Primary Legal Consideration
Liability of Owner
Liability Types (2)
Unlimited and Limited Liability
Companies in Unlimited Liability (2)
Sole proprietorship, general partnership
Companies in limited liability (3)
limited liability company, limited partnership, corporation
Second Primary Legal Consideration
Tax
Two Types of Taxation
Pass Through Taxation
Corporate Taxation
Pass through taxation
on individual tax returns, profit and loss is recorded at personal income tax rates
What companies are included in pass through taxation (4)
Sole Proprietorship, General Partnership, Limited Liability Company, Limited Partnership
Corporation Taxation
Taxed at the corporate level, includes corporations
Sole Proprietorship
Structure:
Tax Entity:
Simple or Complex form?
Liability Type:
- One sole owner
- pass through taxation
- simple, created by default, inexpensive
- Unlimited and full exposure to liability
Limited Liability Company
Structure:
Tax Entity:
For tax purposes, can elect……
type of liability
- Members, board members, owned by many people
- pass through taxation
- can elect to be treated as sole proprietorship, partnership or corporation
- limited, members liable to their ownership
General Partnership
Structure:
Tax Entity:
Liability Type:
Is liability limited to what you put in?:
- two or more partners share profit and losses
- pass through taxation
- unlimited liability for both partners and company obligations
- No not limited to what you put in!
Limited Partnership
structure
type of liability
tax entity
general partner role
limited partner role
- one or more general partner and one or more limited partner
- general partners unlimited and limited partners limited liability
- pass through to all partners
- managing partnership
- passive and silent investors
Corporation
structure
owner of corporation
is ownership transferable?
Equity interest via….?
Type of liability?
3 types of corporations
- legal entity separate from owners
- shareholders and stockholders
- yes it is transferable
- distribution of shares and stocks
- corporation liable for actions, shareholders limited to shares
- B, S , C - Corp
Benefit Corporation
balancing pure profit and social benefit
C corporation - 2 main features
unlimited number of shareholders and double taxation
S corporation - 2 main features
no more than 100 shareholders, stockholders elect special treatment for income tax purposes
How to void legal mistakes during start up? (2) with reason
- hire right legal counsel: don’t let family and friends substitute guidance from lawyers
- Choose right business structure: for tax and liability purposes, investors, formal agreements
Founders Agreement
when does this occur?
clear agreement between founders on several key issues that business might face,
before legal contract and formal written agreement
Vesting and example
imposing equity forfeitures on cofounders over time-period on a partial measure basis should they not stay with the company, etc stock options
