© Mark T. Schenkel 2
Today’s Agenda
• Legal Representation in New Ventures
• Ownership Structures
• Other Legal Issues
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Legal Representation
• Why Have It?
– Determine What Is Needed– Search For Lawyer With Special Expertise
• How to Select Lawyer– One-Time Service or On-Going?– Set-Up Comfortable Working Relationship– Determine Costs Up-Front
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Legal Forms
• Sole Proprietorship
• Partnership
• Corporation
Case 12.2: A Question of Incorporation
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Sole Proprietorship
• Ownership: one person (business = person)
• Set up costs: minimal (e.g., basic filing fees for trade name)
• Liability: individual liable for business liabilities• Continuity of business: death dissolves business• Transferability of interest: complete freedom to sell/transfer• Management control: owner has total• Profit distribution: through individual tax return
• Implications:– Easy and inexpensive if no significant liability risk (e.g., small consulting business)
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General Partnership
• Ownership: more than one owner (no limit on #)• Set up costs: basic trade name filing fees, partnership agreement,
direct legal costs• Liability: all partners equally liable • Continuity of business: death/partner withdrawal dissolves business
unless agreement stipulates otherwise• Transferability of interest: GPs can sell only with consent of all other GPs
• Management control: all partners have equal rights; majority rules• Profit distribution: f(partnership agreement)
• Implications:– State/Fed tax ID required– Partnership agreement highly recommended– Must follow employment laws– Files tax returns (informational)
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Limited Partnership
• Ownership: run by a “general partner”, but rules are more complex and regulated
• Set up costs: basic trade name filing fees, partnership agreement (more comprehensive = higher cost), direct legal costs
• Liability: limited partners liable for amount of capital contributions• Continuity of business: death/limited partner withdrawal has no
affect • Transferability of interest: LPs can sell w/o consent of GPs• Management control: only GPs• Profit distribution: f(membership agreement)
• Implications:– Only recommended for specific situations– Use experts to structure
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C Corporation
• Ownership: No limit on # of shareholders (= Traditional corporation)• Set up costs: filing fees, taxes, articles of incorporation• Liability: limited for shareholders to amount of capital contributions• Continuity of business: death withdrawal of owner(s) has no affect on
legal existence of the business• Transferability of interest: Shareholders can sell/buy stock at will,
although some transfers might be restricted• Management control: major stockholders via key management
appointments• Profit distribution: dividends
• Implications:– Attractive fund raising potential– Double taxation– Simplest to take public
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S Corporation
• Ownership: limited to 75 shareholders• Set up costs: filing fees, taxes, articles of incorporation• Liability: limited for shareholders to amount of capital contributions• Continuity of business: death withdrawal of owner(s) has no formal
affect on legal existence of the business • Transferability of interest: Shareholder can only sell stock to an
individual• Management control: major stockholders• Profit distribution: through individual tax return
• Implications:– Good for start-ups with limited ownership; with simple financing– Large body of tax law exists– No double taxation, but cannot deduct most fringe benefits for
shareholders
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LLC (Limited Liability Corporation)
• Ownership: members (Vs. shareholders or partners) with interests designated in articles of organization
• Set up costs: filing fees, articles of organization• Liability: limited for members to amount of capital contributions• Continuity of business: management rules may create complexity• Transferability of interest: requires unanimous written consent of
members• Management control: based on articles of organization• Profit distribution: through individual tax return
• Implications:– More expensive– Less tax law on books– More documentation required– Attorneys and accountants like (see “More expensive” above!)
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Non-profit Corporation
• Requires approval• Regulated• Limited scope of activity• Can fund raise• Some governmental funding limited to
non-profits
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Other Legal Issues . . .
• Licensing
• Product Liability
• Insurance
• Contracts (aka “tort”)
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Key Takeaways . . . .
• In selecting legal counsel, be sure to determine costs and key selection criteria in advance.
• It is critical to understand the advantages and disadvantages of legal form choice – both at the inception and throughout the growth of the venture, noting that specific needs are likely to change.