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Starting a Small Business/LLC and Joint Venture

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A friend and I are about to start a telecom staffing firm and we would love to get your professional opinion on some things. First, there is a  telecom services provider is looking for staffing firms to supply them with telecom professionals, so the customer and demand are already there waiting to be served. Itís basically our contract to lose and we want to approach it the right way since we havenít done this before. We have spoken with the owner of an IT consulting firm who has experience in staffing and project management, and he has agreed to partner up with us in a joint venture so we can use his profile/financial standing in order to land the contract. My friend and I plan to open an LLC which will then enter into a joint venture with the IT firm. The IT firm owner brings his profile and experience in staffing, and we bring the contract and the financing. Our questions are as follows:

-   We live in Texas. Do you recommend us to file our LLC in another state?
-   What role does a registered agent play?
-   Are there any specific guidelines that pertain to filing an LLC for telecom staffing firms that we need to be aware of?
-   What kind of license, insurance, bonding, etc. is generally required for this type of business activity?
-   In forming a joint venture, will using our sister companyís license, insurance, bonding, etc. be sufficient even though we will be holding the majority stake of the JV?
-   We are expecting net profits of over $500,000 in our first year. What is the best way to minimize our tax liabilities as Texas residents? Should we elect to be treated as an S-corp?
-   How do we structure the JV? We need to have an agreement in place with our partner BEFORE we land the contract in order to protect our interests.

Thank you for your time. Your advice will be greatly appreciated.

Answer
Younous, Thank you for your questions.  Here are my answers:

We live in Texas. Do you recommend us to file our LLC in another state?

There are many factors that go into selecting the state of formation, but keep in mind that even if you form your LLC in another state, if your business is conducted in Texas then it will be required to qualify to do business in Texas as a foreign LLC.  In most cases, that means if you organize in another state, you will be paying fees to your home state (Texas) as well as the state the LLC is organized in.  For that reason, it is most likely that forming a Texas LLC will be your best choice.

What role does a registered agent play?

The registered agent is the person who receives legal notices from the state and, in many cases, is the person who receives service of process in connection with any legal proceedings initiated against the business

Are there any specific guidelines that pertain to filing an LLC for telecom staffing firms that we need to be aware of?

I am not aware of anything that would specifically affect the certificate of formation filed with the Texas Secretary of State.  That is a typically a very generic document.

What kind of license, insurance, bonding, etc. is generally required for this type of business activity?

This question is far too complicated to fully answer in this type of format.  For starters, however, you need to be aware of the license required by the State of Texas for all staff leasing services companies.  Among the licensing requirements are a minimum working capital requirement.  In addition, as the employer of record, your leasing company will be responsible for such items as workers compensation insurance coverage.

In forming a joint venture, will using our sister companyís license, insurance, bonding, etc. be sufficient even though we will be holding the majority stake of the JV?

The leasing company (in this case, the joint venture) must satisfy the statutory and regulatory requirements.  Normally, those requirements do not also pass through to the owner.  Presumably the joint venture will also be an LLC and would stand on its own.

We are expecting net profits of over $500,000 in our first year. What is the best way to minimize our tax liabilities as Texas residents? Should we elect to be treated as an S-corp?

An S corporation can reduce Federal employment taxes but you need to be careful of the implications of state taxation as well. Texas taxes S corporations in the same manner as C corporations, meaning they pay corporate income or income-related taxes rather than passing through to the shareholders. That may more than offset any savings from the Federal payroll taxes.  It is important to sit down with an accountant and run several scenarios to determine what the exact effect of the decision would be on your total taxes at various levels of income.

How do we structure the JV? We need to have an agreement in place with our partner BEFORE we land the contract in order to protect our interests.

You should definitely have an agreement in place with your partner before you land the contract, and really even before you move much further into the planning phase.  The easiest time to deal with sticky issues is upfront before positions have become hardened. It never gets easier than right now. Spending the money now to deal with issues will almost assuredly save you lotís of headaches and money at a later date.

Without discussing a lot of factors with you, I recommend a structure for the JV except that it almost certainly should be an entity that shields you and your partnerís LLC from liabilities connected with the business.  That means either a corporation or an LLC, not a general partnership, which is what the joint venture would be in the absence of any formal entity.

It sounds like you have exciting prospects for your new business.  Proper planning in advance will definitely help smooth the way for the future. Good luck.

Starting a Small Business

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David K. Staub

Expertise

I am a business and tax attorney and have spent more than 35 years assisting people in starting a wide variety of businesses. I can answer questions about the basic differences between the various entities available to new businesses, including limited liability companies, corporations, S corporations and partnerships. I can provide guidance in other areas facing start ups, such as hiring employees, signing contracts and obtaining necessary licenses. I can also direct people to sources for answers to specific legal questions which cannot be answered in a forum of this nature.

Experience

I have an extensive practice in the mergers and acquisitions area and have been involved in the tax and legal issues on hundreds of business transactions.

Website
Staub Anderson LLC
Illinois business attorneys

Practice Areas
Business Organizations
-Corporations

-LLCs
-Partnerships

-Joint ventures
Mergers & Acquisitions
-Buying/selling business
Securities Law
Tax Law
Technology Law
-Software licenses
-Development agreements

Trademarks

Organizations
Illinois State Bar Association; Chicago Bar Association (former Chairman of the Corporation & Business Law Committee and former Chairman of the Mergers and Acquisitions Subcommittee; former Executive Committee member, Federal Tax Committee and Chairman of subcommittee on general tax issues); Keystone Foundation (Trustee); Association for Corporate Growth; Midwest Entrepreneur Forum; Midwest Association of Alpha Delta Phi

Publications
Commerce Magazine; YLS Journal; ISBA Section of Taxation Newsletter

Education/Credentials
Harvard Law School, J.D., 1977; University of Illinois, B.S. in Accounting, with highest honors, 1974

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