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The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
The DEC Education: Setting Up a Business Structure
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The DEC Education: Setting Up a Business Structure

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ABOUT THE CLASS …

ABOUT THE CLASS
This class will help early stage teams understand the most common business structure (Sole Proprietorship, Partnership, Corporations, and Limited Liability Company) and help to determine why that structure best suits the company's needs. Get an understanding of the key decisions that need to be addressed in developing and launching a company through documents such as Articles of Incorporation, By-Laws, etc. Explore indicators that companies can look at in order to decide if they need trademarks/patents.

THE TAKEAWAYS
To obtain an understanding of the different types of business structures along with their respective strengths and weaknesses.
To help companies decide which structure best fits their specific needs.
To highlight the importance of trademarks/patents and other beneficial legal protections.

ABOUT THE INSTRUCTOR, Robert Schroeder
Rob Schroeder is an Associate at Jones Day. His practice focuses on corporate and transactional matters, including domestic and international mergers and acquisitions, private equity buyouts, venture capital financings, securities law compliance, and general corporate counseling. His experience also includes advising clients on fiduciary duties and addressing shareholder rights and duties. He advises clients in a variety of sectors, including technology, communications, energy, manufacturing, retail, and financial services.

PRESENTED BY, The Dallas Entrepreneur Center
The Dallas Entrepreneur Center (DEC) is an entrepreneurial support system dedicated to bringing together the resources, support and opportunities that Dallas-area entrepreneurs need to start, build and grow their businesses. Launched in 2013, the DEC connects entrepreneurs, corporations, investors, educators and other business and community leaders in order to advance the economic interests of the Dallas community. Learn more at thedec.co.

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  1. DEC Education:DEC Education: Setting up a Business Structure September 10, 2013p , Robert A. Schroeder 1
  2. DEC Education: Setting up a Business Structure Agenda • Introductions • Overview • Business StructuresBusiness Structures • Forming a Business Entity • Founder and Investor Agreements• Founder and Investor Agreements • Intellectual Property Q&A• Q&A 2
  3. DEC Education: Setting up a Business Structure Overview – What is a Business? Founders Intangible Assets (ideas Physical Assets (equipment, inventory, etc.) Cash Investors Business Lenders Assets (ideas, patents, etc.) inventory, etc.) Employees BusinessEmployees ServicesProducts 3
  4. DEC Education: Setting up a Business Structure Overview – Why Establish a Business? • Launching a product or serviceg p • Creating intellectual property • Having more than one founder/investorHaving more than one founder/investor • Hiring employees • Obtaining financing• Obtaining financing • Starting a capital gains holding period Establishing ownership rights and governance• Establishing ownership rights and governance procedures 4
  5. DEC Education: Setting up a Business Structure Overview – Primary Business Types • Sole Proprietorship (no entity)p p ( y) • Partnership (general or limited) • Limited Liability CompanyLimited Liability Company • Corporation (C-corp or S-corp) 5
  6. DEC Education: Setting up a Business Structure Sole Proprietorship • Simple, no formation paperworkp , p p • Single decision-maker • No protection against personal liability; personalNo protection against personal liability; personal assets at risk; consider good umbrella insurance policy • No ability to grant equity interests; hard to raise or borrow money A id d bl i i /l i d• Avoids double taxation; income/losses incorporated into your personal tax return; must withhold and periodically pay employment and income taxesp y p y p y 6
  7. DEC Education: Setting up a Business Structure Partnership • Multiple owners (partners); shared financialp (p ); commitment • Generally simple to establish • Avoids double taxation; respective portions of partnership profits and losses passed through to partnerspartners • Partnership files informational return; partners responsible for taxesresponsible for taxes 7
  8. DEC Education: Setting up a Business Structure Partnership • General Partnershipp • Joint liability; liable for partners’ actions • Personal assets at riskPersonal assets at risk • May be established accidentally • Limited Partnership• Limited Partnership • General partner is personally at risk Limited partners have limited liability• Limited partners have limited liability • Established by filing certificate of formation 8
  9. DEC Education: Setting up a Business Structure Partnership • Partnership agreement establishes ownership andp g p decision-making procedures • Partnership agreement may range in complexity • Comprehensive agreement can reduce risk of partner disagreements and disputes • May be hard to raise money from investors • Complicated to grant equity interests to employees 9
  10. DEC Education: Setting up a Business Structure Limited Liability Company • Permits one or more owners (members); shared( ); financial commitment • Provides limited liability exposure to members • Generally simple to establish with state filing • Can avoid double taxation by electing to be treatedy g as a partnership for tax purposes • LLC files informational tax return; members ibl fresponsible for taxes 10
  11. DEC Education: Setting up a Business Structure Limited Liability Company • LLC/Operating agreement establishes ownershipp g g p and decision-making procedures • LLC agreement may range in complexity; but flexible • Comprehensive agreement can reduce risk of member disagreements and disputes • May be hard to raise money from investors • Somewhat complicated to grant equity interests to lemployees • Requires annual state filings 11
  12. DEC Education: Setting up a Business Structure Corporation • Permits one or more owners (stockholders); shared( ); financial commitment • Provides limited liability exposure to stockholders • Can be simple to establish with state filing • Requires annual state filingsq g • Documentation can become complex • Must maintain state prescribed procedures (board ofMust maintain state prescribed procedures (board of directors, officers, meeting minutes, etc.) 12
  13. DEC Education: Setting up a Business Structure Corporation • “S-Corp” Electionp • Available if less than 100 stockholders • All stockholders must be U S individuals (orAll stockholders must be U.S. individuals (or certain trusts and estates) • Restricted to one class of stock; does not permitp preferred stock • Treated as a partnership for tax purposes • Employee-owner should receive reasonable comp or earnings may be taxed as wages 13
  14. DEC Education: Setting up a Business Structure Corporation • Considered a “C-Corp” if not an “S-Corp”p p • Permits multiple classes of stock • Subject to taxation at corporate level and onSubject to taxation at corporate level and on distributions • Typical entity structure expected by ventureyp y p y capital and other institutional investors 14
  15. DEC Education: Setting up a Business Structure Corporation • Certificate of incorporation and bylaws establishesp y ownership rights and decision-making procedures • Provides well recognized governance structure (board of directors and officers) • Comprehensive documentation can reduce risk of stockholder disagreements and disp tesstockholder disagreements and disputes • Investors are familiar with and expect to invest in corporationscorporations • Stock options are available to provide to employees 15
  16. DEC Education: Setting up a Business Structure Entity Related Considerations • Do you expect to have investors? If so, what type ofy p , yp investors (family, angel, VC, etc.)? • Do you expect to have employees? • Will you issue equity to employees or consultants? • Do you expect to sell the business?y p 16
  17. DEC Education: Setting up a Business Structure Entity Related Considerations • Tax pass-through versus corporationp g p • Will the business generate net income soon or are losses expected? • Will you have personal income from other sources to offset losses against? • Will the business retain earning or distribute them to the owners? C id i l l• Consider corporate tax rates at income levels expected; consider reasonable compensation from corporation to shareholders as employees.p p y 17
  18. DEC Education: Setting up a Business Structure Forming a Business Entity – Where? • Delaware • Most common state for incorporation/formation • Well established case law including with respectWell established case law, including with respect to director and officer fiduciary duties • Efficient formation and annual report processesp p • Investors often insist on Delaware • Need to establish an agent for service of processNeed to establish an agent for service of process • Become qualified to do business in Texas (and other states where operating) 18
  19. DEC Education: Setting up a Business Structure Forming a Business Entity – Where? • Texas • If operating in Texas, may be simpler to deal with only one state (no need for an out-of-state agent, no out-of state franchise taxes, etc.) • Investors not as familiar with Texas law; but similar to Dela are la in man respectssimilar to Delaware law in many respects • Other states or countries J i di i h b i i l d• Jurisdiction where business is located • Cayman Islands 19
  20. DEC Education: Setting up a Business Structure Forming a Business Entity – How? • Choose a name • Check Secretary of State for availability (Texas and, if applicable, Delaware and any other states you plan to operate) • Preliminary screening for intellectual property (trademark) infringement search(trademark) infringement search • In-depth infringement analysis if preliminary screen seems clearscreen seems clear 20
  21. DEC Education: Setting up a Business Structure Forming a Business Entity – How? • Create and file certificate of incorporation/formationp • Pay incorporation/formation fees • Identify and engage agent (for forming an entityIdentify and engage agent (for forming an entity outside your business location and in-state if desired) • Create partnership agreement, limited liabilityp p g y company agreement or bylaws • Establish record keeping (initial board and h h ld l i k ifi )shareholder resolutions, stock certificates, etc.) 21
  22. DEC Education: Setting up a Business Structure Forming a Business Entity – Who? • Legal counselg • Experienced attorney can address specific concerns (suitability of structure; founder or investor protections; IP; stock options; etc.) • Caution regarding online providers • Very low price • Generic documents • Limited or no advice on suitability of structure and related matters 22
  23. DEC Education: Setting up a Business Structure Founder and Investor Agreements • Ownership Arrangementsp g • Dividend/distribution/liquidation allocations • Preemptive Rights to maintain ownership levelPreemptive Rights to maintain ownership level • Transfer restrictions Right of First Refusal for co investors– Right of First Refusal for co-investors – Co-Sale Rights to tag along in sales Drag Along Rights to facilitate sale of company– Drag-Along Rights to facilitate sale of company • Information Rights 23
  24. DEC Education: Setting up a Business Structure Founder and Investor Agreements • Governance Matters • Rights to appoint directors/managers • Indemnification rights for activity performed asIndemnification rights for activity performed as director, manager, partner, officer, etc. • Protective provisions requiring consent to takep q g certain company actions (e.g., incurring debt, sale of company, major acquisitions, changing line of business etc )business, etc.) • Non-compete provisions 24
  25. DEC Education: Setting up a Business Structure Founder and Investor Agreements • Documented in a variety of documentsy • Certificate of Incorporation or Bylaws (Corp) • Shareholder Agreements (Corp usually)Shareholder Agreements (Corp usually) • Limited Liability Company Agreement (LLC) • Partnership Agreement (Partnership)• Partnership Agreement (Partnership) 25
  26. DEC Education: Setting up a Business Structure Issuing Debt and Equity to Investors • Subscription Agreement / Stock Purchasep g Agreement • Securities Laws • Limitations on advertising and soliciting investors • Accredited Investors 26
  27. DEC Education: Setting up a Business Structure Intellectual Property • Considerations Before Setting up a Business • Ownership of your intellectual property – Universities, existing/prior employers, g p p y – Friends, mentors, advisors • Existing employment agreementsExisting employment agreements – Employment and confidentiality agreements – Proprietary information agreements -– Proprietary information agreements - assignment of inventions / right to IP – Non-competition / non-solicitation agreementsp g 27
  28. DEC Education: Setting up a Business Structure Intellectual Property • Transferring IP to your businessg y • Technology assignments from founders • Developing new IP within your businessDeveloping new IP within your business • Proprietary information agreements with employeesp y • Consulting agreements with IP assignments • Licensing IP to and from othersLicensing IP to and from others • University IP policies 28
  29. DEC Education: Setting up a Business Structure Intellectual Property • Protecting Intellectual Propertyg p y • Use confidentiality agreements • Mark confidential material as “confidential”Mark confidential material as confidential • Enforce registered intellectual property 29
  30. DEC Education: Setting up a Business Structure Intellectual Property • Registering Intellectual Propertyg g p y • Patents • TrademarksTrademarks • Copyrights • US Patent and Trademark Office• US Patent and Trademark Office • US Copyright Office Non US Agencies• Non-US Agencies 30
  31. DEC Education: Setting up a Business Structure Thank you • IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Di l i Thi J D t ti id t d i f ti l l i d d l t f• Disclaimer: This Jones Day presentation provides comments and information on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Participants should seek specific legal advice before taking any action with respect to the matters discussed herein. 31

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