Many good and generous employers want to share with their employees.
The idea behind giving employees stock is a sound one. Employees who are owners may be more invested in the business’s success. They may feel more appreciated. It could give them a sense of pride, ownership or purpose beyond anything that they would feel from a simple salary.
These are the main reasons I hear from employers who wish to create an employee stock plan.
For a myriad of business reasons, I prefer not to share stocks with employees. I prefer an employee profit-sharing plan that does not involve equity.
But I understand that many business owners may feel like a stock plan is right for their employees.
So you may be wondering, if I tell my employees that they are entitled to stock options in a letter, memo or at a meeting, is that legal? No. Watch to learn more.
I offered stock options to my employees in a memo. Is that OK?
That is not a good idea. Employee stock plans and stock option grants are complicated.
First of all, stock grants may create taxable events that impact you as the employer.
Second, stocks and options create duties by the majority stockholders to the minority stockholders under state laws that you may not anticipate.
Third, such a memo may create earned wages and must comply with wage laws.
Fourth, federal securities regulate promises and statements regarding stocks.
In short, employee stock plans create a variety of legal issues that you must understand before you start handing out shares and options.
There are better alternatives if you wish to give your employees a profit-incentive.
For example, you can have a 401(k) set up to include profit sharing or you can set up a bonus program.
Maybe you have a rich friend who is looking to invest in something interesting or fun or worthy. And you have another friend who has just built a better mouse trap, but is living in his mom’s basement.
Together, the two could make millions. So you consider playing business matchmaker. Nothing wrong with that, right?
Even better… maybe you can get a cut in the business or a fee for a successful transaction. That’s just being enterprising. And your inventor friend is enthusiastically willing.
Someone tells me this story casually at least a few times a year.
And every time, I have to be a wet blanket.
Because if you are going to connect an investor with a business, you may be violating the securities laws. If things go wrong, you could be held responsible. Or worse, you could be prosecuted by the SEC and fined or put in jail.
Like many things in law, something with such good and innocent intentions can surprise the people involved by being illegal.
Watch the video to see what I mean.
Say you have a friend who wants you to introduce him to potential investors in your industry in order to raise money for his new start up business.
Can you take a percentage if he successfully raises money from my contacts?
Federal securities law requires a broker’s license for any person who gets paid any fee for obtaining an investor.
This is meant to protect investors from being scammed.
Even if you just make the introduction, you must still comply with this law.
If you are not licensed, the investor can later sue you for a return of his or her money.
You can still make a simple introduction to help out your friend, so long as you aren’t paid for it.
And, of course, you shouldn’t make any representations or guarantees about the wisdom of investing money in your friend’s venture.
Would you like to have a lawyer at your beck and call without it costing you an arm and a leg? Learn about our Peace of Mind Plan or call us at 800-449-8992 to find out how.
I have a college degree in English Literature. So you would think that I read a lot of novels. You’d be wrong. Since I graduated, I have mostly read must-read business books and law books.
It’s not that I’m boring. (Although I may be that.) Rather, I’m extremely focused on growing Bellatrix PC into the greatest law firm ever. (I may also be a tad bit competitive.)
Running a successful business requires more than vision, dedication and an entrepreneurial spirit. It requires being a lifelong learner.
Business books can inspire, motivate and help you get past operational, management or financial blocks. Here are my favorites:
How to Win Friends and Influence People by Dale Carnegie
Published in 1936, this book is still relevant and insightful. This book teaches three fundamental techniques for dealing with people, both in business and everyday life. It also teaches six unique ways to make people like you, twelve ways to turn people to your way of thinking, and how to influence change in people without making them resent you.
This is perhaps one of the most important must-read business books for small business owners and decision makers to read. Understanding people is one of the keys to success in business and sales.
The 4 Hour Workweek by Tim Ferris
I didn’t I was an entrepreneur until I read this book in 2007. I started my first business almost immediately after read this book. So Tim Ferris literally changed my life.
This book promises to teach you how to “escape 9-5, live anywhere, and join the new rich.” Working only 4 hours a week is not immediately feasible for an entrepreneur, though, so it’s promise is initially elusive. But the ideas in this book form the cornerstone of a new school of thought in the business world.
Pen-ultimately, The 4 Hour Workweek teaches the art of leverage, which is the key to finding freedom as an entrepreneur. It also teaches you how to eliminate 50% of your work in 48 hours using proven principles. A lot of the work you do does not move the needle enough. Ferris teaches you to ruthlessly slash those things so you can make more money and take back your life.
This Must-read business book is not for the faint of heart.
The E-Myth Revisited by Michael Gerber
Truer words have never been put on paper about why small businesses fail than what is in this book. Most small business owners have bought themselves a job and are not flourishing as entrepreneurs. This book explains why through examples and by contrasting how most small businesses operate to successful models, such as franchises.
If you are struggling as a business owner, doing it all, and barely making ends — read this book right now. It could save your business and your sanity.
The Hard Thing about Hard Things: Building a Business When There Are No Easy Answers by Ben Horowitz
Building a successful business is hard! I wish more “gurus” would acknowledge this fact.
What is useful about this book is that Horowitz goes there. Ben discusses how difficult it can be to run a successful business. Where other books focus on inspiration, founding a company and getting started, this one focuses on the myriad challenges that can derail a business after it’s up and running.
Throughout the book, the author shares insights on managing, buying, investing in and developing a business (with a focus on tech companies, but applicable to all industries).
Dotcom Secrets: The Underground Playbook For Growing Your Company Online by Russell Brunson
When I got this book, I devoured it…. And then I promptly read it again. The only other business book that I’ve read more than once is The 4-Hour Workweek. Now Dotcom Secrets sits dog-eared on my desk and I refer to it regularly.
Dotcom Secrets is a hardcore marketing and sales book. I already knew a lot about marketing and sales when I read it. But this dense book filled in some gaps for me. It’s made easier to digest with a lot of stick figure diagrams.
This book generously doles out evidence-based advice on how to sell to your audience (in any context — not just online). There is applied psychological theory in masterful sales. Don’t just emulate — understand.
Optimizing your sales processes could change your business and change your life.
One of the most rewarding aspects of being a business owner is making things happen. You take action on your own schedule. You control your destiny.
Nothing brings this feeling of self-determination to a screeching halt like a business-meeting smack in the middle of a productive day. You know the feeling. You’re cranking the work out – really making progress – and there it is on your calendar – like quick sand in the freshly cut path through the jungle. A meeting.
As much as you’d like to, you can’t avoid them. Sometimes you need to sit with someone face-to-face and hash things out. Occasionally, it’s the only way to get things done. There are some things you can do to keep things moving and make the most out of your time. Here are five steps you can take to have productive meetings.
Step One: Set a Start Time and An End Time
Most people have a firm start time for their meetings but the end is a loose guideline at best. This is a huge mistake.
Setting an end time and letting everyone know you will walk out of the room when that time comes is the best way to create urgency and stay on track. This also helps keep distractions to a minimum.
When you set the meeting and when you confirm it, make sure you get agreement from everyone involved about the “hard stop” at the end.
Step Two: Publish an Agenda in Advance
There should be no surprises during your meeting. All attendees should have the opportunity to prepare in advance. Start on time and stick to the published program.
Predictability is your friend. It helps everyone stay focused.
Step Three: Agree on a Desired Outcome
As soon as the meeting starts, announce the desired outcome and get buy-in from all attendees.
Working toward a common goal is the best way to make certain this time is productive. This also creates a sense of common purpose and a feeling of goodwill – both of which lead to a higher level of productivity and engagement.
Step Four: Only Invite Necessary People
Limit the meeting attendees to people invested in the outcome. All too often people create meeting invitations using a scattershot approach – in other words they invite everyone they know.
This is a bad idea. Keep the list of attendees to people who have maximum control over the desired outcome. If you’re not sure if some belongs, when in doubt, leave them out.
Step Five: Create Actionable Next Steps
As the meeting ends, make certain each person knows what he/she needs to do next.
The key to making the most of the meeting is to assign tasks as a result.
Each person agreeing to take some action is the best way to make this happen. Without this step, the entire meeting will be a waste of time.
This doesn’t need to be an elaborate production. Simply go around the table and get people to agree on the action item assigned to them.
You cannot avoid every meeting. Sometimes they are a necessity. Follow these five steps and your next meeting will be focused and productive.
Congratulations on making the decision to start your own business! As you already know, one critical aspects of business formation is deciding which legal structure your entity will assume, i.e., a limited liability company or corporate entity. The legal structure you select significantly impacts aspects of the company’s legal and financial rights, responsibilities, and limitations throughout the duration of the entity’s existence. For instance, the legal structure you choose will impact significant matters such as personal financial liability, tax considerations, the maximum number of business members, and costs related to the legal maintenance of the business.
The limited liability company (LLC) enjoys widespread popularity among entrepreneurs across all types of industries because it’s “hybrid” legal structure simultaneously offers liability protection while avoiding dreaded “double taxation” issues faced by C Corporations. However, while the LLC structure has the potential to offer considerable legal and financial benefits, it is also important for new business owners to familiarize themselves with the pros and cons of operating as an LLC.
The business formation attorneys of Bellatrix PC have extensive experience assisting entrepreneurs at all stages of their business, including LLC formation, the operation process, and business dissolution or sale of the business. At Bellatrix PC we are well-versed in California and federal laws governing limited liability companies. Whether you need assistance drafting enforceable LLC operating agreements, have questions about converting an LLC into a corporation, or simply need guidance pertaining to entity selection, our knowledgeable legal team is ready to help you meet your goals.
To learn more about how we can help your LLC succeed, call our law offices at (800) 449-8992 to set up a confidential legal consultation.
How LLCs Limit Personal Liability
The limited liability company does exactly what its name suggests, limits the personal financial liability of business owners should the business itself become liable for a debt.
While creditors may pursue funds held by the entity itself, individual members enjoy robust protection against the seizure of personal assets and other collection actions. In most instances, it is illegal for creditors to pursue vehicles, homes, or other possessions held personally by LLC members in order to satisfy debts arising from business transactions. This feature makes the LLC an attractive option compared with other entities which do not limit personal liability on behalf of the individual owners, such as general partnerships and sole proprietorships.
However, while LLCs generally restrict personal liability in the event of financial hardship experienced by the business, there are several situations in which members could still potentially be held personally liable for certain debts. Entrepreneurs must be made aware that even the LLC structure will not shield a member from assuming liability if he or she:
Personally and directly causes personal injury and/or wrongful death, resulting in civil litigation.
Makes a personal guarantee regarding debt repayment.
Engages in fraudulent or otherwise illegal activities pertaining to the business, including but not limited to tax evasion, embezzlement, and employment tax fraud.
Treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.
Tax Obligations for Limited Liability Companies
In addition to limiting their personal liability, most entrepreneurs are equally concerned with minimizing their tax liabilities. The LLC structure can be ideal in this regard.
Like S Corporations (but not C Corporations), the LLC is what’s known as a “flow-through” or “pass-through” tax entity. This term derives from the fact that income which is generated by the LLC “passes through” the LLC itself to individual members thereof. Individual members report profits and losses on individual income tax returns, thereby avoiding the double-taxation applicable to C Corporations. Unlike their pass-through counterparts, the LLC and the S Corporation, C Corporations are effectively taxed twice: first at the corporate level, and then again at the level of the individual shareholders.
While they are both pass-through entities for tax purposes, the LLC enjoys several practical advantages over the S Corporation. To provide just a few examples, LLCs are generally simpler and less costly to form than S Corps, and can have an unlimited number of members.
Single-member LLCs have special tax considerations. The IRS designates single-member LLCs as “disregarded entities” for tax purposes, meaning profits and losses must be reported on the member’s Schedule C Form 1040 (Profit or Loss from Business) just as they would be for a sole proprietorship (in fact, Schedule C is expressly designed for use by sole proprietorships.) This special tax designation means it is unnecessary to file additional taxes for the LLC itself.
If you are forming a single-member LLC and do not wish to be treated as a disregarded entity, you may elect to be treated as a corporation by filing Form 8832 (Entity Classification Election) with the IRS. If you fail to file Form 8832, the IRS will simply use the default federal tax classification. Note that LLCs with two or more members can also request re-classification as a corporation by filing Form 8832.
If you are considering forming an LLC or other type of business entity, it is critical to seek legal guidance from an experienced business attorney. It is absolutely essential to provide a robust legal framework for your LLC during its formative stages to help put your new entity on the path toward success.
The attorneys of Bellatrix PC are prepared to help you navigate formation procedures and administrative requirements, draft company policies and operating agreements which comply with both state and federal laws, and most importantly, help you take all necessary legal measures to protect your bottom line so that your new entity can flourish and grow into the future.
Eric is really angry. Less than a year ago, he started a business with four guys he knew from friends of friends. They shared the dream of opening a sports bar dedicated to soccer that would serve international beer and bar food.
They found the perfect spot and signed a lease. Eric personally guarateed the lease and put $30,000 down for a deposit. He paid for all the kitchen equipment and hired a contractor to bring the building to code.
His partners (they were all equal according to the one page document he typed up) chipped in for a little while. One brought in some TVs. Another bought some beer and tended bar sometimes. Another pitched in a few thousand dollars to buy some advertising to announce their grand opening.
After a month, the first partner was run out by Eric after taking cash from the till. He never came back.
Then one of the partners got sued for pinching the waitresses. Eric became embroiled because they were not a registered partnership or corporation.
Six months in, Eric ran out of savings before the bar started turning a profit and he got behind on rent. He asked the third partner for money. Instead, the third partner took all the TVs and left.
The waitresses quit because they were paid late. There was no cash for food or beer. And the landlord said that Eric was personally responsible for the five year lease — a debt of $250,000 at least.
After a few more months of barely scraping buy, Eric closes the doors to his dream bar. And the landlord sues.
Although this is a fictional story, I get a call from someone like Eric at least once a month. The details vary, of course. But the story is more or less the same: an erstwhile entrepreneur gets burned by less-than-honest partners or landlords and now has major problems. He’s broke, depressed and ruined.
It’s a really depressing story for an optimistic entrepreneur like me. But sadly, 80% of businesses fail within their first year. And the blow up is usually spectacularly devasting for an owner like Eric.
I am CONVINCED that many businesses would not fail if they had simply started off right. New business owners make a lot of the same mistakes that lead to failure. These include:
Not organizing legally, following ALL the steps necessary (e.g. just filing an LLC is not good enough)
Failing to keep professional accounting records from Day 1 and getting into tax problems
Not having good contracts with business partners and investors (this is one of the biggest mistakes)
Getting stuck in a bad commercial lease
Not having adequate resources to deal with all the things a new business must do because of lack of planning or education, which destroys cash flow because of constant traps and problems
Failing to follow good employment and pay practices from Day 1
Underestimating what starting and running a successful business takes
Eric didn’t call me before starting his business. If he had, I would’ve given him my ebook, How to Start A Business… Legally: A Quick and Easy Checklist.
I cannot stress this enough. Getting set up right and under the guidance of someone who has started or help start many businesses will save you thousands of dolalrs and help prevent failure.
Someone like Eric spends $100,000 to open his bar, only to crash and burn in just a few months. Now he’s liable for another $250,000 just with a broken lease…. There are still employee liabilities and taxes to deal with (and that’s if the partners all just disappear). His legal fees with me are going to be a minimum of $50,000. Alternatively, he will bankrupt and lose everything.
In a more perfect universe, Eric would have come to me a year ago. He would have hired me for between $5000 and $18000 and I would’ve helped him set up everything and given him the benefit of my years experience in business start ups.
He would’ve avoided the bad partners, the bad lease, the sexual harassment lawsuit and the waitresses quitting.
He also would have been on track to avoid the plethora of other problems that come from starting a business.
And then his $100,000 investment would not have been such a hopeless risk!
If I practiced law just for money, I would rather have people like Eric pay me $50,000 or more to pick up the broken pieces of their dreams and help them move on.
But I’d rather more small businesses be successful. And the odds of that are much improved when you invest in the foundation when you start up.
Maybe We Can Help. Request Your Consultation Today.
Alicia I. Dearn is the founder of Bellatrix PC, a woman-owned law firm with offices in Missouri and California. Bellatrix PC handles lawsuits and business transactions. We advise in business, employment, real estate, intellectual property, civil litigation, and election law.
The articles published by Bellatrix PC are for informational purposes only and do not constitute legal advice. If you have a legal issue, please get competent advice from a licensed attorney in your jurisdiction. Use of Bellatrix PC's site is subject to our Attorney Advertising Disclaimers.