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Tips for Choosing the Right Business Entity

This presentation highlights some of the key considerations for startup and small business founders in choosing the right business entity. We hope you find the information useful as you start your business by making sure you have adequate protection and growth potential for your venture.

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Choosing the Right
Business Entity
Please note: The information provided in this presentation is not legal advice, which is unique to you and your needs.
Carbon Law Group are counsel to many startups, ancillary service providers, and venture capitalists, handling startup
formations, governance, employment issues, financings, and M&A. If you’d like more information about the right business
entity for your venture, or the impact of your current structure upon you or your company, please give us a call at (323)
543-4453.
Basic Entities
• Entities:
• Sole Proprietorship: A person who is the sole owner of a business and
is entitled to keep all profits but is liable for all losses.
• Corporations, limited liability companies (LLC), general partnerships,
limited partnerships, limited liability partnerships (described in the
following slides).
• Initial considerations:
• Who is the agent? An agent is a person who has the legal authority
to act for the entity.
• No matter what type of entity you choose, the entity needs to have an
agent.
• Ask yourself: who will manage the various affairs of your entity?
Corporation
• Management: The Board of directors is responsible for setting up policies,
direction, and compliance for the company.
• Note: In California, if there are three or fewer shareholders, the
corporation needs as many members on the Board as shareholders.
• All officers have an administrative role to carry out the mandate of the
Board, and are agents unless specified otherwise (e.g. in the bylaws).
• Note: In California, the following positions must be filled:
CEO/President, CFO/Treasurer, Secretary.
• In California, the basic corporation is called the “General Stock
Corporation”.
• Tax consideration: Registrants may establish C Corporations (or C-Corp), and elect to
be taxed as an S Corporation (or S-Corp). Please consult your tax advisor for more
information about your company’s unique tax situation.
C-Corp and S-Corp
• C-Corp
• Limited liability, meaning that with
few exceptions, the shareholders
are not personally liable for
corporate debts.
• Unlimited number and type of
shareholders.
• Entity pays its own taxes, and the
shareholders are taxed on income
(known as “double taxation”).
• Easy to transfer ownership of the
entity.
• Popular choice for businesses to
raise venture capital.
• See 26 U.S.C. Subchapter C.
• S-Corp
• Limited liability (like C-Corp).
• Limited number and type of
shareholders (less than 100, and
only one class of shareholder).
• Pass-through taxation: each
shareholder must include their
company income on their
individual tax return.
• Less venture capital friendly.
• See 26 U.S.C. Subchapter S.
Limited Liability Company (LLC)
• Management can be vested in either the members (decentralized
management), or managers (centralized management).
• Who are the agents?
• Member-managed: authority of each member is described in the
operating agreement of the company.
• Manager-managed: the manager (or managers) has authority,
subject to any limitations in the operating agreement.
• Liability: Members are not held liable beyond the capital they have
contributed to the company.
• Transfer of membership interests is permitted, but generally only for
economic rights like distributions, profit-sharing, or losses.
General Partnership (GP)
• In California, there is no filing necessary (optional filing available) to
create a general partnership. General partnerships may be inferred
based on the course of conduct between parties.
• Management: All partners are equal unless stated otherwise in a
partnership agreement.
• Agency: Any partner has authority to bind the company, unless stated
otherwise in a partnership agreement.
• Liability: Partners are jointly, severally, and personally liable for each
other’s actions.
• Transfer of membership interests is permitted, but generally only for
economic rights like distributions, profit-sharing, or losses.
• Difficult to raise capital with this structure because each of the partners
is personally liable for the debts of the company and the other partner.

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Tips for Choosing the Right Business Entity

  • 1. Choosing the Right Business Entity Please note: The information provided in this presentation is not legal advice, which is unique to you and your needs. Carbon Law Group are counsel to many startups, ancillary service providers, and venture capitalists, handling startup formations, governance, employment issues, financings, and M&A. If you’d like more information about the right business entity for your venture, or the impact of your current structure upon you or your company, please give us a call at (323) 543-4453.
  • 2. Basic Entities • Entities: • Sole Proprietorship: A person who is the sole owner of a business and is entitled to keep all profits but is liable for all losses. • Corporations, limited liability companies (LLC), general partnerships, limited partnerships, limited liability partnerships (described in the following slides). • Initial considerations: • Who is the agent? An agent is a person who has the legal authority to act for the entity. • No matter what type of entity you choose, the entity needs to have an agent. • Ask yourself: who will manage the various affairs of your entity?
  • 3. Corporation • Management: The Board of directors is responsible for setting up policies, direction, and compliance for the company. • Note: In California, if there are three or fewer shareholders, the corporation needs as many members on the Board as shareholders. • All officers have an administrative role to carry out the mandate of the Board, and are agents unless specified otherwise (e.g. in the bylaws). • Note: In California, the following positions must be filled: CEO/President, CFO/Treasurer, Secretary. • In California, the basic corporation is called the “General Stock Corporation”. • Tax consideration: Registrants may establish C Corporations (or C-Corp), and elect to be taxed as an S Corporation (or S-Corp). Please consult your tax advisor for more information about your company’s unique tax situation.
  • 4. C-Corp and S-Corp • C-Corp • Limited liability, meaning that with few exceptions, the shareholders are not personally liable for corporate debts. • Unlimited number and type of shareholders. • Entity pays its own taxes, and the shareholders are taxed on income (known as “double taxation”). • Easy to transfer ownership of the entity. • Popular choice for businesses to raise venture capital. • See 26 U.S.C. Subchapter C. • S-Corp • Limited liability (like C-Corp). • Limited number and type of shareholders (less than 100, and only one class of shareholder). • Pass-through taxation: each shareholder must include their company income on their individual tax return. • Less venture capital friendly. • See 26 U.S.C. Subchapter S.
  • 5. Limited Liability Company (LLC) • Management can be vested in either the members (decentralized management), or managers (centralized management). • Who are the agents? • Member-managed: authority of each member is described in the operating agreement of the company. • Manager-managed: the manager (or managers) has authority, subject to any limitations in the operating agreement. • Liability: Members are not held liable beyond the capital they have contributed to the company. • Transfer of membership interests is permitted, but generally only for economic rights like distributions, profit-sharing, or losses.
  • 6. General Partnership (GP) • In California, there is no filing necessary (optional filing available) to create a general partnership. General partnerships may be inferred based on the course of conduct between parties. • Management: All partners are equal unless stated otherwise in a partnership agreement. • Agency: Any partner has authority to bind the company, unless stated otherwise in a partnership agreement. • Liability: Partners are jointly, severally, and personally liable for each other’s actions. • Transfer of membership interests is permitted, but generally only for economic rights like distributions, profit-sharing, or losses. • Difficult to raise capital with this structure because each of the partners is personally liable for the debts of the company and the other partner.
  • 7. Limited Partnership (LP) • Management is generally vested in the general partners, who have exclusive rights as opposed to the limited partners who have limited rights, including voting. • Agency: General partners are agents and may bind the company, while limited partners are not. • Liability: General partners are liable for debts and liabilities of the company, while limited partners are liable only for their capital contribution to the company. • Transfers of interest are generally permitted for economic rights only (limited partners may not transfer without consent, as may be determined in the partnership agreement). • Company structure is attractive to passive investors, especially real estate investors, who want to contribute cash to earn a return while limiting their personal liability.
  • 8. Limited Liability Partnership (LLP) • Management is vested in all partners who have equal say unless stated otherwise in a partnership agreement. • Agency: General partners are agents and have authority to bind the company, while limited partners are not agents and remain passive. • Liability: Neither general partners nor limited partners are responsible for each other’s misconduct. • Company structure is attractive to passive investors, but because of the extra protections afforded to general partners, many institutional investors find the structure cumbersome.