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
Lane, Alton & Horst, LLC
Teri G. RasmussenPartner and Vice Chair, Business Law Practice Group
Lane, Alton & Horst, LLC
[email protected](614) 233-4753
Lane, Alton & Horst, LLCTwo Miranova Place, Suite 500
Columbus, Ohio 43215
www.lanealton.com
Lane, Alton & Horst, LLC
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
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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)
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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
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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
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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
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Selecting a Legal Form
for Your Business
IS NOT
a Multiple Choice Test
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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
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Factors to Consider in Choosing a Legal Structure
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?
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Factors to Consider in Choosing a Legal Structure
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
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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
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Factors to Consider When You Are Not the Only Owner
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?
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Factors to Consider When You Are Not the Only Owner
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?
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Basic Legal Structure Choices
Sole ProprietorshipPartnership
LimitedGeneral
CorporationC-CorpS-Corp
Limited Liability Company (LLC)
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Basic Types of Ownership Interests
Partnership Partnership Interest
Corporation SharesShares of Capital Stock
LLC Membership Interest
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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
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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
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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
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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
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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.
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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
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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
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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.
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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
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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)
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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)
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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
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Special Advantages of LLC
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.
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Special Advantages of LLC
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
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Special Advantages of LLC
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.
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Decision Points in Selecting Legal Structure of Business
ECONOMICAllocation of Profits and Losses
Distribution Entitlement and Order
MANAGEMENT and
DECISION-MAKING
OWNERSHIP TRANSFERS
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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
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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
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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?
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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
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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?
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Practical Criteria
6. What is procedureprocedure for making important business decisionsbusiness decisions and who makes them?
One owner or group Headcount or Pro Rata
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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
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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
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Agreements Agreements AmongAmong Owners Owners
Partnership Agreement
Close Corporation Agreement
Buy-Sell Agreement
Operating Agreement
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Ensuring an Exit Strategy
“Push-Pull” Right of First Refusal Cross Purchase Puts Calls
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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.
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“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.
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“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.
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“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
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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.
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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.
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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.
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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
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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
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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
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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.
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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
Lane, Alton & Horst, LLC
Choosing a Legal Structure for a Business is Less About the Nature of the Business Today Than Planning for Facing Challenges Lying
Ahead.