10:04:50 Practicing lawyers and we are, we counsel clients on a number of different types of legal issues, mostly business legal issues, you know, entity creation, intellectual property contracts negotiation, things like that.
10:05:04 But we are here to be a resource to anyone and everyone who needs any artist or arts and cultural organization that needs some type of legal assistance.
10:05:15 So we are here as a resource. We are currently in the process of building out our volunteer attorney panel so we do have a number of law firms already in our network that are either have located locations in Connecticut or have attorneys were admitted
10:05:28 to practice in Connecticut, it's still limited at this point but for certain matters, you know, copyright, trademark.
10:05:37 If you're thinking about starting a nonprofit and tax exemption.
10:05:41 We should be able to make referrals on those matters but more state specific cases. We're still working on building up the panel so we are, you know, inviting folks to apply for us, for assistance now but just appreciate that it might take a little bit
10:06:01 of time to actually line up referrals at this point. So today we're offering the first in will hopefully be a series of workshops for, you know, creative enterprises artists and creative entrepreneurs about kind of the business of being a professional
10:06:14 working artist. So, this is a topic this morning that were asked about all the time. What type of business entity Should I farm. What are my options. Does it make sense for me to do this.
10:06:27 When should I do this, what are the right circumstances. what are the costs, what are the challenges, etc.
10:06:34 You know what are the risks, and it's a pretty. It's a pretty dense topic there, we're going to cover quite a bit of ground today.
10:06:43 I will try to make it as entertaining as possible just because, you know, legal entities and taxes aren't the most thrilling.
10:06:51 Breakfast conversation but it's really important and it's, you know, something that, hopefully, all of you, if not most of you have thought about or are thinking about just logistics, you'll notice that you're muted on entry, please stay muted throughout
10:07:07 just so that we don't have any feedback, because this session is recorded. If you do have questions feel free to leave them in the chat and we'll save some time at the end to select some and answer the ones that I think are that we think are kind of relevant
10:07:21 to everyone.
10:07:23 And we'll have contact information at the end.
10:07:26 And yes, the recording will be accessible later.
10:07:30 So that'll be Lizzie, listen and cameras office will distribute that to registrants.
10:07:38 Shortly after this.
10:07:40 So, let's get started. So like I said, this is a topic that I'm asked for counsel on all the time, artists who are really at all stages of their career thinking about.
10:07:53 Should I start a legal entity I've been told I should form an LLC I don't really know what that means.
10:07:59 Do I need to start a corporation, I've got this contract and they're asking me to set up a business, what do I do.
10:08:07 So we're going to talk through really kind of a 30,000, foot view of different types of legal entities that are available to you. And what are the general hallmarks highlights benefits advantages disadvantages, and things and costs and, and, you know,
10:08:24 what you should be thinking about and what are the requirements to kind of sustain it and keep it running. So generally, what type of entities are available to you.
10:08:34 Who should even consider forming an entity, honestly probably all of you at one point or another if you haven't already.
10:08:40 And what should you be thinking about when you're actually deciding, do I need to set up a legal entity of some kind.
10:08:46 So, one of the common, I think there are really four or five considerations that I think tend to have the most influence on this decision for small businesses of all varieties.
10:09:00 One ownership and control, who owns it, and who manages it, who's actually responsible for running this business and I as someone else do I share that responsibility.
10:09:10 How does this affect my taxes, how does this affect my, my income my obligations to report and pay taxes, does it increase my tax bill does it decrease it.
10:09:20 What are the risks does having this business entity truly limit and eliminate my liability.
10:09:30 Does it impose a different type of risk for me to have one. How does it alleviate some of that burden.
10:09:34 How much does it cost to start and maintain a business via an LLC or a corporation even a nonprofit.
10:09:42 And one of the actual things I need to do in order to keep this business afloat to keep it running to keep it sustaining.
10:09:49 So we'll talk about those general distinctions.
10:09:53 Just one introductory note is that this workshop is just about for profit entities.
10:10:01 Next month in February, we're talking about nonprofits I think on Valentine's Day, so what better, what better topic to talk about on the day where we celebrate our love for close our close ones with charitable institutions and tax exemption and IRS regulation,
10:10:17 I think it's fitting.
10:10:19 So this is really we're just talking about for profit enterprises today.
10:10:24 Nonprofits will be next month.
10:10:27 So generally, there are kind of, I think the main four varieties of different types of business structures are these four and these are going to be pretty common throughout every state.
10:10:44 They're certainly typical in Connecticut and Massachusetts where I practice.
10:10:46 These are generally what's available and their sole proprietorship, which is I, as the, you know, owner, I am the business there's no meaningful distinction between myself as a person, as a human being, and my company.
10:11:01 Then you have Partnership, which is kind of similar concept, but now instead of just one person it is two owners in business together.
10:11:10 corporation is a little bit more complicated where we now have a very unique governing structure, the idea really is the business itself is now separate from the ownership, and we'll talk in detail about what all of these concepts mean.
10:11:23 And then last and kind of the most common nowadays is a limited liability company, which combines, some of the flexibility, ease and intuitive ness with the same limited liability protection you get in virtue of having a corporation, so we'll walk through
10:11:38 all of these in a little bit more depth, we'll talk about what the key highlights are of them.
10:11:45 What the distinctions are, how to form them, how they're taxed.
10:11:50 But really just a general overview of these different types of entities, and then we'll talk about some other kind of unique other business tax liability concerns that you should also be thinking about as part of this process.
10:12:05 So first let's talk about sole proprietorship, it's really it's the default entity entity and I say it in scare quotes because it's really it's a non entity.
10:12:14 It is not a separate business. It is not in any way, really separate from the actual owner of the company. So, just in virtue of being an individual who is in business offering services or products in the marketplace.
10:12:31 You have a sole proprietorship whether you set out to form one or not, you know, if you're selling t shirts if you're selling fine art. If you're providing consulting services or design services or, you know, fabrication and things like that.
10:12:45 Whether or not you planned or set up a different business entity. You are a sole proprietorship, so you do have certain privileges and obligations and risks.
10:12:57 So naturally, big advantage of a sole proprietorship, is it's really easy to set up. sometimes he didn't even know you have one disadvantages.
10:13:07 You don't because you don't have a separate entity you don't have any distinction between the business and yourself as a person. You are potentially personally exposed to liability for any harms or injuries that you cause in the course of running your
10:13:24 business. So what that means is if you have personal assets, a home a car, financial investment assets that are otherwise protected.
10:13:36 Those could potentially be claimed by a creditor if you were to incur some type of injury or liability and conducting your business practice. So on the one hand while it's very easy and straightforward and, you know, There aren't any separate requirements
10:13:52 in order to start a sole proprietorship, you do expose yourself to quite a bit of potential liability if you don't mitigate it through insurance or some other type of mechanism.
10:14:03 How are we taxed as a sole proprietor, you So because the sole proprietorship is you is you as a person.
10:14:11 You are the business. It's not a separate taxable entity, you just report your profits and losses on your schedule see I'm sure nearly all of you already are in the practice of doing that right now.
10:14:21 If you do 1099 work independent contractor work that kind of thing.
10:14:28 You report profits and losses your business profits and losses on your schedule C, and you pay your income tax at your personal income tax rate.
10:14:33 So you're not paying it up a separate rate, you're not paying at a corporate rate, you're not really doing any separate return it's just, you know, explaining your income, expenses on your, your separate business Schedule C and then paying taxes as you
10:14:49 normally would. So again, it's really simple, it's really straightforward it's really intuitive. Again, you do run a certain type of risk.
10:14:58 And the other risk is that sole proprietor ships, don't have what's called perpetual existence, meaning.
10:15:04 When a company is perpetual it outlasts it survives the turnover of the constituents that make it up so for a limited liability company it outlast the owners for a corporation and outlast the shareholders.
10:15:18 The officers the directors as they turn over and staff changes and personnel change with the sole proprietor.
10:15:25 The business starts and ends with you so once you pass or become incapacitated or retire or otherwise unable to continue the business, the business ceases to exist.
10:15:36 So sole proprietorship is also not really the optimal tool for thinking about, you know, the legacy of your arts practice especially if you're building an arts practice that you want to survive you to outlast you and you really want to leave a legacy
10:15:51 that survives it survives you in your current existence. So, generally, we always start with sole proprietorship because it is the default, many people are familiar with it, it's easy, it's intuitive really aren't any separate filings.
10:16:07 Except, you know, unless your business, you're operating your company under a name, other than your legal name your given name, then you might need to file what's called DPA or trade name registration or fictitious name registration.
10:16:22 Just to indicate that oh this is the person who is behind, you know, this other this this company name.
10:16:29 Really mostly for transparency purposes.
10:16:32 But other than that, it's really straightforward and doesn't really require any separate filings.
10:16:39 So the next step up is a partnership, and this is again similar to a sole proprietorship and that is still the default, but now it's kind of the default entity for two or more people who are going into business together for the purpose of, you know, earning
10:16:54 a profit for themselves.
10:16:56 The true default is what's called a general partnership and that is, again, like a sole proprietorship, two or more people get together they go into business together they're offering goods they're offering services.
10:17:07 They are a general partnership whether they plan to be or not. So the partner share ownership so they share profit steak, and they also share liabilities and management privileges.
10:17:17 They all share it equally proportionate with the number of partners, there are so if there are three of you you eat share one third of the profits one sure share one third of the losses.
10:17:27 But you are all what is called jointly and separately liable for any injuries you cause what is joining several liability mean it means that even if you only own one third of the company.
10:17:40 If the partnership still results in you know causes some type of harm to a third party like you know personal injury or something like that.
10:17:47 Each individual partner, could be potentially held 100% liable for the entire liability. So say that someone gets injured, say you're a band and an audience member gets injured at one of your concerts, you know, and they sue the Partnership for medical
10:18:04 bills.
10:18:05 If it turns out that the partnership is indeed responsible for causing that injury, then each individual partner could be responsible for 100% of the harm and it's really kind of at the discretion of the, the injured person to determine who that's going
10:18:19 to be who's going to pay that judgment, so it carries a pretty high risk.
10:18:25 The next level up is what's called a limited partnership.
10:18:28 So in a limited partnership now we have one partner who's called a general partner, where we delegate to them, all of the management privileges so they get to make all of the business decisions, they get decide to bring on new partners, they could decide
10:18:42 what to make financial decisions. And they get to make decisions as to what our business will continue to be, but they also bear 100%, or potentially up to 100% unlimited liability.
10:18:56 So with that soul management's authority and decision making authority comes, potentially unlimited liability. And then you have a group of silent partners or limited partners who their potential liability is maxed out at however much money they put into
10:19:10 the partnership.
10:19:12 But they also don't have any say and the governance of the organization. So for example, let's say that we have a corporate, a limited partnership where, you know, I put in $1,000 and the partnership, somehow incurs.
10:19:29 You know $20,000 personal injury, medical debt.
10:19:31 I'm only responsible, I'm only potentially reliable up to the amount of my $1,000 Capital contribution.
10:19:39 But, so that's an advantage for me, that is a you know mitigating my personal risk, but also, you know, in exchange for that limitation for that, you know, minimizing my financial risk.
10:19:52 I don't get any say in the governance of the organization where you might see something like a limited partnership, you might see something like this and something like a film production project where you have the actual filmmaker, and then you have an
10:20:09 executive producer who simply financing it. They don't want to be liable. They don't want to be responsible for the leadership and the decision making, they do want to make sure that they get their profit share but they don't all otherwise want to bear
10:20:22 the risk, maybe you might see a limited partner there.
10:20:26 And then the next level up is a limited liability partnership, those are most common nowadays, all the partners are limited in their liability, up to, again, the amount of their contribution.
10:20:37 But another additional advantages. They are also insulated from any potential liabilities imposed, or incurred by their fellow partners, and you really see this most commonly in licensed professions like physicians, architects, engineers, lawyers, where,
10:20:57 you know, maybe, yet and I are in a limited liability partnership, and I accidentally, you know I commit some type of legal malpractice on a case that yen is not a participant in.
10:21:09 Yeah, and as another limited partner, she is shielded from liability for my malpractice.
10:21:15 Even though she's a partner, as long as she didn't actually participate and you know have a have a hand in that professional negligence.
10:21:24 She is limited from liability against me as well.
10:21:27 So this is really limited liability partnerships you really only see them with license professions.
10:21:33 And then this last level is kind of a quirky one limited liability limited partnership. It's basically like a limited partnership except the general partner also has limited liability, it's confusing it's weird it's not available in most states i don't
10:21:47 think it's not available in Connecticut, so don't worry about it too much. Don't worry too much about partnerships in general for the most part they're pretty uncommon.
10:21:57 You again you usually see them if you're a licensed professional licensed um you know design professional or something like that.
10:22:03 But it isn't going to be aware of if you are entering into a partner, if, you know, if you're entering into a partnership with, you know, a collaborator or a friend and you, you know, don't take an extra step, just bear in mind that you might be a general
10:22:19 partnership and virtue of not having taken any other steps. so you do still bear that potential risk.
10:22:27 So, generally, in terms of ownership, like I said partners co own it, default rule is you own it proportionate with the amount of partners you have so if there are four of you, then you each own a quarter stake if there are two it's huge 5050 etc.
10:22:43 Taxation similar to sole proprietorship, the partnership separately reports income profits and losses, but it does not pay taxes itself. So the partner still pay taxes proportionate what their ownership stake.
10:22:59 So, you know, they'll be responsible for paying income tax on, you know, one half of the profits if you're a two person partnership. So it's pretty intuitive it's still pretty straightforward.
10:23:09 Really where it gets a little bit more complicated is where you're dealing with capital accounting, don't worry about that too much. That's really something where you just have to talk to a part accountant who's comfortable with partnership taxes.
10:23:23 So, generally partnerships are pretty easy to form. Oftentimes it's just going to require a filing at the filing of the your secretary of state's office.
10:23:35 So there's usually some type of at least for a limited partnerships and limited liability partnerships, there's usually some type of separate organizing document they have to file or some type of registration, you have to indicate what type of partnership,
10:23:47 it is and the name so you have to have one of these business suffixes.
10:23:53 So just bear that in mind when you're thinking about naming it, you know, you have to make sure you're actually contributing capital funds or assets or otherwise into the organization and keeping track of that.
10:24:07 And then generally it's always a good idea to have a partnership agreement have some type of written documents setting the ground rules of, you know, what how we're going to govern ourselves how we're going to manage the organization, how we're going
10:24:21 to resolve disputes how we're going to make decisions how we're going to vote on matters.
10:24:26 You know if there are any even number of us, how we're going to break ties that kind of thing.
10:24:32 And then, with dissolution. One of the unique things about a partnership is that, you know, if any partner leaves, either departs retires becomes incapacitated or passes away.
10:24:43 The partnership does fundamentally changed and that triggers, what's called dissolution.
10:24:48 You can decide we want to continue the partnership after this person leaves but you do have to go through this kind of winding down process of making sure you're paying off any outstanding creditors, distributing any outstanding profits to the departing
10:25:06 partners, and then at that point you can decide, you know, we'll carry on the partnership it's just, it's now going to be a new organization.
10:25:14 So the solution is a little bit more complicated. It's not as intuitive necessarily as sole proprietorship where when I end so too does my business. There are some other steps.
10:25:27 Like I said, nowadays partnerships outside of the the true kind of capital P licensed professional world.
10:25:34 You don't see them all that much.
10:25:38 So, we'll talk about corporations and acts but before moving on to that. Do we want to pause and and had a couple of these questions, or.
10:25:49 I'm happy to make that happen. So our first question is, doesn't having a sales tax license or whatever it's called make one at least one at least a sole proprietor, so if you have a sales tax.
10:26:01 Tax license. Does that make you a cell, a sole proprietor.
10:26:05 I mean, generally, if you take if you have a sales tax license, meaning that you're collecting, you know, sale purchase prices from customers and you're, you're setting aside sales tax and remitting it to the state, then yeah you're in business you're
10:26:21 actually, you're providing goods and services and, and commerce and you know the state. The state marketplace at least so whether you know legally, whether you're legally a business really depends on, you know, are you actually providing some type of
10:26:38 product or service you're actually engaging in some type of business activity.
10:26:42 But I think that having a sales tax license would at least, it would be one of those steps that kind of indicates that yes I am a business. So I think it would be like at least evidence that I have an intention to be in business and we'll talk a little
10:26:55 bit about other things you can do to kind of indicate you're in business and why that's important in a second. But yeah, I would think that having a sales tax license what at least indicate, you know, I'm selling products I'm selling goods I am collecting
10:27:10 sales tax for the purpose of committing it to the state. So I think that would be.
10:27:16 Thank you, Luke.
10:27:18 Is it possible to create an LLC that will dissolve upon the owners death.
10:27:23 Yes you can. And that is something, and we'll talk about that with LLC, that's something we're kind of like a partnership, one of the things that we generally recommend when you start an LLC is execute what's called an operating agreement, just like a
10:27:39 partnership agreement. It's just between the owners of an LLC instead and even if you're the only member of your LLC, the only owner of your LLC, you should still have an operating agreement and you can specify that upon, you know, the sole members or
10:27:53 one of the members, deaths that this LLC shall dissolve. So you can specify that and that might also be something to think about.
10:28:02 In a more traditional estate plan in your you know your last will and testament or a trusts like part of my instructions for my, my executor of my estate or my administrator of my estate is to dissolve my, my company.
10:28:15 So that's a really yes that's a really good question and yes that's definitely something you want to plan for is, you know, think about kind of the legacy, and how this is going to continue to run or not run.
10:28:26 If you know when you do pass as well if your business continues until that point.
10:28:33 Any other questions. One more. And the question is, does that affect grant eligibility if the main partner is being.
10:28:42 And so I can maybe, maybe contextualize that but we might have to ask, Helen, if I'm getting it right. And so, like in DZD, there are grants or female owned businesses.
10:28:55 And I'm, what if there's a partner, if there's more than one partner and the main partner is female without partnership be eligible to apply for those, even if another partner maybe it's not but Helen if I'm not getting it would be want to clarify you
10:29:10 can type.
10:29:15 Yeah, that's, yeah, and Liz I know you probably have more information on that of like kind of minority women owned business policy in Connecticut. Yeah, so I don't but I would imagine, but that information I'll look well, Lucas talking, I'll look and
10:29:41 see if I can get you a link for Connecticut about how you define a minority and women owned business, and, but I would guess that every state is different and it could be that every, every grant program depending on who's offering it is actually different.
10:29:47 Yeah, and that's what I was going to say to I think it's all contingent on a great program and, and how they're structured and and we're getting a message in from Evan that says you do not qualify I just went through that same.
10:30:01 Okay.
10:30:02 Good question.
10:30:05 The ice dam for Connecticut, but we can continue having that discussion in the chat.
10:30:09 Is down for Connecticut, but we can continue having that discussion in the chat. And then finally there's one, do you have any advice for those of us. Submitting our os 114 form.
10:30:18 Um, What do you see OS 114 form.
10:30:21 Okay, Amy Do you want to come off mute, I think you can feel able to actually clarify that.
10:30:28 Hey everybody, thank you so much Luke, this is really enlightening. Um, yeah, the oldest 114 and is sales and use tax.
10:30:37 So if you produce a good and sell it, it's kind of like, retail, you buy something and you sell it or if you buy parts manufacturer things. And then so sell those, you have to before you get your return, you have to say what sales you brought in and you
10:30:54 have to pay tax on that upfront.
10:30:58 Okay.
10:30:59 Does that. Yeah. Does that ring a bell. So is that this are you talking about for if your company is paying sales tax or if your company is selling goods and collecting sales tax for the purpose of remitting it to the state basically you're collecting
10:31:13 sales tax from your consumers.
10:31:17 Um, yes, yes and then you pay it in one lump sum or you know sometimes you do it quarterly. I'm a sole proprietor.
10:31:25 Okay, I think, I mean, I don't think you need a specific, I mean because the thing about sales taxes that it's it's not your money, like the sales tax money is is inferior it's never yours, so that it really doesn't necessarily matter and I don't think
10:31:41 having a different type of business entity is really going to affect your sales tax liability, because that's just going to be the rate that's set by the state tax law, what the state sales tax law whatever state you're in, where, you know, it's basically,
10:31:57 you have to, it doesn't really depend on the business because the sale sales taxes is treated it's taxed and collected separately from things like income tax, or the differences were entities really matter is how we're thinking about the tax on the income
10:32:11 that you pay on the income that you earn.
10:32:15 But for sales tax. I don't think it's really going to make a difference between whether you're a sole proprietor partner, LLC or corporation or something like that because the money is never yours You just have to make sure that you're properly allocating
10:32:30 it reporting, you know accurately reporting what you're earning in revenue and making sure that you're properly calculating how much you owe and sales tax.
10:32:39 But generally, I don't think it really makes a difference. I mean, certainly, as with any type of liability if you want to kind of shield yourself from personally being liable for failure to remit your sales taxes.
10:32:54 Then, you know, maybe you want to consider, setting up some type of limited liability business entity so that any tax liabilities will fall upon the company instead of you, but other than that in terms of process and procedure.
10:33:08 I don't imagine it would be any different, it's going to vary depending on your, you know the Connecticut State, you know, Department of Revenue policy and procedure but generally, in terms of how you do it.
10:33:24 I don't think it's going to make a big difference in terms of actual liability exposure. Yeah, maybe you want to consider having an LLC or a corporation, just so you know if you do get hit with like a tax delinquency a sales tax delinquency penalty or
10:33:40 something like that that falls upon your company or not you. That's a really good question.
10:33:55 I think that's it so why don't we go ahead. Awesome. So let's chat about corporations. Corporations are a little bit more complicated for a couple reasons, really, you know, we care of them in a number of contacts were generally, maybe we're familiar
10:34:11 them, and the nonprofit sector. And they generally are fairly similar in terms of kind of governing structure in the for profit sector as well. There are some distinctions and we'll talk about those next month.
10:34:20 But generally the defining feature of a corporation is this governing structure where you really have, in theory, ownership, separated from overall general policy making and strategic management, and then, day to day management.
10:34:37 So a corporation is owned by the shareholders and the shareholders own the corporation based on the proportion of outstanding shares they hold, and those shares often also their proportionate proportion of their ownership also corresponds with usually
10:34:53 their voting rights, and you know their decision making authority. You can indicate different types of breakdowns at different classes of shares, that's getting into really really sophisticated corporate ownership, but generally the rule of thumb is one
10:35:10 share one vote, um, you know one share of common stock common voting stock equals one vote.
10:35:14 So you're voting right is proportionate with your ownership stake in the corporation. So shareholders get the kind of Management Authority in that regard.
10:35:23 And they also are entitled to profits and they're entitled to share of the assets of the company if the company dissolves. So, shareholders are generally at the top of the food chain.
10:35:35 They have the, the, the final say in virtue of. They're the ones who elect the board of directors that actually are responsible for the kind of general strategic direction and operation of the business.
10:35:48 So they set the policy, you know the board decides what is what is our business, what do we do make they make final, and and major financial decisions.
10:35:58 You know they approve the budget.
10:36:01 You know, they might make key hiring decisions, they'll usually higher executive staff, and they'll make decisions on on other matters as well.
10:36:10 And then the day to day management of the business. You know, implementing the company policies, running the, the regular business and programming. That's usually performed by officers and which officers, you need to have varies from state to state was
10:36:25 typically most state corporate laws require the offices of at least a president, a treasure, a secretary president is basically your chief executive, again, kind of the person who's responsible for actually implementing the policies set by the board of
10:36:41 directors treasurer, Chief Financial Officer, so responsible for being familiar with the company's books and accounting usually working with your accountant to your bookkeepers and assisting with taxes and reporting on the financial status of the company
10:36:58 to both the board and the shareholders and your secretary, also known as a clerk in some states is usually going to be the person who is responsible for stewarding corporate documents so being familiar with all the key, you know, bank accounts.
10:37:15 You know, governing documents.
10:37:18 Board Meeting Minutes shareholder meeting minutes that kind of thing.
10:37:21 And the. The other key hallmark of a corporation is that it's a separate it as a separate legal entity from the owners itself, and the other constituents.
10:37:31 So, unlike a partnership I'm like a sole proprietorship where the owners are the business, a corporation is a separate entity, a separate person legally a separate person distinct from the actual human beings who make it up.
10:37:45 So it's a little bit unique in that way and the advantage of it is that now the human beings actually run the business are shielded from liability caused by the business.
10:37:57 So, you know, unlike a partnership where my liability might be limited to the amount of my capital contribution as either a shareholder or a board member or an officer or even an employee or staff or in the nonprofit sector of volunteer.
10:38:13 My personal liability for any injuries caused in the course of, you know, my role in the business.
10:38:21 My personal responsibility is fully limited and fully borne by the business. So instead of this, you know, I'm liable to the extent of my cowboy capital contribution.
10:38:31 Now I'm fully shielded except in very very limited circumstances. Generally there are there are two key circumstances when a limited liability protection of a corporation will not protect you and that is, If you intentionally harm someone.
10:38:48 So, if you get really rowdy and got into a fight at a Sox Yankees game for example, I'm wearing you know I'm a company weekend retreat, even though you're wearing a company jersey, it's still an intentional harm corporate liability protection isn't going
10:39:02 to save you.
10:39:04 And also, if you are a licensed professional corporate liability protection will also not shield you from professional malpractice, that is a risk that can only be mitigated with a policy of malpractice insurance.
10:39:17 So for example, prior to my role at Arts and Business Council I was a, I was a solo attorney and I had a sole proprietorship, because I knew that, you know, I ran my law practice out of my apartment I mostly my clients virtually communicated with them
10:39:30 by email I didn't have anyone on the premises I wasn't dealing with physical property. So most of my risks were the biggest risk was, you know, committing legal malpractice, so I didn't set up a separate business entity because I really wouldn't get any
10:39:44 benefit from it, because my biggest risk was one that couldn't be mitigated by this legal entity structure.
10:39:52 But this is kind of the general framework of a corporation, and in at least the governing structure in the abstract. This is fairly.
10:40:04 This, this crosses over fairly neatly to a nonprofit as well, but again we're sticking with for profits for for today.
10:40:13 One.
10:40:15 One distinction I want to point out is this really unique new structure called a benefit corporation. This is a different type of Corporation, it's still governed by state corporate law, but it is a for profit entity that is organized for, you know, in
10:40:33 addition to your regular profit earning venture also organized for the purpose of creating some type of general public benefit, and a general public benefit is a material positive impact on society and the environment, taken as a whole, as measured by
10:40:49 a third party standard from the business and operations of a benefit corporation.
10:40:53 A lot of words basically your company in addition to whatever your primary earning activity is, you're also organized for the purpose of advancing some type of social or environmental good.
10:41:07 For example, maybe part of your social your general public benefit is to, you know, work only with vendors and suppliers who are minority and women owned businesses for the purpose of, you know, facilitating equity equality in the business sector.
10:41:22 So, part of this means it imposes a couple of additional obligations on the leadership of the corporation. Generally a corporation is organized for, you know, the sole purpose of maximizing profit for the shareholders.
10:41:38 Ultimately, but a benefit corporation. In addition to that, now you also have to consider your company's ability to accomplish your general public benefit.
10:41:45 So in addition to having, you know your regular board of directors, your regular officers, President Treasurer secretary or Clark. You also have to have a benefit director who reports to the shareholders on how are we doing in meeting our public benefit
10:41:59 and a benefit officer who is, you know, tasked with implementing the general public benefit and making sure that we actually achieve it.
10:42:09 And generally if, if there is a risk or a concern that, you know, the leadership of the organization is not actually fulfilling its duties to provide a general public benefit that the corporation can actually Sue to enforce its benefit obligations.
10:42:28 Benefit corporations are new.
10:42:31 They are actually not the same as a B Corp. Some of you might have heard of B Corp, which is a, a third party certification by a company called be labs and be Labs is actually the organization that did a lot of advocacy and lobbying for states to enact
10:42:48 these benefit corporation laws.
10:42:51 So it's not quite the same.
10:42:53 But benefit corporations are really really a very recent vintage I think they were adopted and most states are you know they're currently available in about 35 states.
10:43:03 Most states adopted them within the last 10 years. So, we have virtually no case law on this.
10:43:11 So we don't really have any decision a law we don't really have any opinions on actually enforcing benefit corporations.
10:43:19 So we don't really have, it's still kind of the Wild West we don't really have any framework for what's going to happen how have courts come down on enforcing it really good follow up question on the chat, why did benefit corporations come into existence.
10:43:33 I think part of it is this push towards kind of corporate social responsibility.
10:43:42 Kind of bringing social awareness and social activism into the corporate world in the for profit sector and kind of offering people an opportunity to bake this kind of social good and social policy into the DNA of the organization without necessarily
10:43:59 having to go through the process of forming a nonprofit, nonprofit corporation which is, if you join the workshop next month, a pretty involved intense process with a lot of oversight so I think it's really kind of a bridge between for profit and nonprofit.
10:44:18 The flexibility and ease of running a for profit enterprise with still this legally enforce commitment to a social good.
10:44:29 You know, will we be we discuss later what business structure is best for certain entities, we won't get into, into that much depth but we will talk really quickly about like things to think about how to, how to determine what when what factors kind of
10:44:44 go into deciding what entity is really appropriate for you so that's a very good question and kind of the reason why we're all here.
10:44:51 So we will talk about that issue generally.
10:44:55 So how are corporations taxed. This is the most complicated slide of the morning, I promise it only is uphill from here.
10:45:04 So, corporations, taxation is complicated and short, um, especially at the federal level for traditional for profit corporation. The default is what's called a C Corp.
10:45:18 Compared with what's called an S corp, and those two are just their name, don't think too much about why they're called that if they're just named after the chapter on the tax code that they come from, but C corporations are the default so when you go
10:45:30 to set up a for profit you will automatically be treated as a C Corp.
10:45:36 What that means is that the corporation.
10:45:40 On the same kind of bucket of income tax will be paid twice.
10:45:47 You might hear this as double taxation and kind of lay a kind of common vernacular.
10:45:53 And what that means is when the corporation earns income when it earns a profit. So you've made, you've sold, you know, you've earned more in revenue then you have expanded in, you know, creating and merchandise marketing your goods, you earn a profit,
10:46:08 the corporation pays income tax on that profit that it earns at corporate income tax rates.
10:46:16 So we're taxed once and then when that Corporation takes that profit and issues. It basically distribute that to the shareholders as a dividend or a distribution.
10:46:28 Then the individual shareholders, pay tax on that money again at either their personal income tax rate or their capital gains tax rate depending on you know what type of income, what kind of
10:46:44 corporate income, it is. So, we have the same pot of money the same profits. the corporation is paying tax on it and then the individual owners the corporation or paying tax on it.
10:46:54 Why on earth would anyone want to submit themselves to double taxation.
10:46:59 Really good question.
10:47:01 Really two big reasons one corporate tax rate is usually less than individual income tax rate.
10:47:10 So the general corporate tax rate is usually a few percentage points lower the tax brackets are usually a little bit lower than for individuals and also the capital gains tax rate so the profit that you earn from just holding you know you know the the
10:47:31 profit they earn on selling and appreciating asset is also a lot lower than the personal income tax rate. So that's one reason it's just, it might result in a smaller tax bill.
10:47:41 The other reason is, you can't necessarily decide when you earn a profit you know you're selling your products and services, it's up to the consumers it's up to your, your constituents in your clients to decide when they want to buy in a failure sell
10:47:52 themselves of your services. So you don't really get to truly decide when you earn a profit. But what you can decide is when you distribute that profit to your shareholders, so you have the power to control and decide when to incur that second taxable
10:48:06 event.
10:48:06 You might be kind of catching on that this is really really sophisticated tax planning and for the most part, for 90% of small business owners, way more elaborate than I need, I don't care I don't want to get this fancy.
10:48:21 I don't really want to worry about that.
10:48:23 So the alternative is election as S corporation which means small business Corporation, really intended for small closely held corporations.
10:48:36 And basically, you make a affirmative election to the IRS you basically, you know, write to them a letter saying hey I want to be treated as an S Corp.
10:48:47 And then you have pastor taxation, so you're more or less tax like a partnership.
10:48:52 You know, Corporation will report profits and losses.
10:48:55 individual shareholders will pay income tax at their personal tax rate proportionate with their ownership stake.
10:49:00 So a little bit more intuitive easier, more straightforward more familiar with a lot of small business owners and kind of again kind of giving that that ease of tax management and that simplicity, more strict eligibility requirements to be an S Corp.
10:49:18 I believe you can't have any more than 100 shareholders, and they have to be natural human beings, they can't be I believe, other corporations. So there are some limitations.
10:49:28 And if at any point you are ineligible, you know, you lose your eligibility for S corp status. You're dumped back into C Corp status.
10:49:37 That is the most complicated part of this.
10:49:40 We are now at the other side of the mountain.
10:49:43 State corporate taxes are little usually a little bit more straightforward.
10:49:47 In Connecticut I believe they only apply to see corporations.
10:49:51 And then there's also a Connecticut business entity tax that applies to I think most different types of business entities so including c corpse s corpse and LLC.
10:50:03 And then you know your your corporate tax rate is usually gonna be based on a oftentimes it's some type of excise tax it's kind of based on the proportion of, you know, it's a proportion of your company's net worth, or, you know, physical presence like
10:50:20 how much actual square footage of property you own that kind of thing.
10:50:25 Questions for an accountant.
10:50:28 There's really no substitute for talking to an accountant that's familiar with corporations but taxation can get a little hairy and can get a little messy, because it is a lot more complicated with more sophisticated tax planning.
10:50:40 Usually you don't see a whole ton of corporations in the for profit sector unless you are really looking to get investment, investment in investment, support, and, you know, capital market access and you're really seeking out kind of that venture capital
10:51:00 type of investment and fundraising, but generally for small businesses is pretty uncommon now.
10:51:09 So how do you form it. There are quite a few formalities involved with setting up a corporation.
10:51:14 Step one, you have to file your organizing document with the Secretary of State so usually it'll be either Articles of Organization Certificate of organization Certificate of Incorporation.
10:51:23 They vary from state to state and Connecticut I believe it's Certificate of Incorporation.
10:51:28 You pay a filing fee and that also authorizes you a set amount of corporate shares that your company can authorize and potentially distribute like a partnership, you have to have a certain type of business suffix at the end of your name so incorporated
10:51:45 limited Corp and etc.
10:51:48 You should have an organizational meeting to, you know, determine who are going to be the directors who are going to be the officers, oftentimes you'll specify who the inaugural board of directors and officers are in your Certificate of Incorporation
10:52:03 and adopt your bylaws which are like a partnership agreement the governing document really executed by the board of directors that explain who the board is who the officers are what our roles and responsibilities are, how we make decisions when we hold
10:52:18 meetings and under what circumstances the company might need to dissolve.
10:52:24 So it's a little bit more sophisticated there's a couple more formalities involved. Additionally, how do you maintain it, you have to, in addition to paying your taxes have to file an annual report every year.
10:52:36 And usually you have to have an annual shareholder meeting an annual meeting to elect and reelected directors. So if you are a single shareholder Corporation, you know you're kind of a sole proprietor that has set up a corporation.
10:52:48 That means that you have to have a board meeting at your kitchen table at, you know, once a year, and you have to reelect yourself as a director, you have to reelect yourself or reappoint yourself as president treasurer, Secretary, and you have to keep
10:53:04 meeting minutes that you met on, you know, this evening on January 21 2022 out your dining room table to do turns back to this business, so it sounds really goofy but it's really important for.
10:53:18 Again, demonstrating that you are treating your business as a separate business.
10:53:21 And we'll talk about why that's important in a second.
10:53:26 One really quick, kind of, Quirk. I also want to talk about really quickly is cooperatives, they're not available everywhere. They're very rare I think only about 10 states authorized them as a standalone business entity, but they are popular and I get
10:53:39 asked about it all the time by artists especially artists that are doing social practice work and social practice art.
10:53:46 But, basically the, the key highlight of a cooperative organization is that it's democratically owned, so like I said with a corporation, where you're voting right and your decision making authority is proportionate with your ownership stake in the company
10:54:01 here, regardless of how much of a corporation you own or how much of the coffee you own. You always only have one vote in any matter. So, in a two member Co Op like again say yen and I enter into a co op together.
10:54:16 She owns 99% of it, and I own 1% of it. We still have 50% of the vote on any business matter so her vote counts no more than mine, even despite that she's entitled to 99% of the profits that we are in.
10:54:34 So this is really popular with artists and creatives who kind of want to democratize their business and kind of want to encourage their stakeholders to participate and be a part and and have equity in the company, literally and kind of colloquially as
10:54:45 we're thinking about it.
10:54:47 Traditionally, when we see co Ops, there are a whole bunch of different kinds there are you know pension plans and retirements and things like that but most commonly used kind of think of constituent own co ops like consumer co ops worker employee Co
10:55:02 labor cops housing cops, that kind of thing. I'm not really common in most states and honestly it, even if they are, they vary and how states enforce them, and also a lot of states are kind of, you know, when you're looking for funding and support some
10:55:21 stakeholders and investors are also reluctant oftentimes when they see co ops because you know if I'm contributing $100,000 to your startup, but I only get one vote.
10:55:38 So I just want to introduce this really quickly, they're pretty unique. They're not available in most states still but you know if they come down the pike or if you're thinking about it.
10:55:46 Here are some of the key things to know.
10:55:50 And then last, limited liability companies. These are by far the most common that we see nowadays, at least in the for profit sector, their preferred their preferred now, because they really combine the flexibility and ease of creation and management
10:56:04 of a sole proprietorship or a partnership with the tax treatment of a sole proprietorship or a partnership, and the liability protection of a corporation, LLC is a relatively in the grand scheme their new ish there, you know, popped up in the 70s I think
10:56:21 we were adopted between the 70s in the 90s and men, nearly all states like a corporation, the business itself is separate from the owners. So we still have that liability protection you, and you can be flexible in how you manage it.
10:56:36 You can either treat it like a partnership where all of the managers all the owner or all of the owners the members of the LLC, share management rights and privileges or you can decide that you want to delegate Management Authority to a designated manager
10:56:50 or group of managers, you know, maybe you want to be more like a silent partnership or, you know, you kind of want to be more like a corporation where I get my share of the profits but someone else manages the day to day operations, really popular now,
10:57:06 usually on the other side of it means are a little bit more expensive to set up and maintain, but they're very easy. They're very intuitive and, you know, they do combined kind of the best of all worlds of these different types of of entities.
10:57:19 Just a visual representation of the two kind of management styles, for the most part, I think most of you, especially if you're a single member LLC, you'll be one of these member managed LLC is meeting is owner.
10:57:32 I'm the I manage the business I make business decisions, but you know if you want to delegate authority to someone else, then maybe you might go member managed.
10:57:41 I usually see this in the film industry with executive producer makes an investment, don't really want to be responsible for managing the production of the film, and the business, they really just want to collect the return on their investment, and they
10:57:59 want to support the project. So they delegate the Management Authority to, you know, the film production team that might actually be co owners.
10:58:08 You know they're going to be the managers, they're going to be responsible for day to day operations staffing actually producing the film pitching it showing it, that kind of thing.
10:58:18 But, you know, the executive producer still gets the benefit of their profit share, but they don't have to worry about Management Authority, and kind of the liability and risk that comes with it.
10:58:33 And like with management, the tax treatment various well as well, it can be similarly really really flexible default, if you're a single member LLC, your tax like a sole proprietorship, LLC is not a separate taxpaying entity.
10:58:47 If you are a you know you have more than one owner of the LLC, then your tax like a partnership, the LLC itself reports, profits and losses, but the members pay income taxes at their personal tax rate based on their proportionate share ownership stake
10:59:04 of the company and the proportion.
10:59:08 Your ownership stake in the LLC, usually depends on how much income you, how much money you actually contribute to it. So for example, you know, Tamra yen and I enter into a LLC, I contribute 50% of the capital Tamra contributes 30% yeah and contributes
10:59:27 20%, you know, our ownership stake and our profit share is going to be generally by default proportionate with how much money we actually contribute to it.
10:59:38 Over time, and you can alter this, but you have to get permission from the IRS and they're really reluctant to ever let you do that without a really good reason.
10:59:48 And then you can also elect to be taxed on the corporation, I've never, ever had a client, asked to be taxed as a C Corp, or an S corporation for that matter because you know you're already passed through so why go through extra steps, but it is an option.
11:00:06 option. And, LLC, both in Massachusetts and in Connecticut, you're not subject to Connecticut corporate corporate taxes and Massachusetts you're not subject to Massachusetts excise taxes.
11:00:20 You do still have to pay certain business taxes and filing costs but other than that, it's kind of a more preferable value proposition for many as well.
11:00:31 So, kind of starting to see familiar territory, how do we set it up filing your certificate of organization with the Secretary of State.
11:00:40 You have to have certain types of abbreviations and suffixes at the end of your business name.
11:00:45 Generally you should execute an operating agreement functions similarly to corporate bylaws functions similar to lead to a partnership agreement sets the rules for how us as the owners are going to make decisions manage the company resolve disputes.
11:01:03 If you have a manager, if you have a manager managed LLC, what is the role and responsibility of the manager, how often will we meet to discuss certain business matters, things like that, it's not required, you don't have to file it with anyone but generally
11:01:16 a good idea to have one.
11:01:18 And then file an annual report pay your taxes.
11:01:23 There's an annual filing fee in Connecticut, it's only $80, Massachusetts, it's $500, so your mileage may vary different states charge different rates for it.
11:01:35 And so before we talk. I think we'll talk for a couple more minutes about just kind of miscellaneous business issues and then we'll hop over to, you know, dedicate a q&a time.
11:01:47 I just have this kind of visual representation of basically everything we just talked about.
11:01:55 Do not worry about this, do not take notes on this you don't just screenshot it, we will send you the recording of this you can just go to this and posit, this is just like a really quick snapshot of what are the different types of organizations in this
11:02:08 fifth row you see that, um, you know, you'll see that we include nonprofit corporation is just for comparison sake, again, we'll talk more about what a nonprofit is next month, and the February workshop.
11:02:24 So a couple of miscellaneous business issues really quickly.
11:02:29 hobby last rule, this is something that is such a common issue for creative professionals.
11:02:37 Basically, part of the advantage of being a business is that you can deduct your business expenses as a from your income from your taxable income, when it comes tax time.
11:02:46 So you can claim your expenditures for materials, supplies, consulting, you can you can claim those as business related deductions for tax purposes, meaning you can use it to offset the amount of profits that you've earned and therefore potentially reduce
11:03:04 your final taxable income in your tax bill.
11:03:08 The IRS has concern is that at the end of the day they are very worried about people who are practice who are basically spending money for hobbies, using that to unfairly limit their tax bill so basically the IRS is concerned about getting as much in
11:03:28 taxes that possibly can from individuals. So oftentimes it's pretty quick to judge art related business activity as a hobby and say, You can't claim your business expenses as an artist.
11:03:49 Under this hobby loss rule because, you know, are you sure you're really like a working artist, are you really are you sure this isn't just like you know your little hobby.
11:03:56 That's in the eyes of the IRS in many circumstances unless you can prove otherwise. That's how they're often going to treat it.
11:04:03 So the issue really is. Well I spent, you know, this many thousands of dollars this year on canvas on paint and a professional photographer and getting professional lights to photograph my work, so I can archive it that kind of thing.
11:04:20 You know, the IRS will think you know it's got reaction will be this is a hobby, you shouldn't be claiming it as a business deduction. So, ideally, you need to take a couple extra steps to demonstrate to them, and really any other third parties that might
11:04:32 have to make decisions on your business going into business for the purpose of your livelihood. This is your money making profit earning enterprise, this is not just a hobby.
11:04:44 So,
11:04:47 the IRS has some, some guidance on this on their website. The link is is in that slide and I can, I can drop it in the chat once where I'm done with the presentation portion.
11:05:00 But generally, some guidelines for how to demonstrate that you are actually in business and avoid this issue of, you know, am I just doing this as a hobby.
11:05:13 One of the things you know that, you know, Patricia raised in the chat earlier was, you know, I have a sales tax license. Okay, well, that's a demonstration that you've taken this additional step to show that you are collecting sales tax from business
11:05:26 you know sales and commerce and business activity.
11:05:31 Okay, that's one piece of evidence demonstrate that you are acting as a business, having something like an employee and employer ID number to transact your business and to open business bank accounts and to enter into contracts and things like that.
11:05:45 Another way to demonstrate that you are in business and not just trying to take advantage of liability protection and tax incentives for your hobby.
11:05:54 Maintaining really good corporate books and corporate records. So keeping track of your organizing documents keeping track of your annual reports keeping track of all your accounts, keeping track of.
11:06:20 If you do have meetings or make major decisions or hire assistance and staff. Keep careful personnel records, keep you know contemporaneous records of when you make these decisions and exercise and execute these processes, any major contracts, keep track
11:06:22 of them, you know, keep an inventory of where your work is where it's being exhibited sold, etc.
11:06:29 Keep your corporate records and your business records, separate from your personal records. Same with your bank accounts, keep your business bank account, separate from your personal finances.
11:06:38 Don't commingle them.
11:06:41 And all of these steps have the added benefit of creating a presumption that in court if there ever is a dispute between you and a creditor further proof that I am operating as a business I am not merely operating as a sole proprietor, so it adds more
11:06:57 evidence to the presumption that you should also be granted the benefit of limited liability, remember I mentioned a while ago that there are very very limited circumstances where a creditor can hold you personally liable.
11:07:09 One of them was if you intentionally causing injury. Another one was professional malpractice. Another one is, if someone gets the impression that you are really just a sole proprietorship kind of disguising yourself as an LLC or a corporation, you're
11:07:24 really, acting as a sole proprietorship, but you're still trying to take advantage of liability protection and tax incentives, a creditor can potentially or claimant can potentially try and sue you personally and hold you personally liable if you follow
11:07:37 these steps you document your work, you treat your business assets and accounts and matters, separate from your personal ones. If you do all these formalities like have your board meeting at your kitchen table.
11:07:50 Even if you're the only owner if you do all these things you're creating a paper trail and documentary evidence that, yes, this is a separate business yes this is my livelihood.
11:08:00 Yes, this is a money earning money making enterprise for me, it's not just a hobby that I'm using to, you know, I'm just trying to get tax incentives for.
11:08:09 So, generally just good business practices.
11:08:14 You know what should I think about with liability.
11:08:17 Generally, because I think liability mitigation and liability limitation is the biggest reason that people are thinking about setting up some type of company, I'd say it's kind of three reasons.
11:08:32 I've been sued in the past, my friend told me I should do it.
11:08:36 Or, I have a contract or or an upcoming major project with, you know, a city or state a municipality, a large private client, and they want me to have a limited liability company or some type of entity.
11:08:50 For their sake.
11:08:51 So usually risk mitigation is a big reason.
11:08:56 And I think one of the things about this process again.
11:09:00 An accountant there's no substitute for a really good insurance broker who can talk about your business practice to on your craft and your discipline.
11:09:10 But think about what types of liabilities your artistic practice exposes yourself to.
11:09:16 So if you're a musician, and you're playing in a band, and you're doing live performances, you might have different types of risk than a visual artists who works just digitally or a fine art who works and sells solely through auction houses and intermediaries.
11:09:31 So think about what are the types of risks you expose yourself to, um, is there a risk that that your work do you do a lot of appropriation art or, you know, are you a collage artist where you're relying upon existing subject matter.
11:09:44 So that's one thing to think about, you know, do I am Do I have a higher risk of copyright liability, or some other type of third party liability. Am I a journalist or an opinion writer or critic, or something like that.
11:10:02 Do I potentially expose myself to defamation am I, you know, a caricature artist or a satirist, you know, do I potentially expose myself to some type of personal liability suit to the people I'm, I'm critiquing and commenting on.
11:10:25 exposed to professional liability Am I a design professional like an architect or an engineer. Think about what types of risks you expose yourself to and that will help you.
11:10:30 Certainly in your conversations with an intern insurance broker to think about what policies should I be thinking about.
11:10:38 And I think.
11:10:40 So last thing before we hop over to questions is, you know, question that was asked earlier.
11:10:45 How do I think about what is the right entity for me. What identity for me, myself, yen, any lawyers who might be tuning in, we all know that you spend three years and do you want $1,000 in law school to learn that the answer to every legal question is
11:10:59 is it depends.
11:11:01 It depends, please pay me $350.
11:11:04 Make checks out the cash.
11:11:06 But it really does depend on what type of business here and and there are different pros and cons to each of them.
11:11:14 I think generally, and this are not set in stone obviously but general recommendations is sole proprietorship, you know, small businesses where you don't expose yourself to a lot of risk or young businesses where you don't have a lot of starting capital
11:11:27 and resources, maybe you want to start the sole proprietorship, maybe you're not exposing yourself to the level of risk that you need to think about having a business entity, you don't have any intention of sharing ownership or co owning with anyone else
11:11:39 so you don't need to form a partnership or a corporation or an LLC, licensed professionals like I said when I was a solo attorney. I didn't, I operate as a sole proprietorship because I just couldn't mitigate my risk you're having a business entity.
11:11:51 It was a cost that wasn't worth it to me.
11:11:55 Or a partnership.
11:11:57 You know, do you really really want co ownership to be part of your practice Do you really want that to be part of your model Do you really want to go in together with someone, or are you a licensed professional looking to go into business with someone
11:12:10 else.
11:12:13 Maybe a partnership is more appropriate again rare nowadays with LLC is that kind of cover all of these bases a number of ways.
11:12:21 Corporation.
11:12:23 You want investors you want access to traditional capital markets you want venture capital funding, you want traditional investment funding.
11:12:31 Maybe your business with high income, maybe you're a business that wants to grow.
11:12:38 Corporations are preferred for a couple different reasons.
11:12:42 Least of all being that they're very familiar territory, and we have a very from a legal perspective, a very very rich by of decision a law case law court opinions on how we deal with corporations, their old they've existed for centuries.
11:13:00 They're old they've existed for centuries. So we have a lot of case precedent, and we can generally make good predictions. If a dispute happens, if you know you're in a kind of volatile or risky market.
11:13:09 We know what generally the standards and expectations are of the people involved in a corporation so if you're going into a really risky business or a really risky enterprise.
11:13:20 Maybe a corporation is right for you. Just because it's kind of predictable despite all of the rigmarole of actually sustaining it and having meetings and having, you know directors officers shareholders and keeping stock Ledger's and that kind of thing,
11:13:34 LLC is really folks who kind of want the best of all worlds but don't want to go through a lot of the hassle of, you know, the limitations of a sole proprietorship, or a partnership, you know, we want perpetual existence, we want to have the flexibility
11:13:49 of having, you know maybe one owner multiple owners, we want flexibility in management we want flexibility and potential tax treatment, LLC is the most common usually most of the time when I have for profit clients.
11:14:01 I steer people to that because it's just easier to manage. Easy to start it's intuitive. And while you still need to take care to make sure that you're maintaining it properly and and engaging and good responsible, you know, business processes about practices
11:14:16 and documenting everything.
11:14:18 It's still fairly forgiving.
11:14:21 And while it's a lot newer than partnerships and corporations. We also have a pretty strong body of case law about how courts are going to resolve liabilities and and disputes involving LLC is as well.
11:14:34 So, really, really quick now and I'm just choosing your name, it's a really intimate decision. It's a really personal decision. everyone has their own, and this all presupposes that you're kind of at the early business planning and you haven't already,
11:14:50 you know, been in business for 20 years, which I'm sure, a number of you are.
11:14:55 But just when you're thinking about your name, and you're starting up a new business either registering an existing business entity or, you know, starting something new from scratch, just do a little bit of due diligence, just make sure the name that
11:15:09 you want to use if you feel really strongly about it and if it's a name that's like, Other than like Luke black at our studios.
11:15:17 Make sure you just do a little bit of research to make sure no one else is using it. I had within the last year, three different musicians that over the course of their music career, they found other musicians they were operating under their legal name
11:15:31 not a stage name, they found other musicians and other states, some of which are in the same genre and floating in the same like academic circles that have the same legal name, and they're starting to get confused with each other, so it can raise an actual
11:15:46 legitimate trademark issue, even if you are just operating with your own name.
11:15:50 So just do some research.
11:15:52 Check social media, check the social media platforms you expect to use, do a quick research at the US Patent trademark office database, even if it's informal.
11:16:00 Just take a look at what's out there and make sure no one else is using the name they feel super strongly about.
11:16:06 Connecticut has, you know for corporations, if you want to reserve a name in advance, you can do so you know you you feel strongly about the name you've done your due diligence you know it's not out there.
11:16:15 You want to reserve it for about four months before you incorporate that as an option for you. It also puts others on notice that this name is off limits.
11:16:26 And then the last thing I just want to share is, you know, thinking about advice, it takes a village.
11:16:32 And there's really, I always think it's a good idea to have a good lawyer, a good insurance broker a good accountant, and by good I don't necessarily just mean people who understand the discipline, obviously you want people who are you know outstanding
11:16:46 and know the field and know the answers your questions, but you also want to work people with people who are patient and willing to listen and appreciate and respect your issues.
11:16:56 But, you know, there's no substitute for working with folks who who get this who understand this and are able to and equipped to help you on these topics and also, you know, it's going to cost money, build it into your budget.
11:17:09 I'll talk a second about our program volunteer lawyers for the arts.
11:17:13 Just bear in mind how sophisticated your needs are is going to affect the price and ranges and rates vary, even within the state.
11:17:22 You know in in Massachusetts, our rates in eastern Massachusetts are way higher than rates in western Massachusetts just geography, all these different things discipline.
11:17:32 So build it into your budget, and who to ask.
11:17:37 Obviously, we run a lawyer referral program so we do this as our business but honestly the best referrals, you can get are from people you trust if you have friends who are artists friends who are in similar disciplines, professors, colleagues, peers.
11:17:52 People who you trust and who trust you and like you who've worked with these issues before, ask them for recommendations ask them for referrals, there's really no substitute for someone who trusts you and likes you and knows you, to give their good word
11:18:05 and they're in personal endorsement for someone they like and they trust. We are here to help with this process as well. Again, we are professional matchmakers.
11:18:13 But first line of defense is always get a recommendation from people you know from people you trust.
11:18:20 Because there's really no better way.
11:18:25 And like I said, we provide a lawyer referral program ourselves. We are still, we are rolling it out. It's like Tamra said it's a phased approach so we're prepping to start offering our services to folks in Connecticut.
11:18:40 Right now we're still building our volunteer attorney panel but basically the processes.
11:18:45 You can go to our website, Arts and Business council.org, and you'll see legal services and you'll see a link where you can apply for services and I'll put the link in the chat.
11:18:54 You can apply for services there, fill out an application. Who are you What's your name, general description of your legal issue. If you're seeking pro bono free legal services.
11:19:05 We do need proof of income.
11:19:07 So be prepared to provide you know redacted copies of any financial information so we can verify that you have a financial need for legal services.
11:19:18 And then also we have some demographic demographic information for for grant reporting purposes it's optional but we love to have it, you know, kind of traditional demographic, age, race, gender, that kind of thing.
11:19:31 So, I will put the link in the chat to where to apply but if you have questions, this is my contact information and our kind of launch rollers for the arts main line as well as Yon our art law fellow.
11:19:43 We're happy to answer questions we're happy to chat with you and we're happy to see if we can get you legal assistance on whatever you need.
11:19:51 So with that, I'll leave it for the last few minutes for for more q amp a.
11:19:57 There's a couple of questions, I think, thank you. First of all, sorry I should have started with Thank you, that was a great presentation.
11:20:04 There's a couple of questions that I don't know if we're actually hit upon.
11:20:09 So I'm going to just touch them and you can say, we got that. So one of the questions is what happens if you started your incorporated business with three people and then two of them left the incorporated business.
11:20:21 Their names were removed, but the business is still unincorporated business.
11:20:28 It depends on what type of business it is I mean for really, all of these. So for any, any type of business that is incorporated at least with respect to your state filings.
11:20:37 You never.
11:20:39 I don't believe you ever actually disclose, who are the owners of the entity. So, for something like a corporation.
11:20:45 You're usually not going to be identifying all the individual shareholders and the Corporation for an LLC, you're not usually going to be indicating all of the individual owners and members.
11:20:56 You will indicate who are the managers who are the decision makers, so in a corporation, who are the directors who are the officers in an LLC, if there are any managers if it's a manager managed corporate LLC, who are the managers, but you don't usually
11:21:11 identify who the individual stakeholders are.
11:21:15 So, if you have people who depart and their owners, then it's not, it's not a super complicated legal process it's more, you know, making sure with for accounting purposes.
11:21:28 Make sure that any outstanding profits they owe, or that you, the company owes them gets to them.
11:21:34 If they made a capital contribution, meaning they invested income or invested money or property into the business that either you get that property back to them unless they've promised that like you can keep it, you know, you can keep the printer you
11:21:49 can keep you know the thousand dollars I contributed to the company that kind of thing.
11:21:54 So for the most part it's not so much, cuz you know, thinking about legal concerns I mean, you do want to update you know for an LLC, update your operating agreement to reflect you know who are the actual owners and what are the ownership stakes now and
11:22:10 what are the capital capital accounts in the company.
11:22:13 But generally for legal reporting. It shouldn't be a problem, it shouldn't be that complicated. You just want to make sure your track them down and if you do owe them anything that it gets back to them.
11:22:23 Usually I imagine they'd remind you of that.
11:22:27 And the other thing is think about insurance policies. Do you have any of these owners or colors, or they listed on any insurance policies as additional insured or anything like that.
11:22:37 Make sure they're off so you don't have to keep paying for the additional insurance that aren't part of the company anymore.
11:22:43 And thanks Luke, another question does having an EIN help prove that one is a business enterprise and not a hobby. Yes, it's one way you can demonstrate it by itself, it might not be enough, you know, on its own, but along with all the other things, you
11:22:59 know, ei n usually indicates that you're doing some type of either banking or some other type of financial transactions and for tax purposes doing certain taxable activity, using a business identification number.
11:23:14 So it is pretty decent evidence but I think all the things that also flow from it like having a business bank account.
11:23:22 You know reporting it on, you know, when people ask you for your W nine and your tax identification number and you're giving them that I think that's indication that we're in business, we're operating as a separate entity.
11:23:36 But I mean a sole proprietor can also have any in as well. So it's, it helps but it's not by itself going to get you there.
11:23:46 Whoo. So, we will talk about Fiscal Sponsorship and the nonprofit workshop but so what Fiscal Sponsorship means is that you are a business entity that has a contract with an existing tax exempt charitable nonprofit.
11:24:11 And basically, really the idea of a Fiscal Sponsorship Is that you, as either. Maybe you yourself are a nonprofit that isn't tax exempt yet. Maybe you're independent artists, that's doing charitable work, maybe you're a for profit company like an LLC
11:24:25 that's doing you know public art or charitable project, and you want to be able to get charitable funds but you aren't tax exempt. The idea of a Fiscal Sponsorship is that you enter into a contract with an existing tax exempt nonprofit, where they will
11:24:41 divert, and they will collect
11:24:46 tax free or tax exempt charitable donations and charitable grants that they will allocate towards your program. so your fiscal sponsor, all of your donations are legally fair money, it's their income, but they under the Fiscal Sponsorship agreement.
11:25:07 Are your marketing and allocating that money to your project as an LLC, so you can be an LLC that's fiscally sponsored we've done it, you know, through our organization we've we've done that before.
11:25:18 For constituents that we have.
11:25:20 So if you're doing like a public art project or you're doing a charitable event or, you know, public performance or something like that, and you think that yes this is charitable and this should honestly be, I should be able to get a charitable grant
11:25:34 far as most often where I see it as people applying for big municipal and like any a grants and stuff like that.
11:25:42 Even if you're an LLC, that you can be pretty flexible because ultimately the funds that you're getting through the Fiscal Sponsorship don't belong to you they belong to the tax exempt organization that is sponsoring you, but we'll talk about Fiscal Sponsorship,
11:25:55 you know, pitch pitch for next month's workshop we'll talk a little bit about Fiscal Sponsorship.
11:26:00 And yes, thank you, Ruth Lewis Fractured Atlas is the most well known and the biggest fiscal sponsor for the arts, and they have I think they have a lot of good resources and FAQs about like what do you mean is Fiscal Sponsorship What does it mean.
11:26:17 They might even have sample Fiscal Sponsorship agreements for you to look at.
11:26:28 And a couple more questions just as a follow up to that question of losing two members have that incorporated business can still be considered and incorporate business, just the one owner with water running everything.
11:26:34 Yeah, even as a corporation, even with a traditional Corporation. If you are, you can be the one director, the one, the president the treasure, the Secretary and also the soul shareholder.
11:26:48 It's totally doable.
11:26:49 You do really want to make sure though if that's the case that you are taking care to do all that documentation we talked about to sustain that presumption that you are operating as a separate business and not merely as a sole proprietor disguised as
11:27:02 a corporation. But yes, that's totally okay for that in that an LLC.
11:27:07 Okay. And this is another little bit of a fiscal sponsor question but if one is a board of a nonprofit, can that nonprofit nonetheless be one's fiscal sponsor and I think the follow up is does the nonprofit have to be in the arts as well.
11:27:24 Yes Your Fiscal Sponsorship, the nonprofit they are seeking sponsorship from has to be mission aligned with whatever your project is, so it should still be in the arts.
11:27:37 The reason being is that there are very strict limitations on what type of charitable activities, an organization can do that are tax exempt. And if they are operating and doing activities that are outside the scope of the tax exemption they've been granted,
11:27:51 then they are potentially liable for income taxes.
11:27:54 So you do have to make sure that is within the mission and scope of the organization that you're sponsored by.
11:28:00 If you want to do that so if I'm running an animal shelter I can't seek Fiscal Sponsorship from Boston Symphony Orchestra, because it just it's not aligned.
11:28:11 But for your other question of if I sit on the board of directors or nonprofit, can that nonprofit also fiscally sponsored me or my work or another organization.
11:28:24 In theory, yes, and we'll talk about this in the nonprofit workshop, you have to make sure it does raise a conflict of interest, and it is okay potentially for a tax exempt nonprofit to engage in a conflict of interest, as long as the process has been
11:28:41 documented the board of directors that are going, the any directors or insiders who will benefit from that relationship from that conflict of interest, do not vote on it so meaning basically you're the only one who's not allowed to vote on whether they
11:28:56 decide to fiscally sponsoring you. And then, you know, make sure that they also have to do due diligence to make sure that this is, you know, fair to the company it's a good deal for the company to fiscal sponsor them, like, you know, the rate that that
11:29:09 they earn from the Fiscal Sponsorship is is sensible and they're not getting taken advantage of. So in theory, yes, you can do that. You just have to very carefully abide by your corporations your nonprofits conflict of interest policy, but it's a very
11:29:23 good question. And I'll just add when we do our next webinar and we talk more about Fiscal Sponsorship what you can do and what we are allowed to do as a funder through the state, and through the NEA is not necessarily the same thing.
11:29:38 So, so we'll touch on that.
11:29:41 Another question I know we only have two minutes we'll take this one question I'll look at the rest is it risky for a visual artist to sell prints or paintings, through their own website.
11:29:50 And do they need to charge state tax.
11:29:55 That is a complicated question because it kind of depends on where it depends on where your business is located and for the most part the default rule is if you're a, you know, small, if you're a small business and you run your business out of your home
11:30:09 home usually we're going to say for legal purposes. The business is based out of where you're physically located meaning you know the businesses where you're located.
11:30:16 So your obligation to remit sales tax and depends on two things, depends on what your state laws requirements are for collecting and remit sales tax and to with them.
11:30:29 That is what you're selling the type of product that is covered that is required to be that you're required to collect sales tax on. So if you're an artist who's selling prints and works fine art.
11:30:41 I imagine in most jurisdictions. That's the kind of sale of goods that will be covered by that you will have to remit sales tax, so you should charge sale, I mean you need to look it up and talk about it with an accountant or a tax attorney, but generally,
11:30:58 you should be prepared to set aside, whatever the percentages of sales tax, if you're selling prints in you know whatever state you're located.
11:31:07 And then, you know, the other issue is, no it's not super risky for you to sell your work through your website I mean your biggest risks are things like you know if you're going through e commerce, who's holding the financial data that you're getting
11:31:20 you know you're getting credit card numbers, you're getting financial institution information from clients who who's holding that information. Oftentimes, if you're working through, you know, a third party vendor, like if you're working on these websites
11:31:36 websites like, I can't remember the one that like slick Squarespace I like every, every podcast patches.
11:31:45 I think they probably have like ecommerce vendors that they hold all of the financial institution, other financial information and you don't personally hold it.
11:31:55 So you want to think about things like data security financial records and stuff like that but generally No it's not, it's not super risky to sell prints online.
11:32:03 In particular, but yeah, you should be prepared to hold on to sales tax.
11:32:08 All right. Well, thanks, everybody I think we're at time it's exactly 1130 on my watch and I think we've hit most of the questions if I missed a question, I apologize, but you can feel free to reach out to Luke.
11:32:21 Hopefully, you will sign up for our next webinar. In February, if you haven't already done so, and share that information with your friends because we would love to have as many people here as possible that we're limited to 100 people in the live part
11:32:37 as live participants when we do these webinars, but they will all be recorded and shared. So Luke thank you again thank you for being here and thank you to all of you for coming.
11:32:48 We really really appreciate it.
11:32:50 Thank you for having us and thank you everyone who attended and thank you all for your really great questions, feel free to reach out. We are expecting to start rolling out our lawyer referral services to artists in Connecticut so if you have questions