Volume 4 Issue 1 -- January/February 2000
In Alice in Wonderland, Alice asks the Cheshire Cat to assist her in choosing a fork in the road. The exchange went something like this:
Alice: "Which road should I take?"
Cat: "Where do you want to go?"
Alice: "I don't know."
Cat: "Then, it makes no difference which road you take."
This fictional exchange highlights the difficulty of picking a path if goals are not first chosen. Choosing goals in business relationships is quite different from reaching a geographic objective. Why? Because, there are often many destinations and multiple objectives along a fluid economic path. For example, a business plan from five years ago probably would not have anticipated the current Internet phenomena.
Recently, Davita Crawford, a professional motivational speaker, came to Newland & Associates for advice. She eventually formed a Limited Liability Company (LLC) named Developing Human Capital, LLC. What preceded the formation of the LLC was an interesting menu of choices.
Davita is an independent contractor providing motivational seminars in conjunction with Motivators, Inc. an "S" corporation. Davita assists Motivators with seminars and receives a percentage of the gross receipts. Because of her proficiency, Motivators suggested that Davita become an employee and have a permanent relationship with them. Her choices appeared to be:
1. Become an employee;
2. Become an employee with an equity interest, stock owner.
3. Become an employee, have an equity interest, and also be a Director/Officer.
4. Form an LLC (providing the same services) and enter into various contractual arrangements with Motivators.
Financially, the four choices described above could be structured in such a manner that Davita's total receipts would be approximately the same regardless of her choice. If money is not the driving force, then why did Davita choose the LLC route?
Davita had been an employee-motivator at a large utility company for many years. Based upon that experience, employee status was not attractive to her. This eliminated the first choice.
What about an equity interest for Davita? Such stock interests, particularly with "dot.com" companies, can be very lucrative, but Motivators is unlikely to become a major player on the Internet; hence, an equity interest - stock - was not particularly attractive to Davita. Furthermore, since Motivators is an "S" corporation, there is some risk that she could be responsible for corporate loans and capital contributions in the future if they were needed from the stockholders.
If Davita became a director of Motivators, Inc. she would then become responsible to the shareholders in a fiduciary capacity. Becoming an officer of the Corporation would create executive duties and management responsibilities which Davita neither was accustomed to nor preferred.
Considering these factors, the LLC route seemed the best choice to Davita. Why? Davita, as a one-member LLC, could continue reporting her income on schedule "C" of her Form 1040, as she had been doing as an independent contractor. (See our prior newsletter on "Check the Box.") Additionally, the LLC would provide some measure of protection from liability as her business grows and she hires others to assist her.
Davita's LLC can enter into long-term joint venture arrangements with Motivators that would allow it to share in the receipts from presentations throughout the Washington Metropolitan area while she is freed from both the tedium of operational responsibilities and decisions as well as from some of the risks associated with direct equity ownership in Motivators. The LLC also affords the opportunity for Davita to develop a separate client base from Motivators if she wants to do so.
The development of contractual or employment relationships, like those discussed above, do not occur in a vacuum. Expressed differently, Motivators must accept Davita's choices. If for example, Davita had been an employee of Motivators for some time, it is unlikely that the employer would want her to become independent.
The important thing to remember is that there are many ways to structure business relationships. The role of an attorney is to provide guidance for these choices, make recommendations, and create documents consistent with the preferences of the parties.
If you need assistance in business areas such as Davita's, or other business areas, please contact Newland & Associates, PLC.
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