When startups are choosing a form of entity – usually either an LLC or a C-corporation in my experience – the common advice is to be an LLC (which by default is taxed as a partnership), unless the company expects to receive venture capital funding, in which case it should be a C-corporation. The conversion to C-corporation status can happen later – even concurrently with the venture capital funding – without tax impact. However, this short article in Inc. magazine by Ryan Feit argues that even startups expecting venture capital funding should resist this advice and remain an LLC. Feit notes that the double taxation of C-corporations (corporate-level tax plus income tax at the shareholder level) has a huge impact, which is why single-taxed LLC are the go-to default, and that the rationale for nevertheless using C-corporations – that the VC funds need it for their internal purposes – is misguided.
In my practice, the question of classification of service providers as employees or independent contractors has come up with increasing frequency. This probably results from the increasing amount of freelancing in the economy in recent years. It’s also been in the mainstream news recently, with highly publicized actions against Uber and Lyft for alleged misclassification of their drivers. A classification of a worker as a contractor is generally preferred by companies, as it eliminates a wide range of costs and legal protections available only to employees, e.g., unemployment insurance, workers compensation, tax withholding, minimum wage and overtime laws. Because of this, federal and state regulators are increasingly scrutinizing classification issues, and employers need to be aware of this and be careful and conservative in their classification decisions. …
The NYT on new funding alternatives for small businesses, involving advances on outstanding invoices. I’m not clear on why something like this is preferable to a traditional line of credit from a bank, given the effective interest rates described here. I guess it depends on the business, but applying for a bank line of credit isn’t that difficult and certainly doesn’t involve “selling your soul.”
The SEC recently adopted final rules implementing significant changes to securities offerings done under Regulation A. Because of the greatly expanded scope of the offerings, they are referred to colloquially as Regulation A+ offerings. The SEC announced the final rules with a press release and fact sheet.
Gary J. Ross on how, in the world of small law firms, no one cares about status markers like where you went to law school. I think he overstates this, though certainly it’s true that the outside world is less status-conscious than Biglaw attorneys.
Last week, I detailed a few specific behaviors for transactional attorneys to avoid. Now, I want to identify and describe a particular general type of attorney to avoid becoming (or to avoid hiring, depending on who you are). Needless to say, there are lots of obvious types you don’t want to be – the kind of attorney who steals client funds, the kind who doesn’t return calls, etc. – but what I have in mind here is a type that is thought of, by many, as the best kind of attorney of all: the “brilliant” attorney.
The right kind of lawyer
Let me explain, since I know that sounds anti-intellectual. I’m not opposed to being thoughtful and creative. What I have in mind is the attorney who always seems to come up with convoluted provisions, with long formulas and layers of defined terms. And when asked to explain the provisions, the explanation itself is jargon-laden and impenetrable. Some clients who have done many deals and have self-confidence will see through the B.S., but far more will be intimidated by the attorney’s seeming expertise and be forced to take comfort in the fact that they have a genius attorney working on their behalf. But if the client can’t understand what is being agreed to, that’s a failure on the part of the attorney.
This problem is, of course, not unique to corporate law. Think of a surgeon who can’t explain in an understandable fashion the nature and risks of a proposed procedure and possible alternatives; or a fund manager who prefers complex and opaque investments, and can’t adequately explain why that’s an improvement over something simpler. There is a style among professional service-providers generally that, wittingly or not, takes advantage of the insecure and unknowledgeable, and unfortunately, the practitioners of that style are often successful.
Since I’ve managed to attract and retain many clients over my years of independent practice, I figure they must like what I’m doing (or at least tolerate it). If I were to survey my clients to ask what exactly it is they like, my hope would be it’s not that I can bring more brainpower to bear than most of my peers. Rather, the traits I take pride in, and that I hope are the source of my success, are more mundane, such as the use of good judgment in identifying which risks are more important than others, and being responsive and cognizant of the client’s timeline for getting transactions completed. I’ll take “someone you can count on” over “brilliant” any day.
Some interesting legal reads for the week of March 23, 2015:
Steve Quinlivan reports on eight coordinated enforcement actions by the SEC for insiders failing to file amendments to Schedule 13Ds, not reporting plans in going-private transactions. Quinlivan believes this is part of the SEC’s “robo-cop” efforts, i.e., using data mining to identify disclosure failures.
From DealBook, a survey of deal participants finds them less upbeat than last year about the coming year’s level of merger activity, though a majority remain optimistic.
From Prof. Noah Feldman, a defense of law schools, as opposed to having lawyers trained solely as apprentices to practicing lawyers. I think I agree with him, but the piece is short on examples, i.e., how exactly would the deep knowledge that law school provides allow me to provide better advice to a client in an M&A deal?
This Washington Post piece highlights a study noting that most successful startups don’t require or obtain angel or venture capital financing. Fair point, but this study presumably included companies in all industries. For certain industries requiring (in many cases) huge capital investment before profits can be made (e.g., technology, life sciences), you’re more likely to need this kind of institutional investment.
As most readers of this blog know, one of the key concepts in securities law compliance for private offerings is the definition of “accredited investor” in Regulation D. Although it is possible to include non-accredited investors in private offerings (e.g., Rule 506(b) permits offerings to up to 35 non-accredited investors), many issuers choose to limit their offerings to accredited investors only, which can simplify the offering from a documentation perspective.
From the National Law Journal, a study by BARBRI showing that third-year law students have a higher opinion of their immediate ability to practice law, as compared to the opinions about them from experienced lawyers who work with them.
