The internet is full of chatter on LLCs versus C-Corps versus S-Corps, but by far the most important thing is to register a company – of any kind.  Your choice is not set in stone.  If you do change your mind, it’s typically easier to convert LLCs to corporations than the other way around.

As attorneys, we are constantly asked to weigh in on entity type because it’s often the [...]]]> The Washington Post did a great interview with us on things that every business owner should know.   It was a pretty in-depth interview, and we’ve had such a positive response that we thought we should expand on it here on the blog.  In the next four blog posts, we’ll cover all ten of our Top 10 Legal Tips.  Here are the first three, which should sound familiar if you’ve been doing your homework.

1. Don’t stress too much about whether your new company is an LLC or a corporation.

The internet is full of chatter on LLCs versus C-Corps versus S-Corps, but by far the most important thing is to register a company – of any kind.  Your choice is not set in stone.  If you do change your mind, it’s typically easier to convert LLCs to corporations than the other way around.

As attorneys, we are constantly asked to weigh in on entity type because it’s often the first decision point that people reach, and first decisions tend to be the most intimidating.  The simplest answer is:

- If you intend to seek institutional funding from a venture capital firm, you should be a Delaware S-Corp or C-Corp.

- If you are self-funded, talk to your personal accountant.  Entity form is primarily tax-driven, so make a spreadsheet of base-case, best-case, and worst-case scenarios and ask your accountant what your taxes would be like in each scenario as your business grows over the next 5-10 years.  The best choice for your specific situation will depend many factors, including your personal tax bracket (from your other sources of income) and how much you plan to re-invest in your company.

2. A company isn’t just for branding or legitimacy – it’s also a liability shield.

Declaring corporate bankruptcy doesn’t affect your personal credit score, which makes setting up a company the best and cheapest “insurance” for your venture.  In the United States, you can be sued for $50,000 just for using a photo without permission.  You’ll sleep better knowing that your worst-case scenario is to dissolve your company and start a new one.

3. For most small, local businesses, Delaware is not the right choice.

There’s a persistent myth that incorporating in Delaware will save you taxes, but that’s simply not true.  Just think: do you pay income tax based on where you were born, or where you currently live and work?

If you choose to incorporate in Delaware, you should be aware that you still have to register locally.  For example, California charges an unusually high minimum franchise tax of $800 per year, whereas Delaware’s minimum is $75.  A San Francisco company might be tempted to incorporate in Delaware in order to take advantage of  the tax savings…except that it has to register in California after it incorporates.  Therefore it gets to pay Delaware, and then pay California, and then pay its lawyers twice for doing duplicate paperwork.

The real reason to incorporate in Delaware is if you want to leave the door open for outside funding on a national level.  National investors prefer Delaware companies because it’s easier for investors, lawyers, and accountants to familiarize themselves with Delaware’s rules, rather than learning 50 different sets of state rules.  If you have real plans to take your company national, then Delaware is right for you.  Otherwise, think local.

This hands-on workshop might be the most useful strategy session you do all year. Now that your business has taxable profits, learn the single most expensive tax mistake that business owners often make. For long-term planning, learn how to maximize your value in an exit, partial exit, or growth plan. Presented by Kim Bey, CPA, and Sue Wang, Esq., this session will highlight specific ways to avoid some of the most common pitfalls that a business can encounter. We’ll address relevant questions such as: Can a few targeted changes save you thousands in taxes? (Yes, if you’re smart.) [...]]]> We’re so excited about DCWEEK! 10,000 people are registered, and there’s a full slate of fun and useful events. The Washington Post picked us as a highlighted event and did a great interview. If you’re in DC, come join us at the events we’re hosting!

Common Deadly Mistakes for Growing Businesses (a tax+legal workshop)

This hands-on workshop might be the most useful strategy session you do all year. Now that your business has taxable profits, learn the single most expensive tax mistake that business owners often make. For long-term planning, learn how to maximize your value in an exit, partial exit, or growth plan. Presented by Kim Bey, CPA, and Sue Wang, Esq., this session will highlight specific ways to avoid some of the most common pitfalls that a business can encounter. We’ll address relevant questions such as: Can a few targeted changes save you thousands in taxes? (Yes, if you’re smart.) Can you lose control if you sell only 10% of the company? (Yes, if you’re careless.) Can you dramatically reduce your tax audit risk? Can a “mileage allowance” mistake cost you thousands? Can you really get sued if you ask a job candidate if he has children? (Yes, yes, and yes.) With plenty of time for questions, this workshop will help you plan for years of healthy growth. This two-hour workshop is limited to 20 participants.

Top 10 Legal Tips for Starting a New Company

Our most popular legal talk! Come learn how to be smart about paying people with equity, how to plan for exit and growth, and how to finally get past the analysis paralysis of LLC/C-Corp/S-Corp decisions. We’ll share actionable advice on how to set up your company for maximum flexibility in the future. This will be a fast-paced presentation followed by plenty of time for questions and networking.

Get Paid: Easy Tips to Avoid a Big Mess Later

Experienced businesspeople know that doing the work and getting paid are two different things. Does your contract spell out the terms clearly and in your favor? This talk will focus on great ideas to bake into your deal up front, to avoid a big mess later. We’ll talk about scenarios that apply whether you are a developer, an ad-supported website, a customer-facing business, or even a landlord. This will be a fast-paced presentation followed by plenty of time for questions and networking.

Please click here for details and RSVPs.

I once explained to DC-area venture advisor Glen Hellman that we try to spot risks like a lawyer and deal with them like an entrepreneur.  The best lawyers don’t just go around saying “no, no, no.”  An excellent lawyer spots problems and then follows through by solving them.

“That sounds great,” Glen said, “but what would you advise Travis Kalanick of Uber?”  Travis had mentioned onstage at Startup Mixology that he might be dragged off to jail shortly.  Uber, a wildly popular private car service, has been operating without taxi permits in San Francisco and New York.  Each violation could theoretically get Travis up to 60 days, and given Uber’s wild success, Travis is on his way to racking up a few centuries of jail time.  What can a lawyer say to Travis, other than “stop breaking the law”?

Well, let’s break [...]]]> Entrepreneurs are famous for loving risk, and lawyers are famous for hating risk.  As entrepreneurial lawyers, where do we fit in?

I once explained to DC-area venture advisor Glen Hellman that we try to spot risks like a lawyer and deal with them like an entrepreneur.  The best lawyers don’t just go around saying “no, no, no.”  An excellent lawyer spots problems and then follows through by solving them.

“That sounds great,” Glen said, “but what would you advise Travis Kalanick of Uber?”  Travis had mentioned onstage at Startup Mixology that he might be dragged off to jail shortly.  Uber, a wildly popular private car service, has been operating without taxi permits in San Francisco and New York.  Each violation could theoretically get Travis up to 60 days, and given Uber’s wild success, Travis is on his way to racking up a few centuries of jail time.  What can a lawyer say to Travis, other than “stop breaking the law”?

Well, let’s break this problem down.  If a business needs a particular license – whether for taxis, trademarks, software, or anything – and that license is hard to get, my first thought is to see if we can get a sublicense from any licenseholder.  Bonus points if we can structure the payments so that our client doesn’t have to pay much up front.  In this case, there are probably individual taxi drivers who wouldn’t mind some passive income, but this is probably the option that Uber has already looked at and priced out.  Let’s move on.

Another workaround is to redefine what you’re doing.  I’ve seen all sorts of businesses operating as “private clubs” where you join for free right when you walk in the door.  Until a few years ago, this used to be a popular option in England, where the official cut-off time for serving alcohol was 11pm in “bars” but responsible adults could imbibe with less restraint in “private clubs.”  Unfortunately for Uber, New York’s taxi officials are one step ahead on that one, so let’s keep brainstorming.

What if we completely redefined Uber not as a private car club, but as a car-pooling mechanism that involves cash exchanges only part of the time?  For example, Zaarly (whose co-founder happens to be an attorney) creates location-based peer-to-peer markets.  If you’re about to board a plane and really want a window seat, you open up Zaarly and offer a price.  Anyone nearby on Zaarly can see that offer on that phone.  In a total disruption scenario, Uber could create a Zaarly-like platform so that any member of the public could offer a ride, but only some drivers had Uber badges guaranteeing a certain level of quality.  Would the city of San Francisco really tell its residents that they can’t offer a ride to another resident?  If this type of ride is illegal, so are all carpools where gas money changes hands.  This would be a fresh and interesting question of law, and by the time a policy solution is worked out (many years), Uber would have moved on to another business venture or been so successful at this one that it can buy all the taxi medallions it needs.

Alternatively, since mathematical modeling is their strong suit, Uber could look into dominating the dispatch side of the taxi business.  There are plenty of moneymaking options other than a head-on brawl with the law.  In a head-on collision, The Clash gave good legal advice when they sang, “I fought the law, and the law won.”  (Al Capone –> imprisoned for income tax violations.  Remember?)

A very cool way of looking at how it all comes together!

In the opening scene, Young Flynn infiltrates his own company and releases the software as open-source.  He gets chased down by an unexpectedly intrepid security guard who goes beyond the call of duty and follows Flynn out to the end of a construction crane.  (That’s your first hint that we are far from reality.)

Teetering on the crane, Young Flynn explains, “Don’t worry, your boss approves of what I just did.”  He explains that the guard’s boss is ultimately the CEO, and the CEO’s boss is the shareholders, and Flynn is the biggest shareholder.

Therefore, Flynn can give the software away for free?

WRONG!  SO SO SO WRONG!!!  All the Daft Punk in the world [...]]]> So I was enjoying the Daft Punk soundtrack for TRON today, and there’s one niggling thing that’s been bothering me ever since I saw the movie last Christmas.  I’m about to reveal myself as a super-nerd, but seriously, what will happen if people rely on movies for legal advice?

In the opening scene, Young Flynn infiltrates his own company and releases the software as open-source.  He gets chased down by an unexpectedly intrepid security guard who goes beyond the call of duty and follows Flynn out to the end of a construction crane.  (That’s your first hint that we are far from reality.)

Teetering on the crane, Young Flynn explains, “Don’t worry, your boss approves of what I just did.”  He explains that the guard’s boss is ultimately the CEO, and the CEO’s boss is the shareholders, and Flynn is the biggest shareholder.

Therefore, Flynn can give the software away for free?

WRONG!  SO SO SO WRONG!!!  All the Daft Punk in the world won’t make this right!

Flynn may be a genius hacker, but he fails Corporate Law 101.  If the first principle of geometry is that the shortest distance between two points is a straight line, and the first principle of physics is that energy can’t be created or destroyed, the first principle of corporate law is that companies belong to shareholders.  All of the shareholders, not just the majority shareholder.

Here’s a thought experiment: Suppose I give my niece and nephew a car.  I give it 95% to the older one and 5% to the younger one.  Can the older one donate the engine to the kidney foundation?

No way, Flynn.  It doesn’t matter if you own 51% or 99.99%.  If there’s one minority shareholder out there, you’re getting sued.

I like the garage doors in your bachelor pad, though.

People in all stages of their careers have asked me about non-profit projects, and specifically what it means to be a 501(c)(3) org. Here, for the edification of the whole internet, is a rundown of the pros and cons of being a 501(c)(3).

We played some lively rounds of Family Feud to brainstorm the concepts, and I was amazed. These students knew everything. Internet + free time = omniscience + YouTube.

According to a California state appeals court this week, attorney-client privilege loses.  That’s right.  Gina Holmes filed suit against her employer for pregnancy discrimination.  Her employer presented e-mail correspondence indicating that Holmes had only been annoyed, not devastated, by the alleged discrimination.  Even though the e-mail chain was between Holmes and her lawyer — normally a sacred trust — the court ruled unanimously that Holmes had been warned in writing that work e-mail was monitored, and therefore her communications did not merit protection. The case turned on the fact that the company had a written policy stating that e-mail was monitored [...]]]> Wired reported a disturbing court decision last week. When a worker bee uses work e-mail to contact her attorney, can the employer use that e-mail as evidence?  In one corner, we have attorney-client privilege.  In the other, we have an employer’s “we own your e-mail” computer policy.

According to a California state appeals court this week, attorney-client privilege loses.  That’s right.  Gina Holmes filed suit against her employer for pregnancy discrimination.  Her employer presented e-mail correspondence indicating that Holmes had only been annoyed, not devastated, by the alleged discrimination.  Even though the e-mail chain was between Holmes and her lawyer — normally a sacred trust — the court ruled unanimously that Holmes had been warned in writing that work e-mail was monitored, and therefore her communications did not merit protection. The case turned on the fact that the company had a written policy stating that e-mail was monitored and subject to audit at any time.  The court ruled that in those circumstances, discussing sensitive legal matters on work servers was akin to talking at the top of one’s voice in an office conference room with the door open.

In New Jersey, complicating the puzzle, the state’s highest court ruled that e-mail sent through a personal account was private.  Why?  Because the communications policy was not clear about whether or not personal activity (e.g. Gmail sent on a work computer during work hours) was monitored.  If the communications policy had been clear, the result might have been different.  Employers drafting or amending their computer policies from now on will probably take this into consideration.

Also know this about your work e-mail: Regardless of whether it’s admissible in court, people are going to read it.

It’s pretty funny for us, but it’s not so funny for Assange or other victims of frivolous suits.

Should Assange laugh and ignore the lawsuit?  It depends.  Filing a claim is a two-step process.  First, Crazyman files with the clerk of court (4 mistyped pages and ~$200), and then he has to serve the court papers on Assange.  Even if Assange reads about Crazyman online, American requirements for due process aren’t satisfied until the written complaint is physically delivered to Assange — no easy task.  (In the movies, a fake FedEx person saunters up and asks, “Hey man, can you sign for this package?”)  To bring in WikiLeaks itself as a defendant, Crazyman has to serve WikiLeaks’ (nonexistent) [...]]]> Here’s a funny story.  A Florida man celebrated the new year by suing Julian Assange and WikiLeaks for 150 million “dollors.”  Among other things, this sum is for “serious personan injury” due to living in “fear of being on the brink of Nucliar WAR.”

It’s pretty funny for us, but it’s not so funny for Assange or other victims of frivolous suits.

Should Assange laugh and ignore the lawsuit?  It depends.  Filing a claim is a two-step process.  First, Crazyman files with the clerk of court (4 mistyped pages and ~$200), and then he has to serve the court papers on Assange.  Even if Assange reads about Crazyman online, American requirements for due process aren’t satisfied until the written complaint is physically delivered to Assange — no easy task.  (In the movies, a fake FedEx person saunters up and asks, “Hey man, can you sign for this package?”)  To bring in WikiLeaks itself as a defendant, Crazyman has to serve WikiLeaks’ (nonexistent) registered agent.

If Crazyman succeeds in serving process on Assange, Assange must respond.  If he doesn’t, a default judgment will be entered — it’s just like forfeiting a softball match.  Once Crazyman has a default judgment in hand, he can go after Assange’s U.S. bank accounts (now or in the future).  Banks don’t care if the claim is ridiculous; a court order is a court order.

Even if Assange thinks Miami courts don’t have jurisdiction, he still has to make a filing to contest jurisdiction.  Silence = Forfeit.  It’s possible to vacate a default judgment after the fact, but that’s a more fiddly process.

It’s unfair, but any fool with $200 can send you court papers via certified mail, and then you have to spend time and money on a response.  Among lawyers, we call folks like Crazyman “frequent filers.” Instead of accruing miles, they accrue ill will.

It’s so easy to make a steel-core password.  Start with an image or phrase and shrink it down.  For example, if I’m thinking about Dax from Deep Space Nine, my unguessable password is DAX,ds9, and in my notes I can write down “dax” to remind myself what it is.

I don’t know why Outlook places “Reply” and “Reply All” right next to each other.   Someone could poke an eye out!  Some companies disable the reply-all button, which just trains people to hit the keyboard shortcut instead.  You can right-click the toolbar to get the “customize” option, and then just drag and drop “Reply All” so there’s a good 10 buttons between the two.  Easy!

As a lawyer, I’m [...]]]> With all the WikiLeaks craziness going on right now, do you ever wonder how safe your own e-mails are?  Here are a few tips on how to keep your e-mails private.

1. Use real passwords.

It’s so easy to make a steel-core password.  Start with an image or phrase and shrink it down.  For example, if I’m thinking about Dax from Deep Space Nine, my unguessable password is DAX,ds9, and in my notes I can write down “dax” to remind myself what it is.

2. Move the reply-all button.

I don’t know why Outlook places “Reply” and “Reply All” right next to each other.   Someone could poke an eye out!  Some companies disable the reply-all button, which just trains people to hit the keyboard shortcut instead.  You can right-click the toolbar to get the “customize” option, and then just drag and drop “Reply All” so there’s a good 10 buttons between the two.  Easy!

3. Protect yourself from data failure.

As a lawyer, I’m totally obsessed with good records.  At Clarity, we are comfortable with electronic everything because our data is backed up automatically with bank-grade security.  Before you get too comfortable, take a few moments to think about how secure your data really is.  How often do you perform back-ups?  Does the back-up cover everything it needs to cover?  Are there important, signed documents attached to e-mails and not saved anywhere else?  Which documents should you have a hard copy of?

4. Protect yourself from data sabotage.

If you are in the unfortunate position of having a problem with an employee or partner, keep in mind that they may be able to access your e-mail and server data (legitimately or not).  Be thoughtful about what you write.   If you are having seriously confidential discussions (such as firing your IT person), use a separate account on Gmail or Yahoo or pick up the phone.  If there is any chance that someone could meddle with your files, print out important hard copies and keep them in a safe place.

5. Don’t forget the human factor.

Hey, are you the only person who writes e-mails in your company?  Plenty of interns regale their friends with cringeworthy stories of reply-all fiascoes, so pass these tips on.

The human factor is the trickiest one (isn’t that always the case?).  If your company forbids people from checking personal e-mail during work hours, a lot of personal trash will land on work servers.  If security is not user-friendly, employees will take documents on the road by forwarding to their personal accounts rather than fiddling with remote access VPNs (is the password to their personal account their pet’s name?).  Walking this line isn’t easy, but putting time and thought into e-mail training is one of the most worthwhile investments you can make.  As I’ve said before, your inbox is the first thing lawyers use as evidence, and a little planning now can really pay off later.

To give you a bit of background, I’ve been involved in wind energy since 2001, back when gas cost $1.45 per gallon and renewables were not on the national radar.  I interned in Casablanca, Morocco just months before September 11th.  Morocco was interested in wind almost purely for its long-term economic benefits, since environmentalism is primarily a rich-country luxury.

Since then, I’ve helped clients buy and sell billions of dollars’ worth of traditional power plants.  I’ve also helped finance and build some very exciting green energy projects.  When I first started my career, I chose to join Latham & Watkins because of its people, its prestige, and its leadership position as the go-to firm for green energy.  [...]]]> Last week, I spent two days at a greentech conference organized by the Atlantic Monthly.  As an American I believe energy is one of our top national priorities, and as an energy professional I want to share some thoughts about how the industry actually works.

To give you a bit of background, I’ve been involved in wind energy since 2001, back when gas cost $1.45 per gallon and renewables were not on the national radar.  I interned in Casablanca, Morocco just months before September 11th.  Morocco was interested in wind almost purely for its long-term economic benefits, since environmentalism is primarily a rich-country luxury.

Since then, I’ve helped clients buy and sell billions of dollars’ worth of traditional power plants.  I’ve also helped finance and build some very exciting green energy projects.  When I first started my career, I chose to join Latham & Watkins because of its people, its prestige, and its leadership position as the go-to firm for green energy.  Today, Latham is still leading the way with pathbreaking projects such as Google’s $5 billion HVDC transmission backbone for offshore wind.

Energy affects us all, whether you are thinking in terms of security, trade balances, geopolitics, environment, or economic development.  Here are some knowledge grenades for you:

• Industry insiders generally agree that worldwide energy demand will double by 2050 (mostly due to China, India, and other developing countries).
• If the price of energy rises, American consumers will grumble a lot and change their thermostats a little.  American manufacturers, however, will shut down and move their factories elsewhere.
• From an energy security point of view, you should be worried that the world’s proven reserves of natural gas are in Russia, Iran, Qatar, Turkmenistan, Saudi Arabia, and the US (in that order!).  You already know where the oil is.
• If nothing much changes, we won’t just be famished, flooded, and impoverished.  There are also fun secondary and tertiary effects, such as wastewater treatment plants getting flooded out.  West Nile virus has already made inroads in the US, and in the future we can expect malaria to come back.

None of this means that we are doomed.

All of it means that we need to get moving now on renewable energy — in a serious and committed way, not in patchwork flirtations. Right now, our national energy policy moves in fitful 2-year programs as senators dip their toes in and out.  This doesn’t work.  The energy industry builds new power plants based on 20-year economics; I’ve seen the financial projections myself.

When we finance a power plant, whether it’s coal or natural gas or wind, the lenders need to see 20-year revenues.  Would you drop $500 million based on some spreadsheets and estimates?  Lenders release funds after all the parties have signed binding revenue contracts with actual numbers, after all environmental studies have been fully completed, after all transmission rights (and payments) are completely final, after all land use rights are legally secure for the life of the plant, and after government support is fully committed.

When Congress creates a 2-year energy policy, it doesn’t do much good.  An environmental impact study alone takes 12-18 months, and who knows how long it will take to sort out transmission issues or to get the local landowners to approve the project?  The ill-fated Cape Wind project in Nantucket started 9 years ago!  The energy industry and its providers of capital cannot bank on 2-year policy — it’s anyone’s guess if the policy will still be in place at the time that the project begins commercial operation.

At the greentech conference, an executive from Constellation Energy made a powerful point: overhauling America’s energy infrastructure doesn’t need to cost the taxpayer very much.  The energy industry invests about $80 billion a year in new plants, which adds up to $800 billion over 10 years.  If the government were to create a durable price signal — via a binding renewable energy target, a long-term subsidy, or a small carbon tax — the industry’s investments would be directed in one way.  Until we change from 2-year policies and haphazard renewals to a genuinely durable price signal, the industry’s own investment dollars can’t go to work on bold green investments.

If there is one thing that everyone in the industry can agree on, it is that regulatory uncertainty hurts us all.  The states are a patchwork, and national policy flowers and fades in the blink of an eye.  Short-term policies paralyze all the players, and we have been paralyzed for years now.  In short, we need to put a price on carbon and stick to it; the specific price point is secondary to the need to create regulatory certainty.