous in other ways. And, for individual non-public companies, Nevada has been touted.
In truth, if your primary business is in a particular state, that should control the decision. For example, operating a company in Florida and setting up the legal entities to do that in Nevada, require two different state filing fees, annual reports, and so forth, along with certain issues associated with the choice of law in different matters.
Moreover, because of the liberalization of the limited liability company provisions in the State of Florida, Florida has actually surpassed Nevada as a state to form a company if asset protection is a consideration.
Can an LLC secure my risky assets?
An LLC should be used on a granular and overall level to secure the acquisition, operation, and management of virtually all assets. Whether those assets can be classified as risky or not, does not actually need to be part of that calculus.
Should I have an attorney present when negotiating a business for purchase?
Whether an attorney needs to be present when negotiating a business for purchase is primarily a tactical decision that depends upon the personalities involved, the type of business, how effective the broker is, who’s involved in the transaction and so forth. Often times, the best negotiation can occur between the buyer and the seller directly. Other times, the best negotiation occurs when the negotiations are being conducted by the brokers. And, at other times, an attorney can step in to negotiate very effectively on behalf of the buyer or a seller for that matter. Hence, the decision of when to bring an attorney into the actual negotiation is a tactical decision.
However, what is not up for grabs is whether an attorney should be involved at all. My answer to that is “absolutely.” Whether an individual is buying or selling a business; buying or selling real estate, or buying or selling an asset of any nature, an attorney – particularly one who is independently experienced in business, real estate, and transactions – brings a completely different perspective to the deal and can provide massive value to the process. So my advice is simple enough – get an attorney involved in the transaction at the earliest stage possible and then use the attorney as is appropriate while it unfolds.
Is it safe to use template legal contracts to purchase real estate?
Years ago, I created one of the very first renditions of “template legal contracts” called, The Desktop Lawyer. We sold thousands of those programs in hard copy as well as in software. As a matter of fact, Costco picked them up and we sold tens of thousands of software programs with The Desktop LawyerDocuments as well as the Checklists which I created. In fact, while I ended up selling off that program years ago, a number of the Documents and Checklists are available on complimentary bases here.
I mention that because I don’t have any great fear of template documents. For what they are, they go a long way. The problem with template legal contracts, however, is that it does take legal consideration to determine any number of things which can only be evaluated within the context of the particular transaction. Is there something about the real estate that requires extra protection? Is there a hold-over tenant that somehow has to be handled? Are there particular objectives which I have that I would rather not disclose, but at the same time, make sure that I can obtain those benefits? And on and on and on. For that, even if template legal documents are used, the best way to get the best of both worlds is to use the template legal document but to make sure that an attorney is involved in at least reviewing it. It will still save substantial money and make sure the individual is getting what he or she wants.
One further comment is in order. Often times, I have seen that legal contracts are created by transactional attorneys who have never stepped foot in court. I’ve also seen that commercial litigators tend not to draft documents. That’s a shame because the best documents are drafted by the individuals who are required to enforce or protect them. My concern sometimes with the template legal documents that I’ve seen is that they tend not to hold up in the best of battle because they might be theoretically sound but pragmatically flawed.
Can I manage my own real estate fund?
Absolutely. That’s part of the fun. And there is no greater opportunity to do that than through the gift the Jobs Act has provided to create a 506(c) vehicle for procuring the dollars needed to acquire and manage your real estate.
We have a very selective clientele program which always begins with an initial conversation. Call us today.