Experienced Business Attorneys Serving Southeast Wisconsin

Guiding Your Business’ Future

Whether you are looking to start a new business, or need to manage and maintain an existing company, it is important to consult an attorney to ensure you are operating under the most beneficial legal arrangement. Additionally, signing a contract may seem routine and familiar, but the legal ramifications of making promises to other people or companies using written contracts can have long-lasting effects on your life and finances.

It is key to have a competent lawyer assist in your business expansion actions and review any important contract you are creating or being asked to sign. From business or real estate purchase agreements to purchasing your own commercial building or merging with another company, we can help. Knuteson, Hinkston, & Rosenberg, S.C. is based in Racine, WI and works with clients across Southeast Wisconsin.

Factors of a Business Plan

Creating a vibrant and successful business often takes years of editing and refining your business plan to be more efficient and profitable. There are many different aspects to consider when building or refining a business plan.

For example:

What type of legal entity will be used?

Will you have partners?

Will your company’s physical location and business activities allow you to obtain the necessary licenses and permits to operate?

How will the company dissolve or proceed if there are disputes between owners?

Who will have control and ultimate decision-making power in your business?

Will you have employees or independent contractors?

What types of tax benefits are available?

Choosing a Legal Entity: Limited Liability Companies

Ownership
An LLC is registered with the State, and owned by “members”. They will draft an operating agreement to outline percentages of ownership for each member, as well as the
authority of members and managers.
Liability
The LLC’s structure protects owners’ personal assets from business creditors. In the event of a lawsuit, damages awarded can only be liquidated from the business’ assets—not the owner’s personal property.
Taxation
Single member LLC: Taxes are essentially paid directly as part of the owner’s income tax.

Multi-member: The LLC is taxed
as a partnership, in which case
members pay taxes on profits
based on their respective shares
of the LLC’s ownership.

S-Corp Election—LLCs can elect
to be taxed as an S-Corporation.
The main benefit is allowing owners to split the taxation of their company salaries from their ownership profit distributions, which may save money on taxes. You should consult your professional
accountant before deciding if an
S-Corp election is right for you

Selecting a legal entity should take into account your personal circumstances and business goals. For example, many smaller businesses are best operated as limited liability companies, or LLC’s. An LLC will limit the personal liability of its owners by absorbing any debts connected to the business operations of the LLC.

For example, if a customer were to file a lawsuit against your LLC due to an accident or loss that occurred in connection with your business, the damages ultimately awarded to the customer would be limited to the assets of the LLC itself. The customer would not be able to access your personal assets in satisfying the claim against your business, such as your home or retirement savings accounts.

How does creating an LLC protect its owners?
Operating as an LLC is therefore an important tool in protecting your personal residence and retirement accounts from business creditors. In a worst case scenario, the business creditors could only force you to liquidate and close the LLC in repayment of the creditors’ claims—but they would not be able to foreclose on your personal home or deplete your retirement savings accounts. Corporations provide the same type of personal liability protection as LLCs, and are discussed below.

Choosing a Legal Entity: Partnerships

Ownership
The business is registered with the state and owned by “partners” who all invest in the business. Partners are co-owners and are allocated profits/losses based on their respective contribution amounts to the company.
Liability
Generally, partners are “jointly and severally liable” which means their personal
assets can be at risk in the event of a business lawsuit. Since there is little to no liability shield for partners, this is one of the least popular and ill-advised business entity formations.
Taxation
The partnership is taxed through the owner’s personal income tax. Partners pay taxes based on
their share of the company’s profits.
Partnerships are generally undesirable legal entities for new entrepreneurs since they do not provide much liability protection for their owners by default. Partnerships require two or more partners who are usually personally liable for all of the debts of the business. This means that there may not be protection for a partner’s personal assets when being sued by business creditors.

Partners are usually jointly and severally liable for the business debts too, meaning that creditors can freely pursue any and all of the partners to satisfy claims. Certain specialized partnerships, such as Limited Liability Partnerships (“LLP’s”), can provide some of the same liability protections of LLCs and corporations, but there are some unique rules and requirements that must be met to create a valid LLP.

It is important to consult an attorney if you are contemplating using a partnership for your business arrangement. An attorney can help draft partnership agreements that modify and alter some of the disadvantageous default rules discussed here, as well as assist with properly forming a specialized limited liability partnership.

Choosing a Legal Entity: Corporation vs. LLC

Ownership
The most complicated of the business formations listed, the corporation is also registered with the state. The general structure of a corporate administration requires a board of directors who appoints executive officers. These individuals act on behalf of the “shareholders” who are the owners of stock in the company.
Liability
Stockholders’ personal assets are protected from risk of a business lawsuit. Directors and executive officers are usually protected from business creditors as well, unless said individuals take fraudulent or other self-serving actions which harm the shareholders and company. Corporate records, such as annual meeting minutes of the shareholders and directors, must be maintained and updated to preserve liability protection.
Taxation
A corporation is “taxed twice,” which means that the business is taxed on the profits of the corporation itself, and the shareholders will also pay a personal income tax on any dividends disbursed to them.

A smaller corporation can also designate itself as an S-Corp, which results in the tax liability being passed on directly to the shareholders themselves through their personal taxes. This will prevent the corporation from being “taxed twice.”

When starting or reforming a business, most owners boil their decision down to choosing between an LLC or a corporation for their legal entity. Both LLCs and corporations provide personal liability protection for their owners, which is a major advantage over the default rules for partnerships. The owners of corporations are referred to as “shareholders.” In contrast, LLCs are owned by “members.”

One of the main differences between corporations and LLCs is the way in which they are taxed. By default, corporations are generally taxed twice, meaning they pay tax on the profits of the corporation itself, and then shareholders also pay a second wave of personal taxes on dividends disbursed to the shareholders individually. A sole-member LLC only pays one tax because LLC profits pass through to the personal income of the LLC’s owner—like the second wave of taxes that shareholders pay in corporations. LLCs with two or more members are often taxed as partnerships by the IRS (Internal Revenue Service).

However, smaller LLCs can make an election to avoid the default rules and be taxed as a corporation instead. This flexibility makes LLCs an attractive option for small or new businesses. The election allows the LLC to designate itself as a “C-Corp” or “S-Corp.”

How does designating an LLC as a corporation affect its taxes?
Generally, by designating an LLC to be taxed as a corporation, the LLC’s members will be able to separate and control how much income is reported on their personal tax returns from the profits of the LLC—although this means the money will now be taxed twice if they take personal disbursements like shareholders. Since the LLC is viewed as a corporation after making the election from a tax perspective, the members can retain and reapply some of the profits within the business, and take advantage of the special tax benefits entitled to corporations. Corporate tax rates on the first wave of taxes might be lower than a person’s individual income tax rate.

A Sample Scenario

For example, if a business owner’s personal income will be taxed at the 24% income bracket, it might make sense to leave some of the company’s profits within the business instead of taking the money out for personal use to be taxed twice. The money left within the LLC-corporation will only pay the first wave of taxes under the lower corporate tax rate of 21% as of 2020.

This money can be used to pay off business debts, purchase company cars and cell phones, or invest in expanding the business, etc. The LLC’s members can therefore control how much of the money will be taxed twice if they take out profits for their personal use, and reinvest the business funds that have only been taxed once to save money. From a practical standpoint, many business owners would rather pay the tax only once and simply use LLC-corporate funds to pay for the owners’ company cell phones and vehicles, office expenses, advertisements, etc.

For owners whose lifestyles are bound to their business activities, operating as either a traditional corporation, or as an LLC making the corporate tax election, might save the most money in the long-run.

Have Questions? Contact Our Firm

It is important to consult a business attorney and your tax preparer or accountant when
making decisions based on business tax benefits. Corporations have much more complex tax
and accounting work associated with them than LLCs. Your attorney can recommend and
explain which business structure will ultimately make you the most money.

Contract Drafting, Review, & Negotiation

Signing a contract may seem routine and familiar, but the legal ramifications of making promises to other people or companies using written contracts can have long-lasting effects on your life and finances. It is key that you have a lawyer to review any important contract you are creating or being asked to sign—such as a business or real estate purchase agreement, non-compete and confidentiality agreement, or marital property agreement.

Contracts boil down to promises being made between multiple parties, whether that involves business partners, customers, or spouses. Contracts can be enforced by filing lawsuits against an offending party for breach of contract. Absent special circumstances where a party has been legitimately defrauded and fooled into signing a contract, contracts are usually enforced by courts of law.

However, enforcing or defending against an allegation of contract breach can be expensive for both parties in terms of litigation costs and attorney fees. Therefore, creating a fair contract that can be reasonably complied with by parties is essential to maintaining a prosperous contractual relationship.

Have questions? We’ve got answers.

Stages of Contract Negotiation

Drafting

Our firm can assist with drafting new contracts for your business, such as contractor terms and conditions or liability waivers for customers, as well as business and commercial asset purchase agreements and letters of intent. We also routinely assist clients in drafting real estate purchase agreements and leases to buy, sell or lease residential properties.

 

Another common type of contract occurs between husband and wife through marital property agreements, which can stipulate how a couple will classify ownership of their marital and separate property, and subsequently divide their joint assets in the unfortunate event of a divorce. As the drafter of a contract, retaining an experienced transactional lawyer can ensure that you create a document which is written primarily to your favor and benefit.

Review
When an employer, buyer, or company asks you to sign a contract, it is imperative that you have an attorney review the document for fairness and a clear understanding of your contractual rights. It is wise to consult professional advice before being pressured into signing a contract you don’t fully understand. After all, once the contract is signed, both parties are bound by the contract’s terms under the law.

Attorney Andrew Rosenberg often assists clients by reviewing employment termination contracts, non-compete agreements, severance packages, real estate purchase agreements or amendments, commercial leases, and other business contracts. When reviewing a contract provided by another party, your attorney should plan to spot issues that are not drafted in your favor. If possible, these issues should be addressed and amended to reflect a fairer arrangement for both parties.

Negotiation
Oftentimes, the most difficult part of creating a contract is verbally establishing the basic underlying deal itself before putting any words on paper. A good lawyer will be able to inform you of the legal rights, risks, responsibilities, and potential rewards of entering into a new contract. Understanding your legal position before signing a contract allows for better and more realistic results after the negotiation process.

Your lawyer can also assist with establishing letters of intent, which help commit parties towards completing or finishing a contractual deal. Finally, a skilled transaction lawyer will be able to advocate on your behalf to secure the best deal possible under your existing circumstances.

Knuteson, Hinkston & Rosenberg, S.C.

500 College Ave
Racine, WI 53403

Contact Us:

Phone: 262-633-2000
Fax: 262-633-9900
Email: cfrazer@khrlawyers.com

Hours:
Monday - Friday: 8:30 AM - 5:00 PM

K.H.R. LAW