©2010 Haynes and Boone, LLP Choice of Business Entity by Christina Marshall

©2010 Haynes and Boone, LLP Major Business Considerations Liability of Owners Management Capitalization Transferability of Ownership Interests Economic Provisions Tax Implications –Federal –State

©2010 Haynes and Boone, LLP Entity Choices Sole Proprietorship Corporation Limited Liability Company Partnerships –General Partnership –Limited Partnership

©2010 Haynes and Boone, LLP Sole Proprietorship For the single business owner who has not made a state law filing Unlimited liability for the owner Taxed at the owner level

©2010 Haynes and Boone, LLP Corporations Must file a formation document with Secretary of State Owned by shareholders who hold stock Managed by directors (who are elected by stockholders) Operated by officers (who are elected by directors) Governed by the Bylaws of the Corporation and the relevant state code. Inexpensive to form

©2010 Haynes and Boone, LLP Corporations Shareholders are not liable for the debts of the corporation. –Loss is limited to investment Officers and directors are not liable for the debts of the corporation. –But they owe fiduciary duties Preferred entity for investors

©2010 Haynes and Boone, LLP Taxation of Corporations C Corporation –Double taxation –Shareholders are taxed only when they receive a distribution. S Corporation –All gains and losses flow through to the shareholders. –Shareholders are taxed on their gains regardless of whether or not they receive distribution of profits.

©2010 Haynes and Boone, LLP Limited Liability Company Must file a formation document with the Secretary of State Owned by members (who hold membership interests or units) The LLC is managed by either (i) members or (ii) managers who are elected by the members. Also, the members or managers can elect officers. Members are not personally liable for the debts of the LLC. Managers and officers are not liable for the debts of the LLC. Governed by the LLC Agreement and the relevant state code More expensive to form

©2010 Haynes and Boone, LLP Taxation of LLCs Can be taxed as a partnership or a corporation

©2010 Haynes and Boone, LLP General Partnerships No state law filing is necessary Requires at least 2 persons or entities Each partner is jointly and severally liable for all the liabilities of the partnership. All partners have an equal right to participate in management, unless the partnership agreement provides otherwise.

©2010 Haynes and Boone, LLP Limited Partnerships Must file a formation document with the Secretary of State Need at least 1GP and 1 LP GP is joint and severally liable for liabilities of the partnership. GP manages the partnership. Limited partners’ liability: limited to their contribution (unless they participate in management) Governed by the Partnership Agreement and the relevant state code More expensive to form

©2010 Haynes and Boone, LLP Taxation of Partnerships Partnerships (limited and general) taxed on a flow-through basis (no tax at the entity level) Profit / loss is taxed to the partners Partners are taxed whether or not they receive distributions.

©2010 Haynes and Boone, LLP State Tax Most states impose some form of a franchise tax on business entities. Some states impose a flat tax, others impose tax based upon income or capital apportioned to the state. Texas imposes a margin tax for entities with limited liability.

©2010 Haynes and Boone, LLP Special Considerations For Any Business Entity Buy/sell provisions Voting Agreements Distributions

©2010 Haynes and Boone, LLP Texas vs. Delaware Development of laws Court system Investors’ preference Taxation

©2010 Haynes and Boone, LLP KAUFFMAN INDEX OF ENTREPRENEURIAL ACTIVITY BY STATE (2009) State Texas Florida California New York Washington Illinois Entrepreneurs per 100,000 People

©2010 Haynes and Boone, LLP The Five States With The Highest Entrepreneurial Activity Rates: Oklahoma(470 per 100,000 adults) Montana (470 per 100,000 adults) Arizona(460 per 100,000 adults) Texas(450 per 100,000 adults) Idaho(450 per 100,000 adults)

©2010 Haynes and Boone, LLP Entrepreneurial Activity by Metropolitan Area (Out of Top 15) MSA Miami-Ft. Lauderdale-Miami Beach, FL Atlanta-Sandy Springs-Marietta, GA San Francisco-Oakland-Freemont, CA Dallas-Fort Worth-Arlington, TX Seattle-Tacoma-Bellevue, WA Entrepreneurs per 100,000 people

©2010 Haynes and Boone, LLP Questions? Contact Information: Christina Marshall –