Legal Information for Creative Professionals By: Kirk W. Morgan & Sheila E. Eddy, Attorneys

Question I’m an artist and I want to start a business. What should I do first?

Entrepreneurship Business Basics – Develop a Team of Advisors Make-Up of Your Team Accountant tax questions tax strategies book keeping withholding Business Insurance Agent general business liability insurance specialized policies Attorney (General Counsel) business formation contracting employees intellectual property Banker

Entrepreneurship Methods of Conducting Business Sole proprietor Partnership Limited Liability Company Corporation L3C

Sole Proprietorship One owner No paperwork to file with the State of Michigan Register with county clerk if doing business under an assumed name

Sole Proprietorship Advantages Disadvantages Little to no expense to establish Income taxed at Owner’s rate (and pay self-employment tax) Disadvantages Unlimited personal liability for all business debts Only one owner Business is not perpetual

Partnerships – General Two Types: General and Limited Partnership. More than one owner No paperwork to file with the State of Michigan Register with county clerk if doing business under an assumed name

Partnerships – General Advantages Easy to form Each partners share of the profit taxed at owner’s rate Disadvantages General partners have unlimited liability for business debts The partnership is responsible for the acts of each partner Federal taxation rules are highly complex Business is not perpetual General partners cannot sell or transfer their interest without consent of all partners

Partnerships – Limited Two Types: General and Limited Partnership One or more general and limited partners General partners liable for all business debt Limited partners usually investors do not participate in the business business liability limited to investment Register with State of Michigan

Partnerships – Limited Advantages Very limited and mainly for limited partner investors Disadvantages Complex tax structure Full liability for general partners Must register limited partnerships with the State of Michigan

Limited Liability Company (LLC) One or more owners Articles of Organization with State of Michigan May conduct business under an assumed name (file with State of Michigan)

Limited Liability Company (LLC) Advantages Limited liability for business debts Taxed similarly to sole proprietor (single owner) or a partnership (multiple owners) Easier to maintain than a corporation Perpetual existence Disadvantages More cost to form than sole proprietorship/partnership ($50 filing fee, $25 for each assumed name and yearly renewal fee of $25) More complex start-up requirements than partnerships or sole proprietorships Members do pay themselves wages but may receive money out of business profit Every member must pay taxes his his/her share of the profits and is not exempt from self-employment taxes

Corporation One or more shareholder Articles of Incorporation with the State of Michigan May conduct business under an assumed name (file with State of Michigan)

Corporation Advantages Disadvantages Easier to raise capital through sale of stock Limited liability for business debts – shareholders only risk their investment Easy to transfer ownership Disadvantages Costly to set up and maintain Corporate formalities are complex but must be strictly followed to maintain corporate status and limited liability of shareholders Closely regulated by both federal and state government Double taxation

L3C Hybrid of a nonprofit and for-profit organization Purpose of encouraging private and/or philanthropic investment in businesses Designed for social benefit

L3C Advantages Disadvantages All the benefits of LLC structure Qualification as PRI (Program Related Investment), facilitating foundation investments Not subject to nonprofit regulation Branding and marketing opportunities Disadvantages PRI investments are rare and considered risky, with potential excise tax liability to the foundation So new that there are many unresolved questions about how rules and regulations will be interpreted and/or applied

Entrepreneurship – Issues Co-owners Operating agreement/ by-laws Licenses, permits and other regulations What are they and are you in compliance? Zoning and Building Codes What are they and do they apply? Employees Required signage: Health/safety; immigration law; Minimum wage

Entrepreneurship – Issues Taxes Self-Employment Taxes Employee(s) and withholding applicable income tax (state/federal) Withholding social security, medicare, unemployment (state/federal) Worker’s compensation insurance Sales tax Employer Identification Number (EIN) Funding Family/friends Investors Banks Crowd-sourced financing

Question When should I pay taxes for work from which I receive compensation? ALWAYS!

Question If I hire employees, am I required to form an entity? No, but…

Question What do I need to know about my individual taxes versus those of an entity such as an LLC? When in doubt, call your accountant!

Question I have a studio space in my home. What are the tax implications of this? When in doubt, call your accountant!

Protecting IP in business Have contracts in place for all relationships within and outside of the company. Employment agreements Independent contractor agreements

Employment Agreements Employment relationship Ownership of IP Possession and treatment of confidential information

Independent Contractor Agreements Independent contractor relationship responsible for own expenses, responsible for paying own taxes on income, no benefits, etc. Ownership of IP Work made for hire and assignment provisions

Protecting IP in business Contracts, Contracts, Contracts! Employer Employee / Contractor WANT these: Work made for hire Assignment Non-disclosure Non-competition/non-solicitation (specialized) DON’T WANT these (but check bargaining power): Work made for hire (if contractor) Assignment Non-competition/non-solicitation (specialized)

Helpful Links www.michigan.gov/corporations: general information regarding entity formation in Michigan www.michigan.gov/entitysearch: search for existing names in the State of Michigan www.uspto.gov: federally registered trade names and service marks www.copyright.gov: federal trademarks www.michigan.gov/documents/dnr/DNR_customer_service_guide_407568_7.pdf: Dept of Natural resources information www.michigan.gov/deq: Dept of Environmental Quality information www.michigan.gov/bcc: Michigan construction and Barrier free information www.irs.gov: Federal Tax information www.michigan.gov/business: State of Michigan tax information and business registration www.michigan.gov/treasury/: Michigan Dept of Treasury information www.michigan.gov/businesstaxes: Specific information pertaining to Michigan Business taxes www.michigan.gov/uia: Michigan unemployment Insurance information www.SBDCMichigan.org: Helpful information regarding small businesses in Michigan and assistance

Questions? Kirk W. Morgan, Attorney | kmorgan@shrr.com | 616-458-3319 Sheila E. Eddy, Attorney | seddy@shrr.com | 616-458-4256