Choose a Business Entity: What’s the Right Fit for your Client?

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There are many details to juggle when you’re creating a new business entity—and a lot is riding on those details. When a client approaches you with their idea for an exciting new business venture, will you know which form of entity is the right choice?

This complimentary webinar slides presented by the Lexis Practice Advisor® team, covers the pros and cons of different business entity types to ensure that you know which one is best suited for your transaction. We’ll also provide you with a three-step assessment to help you determine the right course of action while avoiding potential pitfalls. Don’t miss out on this important information!

This Webinar slides covers:
• The various types of entities available to you, including Sole Proprietorships, General Partnerships, Limited Partnerships, Limited Liability Partnerships, Corporations and Limited Liability Companies
• The three basic questions you must ask when you begin to choose an entity
• The best choice for entrepreneurs seeking venture capital financing, and other common scenarios

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    Director Voting – cumulative voting is required when voting for directors in California
    Basic Limitations on Dividends – e.g., a corporation shall not make any distributions to shareholders if the corporation is likely to be unable to meet its liabilities (Cal. Corp Code 501)
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    Supermajority Vote Requirements – restricts large corporations from requiring any supermajority vote set forth in the articles or bylaws in excess of 66 2/3% of the outstanding shares
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  • Choose a Business Entity: What’s the Right Fit for your Client?

    1. 1. 1Lexis Practice Advisor® Lexis Practice Advisor® Business & Commercial Choosing a Business Entity: What’s the Right Fit for Your Client?
    2. 2. 2Lexis Practice Advisor® WHERE DO I BEGIN WHEN CHOOSING AN ENTITY? Three basic questions: 1. LIABILITY 2. COST 3. CONTROL
    3. 3. 3Lexis Practice Advisor® LIABILITY
    4. 4. 4Lexis Practice Advisor® LIABILITY • To help you determine the best choice of entity, assess your client’s risk of liability. • Your client’s appetite for dealing with legal paperwork and statutory formalities also factors into the liability analysis. • Liability insurance is an option.
    5. 5. 5Lexis Practice Advisor® COST COST MaintenanceEntry Taxes Capital
    6. 6. 6Lexis Practice Advisor® COST – 4 Factors 1. Entry Costs •Filing Fees (State) •Filing Fees (Federal) •Licenses, Registrations and Permits •Publication Requirements
    7. 7. 7Lexis Practice Advisor® COST 2. Maintenance Costs •Upfront vs. Long-Term Considerations •Annual Reports /Statements of Information
    8. 8. 8Lexis Practice Advisor® COST 3. Taxes •Taxable Entity •Pass-through or Conduit Entity •Not-For-Profit Entity
    9. 9. 9Lexis Practice Advisor® COST 4. Raising Capital •General Partnerships → Limited Ability •Limited Liability Companies → Limited Ability
    10. 10. 10Lexis Practice Advisor® CONTROL
    11. 11. 11Lexis Practice Advisor® CONTROL • Ownership structure is key • The number of owners drives business entity choice • Control has both external and internal importance o External: Third party perception o Internal: Flexibility and predictability among owners
    12. 12. 12Lexis Practice Advisor® REMINDERS… It’s a balancing act! Do your state homework!
    13. 13. 13Lexis Practice Advisor® Sole Proprietorships Step 1 – What is it? Step 2 – Liability → Unlimited Step 3 – Cost → Minimal Entry and Tax, High Capital Step 4 – Control → Maximal
    14. 14. 14Lexis Practice Advisor® Sole Proprietorships Scorecard Best Suited For: • A sole proprietorship would be a good choice for someone who is looking to start a one-person business quickly and at a low entry cost. Their business should not have excessive outside investment needs and should be extremely low-risk. o Example: Assuming they could procure outside malpractice insurance, an accountant may choose the sole proprietorship form of entity. LIABILITY COST CONTROL - +/- +
    15. 15. 15Lexis Practice Advisor® General Partnerships Step 1 – What is it? Step 2 – Liability → Unlimited Step 3 – Cost → Minimal Entry and Tax, High Capital Step 4 – Control → Maximal
    16. 16. 16Lexis Practice Advisor® General Partnerships Scorecard Best Suited For: • A general partnership would be a good choice for two or more individuals who are looking to start a business quickly and at a low entry cost. Their business should not have excessive outside investment needs and should be relatively low-risk. o Example: Assuming they could procure outside malpractice insurance, an accounting firm may choose to operate as a general partnership. LIABILITY COST CONTROL - +/- +
    17. 17. 17Lexis Practice Advisor® Limited Partnerships Step 1 – What is it? Step 2 – Liability → Both Limited and Unlimited Step 3 – Cost → High Entry, Low Tax and Capital Step 4 – Control → Maximal
    18. 18. 18Lexis Practice Advisor® Limited Partnerships Scorecard Best Suited For: • A limited partnership would be a good choice for a business in which there is a clear division between those providing labor and those providing capital. It would also be a good choice for a one-off venture or a venture that is limited in duration. o Example: Real estate ventures are often organized as limited partnerships. Typically, an experienced property manager or developer serves as the general partner and outside investors provide financing for the project in exchange for a share of ownership as limited partners. LIABILITY COST CONTROL +/- +/- +
    19. 19. 19Lexis Practice Advisor® Limited Liability Partnerships Step 1 – What is it? Step 2 – Liability → Limited Step 3 – Cost → High Entry, Minimal Tax, High Capital Step 4 – Control → Maximal
    20. 20. 20Lexis Practice Advisor® Limited Liability Partnerships Scorecard Best Suited For: • A limited liability partnership would be a good choice for a professional service business that requires a state license in order to operate. o Example: Groups of attorneys, architects, chiropractors, dentists and doctors are often organized as limited liability partnerships. LIABILITY COST CONTROL + - +
    21. 21. 21Lexis Practice Advisor® Corporations Step 1 – What is it? Step 2 – Liability → Limited Step 3 – Cost → High Entry, High Tax, Minimal Capital Step 4 – Control → Mixed • Transparency in Governance (+) • Transferability of Ownership Interests (+) • Compliance (-)
    22. 22. 22Lexis Practice Advisor® Corporations Scorecard Best Suited For: • A C corporation would be a good choice for a business that requires strong liability protection and will be seeking venture capital financing in the near future. If the owners will initially be investing significant amounts of their own money and would like to write off losses (i.e. via a pass-through structure), then an S corporation may be considered. o Example: A startup tech company that is looking to become the next social media success would likely choose the corporate form. LIABILITY COST CONTROL + +/- +/-
    23. 23. 23Lexis Practice Advisor® Limited Liability Companies Step 1 – What is it? Step 2 – Liability → Limited Step 3 – Cost → Minimal Entry, Minimal Tax, High Capital (but changing) Step 4 – Control → Maximal
    24. 24. 24Lexis Practice Advisor® Limited Liability Companies Scorecard Best Suited For: • A limited liability company would be a good choice for a business that (i) needs liability protection, (ii) wants to avoid dual taxation, and (iii) requires flexibility with respect to how the business is managed and allocations are made. o Example: LLCs are ideal for real estate companies, because each separate property can be owned by its own, individual LLC, thereby shielding not only the owners, but their other properties from cross-liability. LIABILITY COST CONTROL + +/- +
    25. 25. 25Lexis Practice Advisor® Top 5 Takeaways from Today’s Presentation 1. Sole Proprietorship – Should generally be avoided by entrepreneurs due to unlimited personal liability and high capital costs. 2. General and Limited Partnerships – Similar to a sole proprietorship and should generally be avoided by entrepreneurs due to unlimited personal liability and high capital costs. Limited partnerships may come into play in specific types of deals, but will generally not be used otherwise. 3. Limited Liability Partnerships – Solid choice for the professional business. 4. Corporation – A corporation should be the first choice for an entrepreneur that will be seeking venture capital financing. Trade compliance burden for liability protection. 5. LLC – Because of their flexibility, tax benefits and liability shield, LLCs are a very attractive option for many types of businesses, assuming venture capital financing is not needed.
    26. 26. 26Lexis Practice Advisor® Q&A Session Rob Cortes, Esq. LexisPracticeAdvisorCLEs@lexisnexis.com www.lexisnexis.com/practice-advisor

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