Our law firm has 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 or grow 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.
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, especially when the principals or brokers have reached an impasse. 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. Our answer to that is “absolutely.” Whether an individual is buying or selling a business; buying or selling real estates, 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 our 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.
Years ago, Larry Pino created one of the very first renditions of “template legal contracts” called, The Desktop Lawyer. We sold tens of thousands of those programs in hard copy as well as in software. As a matter of fact, Costco picked them up and we sold hundreds of thousands more with The Desktop Lawyer Documents as well as the Checklists which Larry created. In fact, while he ended up selling off that entire product years ago, a number of the Documents and Checklists are still available on complimentary basis.
We mention that because we 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 thought 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 benefit? 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 your attorney is involved in at least reviewing and modifying it. It will still save substantial money and make sure you are getting what you want.
One further comment is in order. Often times, we have seen that legal contracts are created by transactional attorneys who have never stepped foot in court. We have 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. Our concern sometimes with the template legal documents that we have seen is that they tend not to hold up in battle because they are theoretically sound but pragmatically flawed.
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.
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 real 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.
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.
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: an “S” corporation has elected to be treated as a pass-through so that its revenue is taxed at 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.
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 which we call “The Integrated Structure”, 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.
Family Limited Partnerships have been popular from time to time over the prior 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.
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, requires 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.
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. Unless you are raising money from a limited number of friends or individuals you have had relationships with in the past, 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.
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 401(k) 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 we can offer, but generally speaking, if the amount of start-up capital is less than $250,000 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.
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 is: “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.
The documents would fall into three primary categories.
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.
Again, there are the legal documents which relate to the formation of the entity which owns the real estate.
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 traditionally 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 which has become exceptionally popular. 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.
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.
