Choosing a business structure in the District of Columbia

 

image courtesy of Nick Youngson http://nyphotographic.com/ CC BY-SA 3.0A common question in the very early stages of any business is what business structure to choose.

There is no one-size-fits-all answer to this question. Different business structures have different advantages and disadvantages. The following is a short overview of the main categories of businesses in the District of Columbia (and many states).

Sole proprietorship

This is the easiest choice for beginning your own business without partners or other stakeholders. It costs nothing to form a sole proprietorship. Essentially, you are the business, and the only real paperwork is on your personal income taxes. (Of course, all businesses must get any necessary licenses and permits to operate, but this article is about forming a business, not running one!) This is also one of the advantages of a sole proprietorship: you are taxed at the individual level — there is no corporation, so you do not have to pay federal corporate income tax. (This is known as “pass-through taxation” — taxes are paid by the owners, not the business entity itself.)

The tax advantage of a sole proprietorship is less substantial in DC, which has an unincorporated business franchise tax that applies to many businesses. This puts unincorporated and incorporated business on roughly equal terms, at least at the DC income tax level. But it may still save you on the federal level.

A significant downside of an unincorporated business, however, is that you are the business, and are personally on the hook for debts or other legal claims arising from your business. This is why a more popular choice is…

LLC

LLC stands for “limited liability company.” A single-member LLC in DC has all the benefits of a sole proprietorship, but as the name implies, your liability as the business owner is mainly limited to your investment in the business. If the business fails or gets sued, your personal assets generally won’t be at stake.

The main disadvantage of this structure (relative to a sole proprietorship) is that it takes more work, time, and money to set up. In DC, you have to file paperwork to set one up (and pay a fee), and you have to file a report every two years (more fees).

Partnerships and multi-member LLCs

If you’re going into business with someone else (one or more partners), there are several ways to do this:

  • You can form a general partnership, which is sort of equivalent to a sole proprietorship — you share the profits and risks with your partner(s). Little paperwork required, pass-through taxation, but you and your partners are personally at risk for the business’s liabilities. Also, any partner can dissolve the partnership, unless there’s an agreement to the contrary.
  • Limited partnerships and limited liability partnerships (LPs and LLPs) are more work to set up (including a partnership agreement and registering in DC), but have clearly defined terms and, in the latter case, limited liability. They also allow some partners to be treated differently than others.
  • LLCs can also be multi-member LLCs. They are kind of like general partnerships, but with the benefit of limited liability. An operating agreement organizing the LLC is highly recommended.

Corporations

All of the businesses above are mainly for people who own and operate their businesses, with money they put in themselves or get through loans. But sometimes you want other people to invest in your business, and own some share (or stock) in the company (even if they do not participate in operating the business). This is when you need a corporate structure, which lets you raise funds by selling shares to investors. A corporation also takes on a life of its own — shareholders can simply sell their shares and walk away, and the corporation keeps going.

One disadvantage of corporations, besides being more complicated to set up and operate, is that most corporations have to pay corporate income taxes of their own. Federal law also allows for a special kind of corporation known as an “S” corporation that benefits from pass-through taxation to its owners, but qualifying as an S corp is complicated and has a lot of requirements.

Not One-Size-Fits-All

Even within these categories, there are countless ways for companies to be structured or operated, based on the operating agreement, articles of incorporation, or similar governing documents. Above are just the main categories we group businesses into, for legal and tax purposes. Even within these categories, there’s a lot of diversity.

If you’re starting a business in DC and are not sure which entity to choose, contact Nigel for a free consultation. He can help you get started with an assessment of your business’s needs and goals.

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Petitioning FDA for flexibility

On March 2, 2017, Nigel Barrella, on behalf of his client the Good Food Institute, submitted a citizen petition to FDA. The petition notes the proliferation of new, innovative foods in the marketplace, and requests that FDA formally acknowledge its policy of allowing new foods to be named in a natural, commonsense way that consumers understand.

The petition particularly addresses the increasing variety of plant-based foods, including dairy alternatives such as soy milk, almond milk, soy yogurt, and so on. Some voices in the dairy industry have asked FDA to adopt anticompetitive policies towards these products — regulating the language that these products use in order to thwart consumer understanding and connote inferiority. The petition describes how this would lead to confusion, and is inconsistent with hundreds of products already on the market. Additionally, the petition notes that this attempt to regulate natural language would likely be unconstitutional under the First Amendment.

The petition is open for public comment online. For more information, contact Nigel.

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To err is human — not a crime

On March 17, 2016, a panel of the DC Court of Appeals delivered a unanimous decision in favor of Nigel Barrella’s client. Nigel had argued this case before the court on September 22, 2015.

In this case, Nigel’s client had been charged with missing his court date, though he testified that he had made a simple mistake — getting the court date confused. And although the trial judge appeared to believe his excuse, she also believed the law required a guilty finding. The government had argued that he was guilty simply because he did not double-check to make sure what his court date was.

Rejecting the government’s argument, the Court of Appeals reversed. The law at issue makes “willful” violations a crime, and the court made clear that “willful” means “knowing, intentional, and deliberate” — not inadvertent or accidental. After clarifying the law, the court sent the case back to the trial judge for reconsideration.

Subsequently, on August 11, 2017, the trial judge entered a verdict of not guilty.

Going forward, this precedential ruling of the Court of Appeals helps reinforce a bedrock principle of criminal law: the government should be required to prove criminal intent (with rare, limited exceptions). Innocent mistakes should not be the stuff of criminal prosecutions.

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DCCA on Drug Paraphernalia, Proof Beyond Reasonable Doubt

I haven’t written a DCCA criminal case summary in a long time, partly because PDS came along and started writing them all up (and doing it better than I ever did). But I simply couldn’t resist writing about this one, as a lovely demonstration that legal standards like “proof beyond a reasonable doubt” and “sufficiency of evidence” have meaning, have teeth — at least sometimes. It also doesn’t hurt that this case involves an extensive discussion of something called a “Bob Marley grinder.”

bobmarley

The opinion of the court, written by Judge McLeese (the most recent appointee to the DCCA), reverses one man’s conviction of possessing drug paraphernalia. The alleged paraphernalia was the “Bob Marley grinder.” Which, apparently, is a metal tobacco/herb/spice grinder, with “a picture of Bob Marley on the front.” (Looks like they’re for sale on Amazon, just like everything else under the sun.) Which — of course — we can assume is being used to grind up marijuana, even though the defendant had no marijuana when he was arrested. I mean, come on! It has a picture of Bob Marley on it!

But that “of course” isn’t enough to meet the standard for a criminal conviction — proof beyond a reasonable doubt. And as the opinion notes:

drug use and drug trafficking are associated with a wide array of items, including spoons, needles, syringes, ziplock bags, microwave ovens, cigarette rolling papers, razor blades, pipes, foil, mirrors, straws, scissors, measuring cups, strainers, and scales.

Grinders, too, have lawful uses. Who’s to say beyond a reasonable doubt that the defendant wasn’t using the grinder for tobacco (or, less likely, cilantro)? The prosecution would have to do more — like show traces of marijuana inside this particular grinder.

The court compares this to a situation in which the prosecution insists — without other evidence — that a single silver spoon is being used for heroin. Of course, it’s not quite the same situation — but the difference between that situation and this case is only a “difference in degree.” That doesn’t warrant a different conclusion when analyzing whether the evidence is sufficient, beyond a reasonable doubt, that this grinder was possessed for drug-related purposes.

Overall, an excellent (and easy to read) opinion that illustrates what meaningful appellate review looks like. Kudos to Jamison Koehler for representing his client (with obvious excellence) in this appeal.

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Presentation on free speech and labeling

On October 30, 2015, Nigel Barrella presented at the Food and Drug Law Institute’s “Constitutional Challenges” Symposium. His article, Constitutional Limits on Compulsory Labeling, is to be published in the Food and Drug Law Journal later this year.

The article is a comprehensive review of how courts have handled First Amendment challenges to mandatory labeling laws (particularly in the food and drug context). Increasingly, businesses have been using the First Amendment to object to labeling requirements, but courts (while taking the issue seriously) have rarely invalidated compulsory labeling requirements involving factual information. In the article, Nigel describes which challenges to labeling laws are most viable, and which are not.

A draft version of the article is available here. If you would like a copy of the final, published version, contact Nigel.

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