IT history lawyer. Life is business outsourcing. Part 1

# FROM AUTHOR
During my career I met a lot of IT entrepreneurs, helped build a business, solved problems. Saw the ups and downs, success and collapse.

The meaning of this story (and all subsequent in the heading “Lawyer's stories”) to tell you about the legal aspects and nuances of the life of the domestic IT business.
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I introduce myself. My name is Vyacheslav Ustimenko, I am the founder of a well-known among IT entrepreneurs law firm and YouTube blogger.

#DISCLAIMER
All the characters in the story are fictional, and the situations are modeled, but if you finish reading to the end, you will understand that the story is very close to reality.

#START
In the courtyard in 2012, Sasha took the position of team lead in a large outsourcing company My Dream LTD.
His salary has reached 4,000 USD per month, his employer is loyal, projects are interesting.
Sasha spoke directly with customers, was responsible for the implementation of project development and led a small team of developers.

# CALL
One weekend, the bell rang. Sasha Skype called customer Mike, offered to leave the company and work with him "directly."

Mike said that the developer rates in the contract between Mike and My Dream LTD were as follows:

$ 85 - senior developer
$ 65 - middle developer
$ 25 - QA Specialist, junior developer

Sasha knew the real salary of his team, and considered that My Dream LTD sells their time about 3.5 times more expensive.

#SENTENCE
Mike offered Sasha a long-term contract, the main condition for which was to reduce the rate by 50%. Sasha took the time to discuss with the team, as he understood that under such conditions you can make good money.
A couple of days later, Sasha offered the team that worked on Mike’s project to quit, with a mandatory salary increase of 30%, but within the framework of the new company.
Sasha understood that even in this situation, he “sells” his team at 35% more than what it costs.

# CHANGE
Not all team members wanted to quit, and far from everyone was motivated only by a salary increase, but despite this, the necessary minimum of developers switched to Sasha’s side.
Senior developer Igor, who knew the project architecture best, wanted a share of 20% of Sasha's profit. After several days of negotiations, they agreed on 15%.

# NEW OFFICE
Sasha understood that he needed a room in which his team would work. I rented a small office as an individual. I agreed with the landlord to pay in cash, since Sasha was not registered as an entrepreneur.

*** Sasha did not really understand that he was violating the current legislation, did not know that conducting business without proper registration is fraught with, for example, a fine in the amount of all the illegally earned amount, but all this was not his priority. ***

# FIRST DIFFICULTIES
The time has come to pay the salary to the team, and Sasha has only a personal bank account and a foreign Pioneer card. Mike transferred the money there, and with colossal conversion and cash withdrawals at the ATM, the first salary was paid “in an envelope”.

*** Sasha did not think that he and his staff would be required to declare the amount received on the account and pay the personal income tax (personal income tax) from it. ***

FIRST PROFIT
According to the agreement, Sasha and Igor participated in the distribution of profits, in shares of 85% and 15%, respectively. Every time after paying the salary and deducting the cost of the office and the “cookies”, Sasha gave Igor his share in cash.

FIRST COMPANY
A couple of months later, one of the developers turned to Sasha with a request to help him arrange documents for a visa to Canada, it was necessary to indicate the place of work (here Mike went to the meeting and signed a direct contract between his company and the developer, exclusively for the visa application form). Then another developer wanted to apply for a loan, but he was denied a bank, as there was no official source of income (Sasha and Igor did not know how to help and gave their money in receipt).

It became clear that you need to bring everything to the “white” level, keep records of finances and create legal and financial instruments. So the idea was to create a company. Without hesitation, the guys found a lawyer on the Internet, registered the company “Pervaya”, re-registered its office for it, and opened a bank account.

# PAPER BUREAUTURE
Before the registration of the company, the guys did not even have a written contract with the customer. Now, there is such a need. Mike provided them with a signed contract (it was the American company Magic Corp.), the guys gave the translator, got a bilingual version and Sasha (by the way, he was the director of LLC “Pervaya”) signed a contract.
Within a few weeks, the guys started looking for an accountant at a distance, and in Linkedin they set up the CFO and CEO status in LLC “Pervaya”.

By the way, this is a common practice in our company to have “directors” in a company more than an employee. If you look at Linkedin, sometimes even Apple or Google have fewer directors than at our local companies ... CEO, CBDO, CFO, CTO, CMO, and so on.

FIRST DISAPPOINTMENT
Sasha already knew what invoice and reporting was, went to the bank if necessary, took paper copies of documents, signed all sorts of “papers” that the accountant sent from time to time. By the way, the latter, at the request of Sasha, calculated the tax losses in the payment of official salaries to employees. The number we saw upset the guys, and the desire to build a “white” company was lost. But the guys understood that the company cannot function without employees, and the legal address LLC “Pervaya” (it was there where the company’s office was located) could come at any time to check and see a dozen unemployed persons there.

In our country, they don’t like to go to doctors or lawyers until they come to it, because there is the Internet, everything can be found there.
So the guys and found a scheme in which an LLC can not employ employees, and register each as an individual entrepreneur and pay not as an employee, but as a contractor under the contract.

# FIRST DIAGRAMS
Something like the company's financial logistics:

The customer pays the amount of X to the LLC account, and the amount of Y to the account of Sasha's “Pioneer”.
Ltd. subcontracts to employees-entrepreneurs the work and pays 95% of X, 3% of X goes to pay office rent, 2% of X settles as a company's profit.
The sum Y is the net profit of Sasha and, accordingly, Igor.

*** But the guys at that moment did not know that there is a judicial practice of recognizing such relations as tax labor, with consequences in the form of serious fines. ***

# FIRST SUPPORTS
It was the middle of 2013. Mike quickly got used to the advantageous rate for him and began to become impudent, to delay payments, in the end he said that he did not need some of the work done.

Sasha and Igor went to a lawyer. The lawyer said that the contract does not protect them at all, and the customer can legally manipulate the facts and not pay for the services of LLC “Pervaya”. What Mike actually did.

It is good that the guys managed to diversify and were in the process of dialogue with several new customers from the USA.

On the same day, they ordered a professional contract from a lawyer that can protect their interests.

# PIONEER ALWAYS READY
The story with Mike ended as quickly as it began. The new customer, by the way, it was NEWONE LTD, signed a contract with First LLC, but surprisingly for Sasha and Igor, refused to pay part of the money for the Pioneer card.

*** Payments to “Pioneer” created additional difficulties for the customer’s accounting department, he was ready to pay only by bank transfer from the account of his company exclusively according to invoices issued by LLC “Pervaya”. This makes sense, because the more complicated financial logistics are, the harder it is to protect yourself in court. ***

NEWONE LTD began to pay monthly the entire amount to LLC “First”. Sasha decided that he would take the money with tax losses better than to delay the start of cooperation with the new customer, because if the customer “disappears”, then developers will have to be dismissed. And the developers are the main asset of the outsourcing company.

Sasha and Igor went to the accountant and asked how they now get their money. The accountant said that the legal way is to distribute the company's profits as dividends, but this would create a fairly large tax burden on First LLC.

# ON THE SAME RAKE
The guys returned to search for an answer on the Internet. The decision came from the “advisers” from one of the forums. Igor was removed from the founders of LLC “Pervaya”, registered him as an individual entrepreneur and was made a subcontractor in relation to LLC “Pervaya”.

# NEW SCHEMES
Something like the company's financial logistics:

The customer pays the amount (100%) to the LLC account,
Ltd. subcontracts to employees-entrepreneurs a job (55%), 5% goes to pay for office rent, 38% goes to the corporate account of “entrepreneur” Igor and is distributed between Sasha and Igor, and 2% settles as a company's profit.

*** But the guys at that moment did not know that there is such a concept in the tax code as “market price” and court practice about non-recognition of a part of the company's expenses. They deliberately exposed First LLC to the risk of additional income tax and penalties. ***

#KARMA
In the yard in 2015, LLC “First” already had three relatively large customers.

LTD HELLO WORLD
NEWONE LTD
SOFTWARE LLC

At the beginning of the month, immediately after paying employees a “wage”, Sasha receives a notice from HR at Slack that 7 employees are no longer working with him.
On the same evening, a notification came from the customer LTD HELLO WORLD about the termination of cooperation. Sasha realized that the boomerang was back, and part of his staff “took away” the customer ...

LEGAL DISPUTES
Sasha called the lawyer who created the contract and asked what could be done. A lawyer in the mode of a paid consultation explained that the customer does not have the right to “lure away” employees / contractors, and for this the contract provides for a fine of 100,000 USD and suggested several options:

Do nothing (what counterparties often count on)
Go to the London LCIA Arbitration (which was listed as a place to resolve disputes)

*** There were high chances in the Arbitration, as the contract was really professionally drawn up, and the server maintained an e-mail correspondence of one of the employees, which by the UK law (Civil Evidence Act 1995) is proof in court. ***

The company in which the lawyer worked was chosen as the main partner.

#ARBITRATION
Mid 2016 LLC “First” with the help of a lawyer won the arbitration and successfully applied the decision of the arbitrators in the United States.

The cost of the entire turnkey procedure was about $ 25,000:

12,000 for arbitration services,
3,000 lawyers in the US, for work on applying the arbitration award to HELLO WORLD,
10,000 (10% of the amount) - lawyer's fee,

Profit: 75,000 USD
Losses: Major customer and part of the team

What do you do here?
The end of 2016. One of the programmers was offended by Igor for criticism and unprofessional communication using obscene language and quit. Igor asked Sasha not to pay the last salary to the programmer in order to punish the “wrong”.

After a couple of weeks, the doorbell rang at the office door, a tax service employee certificate, an unscheduled check. Grounds for verification: a statement from a third party.

Sasha, in a panic, began to call the lawyer, because he absolutely did not understand the grounds for the tax audit, did not know how to behave in such procedures, whether it is possible to prevent the search and seizure of equipment, what can and cannot be said. Employees behaved accordingly.

The result: the court, a fine, recognition of the relationship between LLC “First” and “employees-entrepreneurs” labor.

# RESTRUCTURING
the beginning of 2017, despite the problems experienced, LLC “Pervaya” shows good growth. The lawyer proposed registration of an operating company abroad.

Goals:

- optimize workflow with customers
- tax planning
- increasing the respectability of the company
- secure the profit center
- avoid currency conversion losses
- reduce paper bureaucracy
- make direct payments to employees from a foreign company (minimization of risks that existed for LLC “Pervaya”)

Sasha was a resident of the Russian Federation,
Igor was a resident of Ukraine.

The lawyer selected the jurisdiction for the operating company taking into account the business goals of the company as well as the requirements of the legislation of two future founders:

- For the Russian Federation, the Law on Controlled Foreign Companies (CIC),
- For Ukraine, the resolution of the Cabinet of Ministers and the requirements of the NBU regarding individual licenses.
- Additionally I checked agreements on avoidance of double taxation.

# NEW SCHEMES
A lawyer has registered a company abroad called ALIG LTD
Something like the company's financial logistics:

Customers pay the amount (100%) to the account of ALIG LTD,
ALIG LTD subcontracts under the independent contractor agreement to employees-entrepreneurs (25%),
A small part (5%) goes to LLC “First” to pay for the rent of the office, the salary of the HR department and the office manager.

70% remains on the corporate account of ALIG LTD, 40% of them are distributed by Sasha and Igor as dividends, 20% are invested in marketing, and 10% are paid to personal accounts abroad as contractors under an independent contractor agreement.

# E-MAIL
One of the first major customers - SOFTWARE LLC wrote an e-mail to Sasha. He wants to buy a 51% stake in ALIG LTD.

To be continued...