The Legal Side of Getting a Business Up and Running

Lane, Alton & Horst, LLC

THE LEGAL SIDE OF THE LEGAL SIDE OF GETTING A BUSINESS GETTING A BUSINESS

UP AND RUNNINGUP AND RUNNING

Presented By

Teri G. Rasmussen,Partner and Vice Chair of Business Law Practice

Group of LANE, ALTON & HORST, LLC


Teri G. RasmussenPartner and Vice Chair, Business Law Practice Group


[email protected](614) 233-4753

Lane, Alton & Horst, LLCTwo Miranova Place, Suite 500

Columbus, Ohio 43215

www.lanealton.com


Teri G. Rasmussen

Business Acquisitions and Sales

General Corporate and Business Law

Joint Ventures and Strategic Alliances

Corporate Governance and Shareholder Disputes

Contracts and Loan/Lease Documentation

Business Formation and Financing

Business Planning

Creditors’ Rights and Debt Collection

Business Bankruptcy and Insolvency

UCC and Secured Transactions

Commercial Finance

Litigation

Real Estate


Teri G. Rasmussen

B.A., with honors, 1981, University of Iowa J.D., cum laude, 1984, University of Michigan

Bar Admissions:Supreme Court of Ohio, 1984

U.S. District Court, Southern District of Ohio, 1984

U.S. District Court, Northern District of Ohio, 1993

U. S. Sixth Circuit Court of Appeals, 1997

Professional Associations:Columbus (Former Chair, Financial Institutions Committee),

Ohio State (Former Chair, Subcommittee of Accounts, Payments, and Letters of Credit of Banking, Commercial and Bankruptcy

Committee) and American Bar Associations

American Bankruptcy Institute

National Association of Women Business Owners (NAWBO)

Executive Women’s Golf Association (EWGA)


EVERY Business Has a Legal Form

If you don’t make a Decision, the Law will make one for you.

A one-person business will automatically be a sole proprietorship.A business with two or more Owners will automatically be treated as a general partnership


The TYPE of LEGAL ENTITY Matters

Level of Formality Required for Recordkeeping Level of Formality Required in Decisionmaking Effect of Death or Disability of Anyone Actively

“Involved” in the “Management” of the Business Taxes – Who Pays and How Much Ability of Business Creditors, Disgruntled Employees,

and Others to Reach Personal Assets of Owner(s) Who Has “Say” in, or Control of Business and its

Operations


Customizing the Governance and Legal Structure of a Business

TYPE of LEGAL STRUCTURE

matters less than

SPECIFIC DECISIONS concerning relationships among owners, as well as the management and operation of the

business


Selecting a Legal Form

for Your Business

IS NOT

a Multiple Choice Test


Factors to Consider in Choosing a Legal Structure

How much record-keeping are you able and willing to do on a continuing periodic basis?

What is YOUR tolerance for risk? What sort of risks are you most comfortable having? What sort of risks do you MOST need/want to

avoid? How will the business be financed?

Outside Investors and Creditors Personal and Family Funds



What sort of business risks are there in your industry or type of business?

How much government regulation is your business generally subject to?

Where will your business sell or provide good and/or services?

Locally or within one state? Regionally? Nationally? Worldwide?



Short and Long Term Objectives and Goals Size and Character of Business in Three

Years? In Five Years? Revenues and Sales Employees Number and Diversity of Ownership


Factors to Consider When You Are Not the Only Owner

How well do you know your fellow owner(s) and can you really trust them?

Compatibility of Owners in Temperament, Work Habits, Spending, Risk Tolerance, Etc.

Strengths and Weaknesses of Fellow Owner(s) – Could a Weakness Cause a Problem for the Business and How Can That be Guarded Against



How Many Owners Will There Be?

Will the owners be individuals or business entities?

What Role, Responsibilities and/or Duties Will Each Owner Have? How will these be Shared or Allocated?

Will any owner(s) or group of owners have veto power with respect to certain specific issues?



Are you the “money” person or the “sweat equity” person?

What happens if an owner wants out of the business? Getting Investment Out of the Business Transfer, and Restrictions on Transfer, of Ownership

What happens to ownership interest upon death or disability of owner?

Will some owners get their “investment” back sooner than other owners?


Basic Legal Structure Choices

Sole ProprietorshipPartnership

LimitedGeneral

CorporationC-CorpS-Corp

Limited Liability Company (LLC)


Basic Types of Ownership Interests

Partnership Partnership Interest

Corporation SharesShares of Capital Stock

LLC Membership Interest


Limitations on Number of Owners

One Owner - Can be Sole Proprietorship only if an Individual Can be a Corporation or LLC. Cannot be a Partnership

Two or More Owners – Can be Partnership or LLC Can be Corporation

S-Corps Cannot have More Than 75 Shareholders Cannot be Sole Proprietorship


Special Restrictions on Ownership of an S-Corp

Limited to 75 Shareholders Only U.S. Citizens May Be Shareholders C-Corps Cannot Be a Shareholder Cannot Have other S-Corps, LLCs,

Partnerships or many types of Trusts as Shareholders


Sole Proprietorship Background and History

No separate existence from owner.Business assets in owner’s personal nameOwner signs contract in personal capacityIf owner dies or becomes disabled, so does businessProfits and losses from, as well as expenses of, business included on individual income tax return


Weighing the Sole Proprietorship Alternative

Advantages Maximum authority and control

Simplest and least expensive to start – just find a location and open the doors

Appropriate for very small service business not likely to borrow much money and not likely to be sued

Business losses can offset income from other sources

Disadvantages Death or Illness endangers

business

Growth limited by personal energies

Obtaining financing and investment may be difficult

Personal and business affairs easily mixed


Weighing the Sole Proprietorship Alternative Tax Considerations

Business profits of a sole proprietorship can be taken only as salary and wages which are subject to both income tax and self-employment tax.

Business profits of a corporation could also be taken as dividends or distributions not subject to self-employment tax.


Sole Proprietorship Responsibilities

While sole proprietorships are the simplest and most easily formed business structure, you still have legal responsibilities.

There may be local registration, license or permit laws required to make the business legitimate

Visit the website of the 1st Stop Business Connection, a program sponsored by the Ohio Department of Development's Small Business Development Centers and the U.S. Small Business Administration where you can download a tailored FREE business information kit containing the basics all businesses must know and the state-level regulations and forms specifically for your business.

http://www.odod.state.oh.us/onestop/index.cfm


Purpose of Forming Partnership

Nothing more than a common law contract between owners To operate broad-based businessTo share in the responsibilities of managementTo divide the profits realized from the enterprise


Partnership Characteristics

Almost any management and profit-sharing arrangement can be agreed upon among the partners

Must have at least two partners at all times

Joint Venture or Strategic Alliance differs from true partnership because it is generally limited to an isolated and particular transaction.


What to Include in Partnership Agreement

Name of Partnership Contributions to Partnership Made by Each Partner and When Made Allocations of Profits and Losses; Draws

In proportion to % interest? Distributions only at end of year? Regular periodic draws? Responsive to financial needs of each partner?

Individual Authority of Each Partner to Bind Partnership Partnership Decision-making Procedure Management Duties, or Absence of Same, of Each Partner Admission of New Partners Effect of Withdrawal or Death of Partner; Buyout Procedures Dispute Resolution Process


General Partnership Definition

Ohio law defines a general partnership as

“an association of two or more persons to carry on as co-owners, a business for profit”

Ohio Rev. Code 1775.05(A)


Creation of General Partnership

Can be “accidentally” created – formation occurs whenever parties expressly or implicitly start sharing profits and losses and the management of the business

Can be created orally – no written agreement required, though recommended


Distinguishing Characteristics of General Partnership

All of the Partners Manage the company together

Have joint responsibility for all of Partnership debts

Have authority to make contracts and decisions on their own for partnership


Status of General Partnership

Treated as a separate entity from its Partners for limited non-tax purposes Holds Assets in Name of Partnership Contracts Executed in Partnership Name Must File Separate Tax Return, but does not pay taxes

Both partnership and general partners can be sued for partnership obligations

Partners pay taxes on partnership income and report on their tax returns


Limited Partnership

Only valid if written and formed in compliance with statutory requirements

One General Partner – same responsibilities as in general partnership

Other Limited Partners – Have limited rights in exchange for limited liability for partnership debts


General and Limited Partnerships Comparison

General Partnership All Partners Participate

in Management

Dissolves upon death or withdrawal of any partner

Limited Partnership Limited Partners Must

Not Be Involved in Day-to-Day Operations

Dissolves only upon death or withdrawal of General Partner

More Complex than General Partnership


Weighing the Partnership Alternative

Advantages Two (or more) heads are

better than one Income passes through to

Partners Management Structure

Flexibility No qualification requirements

for doing business in other states

Disadvantages Difficult to get rid of bad

partners More Expensive to form than

sole proprietorship, especially in case of limited partnerships

Difficult to transfer ownership interest

Hazy line of authority in general partnership

Cannot have both management responsibilities and limited liability


Usefulness of Partnership Alternative

General Partnership is obsolete except in very special circumstances

Owner is particularly concerned about deductibility and capital gains treatment of continuing payments to retiring partners (IRC 736(a))

Important that business not be treated as entity for tax purposes (e.g. oil and gas investments)

Limited Partnership duplicated and supplemented by LLC alternative


Corporations

C-Corp - for larger more mature businesses, especially those publicly held, and for those anticipating making initial public offerings (IPO) of capital stock in the near future

S-Corp – for smaller privately held businesses with less than 75 owners, all of whom are individuals


Formation of Corporation

Corporation has NO owners until stock shares have actually been issued to owners by the Incorporator.

Corporation IS NOT validly formed until

Shareholders elect DirectorsAND

Directors appoint Officers.


Corporation Formation Procedure

1. Articles of Incorporation are signed by “Incorporator”, who may or may not become a Shareholder, and filed with the Secretary of State.

2. Incorporator receives subscriptions and payment for shares and issues them to owners.

3. Incorporator calls first meeting of Shareholders to elect Directors, adopt Code of Regulations, and transact any other business.

4. After Shareholders elect Directors, Directors pass resolution appointing Officers.


Corporate Governance

Shareholders have no authority to control day-to-day management or business operations

Shareholders elect Directors Board of Directors set general policy

Board of Directors appoint Officers such as President, Vice President, Treasurer, and Secretary Officers manage day-to-day operations of company Officers are answerable to Board for their actions


Distinguishing Characteristics of Corporations

Ownership interests are known as “shares” or “stock” and are freely transferable to anyone else unless shareholders otherwise agree

Shareholders are not liable for company obligations except under highly unusual circumstances, but the company itself will be held liable

Existence continues even after departure of original owners or key individuals


Comparing Corporations to Partnerships and Sole Proprietorship

In comparison with partnerships or sole proprietorships Extensive record-keeping required Employees, including the owner(s), able to

participate in various types of insurance, profit-sharing, and other benefits otherwise not available

More Flexible approaches to taxation More complicated and expensive to form


Weighing the Incorporation Alternative:

Effect Upon Personal Liability

Incorporating

Helps separate your personal identity from that of your business. Once incorporated, the shareholders of a corporation have only the money they put into the company to lose, and usually no more as a result of being a shareholder.

Remaining Unincorporated

Sole proprietors and general partners are subject to unlimited personal liability for business debt or law suits against their company. Creditors of the sole proprietorship or partnership, including ordinary suppliers, vendors, and other trade creditors can bring suit against the owners of the business and can move to seize the owners’ homes, cars, savings or other personal assets.


Limited Liability Myth

Insulation from all potential liability and become immune from lawsuits? Unfortunately

Banks and other lenders typically require personal guarantees of owners

Accidents and injuries to others resulting from the business are covered by insurance or owner remains personally liable for his own personal actions.


Where Limited Liability Really Does Come In Handy

EXAMPLEKevin is the owner of a small manufacturing business. When business prospects look good, he orders $50,000 worth of supplies and uses them in creating merchandise.

Unfortunately, there's a sudden drop in demand for his products, and Kevin can't sell the items he's produced. When the company that sold Kevin the supplies demands payment, he can't pay the bill.

As sole proprietor, Kevin is personally liable for this business obligation. This means that the creditor can sue him and go after not only Kevin's business assets, but his other property as well. This can include his house, his car and his personal bank account.


Weighing the Incorporation Alternative:Credibility of Business

Adds Credibility. A corporate structure communicates permanence, credibility and stature. Even if you are the only stockholder or employee, your incorporated business may be perceived as a much larger and more credible company.


Weighing the Incorporation Alternative:Tax Advantages Available

Tax Advantages – Deductible Employee Benefits. Incorporating usually provides tax-deductible benefits for you and your employees.

Even if you are the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may now be deductible.

Corporations usually provide an increased tax shelter for qualified pensions plans or retirement plans (e.g. 401K’s).


Weighing the Incorporation Alternative:Attracting Capital and Financing

Incorporated

Capital can be more easily raised with a corporation through the sale of stock.

Investors are more likely to purchase shares in a corporation where there usually is a separation between personal and business assets.

Some banks prefer to lend money to corporations.

Unincorporated

With sole proprietorships and partnerships, investors are much harder to attract because of the inability to have control without personal liability.


Weighing the Incorporation Alternative:Disclosure of Ownership

Incorporated Can offer anonymity to

its owners.

Example: If you want to open an independent small business of any kind and do not want your involvement to be public knowledge, your best choice may be to incorporate.

Unincorporated• If you open as a sole

proprietorship, it is nearly impossible to hide the fact that you are the owner.

• As a partnership, you will most likely be required to register your name and the names of your partners with the state and/or county officials in which you are doing business.


Weighing the Incorporation Alternative:Centralized Management

Incorporated

With a corporation’s centralized management, all decisions are made by your board of directors.

Your shareholders cannot unilaterally bind your company by their acts simply because of their investment.

UnincorporatedWith partnerships, each individual general partner may make binding agreements on behalf of the business that may result in serious financial difficulty to you or the partnership as a whole.


Weighing the Incorporation Alternative:Transferring Ownership

IncorporatedOwnership of a corporation may be transferred, without substantially disrupting operations or the need for complex legal documentation, through the sale of stock.

Unincorporated Cannot sell sole

proprietorship as a going concern, i.e. can only sell individual assets

Partnership may dissolve; generally not easily transferable


Close Corporations

A close corporation is a special sort of

S-corporation designed for businesses with only a few owners.

Allows owners by agreement to bypass many of the usual formalities required of corporations, thereby simplifying management of company affairs

Requires a written agreement complying with specific statutory requirements (Ohio Rev. Code 1701.591)

Often has restrictions on ability of shareholders to transfer ownership


Impetus for Emergence of Limited Liability Company (LLC)

Arose from Desire

of business owners and investors To combine the limited liability protection provided by corporation law withAdvantageous income treatment available

to Partnerships

BUT WITHOUT Management issues of Limited Partnerships S-Corp Restrictions on Type and Number of Shareholders Permitted


Statutory History of Development of

Limited Liability Company (LLC)

Relatively recent legal form of business allowing owners to take advantage of the benefits of both the corporation and partnership forms of business

First statute enacted in Wyoming in 1977

Gained popularity after IRS ruled LLC could be treated as a partnership for federal income tax purposes (IRS Rev. Rul. 88-76)

Ohio has allowed since 1994 Single member LLC permitted since 1997 Written Agreement Not Required; Default Provisions of Ohio Rev.

Code 1705.13 would govern

Now available in all 50 States


Types of Limited Liability Company

Manager Managed Similar to Corporation with only a single

Member or small group of selected Members in control of management of business and affairs of company

Member Managed More like a Partnership with all Members

actively participating in management of company and it business affairs


Limited Liability Company Characteristics

LLCs are not corporations or partnerships, but in many ways offer the best of both.

Many small business owners and entreprenuers prefer LLCs because they combine the limited liability protection of a corporation with the flexibility and “pass through” of a sole proprietorship or partnership.

LLC can choose to be taxed as either a corporation or partnership


Limited Liability Company Characteristics

Unlimited number of Members with any mix of individuals and business entities

Management Participation without loss of Limited Liability Protection

Flexible allocations and distributions of profits and losses

Flexible Control and Governance

Minimal Statutory Formalities Required

Taxation Options – Can choose to be taxed either as corporation or as a partnership


LLC Formation Procedure

1. LLC is validly formed when its Articles of Organization are filed with the Ohio Secretary of State.

2. If LLC does not have an Operating Agreement, Ohio law will apply certain “default” provisions regarding its governance and the operation of its business.


Manager Managed LLC

Manager(s) selected and replaced in whatever manner agreed upon by Members

In general, Manager(s) make all decisions concerning the company’s business, operational, and financial affairs without input or prior approval of Members

Some major substantive decisions still reserved to Members

Manager does not have to be a Member

Any number of Managers permitted


Member Managed LLC

Ohio statutory provisions govern unless displaced by provisions of a written Operating Agreement

Can vote by headcount, pro rata Membership Interest, or any other system agreed upon by the Members

A Member’s management voting rights do not have have any relationship to that Member’s ownership interest


Weighing the LLC Alternative –

Similarities to S-Corp

Both LLCs and S-Corps offer their owners limited liability protection and are both pass-through tax entities.

Pass-through taxation allows the income or loss generated by the business to be reflected on the personal income tax return of the owners. This means that if you have business losses you want to use to offset other income you might have from another job or from your spouse's employment, for example, you can claim those losses on your personal income tax.This special tax status eliminates any possibility of double taxation for S corporations and LLCs


Weighing the LLC Alternative –

Differences From S-Corp

LLCs are more flexible in the way profits can be distributed

An S-corporation can only have one class of stock and your percentage of ownership determines the percentage of pass-through income.

LLC can have many different classes of interest, and the percentage of pass-through income is not tied to ownership percentage. The pass-through percentage can be set by agreement of the members in the LLC's operating agreement.


Weighing the LLC Alternative –Comparison to Limited Partnership

Limited Partnership must have at least one owner with unlimited liability; LLC does not.

Consequence: For total limited liability, additional corporation or LLC must be formed to be the required general partner

Limited Partnership must have at least two owners; LLC can have just one.

Consequence: An individual could establish an LLC to hold property he or she plans to use for gifting purposes in the future, but have that entity ignored for federal income tax purposes until the gift is made (at which point it becomes a partnership for tax purposes)


Special Advantages of LLC

If you're thinking about forming an "S" corporation: An "S" corporation is taxed in the same way as an LLC, but

it has some restrictions on

the number and types of shareholders, how profits and losses can be allocated among the owners, and The kinds of stock they can issue to investors.

The LLC has none of these restrictions



If you're thinking of forming a partnership:

A partnership is taxed in the same way as an LLC but

doesn't offer the limited liability without giving up management

responsibilities to all partners that an LLC offers to all its members.



If you're planning to start a business that will hold real

property that will appreciate“C” corporations and their shareholders are subject to tax on the appreciation when assets are sold or liquidatedAn LLC and its members are not subject to this double taxation



If you're forming a business in which you'll have investors who will want to be paid back their investment before the other owners receive anything:

Instead of being restricted to dividing up profits proportionate to the percentage of ownership (as in a corporation), an LLC allows members to decide what share of the profits and losses each owner will receive.


Decision Points in Selecting Legal Structure of Business

ECONOMICAllocation of Profits and Losses

Distribution Entitlement and Order

MANAGEMENT and

DECISION-MAKING

OWNERSHIP TRANSFERS


Economic Decision Points Allocation of Profits and Losses

Unless Otherwise Agreed by Owners

General Partnership – Divided equally among partners regardless of relative amount of contribution

Limited Partnership – Based upon relative value of contribution not yet returned to partner

Corporation – Divided on a pro rata based on number of shares held

LLC – Divided on a pro rata based on membership interest held


Economic Decision Points Distribution Entitlement and Order

Unless Otherwise Agreed by Owners

General Partnership – Partners entitled to receive profits as they occur

Limited Partnership – Partners have no right to receive any distributions until they withdraw or partnership dissolves

Corporation – Directors have discretion to determine when dividends will be distributed

LLC – Members have no right to receive any distributions until they withdraw or company dissolves


Practical Criteria

1. How manyHow many owners are there and whowho are they?

2. What is the current and anticipated personal and business relationship relationship between the ownersbetween the owners?


Practical Criteria

3. Are you the dominant, subordinate, dominant, subordinate, or equal owneror equal owner in the business?

“Money” Owner or “Sweat Equity” Controlling Ownership Interest Controlling Vote


Practical Criteria

4. Are some or all of the owners owners actively involvedactively involved in the day-to-day operations of the business?

5. Are owners relying on the business as their primary primary source of incomesource of income?


Practical Criteria

6. What is procedureprocedure for making important business decisionsbusiness decisions and who makes them?

One owner or group Headcount or Pro Rata


Practical Criteria

7. What is “exit strategy” for realizing investment in the business?

Voluntary Amicable Departure Dispute Among Owners Occurrence of Certain Events Achievement of Designated

Benchmarks Death of Owner


Practical Criteria

1. How many owners are there and who are they?

2. What is the current and anticipated personal and business relationship between the owners?

3. Are you the dominant, subordinate, or equal owner in the business? “Money” Owner or “Sweat Equity” Controlling Ownership Interest Controlling Vote

4. Are some or all of the owners actively involved in the day-to-day operations of the business?

5. Are owners relying on the business as their primary source of income?

6. What is procedure for making important business decisions and who makes them?

7. What is “exit strategy” for realizing investment in the business? Voluntary Amicable Departure Dispute Among Owners Occurrence of Certain Events Achievement of Designated Benchmarks Death of Owner


Agreements Agreements AmongAmong Owners Owners

Partnership Agreement

Close Corporation Agreement

Buy-Sell Agreement

Operating Agreement


Ensuring an Exit Strategy

“Push-Pull” Right of First Refusal Cross Purchase Puts Calls


WITHOUT A BUY-SELL AGREEMENT…..

Minority Owners Have Little or No Opportunity to Exit Business Without Substantial Loss

Unless the business as a whole is being sold to a third party, owners wishing to leave the business in general have no right to demand that the company or the other owners redeem their ownership interest by buying the departing owner out at any price. Nor does the company or other owner have any responsibility to help find a replacement owner willing to buy the ownership interest. Thus if no purchaser can be found, the owner wishing to sever his ties with the business has no way to obtain the value of his investment.


“Push-Pull” Exit

In two person businesses, a “push-pull” clause sets up a procedure allowing either owner to buy out, or be bought out by, the other owner.

If Tom decides he doesn’t want to continue in business with Kate for any reason, or for no reason, Tom has a decision to make. He must determine whether he

wants to continue running the business, but without Kate, or

would rather move on and leave Kate with the business.


“Push-Pull” Buy-Out

Suppose Tom elects to buy Kate out and run the business by himself. He must then come up with the purchase price at which he is willing to buy all of Kate’s ownership interest. At that juncture, Kate has two choices.

Kate can accept Tom’s offer and sell out to him at the price offered Tom offers Kate $100,000 for her ownership interest. Kate accepts and

sells her ownership interest to Tom for $100,000.

Kate can decide to buy Tom out at the same price Tom had offered to her. Tom offers Kate $100,000 for her ownership interest. Kate rejects the

offer and must then pay Tom $100,000 for his ownership interest.


“Push-Pull” Sell-Out

If Tom would rather end his ownership of the company, he notifies Kate of the price at which he is willing to sell all of his ownership interest.

Tom tells Kate he wants $100,000 for his ownership interest

Kate then chooses between accepting Tom’s request to become the sole owner of the business

Kate pays Tom $100,000 for his ownership interest

and having him buy her out at that same price.

Kate rejects Tom’s offer. Tom must then pay her $100,000 for her ownership interest


Exit Through Puts and Calls

In businesses with more owners, a “put” or “call” option requires the purchase or sale of an owner’s ownership interest by the company or other owners upon the occurrence of certain predetermined events or achievement of particular benchmarks.


Cross Purchase

Your Family Can Receive the Benefit of Your Investment Upon Your Death or Disability Without Argument

Under a “cross purchase” provision, owners agree that on a pro rata basis they will purchase the ownership interest of a disabled or deceased owner at an agreed predetermined price or based upon a specified formula. Sometimes owners agree to purchase life insurance on one another to provide a source of funding for this obligation.


Right of First Refusal

You Can Control Who the Other Owners Are or Will Be

A “right of first refusal” allows the company or fellow owners to match an offer made by a third party for the ownership interest. Provisions requiring owners to be active in the business or preventing them from having full voting rights unless all or a certain portion of the remaining owners agree can ensure that owners share a similar philosophy or that the business stays in the family.


Business Structure Options Available to Sole Owner

Cannot Be Partnership Corporation

Must Ensure Proper Formation Procedure Followed to Be Valid

Must Comply with Formalities Required by Law on an Ongoing Basis

Limited Liability CompanyLimited Liability Company


Business Structure Options Available to “Equal” Owners Both Involved in

Operations of the Business

General Partnership No Limited Liability Protection Few Formalities Required

S Corporation Difficult to Merge into LLC Governance and Growth Limitations

Limited Liability CompanyLimited Liability Company Can mimic partnership management without losing limited

liability protection No Limitations to Subsequent Merger Can later easily add members with differing equity and

management rights


Business Structure Options Available to Multiple Owners with Differing Equity

and Management Rights

General Partnership All Owners Participate in Management No Limited Liability Protection

Limited Partnership LLC has same and additional beneficial characteristics

S Corporation Multiple classes of owners not permitted Voting Rights Must Reflect Extent of Ownership Interest

Limited Liability CorporationLimited Liability Corporation Unlimited Flexibility


Making a Business Work From a Legal Standpoint

Make some preliminary decisions about how business will be run. How will major decisions be made among

owners? Which owners will be actively involved in the

business? Under what conditions will there be new

owners?Answers will guide but NOT require

selection of particular structure.


Making a Business Work From a Legal Standpoint

In most cases, choice is really between For One Owner - LLC and Sole Proprietorship For Multiple Owners - LLC and S Corporation

Contents of Governing Documents is Crucial Regardless of Choice Made


Choosing a Legal Structure for a Business is Less About the Nature of the Business Today Than Planning for Facing Challenges Lying

Ahead.

The Legal Side of Getting a Business Up and Running

Documents

Transcript of The Legal Side of Getting a Business Up and Running