In short, crowdfunding is funding projects through the collective efforts of a number of unrelated individuals. It has existed for some time for disaster relief, film projects, cooperatives and through the donation model used by sites like Kickstarter.com, but a whole new medium has now been legalized so that startup businesses can raise funds through crowdfunding.

The Crowdfund Act is a part of the Jumpstart Our Business Startups Act (“JOBS”), which was signed into law on April 5th by President Obama. To be honest, I’m not crazy about the acronym JOBS because it sounds as if business startups are dead (when else do you “jumpstart” your car?), but I wasn’t on the naming committee.

Though crowdfunding has been signed into law, there is going to be a 9 month transition period while the SEC mounts up and regulates the investor & securities portions of the law. So we really won’t see any legal crowdfunding activity until January of 2013.

The gist of the Crowdfunding Act is that it allows just about any investor to invest in startups by removing 1930′s era SEC regulations, and thus gives startups significantly greater access to capital. The Act accomplishes this by:

• Allowing companies to crowdfund up to $1 million over a 12 month period (or up to $2,000,000 with audited financials)
• Allowing individuals earning less than $100,000 to invest up to $2,000 or 5 percent of their annual income, whichever is greater, over a 12 month period. Individuals earning $100,000 or more may invest up to 10% of their annual income, capped at $100,000, over a 12 month period (this can be in multiple companies)

The other key components of the Crowdfunding Act are:

• It only applies to US companies
• An investor must wait 12 months before selling his/her securities unless the sale is to a family member, the issuing company, or an accredited investor
• A crowdfunding round does not prevent a company from raising capital through other legal channels
• Top employees of issuing companies must successfully undergo a background check
• Companies crowdfunding are exempted from the 500 shareholder cap on private companies (under the Securities Exchange Act of 1934, once you get to 500, you gotta go public)

First of all, let me clear up some misinformation out there. I’ve read and watched several sources which claim that crowdfunding is going to revolutionize small business investing because it will allow unaccredited investors to invest in startups and small businesses whereas they could not before. The part about unaccredited investors is simply not true. Just about every state (at least the ones that I’ve done deals in) have small investor exemptions, and thus for transactions where the company and investor are in the same state, non-accredited investing is oftentimes just fine. Continuing, Rules 505 and 506 of Regulation D allow up to 35 non-accredited, but “sophisticated” purchasers, and sophisticated is not an incredibly difficult hurdle to meet (not for those that are reading this anyway). And Rule 504 allows for an unlimited amount of unaccredited investors, but the total amount is capped at $1M over a year. Yes, there are some legal and professional expenses involved with a 504, 505 or 506 offering, but to say that startups could not raise money from non-accredited investors before the JOBS Act is inaccurate.

There have been some serious concerns raised about crowdfunding, and some hypothesize that we’re going to return to the Boiler Room scenes of the late ’90s where slick talking entrepreneurs are grabbing $10k at a time from unknowing grandmothers. In fact, SEC chair Mary Schapiro has been quite outspoken with her concerns. (Remember that the JOBS Act is much broader than just the Crowdfund Act.) In my mind the concerns are valid, but that’s why the SEC is taking up to 9 months to set the parameters. There will be some initial hiccups, but in the long-run, the crowdfunding portion of the JOBS Act is a good thing (though I’m not on board with the loosened IPO restrictions in the Act).

Now, I think that most people expect crowdfunding to open up a new portal for high-tech/silicon valley type startups who are going to raise a seed or angel round of $100k – $500k through crowdfunding rather than a friends & family or angel round. This may happen a few times shortly after the SEC flips on the crowdfunding switch, but I think the transactional costs related to dealing with multiple investors are going to suffocate the process. And by costs I don’t mean dollar costs, but rather time, resources and frustration.

If you have ever been a part of an early investment round, you’ll know that the less investors the better. Less people calling with questions, potentially less attorneys (who represent the investors) to deal with, less signatures to get for company decisions, less financial reports to circulate, etc. I recognize that SEC licensed crowdfunding platforms like Crowdfunder and WeFunder (oligarchy anyone?) will help to facilitate communication, but it’s not going to solve the ultimate problem which is valuation. Most good entreprenuers know that you don’t want to give up more than 10-20% in your first round. If you’re crowdfunding and you have 10 investors in that seed round, they’re each getting 1 to 2% ownership in the company. That sounds sexy right now if you think that every company is going to sell to Facebook like Instagram did, but after a period of dilutions and failures where crowdfunded investors lose their 1 to 2%, I think that small investors will go back to their IRAs. To make matters worse, I think that larger investors and VCs who will come in after the crowdfunding round will be turned off by the multitude of small investors.

Moreover, I think there is going to be a transition period while the new lot of crowdfunders (which I think should be a class apart from “Angels” just like Angels are separate from VCs) become accustomed to startup investing. Investing in startups involves a radically different risk appetite and understanding compared to traditional investment vehicles and crowdfunding is simply going to exacerbate the learning curve. I expect some negative feedback at first until the general public becomes better educated about the process.

Now, eventually I expect these issues to work themselves out, and for crowdfunding to become a viable capital raise avenue for a legion of small businesses. I think the successor startups to the ones we currently read about in Tech Crunch and Venture Beat will likely forego crowdfunding and stick to traditional models, but I do believe that we will see social good businesses and local businesses with a small geographic reach benefit greatly. Plus, having additional investment vehicles should just make every investment category more competitive, and hopefully should have a positive effect in the long-run.

More to come on crowdfunding. This is going to be a fun topic.

Kevin Vela is a founding partner of Vela | Keller PC in Dallas, and focuses his practice on representing small businesses and start-ups.

Entity 1:  Sole Proprietorships.

A/K/A the “Default” option.  A lot of times entrepreneurs will start their business without having set up an entity.  This puts them into the default, easy to create, sole proprietorship.  The advantage to sole proprietorship is the simple tax structure, which only requires reporting of profits and losses through the owner’s personal tax return.  The disadvantage is that the businesses’ assets/debts are tied to the owner’s personal property.

Entity 2:  Partnerships

A/K/A the “Sharing the risk/reward” option.  Similar to the Sole Proprietorship, but you’re working with someone else on the business.  Like the sole proprietorship, a partnership will tie the business and personal assets of the partners together.  This may lower the individual personal liability of each owner, but each partner is responsible for the others’ debts to the partnership.  The advantage- like the sole proprietorship- is the simple tax structure. The disadvantages include issues of idea ownership and the ease with which disputes between the partners sometimes raise their ugly heads and lead to messy dissolutions.

Entity 3:  Corporations

A/K/A the “Here we come NYSE” option.  The most costly and time intensive entity type, also offers the most personal asset protection.  This entity type creates a completely separate entity apart for the owners (shareholders).  This complicates tax matters and creates “double-taxation” issues (taxes paid by the corporation and then again on the distributions paid to shareholders).  The corporation holds the property/assets of the company and shields the owner’s (shareholders) personal property from debts incurred by the company.

Entity 4:  Limited Liability Company

A/K/A the “Best of both worlds” option.  LLC’s give owners the option of being taxed like a Corporation or being taxed like a sole proprietorship/partnership.  This entity type also offers personal asset protection in the event the business fails.  The advantage of the LLC is, as the new kid on the block, it offers many small businesses the asset protection and tax benefits they require.  The disadvantage is that if the business takes off, the LLC will want to transition to a C-corp to accept larger investment/shareholder opportunities.

Before selecting any one of these entity types you will want to talk about your business objectives with an attorney and accountant to ensure you are best protecting your interests.

Geoff Keller is a founding partner at Vela | Keller PC in Dallas and focuses his practice on representing small businesses and criminal law.

As I have written before, the Texas Series LLC is a great tool for real estate investors, and anyone who needs multiple Texas LLCs. But, since they are new, there are still gaps being filled in as they become more commonly used throughout the state.

I’ve answered a few questions about Texas Series LLCs in a previous post, but since we are in the middle of tax season, I’ve been getting calls from clients and CPAs who work for my clients concerning filing franchise taxes. How are the individual cells within a master series treated by the state? How many returns should the LLC file?

I did not know the answers, so I called the Comptroller’s office where one of the Franchise Tax experts was kind enough to answer my questions. Though this is not a comprehensive account of all franchise tax considerations, here are a few conclusions. (The thoughts below are my own, based on my research and a conversation with a rep from the Comptroller’s office. I can not, and do not, purport to be the final word on anything below.)

1) The cells within a series will most likely be treated as a combined group and will be rolled up to the master (or parent) LLC. Thus, the Series LLC will only file 1 return. This is irrespective of ownership.

Cells within a Series LLC can have different members and ownership structures. So Series A could be owned 51/49 between Joe and John, while Series B could be owned 52/24/24 between Joe, Suzy and Randy. Even though, Series A and Series B would be rolled up to the parent and will file a single Texas Franchise Tax report. This could create all kinds of havoc when it comes time to send out K1s, so check with your CPA and/or Attorney before setting up cells with different owners.

Now, the question that remains to be answered is what happens when Series C is owned 33/33/33 between Joe, Mary and Valerie? The business in Series C may meet the unitary business test, but would likely not be an affiliated group as defined by the Comptroller. I recognize that this simply begs another question, but I want to highlight the importance of talking to a CPA or tax attorney before getting too fancy with your Series ownership structures.

2) (Assuming an affiliated group…) Since the cells will be rolled up into the parent, all of the cells will be totaled for purposes of determining Franchise Taxes due, much like separate LLCs owned by the same taxpayer. Thus, using the current Franchise Tax threshold of $1,030,000 (it went up from $1M with the 2012 CPI adjustment), if each of 5 cells within a Texas Series LLC had $250k in revenues, the parent LLC would be considered to have $1.25M in revenue and thus be subject to a Franchise Tax payment as the taxpaying entity.

This is no different than a single person owning 5 separate LLCs with similar business purposes, as those would be rolled into a combined group  return, so the tax effect is unchanged.

In my mind, this adds a deterrent when considering Series LLCs for clients who plan to have different ownership structures within each cell, as the burden from the reporting and allocations may outweigh the benefit of Series LLCs. But every case is different.

To summarize, Series LLCs are fantastic tools for the individual investor or small business owner, and can work for small privately owned companies who want to replicate ownership structure over and over again. But for the investor who plans to add multiple members with different ownership structures, a Texas Series LLC may not be the right fit. Again, please consult with your tax and legal advisers before filing a Texas Series LLC, or filing your Franchise taxes on any of your entities.

Kevin Vela is a founding partner of Vela | Keller PC in Dallas, and focuses his practice on representing small businesses and start-ups.

Well…that may ring true for highly adept entrepreneurs with a couple successful startups under the belt, but for most of us (or as I’d suggest, all of us) the knowledge obtained from time spent researching and drafting your business plan is going to pay off tenfold.  Time spent looking for and taking shortcuts at the beginning will only exacerbate issues that will undoubtedly arise further down your startup road.

Additionally, for a number of startups funding sources will be much calmer when you are able to put the plan in front of them and show them that you have thought through contingencies.  Remember, you have to Polish that Diamond Idea (http://velakeller.com/year-of-the-startup/year-of-the-startup-step-1-polishing-your-diamond-idea) and the time invested doing that will put you well on your way to completing that formal business plan.

So the next question is always…what do I want in my business plan- what do my targets (investors/banks/potential partners) want to see?

Here is a list of basic sections that we suggest a quality business plan should include:

• Executive summary
• Company overview
• Business environment
• Company description
• Company strategy
• Financial review/sourcing
• Action plan

We’d also point out that brevity is king in your business plan.  Hit the high points and if they want to see further information, recognize that means your target is interested in you and your business and that is your opportunity to dazzle them with your background research.

Geoff Keller is a founding partner at Vela | Keller PC in Dallas and focuses his practice on representing small businesses and criminal law.

For the most part, it’s simple – filing fees.

A trademark (or service mark) is a common law right that is established by using the mark in commerce and letting the public know that the mark is yours.  You are essentially putting your flag in the ground and laying a claim to your property.  Thus, you are not required to gain approval from the United States Patent and Trademark Office (USPTO) to use ™.  In order to use the ®, however, you are required to gain approval through the USPTO by filing an application.

So the next question is – if my mark is protected by using ™ why should I file an application with the USPTO?  Well, if your brand will be used across the nation, then you will want to file an application with the USPTO to protect your mark in the US.  For instance, if you have a product that will be sold in stores throughout the country, then you should probably file an application to register your mark with the USPTO.

If, however, you are only using your mark in Texas, then a simple ™ may suffice to protect your mark.  You can also take the extra step and file a trademark application with the state of Texas to have your mark registered throughout the state of Texas.  It is important to note, however, that you cannot use ® if your mark is registered by the state of Texas.  You would still need to use ™.  The ® is reserved for a federal trademark.  The ® is the best evidence to show everyone that this trademark is yours because the federal government said so.

This is only a brief introduction into the world of Trademarks.  In subsequent blogs, I will address common concerns amongst our clients, including, but not limited to, Is Anybody Else Using My Mark Now?, What if There is a Similar Mark but It’s In a Different Field? and The Likelihood of Confusion Test.

Please note that the text above is informational only and does not constitute legal advice. Feel free to contact me at srooker@velakeller.com or speak with an attorney to determine the best means to protect your marks.

Scott Rooker is an associate at Vela | Keller and focuses his practice on business litigation, trademarks, copyrights, and HOA law.

Sometimes entrepreneurs get lucky and are able to jump into the market with their idea and land on treasure on the other end of the rainbow; however, that is the limited exception.  The better plan of action is to spend time in the early stages determining if there is a market for your business idea.   The key is to objectively determine through targeted research that dollars, time, toil, and effort spent on your business idea are going to find a market.  The research you perform on the web, through industry magazines, taking industry players to lunch, visiting the local library, or chamber of commerce, will enable you to focus your product or idea and better understand the market landscape.  It will also help you project what the future of that landscape may look like and what part you will play in it.

This fine tuning, or polishing, will help guide your objectives and provide you with tangible benchmarks to assist the early development of your idea.  It will help you to determine answers to questions, like:

- What are my idea’s core benefits to customers?

- Who are my competitors, what are they up to, and how is my idea different?

- Who can help/partner/invest in me?

- What are my idea’s weaknesses?

Without evaluating your idea and performing focused research on your market, your diamond idea may very well remain cloudy.  Better to spend time and energy, doing your homework and grinding out flaws now to truly cement a business idea that will thrive.

Geoff Keller is a founding partner at Vela | Keller PC in Dallas and focuses his practice on representing small businesses and criminal law.

My first response is always “how much have you put in?”  I remember reading a VC guy’s blog a few years ago who said that if you can’t come up with $100k on your own, then you’re not resourceful enough for me to invest in.

$100k may be a little steep, but based on my interaction with Angel investors around town, the message rings true.  There are a number of financing sources out there – parents, family, friends, banks, credit cards, etc., all of which should be exhausted before looking for Angels.  If you’re not ready to invest your own money, or those of your closest friends and family, why would anyone else be ready to invest theirs?

Most Angel investors have full-time jobs outside of Angel investing, so their time is extremely valuable.  If you walk in and are not prepared to talk about your personal commitment to the idea or company, you’re doubling up on your time-wasting.

I know that a lot of my clients whom are Angel investors are much more interested in a young guy with an average idea, but who is so passionate about his idea that he’s leveraged to the hilt in credit card debt* and can’t possibly get anymore cash on his own, so now he’s seeking Angel funding, than an entrepreneur with a brilliant idea but who is not willing to risk his own money or quality of life.

Remember, when an investor invests in a start-up, he or she is investing in you, not the idea.  If you can show potential investors that you’ve already maxed out your personal investment in yourself, then you’ll be much more likely to convince someone else to do so.

*Note, I’m not advocating credit card debt.  But I would like to encourage entrepreneurs to explore all personal channels before seeking Angel funding.  Please consult with your attorney and advisers before doing anything rash.

Kevin Vela is a founding partner of Vela | Keller PC in Dallas, and focuses his practice on representing small businesses and start-ups.  You can contact him here.

In her story, Ms. Jean pointed out that in 2011, 126,000 Certificates of Formation were filed in Texas, and 26,150 DBA Certificates were filed in Dallas County.  Texas’ continued population growth and the prospects of a better economy all point to even more starts in 2012.

What is a Startup Year you ask?  Well, as most of you know the Mayan calendar closes out this year, but what may be news to you is that the Mayans aren’t marking the end of it all, but rather the beginning of a new era.

We at VK wholeheartedly agree, and are marking 2012 as the YEAR OF THE STARTUP! This year we are all going to dust off those shelved plans to start that next great new business “when the timing is right.”  You know the business idea we are talking about… the one that has nagged you for years and you just can’t shake.  The one that puts a smile on your face when you say “one day I’d love to have a business that…”   Until now, you’ve been too tired, frightened, or financially unready to take and make those dreams a reality, but now, in 2012, is when we take those great ideas, lay the right foundation and build them up during the YEAR OF THE STARTUP!

And We’re Here to Help^SM.  Each month we will blog about the startup lifecycle including the steps, growing pains, concerns, and considerations of taking your great idea from inception to marketplace.  Further, we will sponsor startup events around Dallas (and perhaps elsewhere), talk about startups, think about startups, and generally help startups where we can.  To this end – we’ve created a new email address for you to send in your startup questions – startups@velakeller.com.  Send us any question you have regarding startups, and we’ll reply to as many of them as we can.  Most likely we’ll aggregate them from time to time and blog about them, so please let us know if it is okay if we use your first name and discuss your idea.  If you don’t want us to publish your first name or talk about your question, we will respond to you directly.

As small business attorneys we understand your motivations and concerns and we look forward to discussing the universal topics associated with any startup business over the next 12 months in our 2012 – THE YEAR OF THE STARTUP series.

Geoff Keller is a founding partner at Vela | Keller PC in Dallas and focuses his practice on representing small businesses and criminal law.

1) While I’m still recommending to clients that they have a separate bank account for each Series, I do not feel that it is absolutely necessary to do so.  A single member LLC with very little cash coming in/going out among the Series cells (more on that below) should be able to easily and clearly delineate within its own records and a separate bank account for each cell is likely not needed.  Further, some can get away with one EIN.  It’s a case by case basis, but a single member Series LLC will most likely need only one EIN.

2) A few other states refer to the entities within the Series (Series A, Series B, Series C, etc.) as “cells” to distinguish them from the master, which in itself is a “Series LLC.”  This makes a lot of sense and I’ve been doing it with my clients as of late, and I think that the legislature will likely adopt something like this down the road in Texas.

3) Back in September, I wrote that the management/member structure for each cell should be identical, but I’m ready to back off of that thought. Section 101.607 of the Texas Business Organizations Code states that a company agreement may:

“[e]stablish classes or groups of one or more members or managers associated with a series each of which has certain express relative rights, powers, and duties, including voting rights…”

My interpretation (and that of several of my colleagues) is that this allows each cell to have one or more members or managers, and the membership structures from cell to cell do not need to be identical.  For safety’s sake, I corresponded with a staff attorney at the Secretary of State’s office.  While staff attorneys can not offer legal advice (and I’m not doing so either through this medium), the staff attorney confirmed my interpretation. Now, I’m not going to prescribe one Series LLC for a client and then let her go carte blanche with dozens of cells underneath the parent with a myriad of ownership structures, but I do feel comfortable with different ownership structures per cell in some cases.

I recently went to an attorney luncheon (I know, sounds like fun) to discuss Series LLCs (fun-ner [I know that's not a word, but you get the point]), and the place was packed.  This tells me that lots of attorneys and investors are considering Texas Series LLCs and I think we’ll see widespread adoption of them in 2012.

If you are considering forming a new LLC in Texas, and think a Series LLC may be for you, please reach out to us or your attorney for more info.  Happy New Year!

Kevin Vela is a founding partner of Vela | Keller PC in Dallas, and focuses his practice on representing small businesses and start-ups.