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Entity Formation BasicsEntity Formation BasicsEntity Formation BasicsEntity Formation Basics

By: Uzma Ahmad734.214.7720

uahmad@dykema.com

By: Uzma Ahmad734.214.7720

uahmad@dykema.com

Why should I think about forming an entity?Why should I think about forming an entity?

Formalization of activities and relationships

Branding/reservation of name

Insulation from personal liability

Value Maximization

The Corporate VeilThe Corporate Veil

Generally, shareholders are viewed as being distinct from the corporate entity

Generally, shareholders are not personally liable for the liabilities and obligations of the corporation

Piercing the Corporate VeilPiercing the Corporate Veil

Insufficient capitalization, lack of corporate formalities, nonpayment of dividends, insolvency, siphoning of funds by dominant shareholder, non-functioning officers, absence of corporate records, facade for individual dealings

Corporate formalities:• Board of director meetings, minutes• Good corporate records• No co-mingling of business and

personal assets

Corporate GovernanceCorporate Governance

Delineates the roles and responsibilities of directors versus officers

Independent directors, board committees with charters, related party transactions

Internal controls, effective disclosure

Accurate financial reports

Corporate GovernanceCorporate Governance

The Sarbanes-Oxley Act of 2002 -- public companies

Through various sources has become important for private companies:• Lenders• Grant-makers, government contracts• Insurers (D&O policy)• Best practices organizations• Venture capital investors

Good Corporate Governance = Maximization of ValueGood Corporate Governance = Maximization of Value

Commentators indicate that there may be an acquisition premium for companies that have good corporate governance

Minimizes post-acquisition integration costs

In any case, venture capital investors will diligence these issues and good corporate governance helps the target to distinguish itself

Entity ChoicesEntity Choices

Sole proprietorship

Corporation• Subchapter C corporation• Subchapter S corporation

Limited liability company (LLC)

Basic DocumentsBasic Documents

Articles or Certificate of Incorporation – filed with the state of incorporation

Incorporator resolutions/Board resolutions

Bylaws

Subscription Agreements and Stock Certificates

Stockholders Agreement (repurchase rights, rights of first refusal, drag-along, tag-along)

Confidentiality, Non-Compete and Assignment of Inventions Agreement

Other TopicsOther Topics

Roles of shareholders, directors, officers

Common stock and preferred stock

Angel investors and venture capital investors