STRUCTURING YOUR COMPANY DAY ZERO Gregory H. Teufel, Esq. Member, Eckert Seamans Cherin & Mellott, LLC Pittsburgh

2 STRUCTURING YOUR COMPANY DAY ZERO Gregory H. Teufel, Esq. - Focuses practice on outside general counsel work and commercial litigation, including breach of contract disputes, construction litigation, employee benefits matters, employment disputes, automobile dealer termination disputes, and product liability claims. Has counseled numerous new businesses on structuring and choice of entity issues, and has assisted with the creation of many corporations, limited liability companies, and limited partnerships, and the drafting of bylaws, organizational minutes, and operating agreements. Nothing in this presentation is legal advice.

3 STRUCTURING YOUR COMPANY DAY ZERO What initial agreements and filings are needed? For corporations: Articles of Incorporation Consent in writing of Incorporator(s) (usually attorney), adopting bylaws and electing first Board of Directors Consent in writing of Board of Directors in lieu of organizational meeting (accepting Articles of Incorp., approving and adopting Bylaws, electing officers, issuing shares, etc.) Bylaws (rules for operation and management) Stock certificates and ledger Shareholder’s Agreement (not required but needed)

4 STRUCTURING YOUR COMPANY DAY ZERO What initial agreements and filings are needed? For both corporations and LLCs (continued): Form S election (rare for LLCs) In Arkansas, New Jersey, New York, Ohio, and Wisconsin separate state filings required Form SS-4 – Application for EIN Special permits and licenses? Fictitious name registrations? Registrations to do business in other states, foreign countries

5 STRUCTURING YOUR COMPANY DAY ZERO What initial agreements and filings are needed? For LLCs: Certificate of Organization Docketing statement Operating Agreement (like bylaws plus shareholder agreement) Membership Listing (like stock ledger)

6 STRUCTURING YOUR COMPANY DAY ZERO What structure should you use? C Corp.: only entity type subject to double taxation, but Only taxed twice on profits, not salaries Shareholders only pay tax on profits that are distributed, which investors may prefer Investors may prefer not to have to file K-1s Fewer tax questions from investors Can deduct benefits to a greater extent than other entity types

7 STRUCTURING YOUR COMPANY DAY ZERO What structure should you use? S Corp.: pass through tax status but Only one class of stock allowed Limited # of shareholders (100) allowed Shareholders must be U.S. citizens or residents Shareholders must not be partnerships or for-profit corps. Pay tax on profits even if profits not distributed Losses only offset passive income of passive investors

8 STRUCTURING YOUR COMPANY DAY ZERO What structure should you use? Limited Liability Company (LLC): Ability to issue different classes of securities Ease of set up, informality of operating agreements Non-US and corporate and partnership investors allowed Not generally used if anticipate seeking VC funding or going public Misconception that protection from personal liability somehow weaker Misconception that LLCs must be taxed as partnership

9 STRUCTURING YOUR COMPANY DAY ZERO What structure should you use (continued)? Limited Partnerships Used mostly for businesses holding real estate, for state tax reasons in Pennsylvania Limited personal liability except for at least one general partner Limited partners cannot participate in management Limited Liability Partnerships Used mostly for law, accountant, and architect firms, and similar entities No personally liable general partner required General Partnerships & sole proprietorships – personal liability

10 STRUCTURING YOUR COMPANY DAY ZERO How do you initially divide up equity in the company? Founders: Negotiated case-by-case, based on what each founder brings to table Earlier, bigger, and longer contributions are better How long does a founder plans to stay with company? Intellectual property and money contributed Business expertise and expected work to build the business Connections and reputations; credibility contributions Tie vesting to contribution for future contributions Small equity for part time contributors

11 STRUCTURING YOUR COMPANY DAY ZERO How do you initially divide up equity in the company? Founders: Why not 50/50? to provide faster, consistent decision making when needed equal partners can destroy a company when the partners can’t agree Clawback (ability to buy back equity issued to Investors and Employees)

12 STRUCTURING YOUR COMPANY DAY ZERO How do you initially divide up equity in the company? Investors: Simple formula: value of company compared to size of investment Stock Warrants/Options Preferred returns

13 STRUCTURING YOUR COMPANY DAY ZERO How do you initially divide up equity in the company? Employees: Restricted Stock (forfeitable) Options Phantom Stock/Shadow Stock/Stock Appreciation Rights Nonvoting Don’t get carried away giving too much equity away

STRUCTURING YOUR COMPANY DAY ZERO QUESTIONS? Gregory H. Teufel, Esq.