Business Law Archives - Page 4 of 4

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What is a Capital Contribution?

February 15, 2018/in Business Law

Are you a new business owner? If so, there are probably entrepreneurship terms that leave you scratching your head. A capital contribution is one of them.

This contribution is money given to a business or partnership.

Sounds simple, right? But there’s a lot more involved in this contribution.

Are you interested in finding an investor? Before you sign, read the fine print before accepting a contribution. Continue reading this guide and understand how contributions work.

What Is a Capital Contribution?

A capital contribution is an act of giving money or assets to a company or organization.

When an investor or partner gives money for your business, this is called a contribution. But this differs from another form of contribution, such as a loan.

A capital contribution is usually given by an investor or someone who’s interested in partnering with your company.

Depending on the agreement, the capital doesn’t have to be paid back. But other contribution types require a debt from the business.

This investor or partner wants some form of control, called equity. When a third-party offer money, they desire some form of control or partnership over your enterprise.

There are other reasons why a third-party gives a company capital or money. These reasons include stock exchange.

When you submit your taxes, you report this capital as “paid-in capital.” This means this money was not received by a business operation, but are business funds as a result of equity.

Let’s discuss capital’s significance in these two areas.

What’s Equity?

Equity can have several different meanings, depending on the agreement between business owner and investor. Typically, equity refers to ownership.

Equity is usually expressed by subtracting the number of assets by the amount of liability. In this case, equity also represents a company’s value and worth.

Ownership can take a few different meanings. Some investors contribute their own capital to undertake a business under their wing. This means the investor takes on the business’ liabilities.

Or, the third-party can express ownership through stocks. In this situation, the third-party doesn’t have any liabilities with the company.

Two Types of Contributions

When you approach an investor for capital, they will usually order one of two contribution methods.

One method requires ownership or the investor taking a share of your profit. If you’re interested in an investment but are wary about a stake or ownership, then you will have to repay that amount.

Here’s more information regarding both forms of contribution:

Equity Investment

One of the most common contribution methods is the equity method. Like stated previously, equity is the ownership one of more people have over a company.

When an investor claims equity, they have a share of the profits and losses of your business. Higher equity stakes involve the investor taking your company under their wing to maximize profit.

Your investor will help sculpt a business plan that will use their capital. This includes business expansion, reducing debt, building liquidity, and hiring new staff.

This brings more capital into your company, so the investor receives an ROI.

Some investors use this money for stock ownership. In this instance, they have low equity. They take a share of your stocks but don’t have a say over the profits and losses of your company.

Debt Investment

Are you uneasy by the thought of someone running your business? No problem — utilize a debt investment. This investment is similar to a traditional loan. A private investor will loan you capital, but you will have to pay it off.

You can pay this off with the capital your business generates. Or you pay it off in interest.

Other Types of Capital

Capital doesn’t have to be expressed as money. There are plenty of non-cash advances that signify a stake or loan for the company. This is defined a non-cash asset. A non-cash asset can include buildings and machinery.

But the two types of investment still apply.

If your investor wants equity in your company, they will use the non-cash asset to improve your business’ structure. This can include a new office or updated equipment.

If you decide on a debt investment, the investor will buy you the property and equipment.

For property, you may make rent payments to the investor. For machinery, you’ll pay off the amount by the duration of the equipment’s life cycle.

Owner’s Contribution

What if you don’t want a middle-man or any loans? You can use owner’s contribution. This is capital you contribute to your own company.

Capital could mean money you transfer to your business from your personal account. You can also buy property or equipment using your own funds.

Owner’s contribution is beneficial if you run a partnership. If you contribute a certain amount, your ownership increases over your partner’s.

Keep in mind, any amount of the contribution that you take out decreases your owner’s equity.

Why You Should Accept a Contribution

Capital is essential to the growth of your business. Whether you’re using capital as money or a non-cash asset, a contribution can greatly help your business.

Even if you’re submitting your own contribution, your personal funds can be the ticket for business growth.

If you accept an equity investment, you have no obligation to pay the money back.

Rather, your investor will use their skill to grow your business and maximize your capital. And if you accept a debt investment, the stakes are usually more lenient then if you go through a bank.

Your Business Will Grow with More Capital

When an investor gives your business capital, this is called a capital contribution. But this capital always comes at a price. An investor will have a stake in your company, either through business ownership or stock ownership.

Or, you can choose the pay back the investor the same you would a lender. If you have the personal finances, you can make an owner’s contribution and increase the equity you have on your company.

Did an agreement fall through between you and your investor? Request an appointment with a business lawyer.

What is the Difference Between a C-Corp and an S-Corp?

August 8, 2017/in Business Law

One of the most important questions a prospective business owner is faced with is how to structure their business. The different types of businesses offer certain benefits as well as draw backs. It is therefore important to understand the various possibilities in order to select the option that best fits the goals for the business.

What is a C-Corp?

C-corps are owned by shareholders. Business decisions are made by a board of directors, who are elected by the corporation’s shareholders. C-corps are their own legal entities. This means they are not an extension of their owners, and the owners can change without impacting the status of the C-corp. This also means that the owners have limited liability. With few exceptions, owners cannot be sued personally if the corporation does something wrong, and they cannot be required to pay corporate debts.

What is an S-Corp?

Unlike a C-corp, an S-corp is not its own entity for the purpose of taxation. Instead, owners are taxed based on the net profits or losses. Owners of an S-corp are referred to as shareholders, and the shareholders do enjoy limited liability. This means that shareholders’ assets are protected in the event that the corporation is liable for debts.

Tax comparisons

One of the main differences between C-corps and S-corps is the way in which they are taxed. C-corps are subjected to “double taxation.” This is because the corporation is a separate taxable entity, responsible for paying its own taxes. Thus when the corporation has profits it is taxed on those profits. Then when shareholders take distributions, they can be taxed a second time.

S-corps, on the other hand, are not taxed in this way. Instead, the taxes on S-corps occur at the shareholder level only. These differences in how these two types of entities are taxed is one reason some people opt for an S-corp over a C-corp.

Shareholder differences

S-corps might have tax benefits, but there are some restrictions placed on an S-corp that are not present in C-corps. For one, only American citizens or legal residents can be shareholders in an S-corp. A C-corp can have foreign investors. Additionally, an S-corp cannot have an owner who is a business entity, while a C-corp can. S-corps are also limited in size because they can only have 100 shareholders or less. There is also only one type of stock that shareholders can have in an S-corp, while C-corps can have various stock types.

It is important for any prospective business owners to the take time to research the different options for creating business entities. The potential benefits and drawbacks to each form of entity need to be compared to the individual needs of the new corporation and to the goals for the future of the corporation.

Choosing an Entity for Your New Business

June 21, 2017/in Business Law

Starting a new business is exciting and stressful. For many, creating a business is the achievement of a lifelong dream. However, it is no secret that many businesses fail within just a few years of opening. To avoid failure, business owners need to speak with experienced business law attorneys long before opening the doors to their new companies. At the De Bruin Law Firm, our Greenville, South Carolina business attorneys are experienced in assisting clients with all aspects of business law, from entity formation to litigation. Further, our attorneys are experienced business owners, which provides our clients with well-rounded knowledge of the numerous questions and concerns business owners may have.

Choosing a business entity

Before you choose a business location, create a logo, or begin hiring employees for your new company, you have some other steps you must take. One of the first choices you must make as a business owner is determining which business entity is best for your new company. There are several different options for your business, each with advantages and disadvantages. Each entity also has different tax liabilities and consequences and should therefore play a large role in your entity formation analysis.

Limited liability companies (LLCs)

In an LLC, the company itself is a separate legal entity from the owners of the LLC. This means that the owners’ personal assets are not available to satisfy any business debts, which is beneficial in litigation. An operating agreement governs the life of the LLC. Business owners must register with the state to create an LLC.

Partnerships

In contrast to an LLC, the partners (owners) in a partnership are personally liable for any legal claims that are filed against the business. No state filing is required to form a partnership. Partners must report business income on their tax returns. They may deduct losses on their taxes as well. It is wise to have a partnership agreement in place in the event the partners ever disagree on how the business should be run.

Sole proprietorships

In a sole proprietorship, the owner is personally liable for any lawsuits that are filed against the company. No state filing is required to create a sole proprietorship. Owners must pay personal income taxes based upon the sole proprietorship’s profits. Similarly, owners may deduct business losses from their taxes.

These are only a sampling of the numerous business entity types in existence. Based upon your individual business goals, a different business entity may be best for you. It is important to understand the different liabilities involved with each entity as well in case issues arise with your business.

Our attorneys guide new business owners throughout the life of their companies

Our business law attorneys have helped clients create various types of companies, including LLCs, partnerships, sole proprietorships, and other entities. Our attorneys have assisted these companies when disputes have arisen and when legal action has become necessary. We provide guidance with complicated tax concerns, with obtaining business licenses, and with determining a plan of action for your company. Our legal guidance does not stop once the business entity type has been selected. We help our clients get their business off the ground and running as well. For many of our clients, we remain available to address any concerns they may have for years to come.

Registering for and Filing Income Tax Withholding in South Carolina

March 7, 2017/in Business Law

South Carolina business owners must take several steps to get their businesses off the ground. They must choose a location for their business and they must obtain financing. They must choose a business entity, such as a limited liability company or a partnership, and they must register a business name. And, of course, the business must register for state and local taxes.

Withholding Tax

Withholding tax is taken out of wages. The withholding tax goes toward the total annual income tax liability. Employers that hire South Carolina employees must issue a return to the South Carolina Department of Revenue for the taxes that have been withheld.

First, the business owner should complete Form SCDOR-111, which is the Business Tax Application. After this form is completed, the business owner will be able to move forward with a number of steps, such as registering for a retail license. After completing the Business Tax Application, the business owner will also be able to register for income tax withholding. Once the application is completed, the business will receive a withholding file number. The business owner will reference the withholding file number in all correspondence and when making payments. It must also be referenced when the business owner calls the Department of Revenue.

Tax Payments

The method of payment varies depending on the amount of withholding tax the business is filing. For those whose withholding tax is more than $15,000 during a quarter, or that make more than 24 payments each year, the business must pay online. These businesses must also submit the Withholding Tax Coupon, Form WH-1601. For businesses that must pay less than $15,000 per quarter, payment may be submitted voluntarily online.

W2 forms for employees are due by January 31 following the tax year. So for tax year 2017, W2s are due by January 31, 2018. These may be submitted online.

As for filing the returns, businesses must file a withholding quarterly tax return (form WH-1605) for the first three quarters of the year. At the end of the fourth quarter, a withholding fourth quarter and annual reconciliation return, WH-1606, must be filed.

Tax Deadlines

These returns are due on April 30, July 31, October 31, and January 31. It is very important to meet these filing deadlines. If a business misses one of the withholding tax deadlines, the business may be subjected to penalties.

As of January 1, 2017, the South Carolina Withholding Tax Tables have been updated for the first time in 25 years. The withholding tax tables will also be updated every year beginning with 2017. It is very important that business owners use the new tables to ensure they are submitting the proper amounts. These tables, along with the withholding tax formula, are available at the South Carolina Department of Revenue website, www.dor.sc.gov.

How business attorneys can help with registration and filing

Navigating the websites of South Carolina’s governmental agents is not always easy. There are dozens of forms online, and it is not always clear which ones you need to use. With the assistance of a business attorney, you will ensure that you are taking the proper steps to launch your business and meet state tax requirements. Rather than risk being subjected to penalties, it is better to seek the guidance of an experienced attorney who understands applicable laws and regulations.

Let our business attorneys advise you

At the De Bruin Law Firm, our attorneys are experienced in helping businesses register for state and local taxes and filing those taxes. To schedule a free consultation with our attorneys, call 864-982-5930 or visit debruinlawfirm.com.

Benefits of an Operating Agreement

March 6, 2017/in Business Law

Operating Agreements

If you are considering starting your own business, you need to take certain steps to protect that business, as well as your own legal interests. When business owners decide to form a limited liability company, or an LLC, they often skip creating and implementing an operating agreement. However, the failure to draft and enforce an operating agreement may be a costly mistake in the future if the business runs into trouble. Without an operating agreement, the default laws of a state will govern any disputes that arise, which may lead to unpredictable results.

Many business owners choose to make their businesses an LLC because the company itself becomes a separate entity from the members (the owners). Typically, the members are shielded from liability in certain incidents involving the LLC. The members are also not usually responsible for the debts or liabilities of the LLC. Operating agreements are executed between the LLC itself and the members of the LLC. Operating agreements are legal contracts. The operating agreement describes how the LLC will be managed, as well as how profits and losses will be distributed. Essentially, the operating describes how all aspects of the LLC will be handled.

How Operating Agreements Work Within LLC’s

Although the LLC and the members are unique entities, there are occasions in which members may be liable for their actions and the protections of the LLC do not apply. Members may find themselves accountable for debts and liabilities of the LLC if they personally guarantee debts, such as business loans.

You may have heard the term “piercing the corporate veil.” A creditor may try to go after a member’s personal assets if the creditor can offer evidence that the only reason the LLC was created was to provide legal protections for the members. There are a number of ways to demonstrate this. For example, if annual meetings were never held and minutes were never recorded, the court may find the member liable. If a member maintained too much control over the LLC, if personal funds were mixed with business funds, or if the LLC was not adequately capitalized at the time of its inception, courts may determine that the members are personally liable for the debts of the LLC. Committing fraudulent actions will also usually result in liability.

To avoid these scenarios, the operating agreement must lay out the expectations of its members. The operating agreement may be as detailed as the members like. An enforceable operating agreement also shows that the LLC is legitimate.

Operating Agreements Can Resolve Disputes

In addition, operating agreements may prevent disputes from arising between the members of an LLC. Since operating agreements lay out the expectations of the members, the members are less likely to be involved in disputes because they understand what actions will not be tolerated or may result in liability. If the members are involved in a lawsuit, it often turns into a time consuming, expensive ordeal. A clear operating agreement significantly reduces the odds of such an event.

Operating agreements may also address unforeseen events. For example, what would happen if a member died? The operating agreement may include a key man life insurance clause, which provides that the LLC will purchase life insurance to cover the death of one of the members.

Contact our attorneys for guidance with your new business

At the De Bruin Law Firm, our business law attorneys possess the experience necessary to help business owners launch limited liability companies. We can help you with setting up your business and helping you arise disputes in the future.