Business

1. THE BASICS OF BUSINESS FORMATION
Legal Issues for Startups & Entrepreneurs
Follow me at:
@CoStartupLawyer
ColoradoStartupLawyer.com
http://www.meetup.com/Legal-Issues-for-Startups-and-Entrepreneurs/

2. WHAT IS A BUSINESS ENTITY?
• Form of business
• Default entities
• Entities that must be filed with a state agency
• Determines structure of ownership and type of
taxation with state and federal governments

3. WHY DOES IT MATTER?
• Shield from personal liability
• Potential for tax write offs on personal tax
returns
• Investment opportunities/differentiation

4. SHOULD I BOTHER TO FILE?
• $50 insurance policy on all present and future
assets
• No guarantee (particularly if you do it wrong),
but it is better than the alternative

5. CONVENTIONAL STARTUP WISDOM
• Form as a Delaware C Corporation
• But: this costs a minimum of $600-700 a year in
filing fees, registered agent fees, plus
accounting costs and other hassles

6. CONVENTIONAL SMALL BUSINESS WISDOM
• Form as an LLC and never think about it ever,
ever again
• But: there are many circumstances when a small
business owner could lower its tax burden and
improve its financial position by choosing a
different entity

7. WHAT IS AN LLC?
• New form of business (first LLC statute 1978)
• Limited liability
• Default rule is to be taxed as a sole
proprietorship or a partnership, depending on
number of owners
• Beware – partnership taxation is very complex!

8. FOR WHOM IS AN LLC THE OPTIMAL CHOICE?
• Those who are spending their own money to
fund the business
• Anyone who wants to avoid corporate formality
• If more than one owner, make sure to hire a
good accountant!

9. WHAT DOES AN LLC NEED?
• To file articles of organization with the state
• To keep all business and personal assets
separate
• An operating agreement
• Depending on the business, either a buy-sell
agreement, RSUs, or intellectual property
assignment agreements

10. WHAT IS AN S CORPORATION?
• A tax designation that can apply to both LLCs
and corporations
• Basically a corporation where gains and losses
go directly to shareholders
• 99% structured as corporation with state
• Strict limits on who can own shares

11. FOR WHOM IS THE S CORP OPTIMAL?
• Anyone looking to get the tax write off
associated with initial business expenses
• Businesses that expect to earn profits that
exceed the owners’ salary expectations
• Businesses looking to write off expenses in first
year and raise investment in 2nd or 3rd

12. WHAT DOES AN S CORP NEED?
• To file articles of incorporation with a state
• To file a 2553 with the IRS within 75 days
• Bylaws, stock certificates, a board of directors,
annual board and share shareholder meetings
• Highly recommended: shareholder (or founders’)
agreements, IP assignment agreements, stock
purchase agreements (with vesting schedules for
founders)

13. WHAT IS A C CORPORATION?
• Traditional corporation
• Double taxation
• Two tax returns
• No pass through of income/losses
• Owners can write off reasonable business
expenses, but not losses of business

14. FOR WHOM IS A C CORP A GOOD IDEA?
• Anyone looking to raise money from VCs or
repeat angels right away
• Anyone who wants multiple classes of stock
• Anyone with foreign investors
• Anyone who wants a complete separation of
business/personal tax returns

15. WHAT DOES A C CORP NEED?
• To file articles of incorporation with a state
• To file a separate annual tax return (1120)
• Required: Bylaws, stock certificates, a board of
directors, annual board and shareholder meetings
• Highly recommended: shareholder (or founders’)
agreements, IP assignment agreements, stock
purchase agreements (with vesting schedules for
founders)

16. WHAT IF I CHANGE MY MIND (OR IF
CIRCUMSTANCES CHANGE)?
• Easier than ever to change between states or to
change from an LLC to a corporation
• The process is called conversion
• Very hard to change from a corporation to an LLC
• Regardless, there are a number of legal steps
required to effectuate the process. Consult a lawyer
and an accountant before switching!

17. THE BASICS OF BUSINESS FORMATION
Legal Issues for Startups & Entrepreneurs
Follow me at:
@CoStartupLawyer
ColoradoStrartupLawyer.com
http://www.meetup.com/Legal-Issues-for-Startups-and-Entrepreneurs/