1. Mark P. Walters Intellectual Property Attorneys & Members
9/22/2017
How To Define a Corporate Structure for Start-ups: What, Why, Where, & How?
Gary M. Myles, Ph.D.
Mark P. Walters Intellectual Property Attorneys & Members
Lowe Graham Jones PLLC
November 5,2015

2. How to Define a Corporate Structure for Start-ups
9/22/2017
How to Define a Corporate Structure for Start-ups
"A well-defined corporate and organizational structure is key to attracting investors"
Topics for Discussion
WHAT: Overview of Business Entities
Legal, Tax, and Liability Considerations
WHY: Choosing the Best Business Entity
Ensuring Successful Business Transactions
Financing, Partnering, M&A, IPO
HOW: Logistics of Incorporation

3. Choice of Business Entity
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company
Corporation
S-Corp
C-Corp

4. WHAT? Sole Proprietorship
Definition:
Business entity in which all assets are owned by one person
Management:
Management and operation decisions are wholly in the control of the owner
Liability:
Owner is personally liable for all business liabilities
Tax Treatment:
Income and loss are recognized by the owner directly on his or her personal tax return
No separate entity tax return required

5. HOW? Sole Proprietorship
Formation:
No governing statute
No legal formation requirements
File master business application with Washington Business Licensing Service (
Acquire employer identification number (EIN) from IRS ( Self-Employed/Employer-ID-Numbers-EINs)

6. WHY? Sole Proprietorship
Pros:
Simple and cheap
No legal formation requirements
No non-tax record keeping
Single level of taxation
Cons:
Unlimited personal liability
Co-owners prohibited
Business ceases with owner’s death

7. Choice of Business Entity
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company
Corporation
S-Corp
C-Corp

8. WHAT? General Partnership
Definition:
An association of two or more persons to carry on as co-owners a business for profit
Intent to form a partnership is not necessary
Sharing in profits evidences partnership
Management:
Vested in the partners, unless specifically delegated to one or more partners
Delegation of management does not limit a partner's liability for the obligations of the partnership

9. WHAT? General Partnership
Liability:
Each partner has joint and several liability for
His or her acts and the acts of the other partners
Debts and obligations of the business
A partner is not liable for obligations of the partnership incurred before the partner's admission to the partnership

10. WHAT? General Partnership
Tax Treatment:
A general partnership is a flow through entity
No entity level taxation
Income and loss are reported and recognized by the partners on their personal tax returns
Cash distributions of the partnership are taxable if they exceed a partner's tax basis in his or her partnership interest
A federal partnership tax return must be filed

11. WHAT? General Partnership
Costs:
Limited formation and maintenance costs
Transferability of Interest:
A partner's economic interest is transferable
A partner’s right to manage the partnership or vote are not transferable unless …
all partners consent, or
provided by the Partnership Agreement

12. HOW? General Partnership
Formation:
Governed by the Uniform Partnership Act (RCW
A Partnership Agreement setting forth terms of ownership, voting rights, distribution of profits, ability to transfer interests, dissolution -- not required but recommended

13. WHY? General Partnership
Pros:
Simple and cheap.
No non-tax record- keeping requirements
Can allocate profits and losses specially among the partners
Single level of taxation
Practical where liability is minimal
Cons:
Partners have unlimited personal liability
Problems inherent in shared management responsibility

14. Choice of Business Entity
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company
Corporation
S-Corp
C-Corp

15. WHAT? Limited Partnership
Definition:
A partnership comprising
one or more general partners who manage [the] business and who are personally liable for partnership debts, and
one or more limited partners who contribute capital and share in profits but who take no part in running [the] business and incur no liability with respect to partnership obligations beyond contribution

16. WHAT? Limited Partnership
Tax Treatment:
A flow through entity
Income and loss are reported and recognized by the partners on their personal tax returns
A federal tax return must be filed by the partnership

17. WHAT? Limited Partnership
Liability:
General Partner
Unlimited personal liability for the obligations of the partnership
Limited Partner ("silent partners”)
Liability is limited to the extent of his or her capital contribution to the partnership
A limited partner who participates in the management of the partnership may lose his or her limited liability protection

18. HOW? Limited Partnership
Formation:
Formed by filing a Certificate of Limited Partnership with the Secretary of State (
Partnership Agreement not required by statute, but is highly recommended
Partners can be individual persons or entities

19. WHY? Limited Partnership
Pros:
General partner retains control of partnership
Limited partners have limited liability
Capital structures are more flexible than general parnerships
Single level of taxation
Cons:
General partners have unlimited personal liability
Limited partners may lose limited liability protection if they participate in management and control of the partnership

20. CHOICE OF BUSINESS ENTITY
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company
Corporation
S-Corp
C-Corp

21. WHAT? Limited Liability Partnership
Definition:
A partnership that files a statement of qualification of registration as a limited liability partnership according to state law
Elements of both partnerships and corporations
Limited liability is analogous to liability of corporate shareholders
Unlike corporate shareholders, LLP partners can directly manage the business

22. WHAT? Limited Liability Partnership
Tax Treatment:
A flow through entity
Income and loss are reported and recognized by the partners on their personal tax returns
A federal LLP tax return must be filed by the partnership

23. WHAT? Limited Liability Partnership
Generally, a partner is not liable for acts or omissions of other partners (“full-shield liability”)
In some states, a partner is liable for the debts of the LLP and for acts or persons under the partner’s direct supervision and control (“partial-shield liability”)

24. WHAT? Limited Liability Partnership
Transferability:
A partner’s economic interest in an LLP is transferable
A partner’s right to manage/vote is subject to a LLP Agreement and state law

25. HOW? Limited Liability Partnership
Formation:
Formed by filing a Certificate of Limited Liability Partnership with the Secretary of State (
Partnership Agreement not required by statute, but is highly recommended
Partners can be individual persons or entities

26. WHY? Limited Liability Partnership
Pros:
High level of flexibility and control
Limited liability protection
Commonly used entity for accountants and lawyers
Single level of taxation
Cons:
Limited liability protection vulnerable to application of “piercing the corporate veil” theories
Formality and expense similar to LLCs
Uncertainty owing to under-developed case law

27. CHOICE OF BUSINESS ENTITY
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company
Corporation
S-Corp
C-Corp

28. WHAT? Limited Liability Company
Definition:
A company that is characterized by
Limited liability
Management by members or managers
Limitation on ownership transfer
Ownership interests (i.e., “membership interests”) are held by members of the company
Management:
Management of an LLC may vest in its members or in a member or non-member manager

29. WHAT? Limited Liability Company
Tax Treatment:
LLCs can be treated as partnerships for federal income tax purposes thereby avoiding taxation as a corporation (i.e. single vs. double taxation)
LLCs may elect to be treated as corporations for federal tax purposes
If an LLC has operations in multiple states, its state to state tax treatment may vary

30. WHAT? Limited Liability Company
Members of an LLC enjoy limited liability protection
Liability of managers is limited by statute absent a breach of fiduciary duty
Limited liability protection may, however, be negated by “piercing the corporate veil” theories

31. WHAT? Limited Liability Company
Transferability:
A member’s economic interest in an LLC is transferable
A member’s right to manage/vote is subject to a LLC Operating Agreement and state law

32. HOW? Limited Liability Company
Formation:
Formed according to state statute by filing a Certificate of Formation with the Secretary of State (
The LLC and its members execute an Operating Agreement (i.e., LLC agreement) setting forth the agreement of the members as to the management of the affairs of the LLC and the conduct of its business

33. WHY? Limited Liability Company
Pros:
Members enjoy limited liability protection
Flexible capital structure
May have different classes of membership interests
Admission to membership without a capital contribution
Membership interests without economic interests
Fewer statutory formalities than for corporations
Partnership tax treatment
Cons:
Uncertainty owing to under-developed case law
State to state variability in LLC statutes

34. CHOICE OF BUSINESS ENTITY
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company
Corporation
S-Corp
C-Corp

35. WHAT? Corporation Definition: Management:
A legal entity that is formed under state law and in which ownership interest (i.e., stock) is owned by one or more shareholders
Management:
Corporations have centralized management that is vested in a board of directors and company officers
The board of directors is elected by the shareholders
Officers are appointed by the board of directors

36. WHAT? S Corporation Tax Treatment:
A corporation electing to be taxed under Subchapter S of the Internal Revenue Code
S corporations are flow-through entities and are taxed like partnerships thereby avoiding double taxation
S corporations must file federal corporation tax returns
S corporations have the following restrictions
No more than 100 shareholders
Shareholders must be individuals or trusts (NOT corporations or partnerships)
Shareholders may not be non-resident aliens
Limited to one class of stock, which can include both voting and non-voting common stock

37. WHAT? C Corporation Tax Treatment:
A corporation taxed under Subchapter C of the Internal Revenue Code
C corporations are subject to double taxation
Income of the corporation is taxable at the entity level and distributions to shareholders are taxable to the shareholders
Election for Subchapter C treatment is NOT required

38. WHAT? Corporation Liability:
Shareholder liability is limited to the extent of his/her investment in the corporation unless a court “pierces the corporate veil”
Limited liability protection and indemnification of corporate officers and directors unless they breach a fiduciary duty

39. WHAT? Corporation Transferability:
Shares are freely transferable unless restricted by a Shareholder’s Agreement or under securities law

40. HOW? Corporation Formation:
Formed according to state statute by filing Articles of Incorporation with the Secretary of State (
Must adopt by-laws addressing management and control of the corporation
Must observe significant corporate formalities
Authorizing resolutions
Issuing shares
Subscription agreements
Preparing minutes of board and stockholder meetings
Maintaining books and records
Must provide buy-sell arrangements and transfer restrictions in a Shareholder or Founder Agreement

41. WHY? Corporation Pros: Cons:
Shareholders enjoy limited liability protection
Familiar corporate structure and well-developed juris prudence is appealing to investors and lenders
Tax advantages in many liquidity transactions
Availability of incentive compensation (e.g., stock options)
C corporations may have more than one class of stock
Appealing to venture capital transactions (i.e., preferred stock)
Cons:
Double taxation with C corporations
Significant and on-going formalities and filing requirements
Detailed and restrictive state corporation laws
Income and loss must be allocated in proportion to shares owned

42. Which Entity to Choose? Primary choices Key Considerations
Limited Liability Company
S corporation
C corporation
Key Considerations
How will your business be financed?
Self financed
Grants
Angel investment
Venture capital
Bank loans
Substantial outside financing disfavors an LLC

43. Which Entity to Choose? C-Corp S-Corp LLC Pass-through Tax TreatmentNo
Yes
Flexible Ownership and Capital Structure
High
Low
Attractive to Investors
Complexity
Moderate
Moderate to High
Costs
Small to Moderate
Small to High
Ideal Profile
VC or angel backed
Early state intending to convert to a C corp
Insubstantial outside investment
Adapted from

44. Incorporation in State of Principal Office or in Delaware?
Variability in State filing fees, taxes, and response times
Variability in extent of limited liability protection and indemnification of officers/directors
Variability in maturity of case law
Variability in favorability of regulations and business laws

45. 9/22/2017
Thank you!