1. Patterns of Entrepreneurship
Setting Up the Company
Patterns of Entrepreneurship
Chapter 5

2. copyright 2003 Jack M. Kaplan
Session Outline
What form of Ownership is Best
Forms of Doing Business
Setting Up a Proprietorship
Setting Up a “C” Corporation
Getting Registered
Choosing Legal Counsel
Setting Up a Limited Liability Company(LLC)
Setting Up a Sub. S
Setting Up the Board of Directors
Comparison Organization Charts
copyright Jack M. Kaplan

3. What form of Ownership is Best
1.How big can this business potentially become?
2.  How much control do you need in the decision-making process of the company?
3.How much capital is needed to start the business?
4. What tax considerations are important?
5. In case of failure, to what extent are you willing to be personally responsible for debts created by the business?
6. Is it important that the business continue in case of owner capacity or death?   
copyright Jack M. Kaplan

4. Forms of Doing Business
The legal form of the business:
Sole Proprietorship,
C-Corporation,
S-Corporation,
Partnership,
or LLC) should be determined in light of the business’ short- and long-term needs
copyright Jack M. Kaplan

5. copyright 2003 Jack M. Kaplan
Proprietorship
A sole Proprietorship is a form of business that has a single owner and only requires local business licenses to open.
Advantages:
. Simple to create
.Low cost start up fees
.No special legal restrictions
copyright Jack M. Kaplan

6. copyright 2003 Jack M. Kaplan
Proprietorship
Disadvantages:
Unlimited Personal liability
Limited access to capital
Lack of Continuity for the Business
copyright Jack M. Kaplan

7. Setting Up a “C” Corporation
Choose the name of the business.
Register the name with a state.
Decide on the location of the company’s principal office.
Obtain a federal employer ID number SS-4.
Establish the capital structure of the company.
To open a bank account, ID number and corporation seal are required.
copyright Jack M. Kaplan

8. copyright 2003 Jack M. Kaplan
Getting Registered
Check on state availability of name
call (609)
Costs $15.00 for one name
Costs $20.00 for two names
Reserve a name for $60.00 for 60 days
Get an ID number
call (800)
copyright Jack M. Kaplan

9. Setting Up a Corporation (C)
Overview:
Separate legal and tax entity.
Shareholder liability limited to invested capital.
Existence continues after shareholder’s death.
Easier to raise capital.
Pros:
Limited liability.
Most appropriate structure for IPO.
Tax benefits and stock option plans.
Ease of transferability of interests.
Structure that a venture capitalist requires.
Cons:
Double taxation.
High administration compliance costs.
Directors are held accountable.
Well defined corporate governance rules and laws to follow.
copyright Jack M. Kaplan

10. Choosing Legal Counsel
Law firms handle a variety of legal matters, including corporate, intellectual property, and tax and employment issues.
Attorneys often specialize in one of these areas.
Look for firms that are experienced with start- ups from early stage to IPO.
Avoid attorneys that do more work with venture capitalists than start-ups.
copyright Jack M. Kaplan

11. Setting Up a Small Business Corporation (Sub S)
Overview:
A corporation, but with “flow through” tax benefits.
As a corporation, Sub S is a separate entity and therefore has limited liability for owners and stockholders.
Limited to 75 owners, only one class of stock allowed, and no foreign shareholders.
Pros:
Liability protection.
Enjoy corporation status, but owners pay the taxes.
Cons:
Stringent rules necessary to maintain Sub S status.
Qualification requirements necessitate administrative and cost burdens.
If failure to comply with Sub S rules, tax consequences can be disastrous.
Not eligible for qualified employee stock options.
Investors cannot receive preferred shares as in a C Corporation.

12. Setting Up a Limited Liability Company (LLC)
Overview:
Relatively new form of doing business. Owned by “members”, not shareholders.
A combination of the best characteristics of corporations, partnerships, and sole proprietorships.
Pros:
Liability protection (a separate legal entity as in a C Corporation).
LLC is not a tax paying entity (tax benefits to members).
Statute meetings and minutes are not required.
Cons:
Unlikely that a venture capitalist would invest.
Cannot take the company public.
Different shareholder interests result in complex operating agreements.
All members must consent to transfer ownership.
Some states have different management and member rules.

13. Setting Up a Partnership
A partnership is usually defined as an association of two or more people carrying on as co-owners of a business for profit.
Advantages:
Easy to Establish
Division of Profits
Ability to attract partners
Little Government Regulation
copyright Jack M. Kaplan

14. Setting Up a Partnership
Disadvantages:
Unlimited Liability of at least one Partner
Capital Accumulation
Restrictions of Eliminating General partner
Potential for Personality and Authority Conflict
copyright Jack M. Kaplan

15. copyright 2003 Jack M. Kaplan
Choosing Counsel
Problems are different - possibility of mixed loyalties for the entrepreneur.
A friend is a poor choice. Investors want to deal with experienced lawyers.
Avoid using the largest firm. Biggest is not necessarily better.
Select a firm that provides the basics and a hands-on approach.
Check the experience and credentials of the attorney handling your matter.
copyright Jack M. Kaplan

16. Setting Up the Board of Directors
Set the number of directors.
Designate the initial board of directors.
Determine whether the directors will be elected by a plurality of the vote or cumulative voting.
Cumulative voting entitles each stockholder to cast the total number of votes multiplied by the total number of directors to be elected and insures the minority has representation of the board.
copyright Jack M. Kaplan

17. Setting Up the Board of Directors
Establish a procedure to fill vacancies on the board.
Designate the executive officers of the company.
Determine whether the officers should be elected by the stockholders or appointed by the board.
Determine each officer’s title and responsibilities.
copyright Jack M. Kaplan

18. copyright 2003 Jack M. Kaplan
Legal Agreements
Subscription Agreements
Used for initial and subsequent capital contributions.
Purchase and Sale Agreements
Used for purchase of operating assets.
Employment Agreements
Given to senior executives.
Confidentiality Agreements
Used to protect existing and in-process intellectual property.
License Agreements
Covers any intellectual property that you use or license.
Customer Agreements
Basis for delivery of services (service companies only).
copyright Jack M. Kaplan

19. Business Organizational Structure Comparison Chart
Characteristic
C-Corp.
S-Corp.
LLC
Limited liability for all owners
Yes
Yes
Yes
Owners can participate in management without losing liability protection
Yes
Yes
Yes
Easy to form and without maintaining extensive record keeping
Yes
Yes No
Number of owners
2 or more
1-75
2 or more
Restrictions on ownership No
Yes No
Double tax
Yes No No
copyright Jack M. Kaplan

20. Business Organizational Structure Comparison Chart
Characteristic
C-Corp.
S-Corp.
LLC
Able to deduct business loss on individual return No
Yes
Yes
Basis for loss includes owner’s share of company debt in owner’s tax return No
Yes
Yes
Can increase basis by “step-up” election
Yes
Yes
Yes
Can specially allocate items of income and expense
Yes
Yes
Yes
Contribute and distribute appreciated property tax free No
Yes
Yes
copyright Jack M. Kaplan

21. copyright 2003 Jack M. Kaplan
Summary Guidelines
The key issues to consider are liability, taxation, and corporate governance.
The structure should be based on your goals and objectives.
You should consider an LLC or a Sub S for a lifestyle/family business.
If you plan to go public or raise venture capital, consider a C Corporation.
Consider the advantages in registering a C Corporation in Delaware.
copyright Jack M. Kaplan

22. Setting Up Employer –Employee Agreements
· The employee cannot disclose any confidential information about the company either during or subsequent to employment.
·  They must return all materials that belong to the company at the time of termination of employment.
·   They cannot engage in a new business during the period of employment without the consent of the employer.
·       They will not compete with the company for a period of time subsequent to employment.
·        
copyright Jack M. Kaplan