Business Entity Formation

Why Form A Business Entity?  All legal and tax professionals agree, if your business is not incorporated you may be throwing away thousands of dollars in tax savings and deductions.

In addition, and most importantly, all of your personal assets such as your home, cars, boats, savings and investments are at risk and could be used to satisfy any law suits, debt or liability incurred by the business. Forming a business entity can provide the protection and tax savings needed to give you peace of mind and make your business even more successful and profitable.  Some of the benefits include:

Liability Protection:  Properly forming and maintaining a corporation will provide personal liability protection to the owners or shareholders of the corporation for any debt or liability incurred by the business.    Personal liability of the shareholders is normally limited to the amount of money invested in the corporation.

Tax Advantages:  Another important benefit is that a corporation can be structured many ways to provide substantial tax savings. You can minimize self employment taxes and increase the number of allowable  deductions lowering the taxes you pay on the income of the business.  Many corporations structure retirement and tax deferred savings plans for their owners and employees which can provide even greater tax savings.

Raising Capital:  Sale of stock for the purposes of raising capital is often more attractive to investors than other forms of equity sales. A corporation can also issue Corporate Bonds to raise capital for expenditures without compromising the ownership of the business.

One of the most important decisions in forming a new business is deciding on the type of entity.  Each entity, be it a partnership, limited liability company, or corporation, has its own advantages and disadvantages and unique legal requirements.  However, regardless of the entity chosen, each of the founders will need to consider a variety of other issues as they proceed with the formation and organization of the new business.  The purpose of this letter is to lay out the steps that need to be taken, and some of the decisions that need to be made, as you form and organize your new business. Once a decision has been made regarding the choice of entity, we’ll work with you on satisfying the specific requirements relating to forming and organizing the entity.

Below is a list of items that we typically review with our clients as they consider formation of a new business.

1.         Preliminary Issues

(A)      Consider the business experience of each of the principals of the business.

(B)      Please provide us with information regarding the proposed business, including any draft that you might have of the business plan for the enterprise.

(C)      Consider the advantages and disadvantages of each form of legal entity and make a decision as to the proper entity for your business.  We’ll also need to discuss the state in which the chosen entity should be organized.

(D)      Select a date for launching the new business, taking into account all anticipated delays in obtaining information, signatures, approvals, etc.  Make sure that we have contact information for all parties necessary to complete the incorporation process.

2.         Name

(A)      Select the name for the new business.

(B)      If you expect to do business in other states, we can check the availability of the name for use in other states.  We’ll reserve the name for use in other states.

(C)      We can file all necessary trademark and domain name registrations for the chosen name.

3.         Pre-formation Agreement

Consider the need to complete and execute a pre formation agreement.  Such an agreement may merely be an agreement to launch a new venture or form a new corporation.  On the other hand, consideration should be given to a comprehensive agreement covering:

  • Name of the business
  • Purpose of the business
  • Proposed capital structure
  • Initial managers (e.g., directors and officers)
  • Voting agreements among owners
  • Employment and buy sell agreements
  • Selection of professionals
  • Tax elections (e.g., Subchapter S corporation)

4.         Owners and Managers

(A)      Provide us with the names, addresses, positions; ages of principals, directors and officers.

(B)      Identify past and present relationships among the owners.

  • Business
  • Family

(C)      Consider the need for noncompetition agreements signed by principals or employees.

(D)      Consider the financing and other contributions to be made by the founders:

  • Cash
  • Property
  • Leases

(E)      Consider restrictions on alienability of ownership interests.

  • First refusals
  • Redemption
  • Voting trusts or stockholder agreements

(F)      Special business or technical qualifications of principals.

5.         Operational Matters

(A)      Determine the location of the office(s) for the business;

 

(B)      Establish procedures for owners’ meetings:

  • Time and place of annual meeting
  • Procedures for calling special meetings
  • Notice and quorum requirements

(C)      Establish voting procedures:

  • Restrictions on voting rights
  • Percentage of ownership vote required for action by owners
  • Proxies

(D)      Establish procedures for management board:

  • Number of members
  • Term
  • Removal and vacancy procedures
  • Compensation
  • Powers
  • Indemnification
  • Committees
  • Meetings
  • Action without a meeting

(E)      Officers:

  • Number and qualifications
  • Term
  • Powers and duties
  • Removal and vacancy procedures
  • Bonding
  • Loans

(F)      Convene an organizational meeting of managers for the following purposes:

  • Selection of chairman and secretary
  • Receipt of report of filing of formation documents (e.g., articles of incorporation) and placement into the record of the meeting
  • Adoption of bylaws or other rules for operation of entity
  • Opening of ownership record books
  • Issuance of ownership interests, including evidences thereof (e.g., stock certificates)
  • Election and swearing in of officers
  • Designation of principal office
  • Appointment of resident agent
  • Adoption of owners’ agreement

6.         Bank

(A)      Select the banks with which the enterprise is going to do business.

(B)      Furnish the banks with a list of persons authorized to transact the enterprise’s bank business, such as negotiation of loans or signing of checks.

7.         Miscellaneous

  • Pay organizational fees and taxes;
  • Pay the expenses of organization;
  • Retain legal counsel and accountant;
  • Have the directors or managers establish officers’ salaries and prepare Form W 4 authorizing withholding on wages;
  • Obtain the necessary insurance on your property and key employees;
  • Look into the employee benefit plans (accident and health, medical reimbursement, and wage  continuation);
  • Determine whether the business is going to have a pension and/or profit sharing plan and work out the details;
  • Consider the need for formal agreements covering transactions between the entity and insiders (e.g., lease arrangements or employment agreements);
  • Establish a legal compliance program, particularly for the protection of the entity’s intellectual property rights;
  • Document any transfer of physical or intangible assets to the entity;
  • Obtain all required business licenses and permits;
  • If incorporating an existing business, notify all creditors of the change to corporate status;
  • Calendar important dates, including filings of tax returns, managers’ and owners’ meetings, etc.

Please contact an attorney to discuss all of the foregoing formation and organization matters and to answer any specific questions you may have.

Law Library Articles - Business & Corporate Law