Forming The Start Up VentureWhich Structure is Right for You?

Gregory W. Gribben, Esq.Woods Oviatt Gilman LLP

October 9, 2012

• Greg Gribben is a partner with the law firm of Woods Oviatt Gilman LLP. His practice is focused in the areas of corporate finance, securities and venture capital. This practice includes the representation of issuers in public and private offerings of securities and venture capital transactions. He assists clients in structuring company formation and capitalization, and in negotiations with equity and debt providers. With over 18 years of experience, he has represented both corporate buyers and sellers in asset, stock and merger transactions. He also counsels businesses with corporate governance and compliance issues. He is admitted to practice law in the states of Arizona and New York.

Forms of Conducting Business, Generally

• Corporation• Limited Liability Company• Partnership• Sole Proprietorship

Selecting the Form of Business EntityNon-Tax Factors• Liability

• Management – concentrated or shared?

• Allocation of profit and loss

• Growth plans, expectations of investors

Selecting the Form a Business Entity

Tax Factors• Flow through taxation (“C” corp. vs. “S” corp.,

partnership or LLC)

• Allocation of profit and loss

• Other tax matters (real estate, oil and gas, other specialized areas)

Selecting the Jurisdiction

General Rule –promoters of a business that will primarily do business in one State should normally select that State

• One level of expense• Limit the number of States for litigation• Local taxes still apply to owners of flow-

through entities

Selecting the JurisdictionConsiderations for Arizona Resident

Businesses

• Benefits of Arizona over other jurisdictions

• Expectations of Investors • Other common jurisdictions

– Delaware– Nevada

Specific Types of Entities

Corporations• Limited liability - protects personal assets of

shareholders

• Corporate formalities – must follow corporate formalities to help ensure limited liability protection – Director and shareholder annual meetings, – Meeting minutes or resolutions, – Annual report with Arizona Corporation Commission.

Specific Types of Entities

Corporations• “C” corporation

– Taxable entity separate from its shareholders• Corporate earnings, shareholder dividends

• Sale of corporate assets – gain on sale, distributions of proceeds to shareholder

• Net operating losses, only available to corporation

Specific Types of Entities

Corporations

• “S” corporation – generally not treated as a separate taxable entity and pays no income tax. Corporate level income and deductions pass through to the shareholders

• “S” corporation allows shareholder-employees to save on payroll taxes compared to partnerships, LLC’s– shareholder-employee payroll taxes only cover profit

labeled as "salary." Must be reasonable, but the remainder can be paid as a dividend or distribution

Specific Types of Entities

Corporations“S” corporation requirements:– No more than 100 shareholders– Limited in types of shareholders (U.S. natural

persons or certain trusts)– Limited to one class of stock

• “Phantom” Income – must pay tax on income even if no cash is distributed

Specific Types of Entities

Limited Liability Companies• Limited Liability

• More flexibility in operations;– Less paperwork to maintain entity form– Can give power to one or more managers, or share among members– Allocations of profit and losses

• Generally, absence of entity level tax – Multi-member LLC’s generally taxed like a partnership with flow-through tax treatment– Single member LLC’s disregarded for tax purposes, taxed like a sole proprietor– May also elect to be taxed as “S” corp. or “C” corp.

Specific Types of Entities

Limited Liability Companies

• Note: Arizona LLC’s – publicly filed Articles of Organization must identify and update 20% owners

• Courts have not tested the limited liability protection of LLC’s as much as corporations (high risk businesses may consider corporations for this reason)

Specific Types of Entities

PartnershipsLimited Partnerships, General Partnerships, Limited Liability Partnerships

• General partners - liable for all of the partnership liabilities

• Limited partners - generally liable only to the extent of their investment in the partnership, unless they actively participate as limited partners in the management of the partnership

• General Partnerships, Limited Liability Partnerships – more prevalent in professional practice – attorneys, accountants, etc.

• Limited Partnerships – more prevalent as investment vehicles – real estate projects, private equity funds, venture capital funds

Specific Types of Entities

Sole Proprietorship

• Not a business entity• Personally liable for all of the debts and

liabilities created by his or her proprietorship.• Does not permit more than one owner

Other Considerations• Operating Agreement

• Shareholder Agreement

Questions?

Contact

Gregory W. Gribben, Esq.Woods Oviatt Gilman LLP

2 State Street 127 North Gateway Drive700 Crossroads Building Suite 118Rochester, New York 14614 Phoenix, Arizona 85034Phone: 585-987-2875 Phone: 602.633.1793Fax: 585-987-2975 Fax: 585-987-2975

E-mail: ggribben@woodsoviatt.comwww.woodsoviatt.com