You have now consulted with your small business attorney and to your surprise the attorney has advised you as a small business owner that a selling LLC interests may be subject to securities laws.
Selling a piece of your limited liability company, even if it is a small business, may put you on the radar of the Securities and Exchange Commission (SEC). It doesn’t mean that you have to go public. “Going public” for those not in the know basically means that you have to register the securities with the SEC. Think big bucks for your securities lawyers and investment bankers. If you have a security, then you either have to register with the SEC or you must meet an exemption. If you fall within an exemption to the securities laws, you do not need to register the securities. Just to hammer home the point, the SEC succinctly states: If a small business is offering and selling securities, even if to just one person, the offer and sale of the securities must either be registered with the SEC or conducted in accordance with one of the many registration exemptions under the Securities Act. As a small business owner, if the membership interests may be considered securities, you are looking for an exemption as you do not want the risk of substantial fines from the SEC and possibly worse yet, you do not want the purchaser to try to rescind the purchase. This article reviews the various exemptions from the securities laws.

You have a small company and formed the business as a limited liability company. You think that securities laws are only for large companies. But If you think that the Securities and Exchange Commission is not interested in selling some membership interests in your LLC, you may want to think again – and ready this article. You have to be worried about federal and state securities laws only if you are selling securities. The big question is whether membership interests in an LLC are “securities.” The sale of certain limited liability company interests may fall within the ambit of a securities transaction. This article addresses the question of whether ownership interests in a LLC are subject to securities laws. In the next article, we will discuss what are the implications of treating the sale of ownership interests in a LLC as a securities transaction. Then you need to think about who you can sell those LLC interests to and who can represent your company in finding investors.

This article is about some of the traps that lie in wait for unwary founders. Remember that any startup has numerous issues to deal with starting on day one of the formation of the new business. A new business owner who fails to be ready on day one proceeds at his or her own peril. Startup legal problems can take numerous forms and this article discusses some of the major issues such as failing to assign the IP to the new company, failing to reduce investor or partner agreements to writing, agreeing to a “standard” agreement, failing to observe corporate formalities, and failing to take into account that partners may die, get divorced or file for bankruptcy.

Checklist for selling or buying a small business: Starting a business is relatively simple, especially if you have worked with a startup lawyer. Selling your small business, however, may be more challenging than you anticipated. Forming a new business is not challenging. You can form a business just as quickly as you ask your small business lawyer to file the papers with the corporations department or in Washington DC with the Department of Consumer and Regulatory Affairs. Selling a business is a lot more challenging than forming a business. There may be many reasons to exit and you now want to receive the full value (value is in the eye of the beholder of course) of the company that you started. You will need the services of your business advisers, your tax advisers and of course your mergers and acquisitions attorney. This article highlights some of the guideposts in the merger or acquisition of a small business.

Primer on crowdfunding for small businesses. The startup or small business faces daunting challenges in attracting funding. Simply, startup funding isn’t simple. The Jumpstart Our Business Startups Act of 2012 (the JOBS Act) added another arrow in the quiver of those looking for funding sources for their startup or small business. Crowdfunding has been around for a while, but the JOBS Act added an entirely new dimension to crowdfunding. This blog post discusses innovations recently introduced to allow the small business to attract investment through crowdfunding. The new crowdfunding rules are “designed to assist smaller companies with capital formation and provide investors with additional protections.” Crowdfunding may not be for every small business, but you should at least familiarize yourself with the contours of the JOBS Act crowdfunding and decide whether it is an avenue that your small business may want to pursue.

Justice Scalia’s unexpected death leaves a huge void on the Supreme Court and he will be missed by liberals and conservatives alike for his brilliant mind and uncommon humor. Others may not miss him as much for his biting dissents and personal invective against some of his colleagues on the court. Regardless of whether you agreed or not with his opinions–and I confess that I did not subscribe to his conservative judicial views–the Court and the country lost a judicial icon. This blog post recalls a special lunch I had many years ago with Justice Scalia.

Negotiating LLC Operating Agreements

Tuesday, 09 February 2016 by

This blog post highlights some of the critical issues in negotiating operating agreements for a new business. The operating agreement for a limited liability company (LLC) is the critical document that governs formation, governance, distributions and dissolution of your business, among other issues. You will want to give special attention to negotiating the operating agreement, especially when your business has several partners or investors. The LLC is a creature of state law and the operating agreement is an agreement. You have great latitude in negotiating the terms of the operating agreement as most states have few mandatory provisions. The operating agreement for your LLC is the most important agreement that will govern your business for the life of the business. These terms may be difficult to negotiate but if a dispute arises, they will be even more difficult to resolve without the guidance from your operating agreement. You should go over the terms and conditions of the operating agreement carefully with your small business lawyer and make sure you understand and agree before you jump in to a relationship with partners and investors.

If you ask entrepreneurs what are their major challenges in getting a new business off the ground, the three most common responses are money, money, money. There are indeed other major challenges but the primary concern of most new businesses is how to attract startup funding. Whether the entrepreneur is opening a small service business or introducing a new product onto the market, the challenge of funding looms large. When these small business owners face a major hurdle in attracting funding to support their new businesses, either as they are starting out or as they try to grow the business, they have at least three options: funding their business with their personal reserves; taking out a loan; attracting investors. This Rosten Law blog briefly discusses each of these options.

Careful when electing LLC taxed as S Corp. Your startup business is organized as a LLC and you have consulted with your small business lawyer and tax adviser about whether you should elect to be taxed as a S corporation. Your startup lawyer has filed the papers to organize your LLC in Washington DC or elsewhere. You decided to make the S corp election to save self-employment taxes—a good reason for many small business owners. All is good and well, except that there are looming traps for the unwary. When you talk with your tax adviser or your startup attorney, you want to come prepared and understand that the S corp election may pose some financial risks for you. This article describes some of the looming risks for those business owners who have elected for their LLC to be taxed as a S corp. This article is not meant to provide tax or legal advice, rather to highlight some of the issues that you as the small business owner may face and will want to make an informed decision with you small business attorney or tax adviser. This article was not intended to provide an exhaustive list of differences between taxation of a partnership and taxation of a S corporation. Rather, this article was intended to highlight some of the differences. You may have a good idea of your exit strategy for your new business. If you think that you will be able to take it public in a few years, or that you will stand to benefit for minimizing self-employment taxes, then there may be good reason to make the election to be taxed as a corporation. This article intended to point out some of the countervailing considerations and you should discuss your particular needs with your small business attorney and tax adviser.

We have reviewed the considerations for choosing your business formation type between a limited liability company (LLC) or corporation. You have discussed the choices with your startup lawyer. The threshold question you want to ask is whether your small business would qualify for S corporation tax treatment. For many clients, that is the end of the story because their startup has something that would make it ineligible for S corporation tax treatment such as one of the partners is a corporation. If the business meets the S corporation criteria, then the next question is whether it is advantageous to the new business to elect to be treated as a S corporation. As we have discussed in this blog, the clear answer is “it depends.” There are advantages and disadvantages to both S corporation tax status and partnership tax status, but the primary driver for those who elect S corporation status is to try to save self-employment taxes. In the next blog, I will write that there are more dimensions to this decision. We will go over some of the rules regarding distributions, redemption of ownership interests, contributions of goods or services, among some other rules that you may want to talk about with your tax adviser. The rules governing taxation of LLCs are complex and a tax adviser is essential to help guide you through the tax maze.

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