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The Very Basics: Forming the Business (Series: The Start-Up/Small Business Advisor)

The Very Basics: Forming the Business (Series: The Start-Up/Small Business Advisor)

So, you are an entrepreneur and want to start your own business (or you are an attorney, accountant, or other professional advisor working with one). One of the first decisions required is to choose a legal structure for the business. What factors should be taken into consideration prior to selecting a legal structure? Does a sole proprietorship, partnership, limited liability company or corporation (C- or S-corp) make the most sense? This webinar focuses on business formation and the pros and cons to the different legal structures, and includes tips on how to keep one’s personal assets safe from the claims of future creditors of the business.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/forming-the-business-2019/

So, you are an entrepreneur and want to start your own business (or you are an attorney, accountant, or other professional advisor working with one). One of the first decisions required is to choose a legal structure for the business. What factors should be taken into consideration prior to selecting a legal structure? Does a sole proprietorship, partnership, limited liability company or corporation (C- or S-corp) make the most sense? This webinar focuses on business formation and the pros and cons to the different legal structures, and includes tips on how to keep one’s personal assets safe from the claims of future creditors of the business.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/forming-the-business-2019/

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The Very Basics: Forming the Business (Series: The Start-Up/Small Business Advisor)

  1. 1. Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2
  2. 2. The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. While Financial Poise is happy to make this PowerPoint freely available to all, the reader is cautioned that it was created for use as part of a webinar that featured an extensive verbal discussion of the topics addressed in the PowerPoint. It was not designed to be read by itself. Financial Poise webinars can be purchased at www.financialpoise.com. You may also receive offers for free webinars by subscribing to Financial Poise's DACyak, a free weekly newsletter. DISCLAIMER 3
  3. 3. MEET THE FACULTY MODERATOR: Chris Cahill Lowis & Gellen LLC PANELISTS: Leslee Cohen Hershman Cohen LLC Kurt A. Oreshack Breakwater Law Group Nick Petit Vamonde 4
  4. 4. ABOUT THIS WEBINAR So, you are an entrepreneur and want to start your own business (or you are an attorney, accountant, or other professional advisor working with one). One of the first decisions required is to choose a legal structure for the business. What factors should be taken into consideration prior to selecting a legal structure? Does a sole proprietorship, partnership, limited liability company or corporation (C- or S- corp) make the most sense? This webinar focuses on business formation and the pros and cons to the different legal structures, and includes tips on how to keep one’s personal assets safe from the claims of future creditors of the business. This webinar is delivered in Plain English, understandable to you even if you do not have a background in the subject. It brings you into an engaging, even sometimes humorous, conversation designed to entertain as it teaches. And, it is specifically designed to be viewed as a stand-alone webinar, meaning that you do not have to view the other webinars in the series to get a lot out of it. 5
  5. 5. ABOUT THIS SERIES Most startups are not destined to become billion dollar unicorns. Most, in fact, will fail and most of those that survive will never be more than small businesses. Whether and to what extent a startup will be successful depends on many factors. One set of factors is the foundational pillars on which the company is built, and includes things such as the company’s capital structure, financial controls, human capital, market niche, and marketing functions. This series explores each of these topics, giving startups and their advisors useful tools and insight into how they can build a foundation for success. As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business owners, and executives without much background in these areas, yet is also valuable to attorneys, accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 6
  6. 6. Dates shown are premiere dates; all episodes will be available on demand after their premiere date. EPISODES IN THIS SERIES Episode #1 The Very Basics - Forming the Business January 22, 2019 Episode #2 Raising Capital- Negotiating with February 19, 2019 Potential Investors Episode #3 Human Resources-101: Finding, March 19, 2019 Negotiating With & Retaining Potential Hires Episode #4 What Every Founder/Entrepreneur Must Know April 16, 2019 7
  7. 7. Episode #1: The Very Basics - Forming the Business © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 8
  8. 8. INTRODUCTION • So…you’ve decided to start a business! • Which means you have asked and answered the following questions: ✓ What problem am I solving? ✓ Who is my competition? ✓ How am I different than my competition? • What now? © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 9
  9. 9. FORMING AN ENTITY • What’s the first thing a new business owner should do? ✓ Form an entity • Why form an entity? ✓ Limited liability (capped vs. unlimited) ▪ With: The business owner is only at risk for the amount of their investment and none of the other obligations of the business ▪ Without: The business owner is responsible for all of the business’ liabilities © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 10
  10. 10. FORMING AN ENTITY (cont’d) More Reasons to Form an Entity: • Interaction with third parties ✓ Credibility with financing or other sources ✓ May be demanded by third parties as a means of reducing potential liabilities • Flexibility and structure for management and control © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 11
  11. 11. FORMING AN ENTITY (cont’d) What happens if you do NOT form an entity? • 1 person = sole proprietorship • 2 or more people = general partnership © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 12
  12. 12. TYPES OF LEGAL ENTITIES • The two most common forms of legal entities are: ✓ Corporations ▪ C or S-Corps ✓ Limited Liability Companies (or LLCs) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 13
  13. 13. CORPORATIONS • Corporations ✓ There are two variations on the corporation (based on the way they are treated for tax purposes) ▪ C-Corp ➢ Unless you plan to raise venture capital or go public, you’ll likely want to stay away from the C-Corp…it’s earnings are taxed twice! © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 14
  14. 14. CORPORATIONS (cont’d) ▪ S-Corp ➢ Not subject to double taxation (pass-through entity) ➢ Restrictions include (1) only individuals can be shareholders, (2) no more than 100 shareholders, (3) only U.S. persons can be shareholders, and (4) funds can only be divided between the shareholders “pro rata” © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 15
  15. 15. CORPORATIONS (cont’d) • Both types of corporations are owned by their shareholders, whose ownership is evidenced by share certificates. • Likewise, both types of corporations are largely managed by boards of directors, with day to day responsibilities handled by their officers. • For both types of corporations, liability is generally limited, subject to adequate capitalization and following corporate formalities, to the amount of the shareholders’ investments in the corporations © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 16
  16. 16. WHY CHOOSE C CORP OVER S CORP? Given that S corporations generally have a single level of taxation, why would any company want to be a C corporation? • S corporations have strict limitations on who can be their shareholders (generally, only citizens or resident aliens and most notably, generally not other business entities, although another S corporation may be permissible) and how many shareholders they can have (not more than 100) • C corporations are generally better for fundraising, because they can have more than one class of stock, which is typically demanded by professional investors and must be used for public companies • C corporations permit their shareholders to defer taxes until earnings are actually distributed © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 17
  17. 17. OTHER TYPES OF CORPORATIONS • Professional Corporations ✓ Available, and typically mandatory, if forming a corporation, for certain professions (lawyers, doctors, accountants, etc.) ✓ May not be able to limit individual liability, at least for malpractice actions, even if using • Statutory close corporations ✓ Limitation on number of shareholders (35) ✓ Flexible management structure such that a shareholder with much less than majority ownership may be able to control management ✓ Fallen into disfavor in the LLC era? © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 18
  18. 18. OTHER TYPES OF CORPORATIONS (cont’d) • Non-profit corporations ✓ No profits distributed to shareholders ✓ Limitations on purpose, use of funds, etc. • Co-operative corporations (consumers, agricultural, etc.) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 19
  19. 19. LIMITED LIABILITY COMPANIES (LLCs) • LLCs offer, as their name suggests, limited liability like a corporation, taxation like a S corporation or a partnership, and do not have the restrictions on ownership of a S corporation • LLCs offer a flexible management structure such that they can either be operated by one, some or all of their members (the LLC equivalent of shareholders) or a manager or managers, who may or may not be members © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 20
  20. 20. LIMITED LIABILITY COMPANIES (cont’d) • LLCs are formed by the filing of a certificate (or articles) of organization. • Their primary governing documents, which are not mandatory but are highly advisable, are known as operating agreements ✓ Operating Agreements are similar to bylaws but often include additional provisions of governance and share transfer which may be included in a shareholder agreement of a corporation. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 21
  21. 21. LIMITED LIABILITY COMPANIES (cont’d) • LLCs have become extremely popular for the advantages and flexibility they offer. • However, because of their relative newness and largely contractual nature: ✓ LLCs offer less certainty, to both their members and outside entities dealing with them, than do corporations. ✓ While LLCs are permitted to grant stock options, have more than one class of stock and do not generally have limitations on who can become members, there is enough haziness on these issues such that professional investors will generally prefer a C corporation © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 22
  22. 22. SUMMARY OF PRIMARY ENTITY CHOICES © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 23
  23. 23. FUNDING YOUR BUSINESS • Sources of Financing ✓ Bootstrap ✓ Friends & Family ✓ Government ✓ Angel Investors ✓ Venture Capitalists ✓ Commercial Banks © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 24
  24. 24. FUNDING YOUR BUSINESS (cont’d) • Types of Financing ✓ Debt (where you borrow money from a lender that you’ll eventually pay back plus interest) ▪ Pros ➢ Relatively inexpensive form of financing ➢ Control how capital gets allocated (some lenders impose certain restrictions) ➢ No impact on the operations of the business © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 25
  25. 25. FUNDING YOUR BUSINESS (cont’d) ▪ Cons ➢ Reduces cash flow (diverts capital to principal and interest payments) ➢ Reporting requirements ➢ Potential personal guarantee © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 26
  26. 26. FUNDING YOUR BUSINESS (cont’d) • Types of Financing ✓ Equity (where you sell ownership in your business in return for capital) ▪ Pros ➢ No diversion of capital (i.e., no principal or interest payments) ➢ Right investors bring more than capital (experience, industry connections) ▪ Cons ➢ Relatively expensive form of capital ➢ Giving away ownership and possibly control of your business ➢ Raising equity can be a long process © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 27
  27. 27. FUNDING YOUR BUSINESS (cont’d) • Types of Financing ✓ Convertible Debt (a loan (a debt obligation) that can be turned into equity (or stock ownership)) ▪ Pros ➢ Avoids setting a valuation (eliminates the risk of a “down round”) ➢ No impact on the operations of the business ▪ Cons ➢ Reduces cash flow (diverts capital to principal and interest payments) ➢ Giving away ownership and possibly control of your business ➢ Requires extensive documentation © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 28
  28. 28. FUNDING YOUR BUSINESS (cont’d) • Select documents necessary to raise financing ✓ Business Plan ▪ Executive Summary ▪ Management Team + Board of Directors (Advisors) ▪ Market Size ▪ Financial Projections ✓ Business Formation Documents ✓ Confidential Information Memorandum (CIM) ✓ Contracts ▪ Employment Agreements © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 29
  29. 29. RISK MANAGEMENT • Corporate counsel • Business licenses & registrations • Internal controls / policies & procedures • Insurance ✓ D&O ✓ Key Man ✓ General Liability © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 30
  30. 30. BUILDING A TEAM • Board of Directors vs. Board of Advisors • Resources needed (by function) ✓ Business Development ✓ Operations ✓ Finance & Accounting (including Tax) ✓ Legal ✓ Human Resources • Employee vs. independent contractor (IC) • Focus on revenue generation (infrastructure lags revenue) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 31
  31. 31. EXTERNAL PROFESSIONALS • Corporate counsel • Accountant / bookkeeper • Auditor • Insurance broker © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 32
  32. 32. BUSINESS DEVELOPMENT • Start Early! • Business Development vs. Marketing • Who is responsible for revenue? • In your head or preferably in a working document ✓ Goals ✓ Business Development Strategy ✓ Implementation Plan © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 33
  33. 33. LESSONS LEARNED • Do something you like and are passionate about • Understand the problem you are solving, why that problem exists and will customers/clients pay you for the solution • There are not enough hours in a day – prioritize those tasks that are the highest and best use of your time • Building infrastructure should lag revenue (i.e., capital should be allocated to revenue generating assets) • Hire smart, talented employees because you are only as good as your team (if you’re the smartest guy in the room, you’re in the wrong room) © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 34
  34. 34. ABOUT THE FACULTY CHRISTOPHER CAHILL ccahill@lowis-gellen.com Christopher Cahill is Head of the Bankruptcy and Restructuring Practice Group at Lowis & Gellen LLP, in Chicago. He advises businesses on relationships with vendors, customers, and lenders, to maximize market share, return, and liquidity. He also litigates on behalf of secured creditors, trade creditors, and in chapter 11 cases and advised more generally on corporate restructuring, including workouts, loan forbearance, assignments for the benefit of creditors, UCC Article 9 foreclosure sales, and avoidance litigation. Mr. Cahill also publishes and speaks frequently on commercial insolvency and commercial transaction issues. He is an Executive Editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2019), a comprehensive treatise that is updated annually and published by Thomson Reuters. In addition, Mr. Cahill is the host of Financial Poise Radio, a weekly interview and commentary podcast for investors and other market participants, with 100 episodes and counting. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 35
  35. 35. ABOUT THE FACULTY LESLEE COHEN lcohen@hershco.com Leslee Cohen, Principal at Hershman Cohen, concentrates her transactional practice in securities law, corporate finance and general corporate law. She counsels a variety of entities, from small entrepreneurs and start-up companies to large established businesses, across many industries from real estate to technology in connection with private placements of both equity and debt securities, including venture capital, private equity and “friends and family” investments. Leslee also structures, negotiates and documents significant business transactions, including mergers and acquisitions, tender offers, joint ventures and other business combinations and financial transactions. In addition, she handles general corporate matters including commercial contract drafting and review, stockholder and limited liability company agreements and structuring, business restructurings, employment and consulting agreements, and equity incentive plans and agreements, on behalf of a diverse group of clients. Leslee’s practice encompasses Securities and Exchange Commission (SEC) compliance for microcap public companies and committees of their boards of directors, providing counseling regarding disclosure and regulatory obligations under the Securities Exchange Act of 1934 and the requirements of the Sarbanes-Oxley Act, including corporate governance, ethics and executive compensation issues. Leslee also represents broker-dealers and investment advisors in connection with securities law issues. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 36
  36. 36. ABOUT THE FACULTY KURT A. ORESHACK ko@breakwaterlawgroup.com Kurt is a corporate and securities associate in our San Diego office. Kurt specializes in the representation of emerging growth companies throughout their lifecycles. He has significant experience in corporate formation and governance matters, initial public offerings and mergers and acquisitions, regularly practicing before the United States Securities and Exchange Commission and the Financial Industry Regulatory Authority. Kurt represents a wide variety of technology companies including biotech, cleantech, consumer internet, software, telecommunications, and entertainment technology industries, as well as a number of leading venture capital firms. Kurt joined Gunderson Dettmer in 2011 after practicing in the San Diego office of Luce, Forward, Hamilton & Scripps LLP where the San Diego Daily Transcript recognized him as one of the top young attorneys in San Diego. Kurt received his J.D., cum laude, from the University of Notre Dame where he was the Production Editor for the Notre Dame Journal of Law, Ethics and Public Policy. He received his B.A., Honors, magna cum laude, in Philosophy from Loyola University Chicago. Kurt is admitted to practice in California and Arizona. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 37
  37. 37. ABOUT THE FACULTY NICK PETIT nick@vamonde.com Nick is an experienced entrepreneur and proven leader that couples business strategy and disciplined execution with enabling and emerging technologies. As CMO of VAMONDE, Nick inspires a multi-talented team leading growth and shaping the future or travel and cultural discovery. VAMONDE is a SaaS platform that is transforming how our most important cities and cultural institutions leverage new technology and rethink marketing. Nick is a growth-oriented executive delivering high-impact results across strategy, operations, and business development for technology and business services firms. He’s a 3X entrepreneur, Big 4 leader, innovation executive, part-time butcher, traveler, painter, and Peace Corps veteran. Nick serves on the board of directors for G-PAC - Gun Violence Prevention PAC. © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 38
  38. 38. The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. While Financial Poise is happy to make this PowerPoint freely available to all, the reader is cautioned that it was created for use as part of a webinar that featured an extensive verbal discussion of the topics addressed in the PowerPoint. It was not designed to be read by itself. Financial Poise webinars can be purchased at www.financialpoise.com You may also receive offers for free webinars by subscribing to Financial Poise's DACyak, a free weekly newsletter. IMPORTANT NOTES 39© 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  39. 39. If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar on demand, please don’t hesitate to email us at: info@financialpoise.com Please include the name of the webinar in your email, and we will provide a response to your question. QUESTIONS OR COMMENTS? 40© 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™
  40. 40. To receive Financial Poise’s DACyak, our free weekly e-newsletter, just send an email to: info@financialpoise.com Please add the message, “Subscribe Please” to your email, or add yourself by going to: https://www.financialpoise.com/newsletter/ Subscribers are eligible to receive discounts and giveaways from time to time, and subscriber emails are never sold to or shared with third parties. 41
  41. 41. About Financial Poise™ www.financialpoise.com DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. 42

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