This document provides an overview of considerations for forming a business entity. It discusses why to incorporate to limit personal liability and isolate assets. When choosing an entity, Delaware is typically recommended due to its developed corporate law and familiarity with investors. Costs to form an LLC or corporation in Delaware and New York are provided as an example. Other entity types like sole proprietorships, partnerships, and corporations are briefly outlined. Key documents needed to form an initial corporation are also summarized such as certificates of incorporation, bylaws, stock purchase agreements, and employment agreements. Intellectual property protection, insurance, and funding options are additionally touched on.

1. Forming Your Business : A Practical Approach
By : Ilana Lubin / Sullivan & Cromwell
April 2015

2. Forming Your Business:
A Practical Approach
March 31, 2015

3. Why incorporate?
• Why incorporate?
– Limit your personal exposure!
– Isolate assets
– Enhance your credibility
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4. Choosing your entity
• Choosing your entity & jurisdiction of
formation
– Rule of Thumb !Delaware Corporation
– Discuss other alternatives with your lawyer
and/or accountant, considering:
• Fees (i.e., to incorporate & administer)
• Your business (i.e., are you a one man shop?)
• Your goals & timeline
– Conversion is an option
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5. Example of costs
Corporation:
Required Organizational
Documents
Delaware New York
Certificate of Incorporation
$685 (fee will increase or
decrease based on number and par
value of authorized shares; fee
includes a registered agent fee of
$342.00)
$732 (includes a registered agent
fee of $342)
By-Laws N/A N/A
Stockholders Agreement N/A N/A
Statement of the Incorporator N/A N/A
Initial Resolutions of the Board of
Directors
N/A N/A
Minute Book
$84 $84
LLC:
Required Organizational
Documents
Delaware New York
Certificate of Formation/Articles of
Organization $690 (includes a registered agent
fee of $342)
$807 (includes a registered agent
fee of $342)
Publication N/A
$2199 (as determined based
upon the two designated newspapers
chosen by the county clerk)
Operating Agreement N/A N/A
Initial Resolutions N/A N/A
Minute Book
$84 $84

6. Types of entities & jurisdictional considerations
Advantages and Disadvantages
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LLC Corporation
Pros • Flexibility
• Sophisticated tax
structuring
• Flow through taxation
• Easier to grant equity
incentives (options &
RSUs)
• Formalities are
straight forward
Cons • Complicated tax
structuring
• Complications
regarding the grant of
equity incentives
• Increased corporate
formalities
• 2 levels of taxation

7. Corporate Entity Types
• Sole proprietorship
• General partnership
• Limited partnership
• Corporation
• Limited Liability Company
• Limited Liability Partnership
• Disregarded
• Partnership
• C corporation
• S corporation
Tax Entity Types
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• Choice of entity for corporate purposes
does not necessarily dictate how it will
be treated for tax purposes. This can
change how you complete the SS-4 to
obtain an EIN.

8. • A sole proprietorship and any entity other than an Inc. will
generally be treated as a disregarded entity for tax
purposes by default or can elect to be treated as a
disregarded entity, as long as it has only one member. This
is also the default classification for single-member LLCs.
• Disregarded entity is completely ignored for federal and
state income tax purposes. (It is usually “regarded” for
sales and property tax purposes.)
• Owner is subject to income tax at his own rates on the
income of the disregarded entity.
Disregarded Entity
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9. Feature S Corporation Partnership/LLC
Formation File with state File with state
Number of Owners Restricted to 100
shareholders
Generally, unlimited
number of members
(owners)Corporate Owners Allowed No Yes
Foreign Owners Allowed No Yes
Different Classes of Shares
Permitted?
Yes, as long as all of the
classes have identical
economic rights (rights to
dividends and liquidating
proceeds). Shares may have
Yes – Shares can have
both different
economic and voting
rights.
Liability Protection Yes Yes
Corporation Formalities
(assuming state law
corporation)
Many mandated corporate
formalities, including, but not
limited to:
- Annual meetings
- Election of Board of
Directors
- Election of officers
Few mandated
corporate formalities.
However, typically
members choose to
create such
formalities through an
Operating Agreement
Management (assuming state
law corporation)
Board of directors As decided by
members
Profit Sharing Directly proportional to
ownership percentage. All
shares must convey equal
economic rights.
As decided by
members
Annual Accounting Costs May be lower May be higher
Quarterly Estimated Tax
Payments Made by Members
Yes, with respect to residual
profits (corporation withholds
on salary because shareholder
can be employee).
Yes, with respect to
both salary and
residual profits
(partner cannot be
employee)Social Security and Medicare
Tax
Paid only on salary (though
new 3.8% tax that started in
January 2013 applies to
passive earnings).
Generally paid on all
earnings from LLC
(salary and profits)
Side-by-Side Comparison of S Corp vs Partnership/
LLC
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10. Types of entities & jurisdictional considerations
• Choose DE
• Well developed body of corporate law
• Sophisticated courts
• Every corporate lawyer, and more importantly,
VC investor is familiar with DE documents and
law– this is what they want to see. You are
making getting funding easier both practically
speaking but also by conveying credibility and
legitimacy.
• Another reason, see: NY Business Corporation
Law §630 – Liability of Shareholders for Wages
Due to Laborers, Servants or Employees
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11. Types of entities & jurisdictional considerations
“The ten largest shareholders….shall jointly and
severally be personally liable for all debts, wages
or salaries due and owing to any of its laborers,
servants or employees other than contractors, for
services performed by them for such
corporation…”
- N.Y. BSC. LAW Section 630
- This does not apply to a publicly traded
company
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12. Types of entities & jurisdictional considerations
• Remember to apply for authority to do business in
the states you are doing business
– If you are a DE LLC, this will result in publication fees in
NY
• Conduct name reservations and trademark
clearances if the company name will be consumer
facing
• A great resource: Delaware Secretary of State
website
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13. “Corporation In-A-Box” – The basic
documents that get you up & running
brought to you by
C&M’s Corporate Formation Questionnaire can help you
organize and focus on initial decisions that need to be made:
– Set a number of directors and decide who will be your
directors.
– Determine how you will divide equity interests? And what is
the consideration for each? (i.e., cash, intellectual property,
sweat)
– Consider a Pre-Nup.
• Vesting/accelerations schedules
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14. “Corporation In-A-Box” – The basic documents
that get you up & running
• Certificate of Incorporation
– Authorized Number of Shares. (a lower number with a lower par
value (i.e., 0001 will make your annual franchise taxes cheaper
(the minimum tax is $175-350; you can always authorize more;
on the other hand, think optics when issuing options (a grant of
10 can have the same value as 100 but 100 sounds better)
• Action of Incorporator (signs the original certificate,
adopts bylaws and elects initial directors)
• Bylaws (rules of how the company conducts its affairs,
which must be consistent with the DE law and the
charter; they cover meetings, voting, officers, directors,
indemnification, fiscal year, etc.)
• Consent of the Board (adopting Action of Incorporator,
COI, Bylaws; electing officers, adopting relevant
agreements)
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15. Corporation in a box – The basic documents that get you up
& running
• Founders Common Stock Purchase Agreement (this can also be a
subscription agreement)
– Typical purchase price at founding is 10 x par value (.0001) = $.001, but if
there is substantial value in the Company at formation then the purchase
price could be something different (i.e., book value of assets), and this
should be discussed with tax counsel
– Can use vesting restrictions here
• VCs may want to see this for assurance people will stick around
• Helpful if you have multiple founders because you have pre-negotiated how to deal
with someone leaving or becoming disinterested. A “founder divorce” is common
when you have 3 or more founders.
– Transfer limitations (Securities Law; Right of First Refusal)
– Lock Up
– Bill of Sale/Assignment and Assumption for non-cash consideration such
as intellectual property or other assets
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16. Corporation in a box – The basic documents that get you up
& running
• D&O Indemnification Agreement
– Your VC board representatives will certainly
want this and namely primacy of
indemnification
• Non-Disclosure Agreement
– This allows you to start commercial
discussions with companies by protecting
your confidential information
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17. Corporation in a box – The basic documents that get you up
& running
• Employment Agreements
• Consultant Agreements
• Confidential Information and Invention
Assignment Agreement
– Work for hire doctrine
– Non-Solicits & Non-Competes
– Mischaracterization Issues
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18. Other Practical Considerations – Protecting Your Assets
Intellectual Property Employees
Real Estate Key Contracts
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19. Intellectual Property - Types
• Patents (Provisional, Design & Utility)
Inventions
• Copyrights
Expression
(GUI, Software, Books, Apps, Website Content)
• Trademarks
Source Identifier
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20. Intellectual Property - Patents
Disclosure is a bar to patent protection.
Remember to rely on your NDA.
Provisional Patent = A Stake in the Sand
• Be the first to the patent office & preserve rights
globally
• Make commercialization easier
• Obtain the benefit of using “patent pending”
– You will have one year to submit full patent application
with claims and proper drawings
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21. Intellectual Property – Patents
Utility Patents Design Patents Provisional
Process, machine,
manufacture, or
composition matter or
improvement thereof
Ornamental Designs Your stake in the
sand
20 years from first filing
date
14 years from date
of grant
1 year from filing
date
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22. Intellectual Property – Copyrights & Trademarks
Copyrights Trademarks
Protected on creation Rights inure upon use
Registration is cheap
A U.S. citizen needs a
copyright to be registered in
Registration is based on geography
© 2012 Jane Doe
Unregistered ™
Registered ®
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23. Trade Secrets
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Information
Reasonable measures taken to protect the
information
Derives independent economic value from
not being publicly known

24. Other Practical Considerations
Privacy Policies
• Be clearly posted, with appropriate links
• Must accurately inform users about a website operator’s practices
regarding its collection and use of information, including personal
information (i.e., social media applications, direct marketing). This
is specifically tailored to YOU.
• Practices must comply with privacy and data security laws (i.e.,
COPPA, HIPPA)
• Should be consistent with the terms of use
Terms of Use
• Can minimize liability to site users, protect intellectual property by
prohibiting unauthorized reproduction, and prohibit certain
behaviors (i.e., introducing viruses)
• Clickwrap
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25. Other Practical Considerations
• Get the insurance policies you will
need for your business. One lawsuit
could make or break you.
– Commercial General Liability
– Cyber Security / Data breaches
– Industry specific, i.e., Food Contamination
Policy
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26. Funding – Types of Investors
– Friend & Family
– Angels (i.e., Jeff Bezos, Paul Graham)
– Venture Capital Funds
– Strategic Inventors
(i.e., Peacock Equity Fund (GE/NBC Universal);
Simon Venture Group (Simon))
– Leasing Companies
– Banks
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27. Funding – Types of Investments
• Common Stock
• Preferred Stock
• Convertible Promissory Notes
• Warrants
• Subordinated Debt (with or without an
equity “kicker” – see
above)
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28. Funding
• How much to raise?
– Rule of Thumb: Raise for 9-18 months
– Raise enough to get the company off of the
ground
• Develop a beta version or proto-type
• Develop your website
• Generate initial revenues
• Sign a key contract
• Hire key management
•You will probably need to raise capital more
than once
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29. Funding – Securities Law
A company should register the
offer and sale of securities
with the SEC unless there is a
corresponding exemption (Securities Act of 1933)
You need an exemption:
– 4(2) “private offering” (no filing required)
• Used for a limited number of people (think: 10)
• Insider access to information is key
• Sophistication (except for founders)
• Ability to absorb loss
• Subject to transfer or resale restrictions
– Regulation D (Form D filing required)
Blue Sky Laws
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30. Funding
Think about your end-game:
M&A, IPO, Lifestyle
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31. Speaker
Ilana Lubin
New York
ilubin@crowell.com
Phone: +1 212.895.4224
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32. get started at www.lawtrades.com
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