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Starting Your Business 101--Legal Structures

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Choosing the appropriate legal entity for your business and what is involved in the incorporation process.

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Starting Your Business 101--Legal Structures

  1. 1. Asian Women In Business Starting Your Business 101 Legal Structures: Sole Proprietorship, LLC, S-Corp, C-Corp, Limited Partnership, General Partnership The Appropriate Structure for Your Business Julia Cheng, Esq. Di Santo LLP 15 Maiden Lane, Suite 1208 New York, NY 10038 T: 1.212.766.2468; F: 1.866.395.5856 [email_address] www.disantolaw.com
  2. 2. Disclaimer <ul><li>The information and materials presented here is not intended to be legal advice, but merely, conveys general information related to legal issues commonly encountered. If you have specific questions related to the information or materials presented here, please consult an attorney who can advise you on the particular circumstances of your situation. </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  3. 3. <ul><li>structures formed by default : </li></ul><ul><ul><ul><li>1 person  sole proprietorship </li></ul></ul></ul><ul><ul><ul><li>2 persons  general partnership or partnership </li></ul></ul></ul><ul><li>consequences : </li></ul><ul><ul><ul><li>Personal liability </li></ul></ul></ul><ul><ul><ul><li>If partnership, all partners jointly liable for contractual obligations of entity (after partnership assets exhausted) and all jointly and severally liable for tort obligations </li></ul></ul></ul><ul><li>conclusion : </li></ul><ul><li>INCORPORATE—BENEFIT FROM LIMITED LIABILITY PROTECTION. </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  4. 4. <ul><li>LIMITED LIABILITY PROTECTION: </li></ul><ul><li>MEMBER’S LIABILITY FOR THE DEBTS OF OR CLAIMS AGAINST THE COMPANY IS LIMITED TO THE AMOUNT OF SUCH MEMBER’S CAPITAL CONTRIBUTION TO THE COMPANY </li></ul><ul><li>BEWARE: </li></ul><ul><li>piercing the corporate veil </li></ul><ul><li>(failure to maintain separate accounts, failure to observe formalities, etc.) </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  5. 5. <ul><li>time required for incorporation </li></ul><ul><li>1 Day, for $25 expedited fee </li></ul><ul><li>time it takes to receive incorporation documents to open bank account </li></ul><ul><li>2 weeks from filing </li></ul><ul><li>for $25 extra, can shorten to 1 week from filing </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  6. 6. Types of Legal Structures <ul><ul><li>Limited Liability Company (LLC) </li></ul></ul><ul><ul><ul><li>by default, all members are active in the business, but can create centralized management by appointing managers </li></ul></ul></ul><ul><ul><ul><li>flexibility in allocation of voting rights, P&L, and contribution  favored by wealthy investors </li></ul></ul></ul><ul><ul><ul><li>pass-through taxation ,* suitable for single member, friends & family business and private ventures </li></ul></ul></ul><ul><ul><ul><li>* LLC can also elect to be taxed as a corporation ! </li></ul></ul></ul><ul><ul><ul><li>publication requirement </li></ul></ul></ul><ul><ul><ul><li>no incentive stock options </li></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  7. 7. Types of Legal Structures (cont.) <ul><ul><li>Limited Partnership (LP) </li></ul></ul><ul><ul><ul><li>requires 1 general partner who will be personally liable for all debts and obligations of the venture. Therefore, general partner usually a corporate entity itself. General partner will manage the business. Rest will be limited partners with limited control over the business </li></ul></ul></ul><ul><ul><ul><li>pass-through taxation </li></ul></ul></ul><ul><ul><ul><li>great for entrepreneurs to raise capital for a venture while retaining complete control of the business as a general partner, such as: oil and gas drilling, real estate syndications, and motion picture productions </li></ul></ul></ul><ul><ul><ul><li>publication requirement </li></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  8. 8. Types of Legal Structures (cont.) <ul><ul><li>Corporations (Inc., Co.) </li></ul></ul><ul><ul><li>centralized management via board of directors </li></ul></ul><ul><ul><li>by default, % vote tied to % shares owned </li></ul></ul><ul><ul><li>convenient vehicle to raise capital from the masses due to established corporate and securities case law regarding corporations—Delaware corporations </li></ul></ul><ul><ul><li>double taxation , but see S-corp </li></ul></ul><ul><ul><li>double taxation , good for profitable businesses that reinvest as shareholders only get taxed if company pays out the dividends. Unlike pass-through entities, where owners get taxed on entire net profit regardless of whether such profit is actually distributed out. </li></ul></ul><ul><ul><li>formalities </li></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  9. 9. Types of Legal Structures (cont.) <ul><ul><li>S-corp </li></ul></ul><ul><ul><ul><li>a form of corporation, can elect to be S-corp by filing Form 2253 with IRS upon incorporation </li></ul></ul></ul><ul><ul><ul><li>pass-through taxation like LLC </li></ul></ul></ul><ul><ul><ul><li>no more than 100 shareholders </li></ul></ul></ul><ul><ul><ul><li>shareholder eligibility: no foreigners, only individuals, estates, certain exempt organizations and certain trusts </li></ul></ul></ul><ul><ul><ul><li>only 1 class of stock (identical rights to distribution and liquidation proceeds) </li></ul></ul></ul><ul><ul><ul><li>hybrid of C-corp and LLC  suitable for early stage companies seeking to raise capital while at the same time wishing to enjoy pass-through taxation. Can later switch to C-corp if necessary. </li></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  10. 10. Filing Process <ul><li>1. File incorporation documents with New York State Department of State. </li></ul><ul><li>a. Limited Liability Company Articles of Organization </li></ul><ul><li>b. Corporations Certificate of Incorporation </li></ul><ul><li>c. Limited Partnership Certificate of Limited Partnership </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  11. 11. incorporation documents <ul><li>If company wishes to… </li></ul><ul><ul><ul><li>consult regarding the number of shares company authorized to issue, par value; </li></ul></ul></ul><ul><ul><ul><li>issue more than 1 class of shares; </li></ul></ul></ul><ul><ul><ul><li>issue share options; </li></ul></ul></ul><ul><ul><ul><li>give directors a “blank check” to decide terms of preferred shares; </li></ul></ul></ul><ul><ul><ul><li>have right to repurchase shares; </li></ul></ul></ul><ul><ul><ul><li>set terms regarding voting rights of shareholders; </li></ul></ul></ul><ul><ul><ul><li>use managers, rather than members, to manage LLC… </li></ul></ul></ul><ul><ul><ul><ul><li>above provisions, along with other rights, will need to be reflected in incorporation documents to be valid. </li></ul></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  12. 12. Filing Process (cont.) <ul><li>2. Can file by fax or online: </li></ul><ul><ul><ul><li>a. Visit www.dos.state. ny . us/corp/filing .html to file online or if file by fax, download appropriate incorporation document and credit card authorization document form </li></ul></ul></ul><ul><ul><ul><li>b. Remember to order certified copy of incorporation document! </li></ul></ul></ul><ul><ul><ul><li>Need certified copy to open bank account. </li></ul></ul></ul><ul><ul><ul><li>c. If file by fax, complete both incorporation document and credit card authorization forms, along with cover sheet and fax to 518-474-1418, Division of Corporations </li></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  13. 13. Incorporation Document Form—Registered Agent <ul><ul><ul><li>an agent in the state upon whom process against such corporation may be served </li></ul></ul></ul><ul><ul><ul><li>having a registered agent is entirely optional </li></ul></ul></ul><ul><ul><ul><li>company can serve as its own registered agent </li></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  14. 14. After Filing… <ul><ul><li>1 Company incorporated? </li></ul></ul><ul><ul><ul><li>check via www.dos.state. ny .us , “Corporate/Business Entity Database” to see if company is incorporated </li></ul></ul></ul><ul><ul><li>2 Apply for EIN online (Form SS-4), via www. irs . gov </li></ul></ul><ul><ul><li>3 Prepare internal corporate documents </li></ul></ul><ul><ul><li>4 Upon receipt of IRS EIN Confirmation Letter and certified copy of the incorporation document, bring both documents to bank to open corporate bank account. </li></ul></ul><ul><ul><li>5 If LLC or LP, need to fulfill publication requirement. </li></ul></ul><ul><ul><ul><li>Service companies: www.vcorpservices.com </li></ul></ul></ul><ul><li>6 Need corporate seal, stock certificates, binder, etc..? </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  15. 15. Internal Corporate Documents--Corporation <ul><ul><li>Incorporator minutes </li></ul></ul><ul><ul><li>Bylaws </li></ul></ul><ul><ul><ul><li>duties and rights of directors, shareholders </li></ul></ul></ul><ul><ul><ul><li>meetings, notices (traditional paper notice vs email) </li></ul></ul></ul><ul><ul><ul><li>director/shareholder decision making—action by written consent. For shareholders, default rule requires 100% shareholder to sign. However, can provide clause in Certificate of Incorporation to reduce 100% shareholder consent to majority-in-interest. </li></ul></ul></ul><ul><ul><li>Initial resolutions or minutes </li></ul></ul><ul><ul><ul><li>approving by-laws, election of initial officers, directors, opening bank account, issuing shares, etc. </li></ul></ul></ul><ul><ul><li>Shareholder Agreement </li></ul></ul><ul><ul><li>All future major decisions need to be documented via resolutions </li></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  16. 16. Internal Corporate Documents--LLC <ul><li>1 Operating Agreement </li></ul><ul><ul><ul><ul><li>Voting/profit/loss/capital contribution %s </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Distributions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Restrictions on transferability </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Admission/withdrawal of members </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Managerial </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Non-compete </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Duties of members </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Confidentiality </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Dissolution </li></ul></ul></ul></ul><ul><ul><li>2 Initial resolutions or minutes </li></ul></ul><ul><ul><ul><ul><li>approving operating agreement, election of initial officers, managers, opening bank account, issuing LLC units, etc. </li></ul></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  17. 17. Agencies to Contact Upon Formation : <ul><ul><li>IRS: EIN, subchapter-S-status, www. irs . gov </li></ul></ul><ul><ul><li>New York State Department of Taxation and Finance: sales tax (Form DTF-17), www.tax.state. ny .us </li></ul></ul><ul><ul><li>New York State Department of Labor: worker’s compensation & disability benefits coverage, www. wcb .state. ny .us </li></ul></ul><ul><ul><li>New York State Department of Labor: unemployment insurance, www.labor.state.ny.us , click on “Employer Registration.” </li></ul></ul><ul><ul><li>United States Immigration and Naturalization Service: Form I-9, www.uscis.gov </li></ul></ul><ul><ul><li>New York City Government: licenses and permits, www. nyc . gov , www.nys-permits.org </li></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  18. 18. <ul><li>what’s in a name ? </li></ul><ul><li>corporate name … DBA … trademarks </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  19. 19. <ul><li>Corporate Name--ABC Inc. </li></ul><ul><ul><li>Name used for bank account, legal documents, leases, etc…only protects within the state incorporated—there </li></ul></ul><ul><ul><li>can be 50 ABC Incs! </li></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  20. 20. <ul><ul><li>DBA--ABC </li></ul></ul><ul><ul><ul><li>“ doing business as,” name used to advertise business under, obtained by filing: </li></ul></ul></ul><ul><ul><ul><ul><li>for sole proprietorships and partnerships -- “Certificate of Assumed Name” or “Business Certificate” in NY county where business conducted, visit: nyc.gov/html/sbs/nycbiz/downloads/pdf/registering.pdf </li></ul></ul></ul></ul><ul><ul><ul><ul><li>for corporations and other entities --“Certificate of Assumed Name” with New York State Department of State, forms downloadable at www.dos.state. ny .us </li></ul></ul></ul></ul><ul><ul><ul><li>filing a dba certificate DOES NOT confer trademark ownership </li></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  21. 21. <ul><ul><ul><li>Trademark--ABC </li></ul></ul></ul><ul><ul><ul><ul><li>Same as dba, name used to advertise business under, obtained through use, but if seeking protection at federal level (only 1 ABC can exist in entire US), need to file for federal registration. </li></ul></ul></ul></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  22. 22. <ul><li>Independent Contractor vs Employee </li></ul><ul><li>IRS’s 20-Factor Analysis </li></ul><ul><li>Worker running separate business? </li></ul><ul><li>Does worker do outside work? </li></ul><ul><li>Is worker supervised like an employee? </li></ul><ul><li>Is the work very important to the company? </li></ul><ul><li>Is worker hired by the company continually? </li></ul><ul><li>Does worker need help from the company to provide services? </li></ul><ul><li>Is worker’s business incorporated? </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  23. 23. <ul><li>raising capital </li></ul><ul><li>If company seeks to raise capital, PLEASE consult an attorney experienced in federal and state securities laws before doing so! </li></ul><ul><li>Company needs to comply with federal and state securities laws when raising capital. </li></ul><ul><li>If such laws not complied with, civil and criminal penalties may apply to officers and directors —investors can ask for return of all their investment. </li></ul><ul><li>© 2009 CyberlawStudio, Pllc. </li></ul>
  24. 24. <ul><li>Thank You </li></ul><ul><li>any questions, please feel free to contact: </li></ul><ul><li>Julia Cheng, Esq. </li></ul><ul><li>Di Santo LLP </li></ul><ul><li>15 Maiden Lane, Suite 1208 </li></ul><ul><li>New York, NY 10038 </li></ul><ul><li>T: 1.212.766.2468; F: 1.866.395.5856 </li></ul><ul><li>[email_address] </li></ul><ul><li>www.disantolaw.com </li></ul>

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