September 2011 - Business Law & Order - Douglas S. Parker


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When forming a business one of the first decisions an entrepreneur will make is choice of entity. This session will cover the possible legal structures for your business activities, including the advantages and disadvantages of each type of entity in terms of limited liability, management of the business, employee compensation and tax matters. Learn the basics of Corporate Formation and understand the pros and cons of incorporating in Michigan and Delaware.

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September 2011 - Business Law & Order - Douglas S. Parker

  1. 1. Entity Formation Basics Results. Value. Dykema.Doug Parker248/203-0703 California | Illinois | Michigan | North Carolina | Texas | Washington, D.C.m
  2. 2. Choice of Business Entity Based on Individual State Law – Michigan Business Corporation Act – Michigan Limited Liability Company Act Corporation – Subchapter C corporation – Subchapter S corporation Limited Liability Company Conversion Results. Value. Dykema. 2
  3. 3. Why Should I Form an Entity? Insulation from personal liability Formalization of business activities Branding/reservation of name Capital raising Results. Value. Dykema. 3
  4. 4. Personal Liability Protection – “The Corporate Veil” Generally shareholders/members are viewed as distinct from the business entity Entity is responsible for its debts & losses Shareholders/Members are not personally liable for the liabilities and obligations of the entity and are only liable for the amount invested Results. Value. Dykema. 4
  5. 5. Piercing the Corporate VeilProtection disregarded if entity used to subvert justice or cause a result contrary to public policy.Three Factors (Sixth Circuit 2007): Entity used as a mere instrumentality of another entity or individual; Entity used to commit fraud or wrong (use of entity assets for non- entity purposes, undercapitalization); and Plaintiff suffers an unjust loss Results. Value. Dykema. 5
  6. 6. Maintaining the Corporate Veil Separate Entity bank accounts (no commingling with personal assets) Up-to-date corporate minutes (reflecting discussion and approval of material business decisions) Adequate capitalization of entity Clear delineation of roles of directors/officers or managers/members Executing contracts in corporate, not individual, name Adherence to governing documents (Articles, Bylaws, Operating/Shareholder Agreement) Results. Value. Dykema. 6
  7. 7. Additional Benefits of Good Corporate Governance Angel and Venture Capital investors and Lenders will diligence these issues Acquisition Premium Reduction in Future Costs Results. Value. Dykema. 7
  8. 8. Basic Corporate Documentation Articles of Incorporation (public record) – In Michigan, filed with the Department of Licensing and Regulatory Affairs and publicly available – Caution! State-provided forms do not include all provisions – exculpation of liability, class voting, shareholder consent actions Bylaws – Shareholder rights, Officer duties, Board duties, Indemnification Subscription Agreement/Stock Certificates Shareholder Agreement (multiple shareholders) Confidentiality, Non-Compete and Assignment of Inventions Agreement (*Corporate Veil Preservation) Results. Value. Dykema. 8
  9. 9. Basic LLC Documentation The “hybrid” business entity – personal liability protection of a corporation, taxation of a partnership Articles of Organization (public record) – In Michigan, filed with the Licensing and Regulatory Affairs and publicly available – Caution! State-provided forms do not include all provisions – Manager- managed Operating Agreement – Similar to Bylaws/Shareholder Agreement Results. Value. Dykema. 9
  10. 10. Corporation vs. Limited Liability Company Corporation LLC Centralized Management  Flexible Governance (Member (Board of Directors) v. Manager) Strict Formalities  Flexible Formalities – Adhere VC Fund Preference to Operating Agreement! Taxation (Sub S v. Sub C)  Corporate Investor Preference Equity Compensation  Taxation Advantages Results. Value. Dykema. 10