Tag: startup formation (Page 1 of 2)

S Corporations: Electing to be taxed as an S Corporation

I’m going to be posting a number of posts on the ins and outs of electing and operating a corporation which elects to be taxed as a small business corporation (an “S Corp”) with the IRS.  There are many benefits to such an election, but there are also pitfalls that many owners run into that could jeopardize the election.

The first post in this series is simply how to make the election.

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New York’s STARTUP-NY Program @ Paper This Deal

Starting at the beginning of 2014, New York’s STARTUP-NY Program went live.  Here is the official website for the initiative.  Its goals are laudable but its only available to a small niche of companies.  If your company qualifies, however, the benefits are rather nice.

In summary, the Program provides eligible companies with free office space (at certain locations) for a period of time and the employees of the company pay no state income tax on their income (at least for the first five years, with a small amount possibly paid in years 5 through ten).  The Program is attempting to lure out-of-state companies into New York, while encouraging sprouting of new startups that otherwise may not have started without these benefits.  Overall New York is looking to add more jobs in the state, and the more jobs now (even with tax breaks) the more taxes the state can collect in teh future. 

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Series LLCs @ Paper this Deal

If you are one of those people who is tired of having to form seperate entities (LLCs or corporations) for each type of business you operate, or for each piece of real estate that you own, a Series LLC may be useful to you. Nearly a decade ago, the state of Delaware introduced a legal entity that would become known as the Series LLC. Despite its origins in Delaware, several other states have now started to permit the usage of Series LLCs. 

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Benefit Corporations (B-Corps) & Other “Good Vibe” Corporate Structures @ Paper this Deal

It used to be that if you wanted to start a corporation and the end goal was not to maximize shareholder value (or other typical corporate goals), you’d start a not-for-profit corporation.  That’s no longer the case. Now in New York (and at least six other states) you can form a Benefit Corporation (a “B-corp”) which has other purposes besides making money.  There are also other strategies you can use in a for-profit company to give it more of an egalitarian feel.  We’ll discuss below.

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How to form a Single Member LLC in New York State @ Paper this Deal

There are a lot of small businesses out there operating as sole proprietorships, that is they operate the business through the individual(s), and there is no formal entity.  Many sole proprietors tell me that they’ve filed a d/b/a with the local county (here, the counties of Onondaga, Tompkins or Monroe), and therefore believe that is all they need to ensure that they are not personally liable, but this is not correct.

The main reason people incorporate or organize LLCs is to limit liability.  Debts and contractual obligations are not something that you want to owe personally if you can avoid it.  Setting up an LLC will create a seperate legal entity from yourself that you will operate the business through, own business assets, and contract through.  Not much has to change when you form a single member LLC.  LLC’s are also useful because the IRS will let you choose how you want the LLC taxed (either as a disregarded entity, S corp or C corp).

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Hack-a-thon Agreements @ Paper this Deal

I hit on the Hack-a-thon craze in an earlier post. The IP that is created by the hackers in these programs has to be owned by someone, although there are still times where everyone walks away not knowing what everyone’s rights are.  If nothing is ever signed by all participants and the hackathon sponsor, its unclear who owns what.

There are a couple different options.  The sponsor may want to own everything, or may want to at least have a perpetual paid up license to use the IP created.  The hackers should get some rights as well, but its been hard to delineate what and how it should be handled.

A friend of mine and a fellow startup lawyer, Dave Capuccilli of The Capucilli Firm has been working on a solution to this dilemma. Check out his latest iteration to a Hack-a-thon Collaboration Agreement, courtesy of Docracy.  Its a great way to ensure all hackers and the sponsor get a fair shot at using the IP created.

I currently represent a few companies that were born at Hack-a-thons and Startup Labs (a similar idea but slightly different format/program), and if they had an agreement like this signed before they came to me it would have made things much smoother.

Corporate Dual Class Share Structures @ Paper this Deal

A dual class share structure is used in certain corporations where one or more classes are given all or a bulk of the voting rights and another class or class has the same economic interest in the company, but none of the voting rights.   There can also be other rights that are given to one class instead of the other.  This type of structure is used so that the existing Board of Directors and management of the corporation maintain their control of the company.  It bcaeme common in news organizations (think the Economist Group, or the News Corporation a la Rupert Murdoch) so that the company could ostensibly keep its journalistic integrity and credibility or to stay true to its goals, without pesky shareholders muddying the waters.

A dual class share structure can serve desirable goals, such as shielding management and the board from short term views of dissident shareholders/analysts and hostile takeovers.  This can be helpful, as the constant quarterly pressure to meet revenue expectations is a burden on many companies at the expense of long term sustainable growth.  Management at companies with dual class structures argue that if shareholders aren’t happy with the structure, they are free to sell their shares and walk away.  Not surprisingly, only companies that are rather a hot commodity in the market can really get away with using this structure.

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Crowdfunding – Prepare your Company to Crowdfund @ Paper this Deal

As I’ve discussed earlier, the SEC is now preparing regulations to allow for Crowdfunding pursuant to the recently passed JOBS Act.  These should be done by 2013 (emphasis on should be done by then – we’ll see when they actually come out).  As you may have heard, it will allow for true equity sales over the World Wide Web.  Companies will soon be able to sell shares of their corporation (or LLC) through online portals to regular persons that are not accredited investors (i.e. not millionaires or otherwise sophisticated).

There are a couple of things to discuss, the first is whether this is something your company actually would want to do.  The second item is, if it is something you want to do, then what can you do to prepare your company to do a Crowdfunding raise in 2013 (or whenever the SEC finishes the regulations).

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Remember to make your 83 B elections! Here’s why and how to do it @ Paper this Deal

As I’ve written about in the past, founders of a startup should have their equity vested. There are times when you may not want to, but the majority of the time it is beneficial. Some investors may insist upon it, although its one of the things in the negotiations.  If the founder’s stock is vested, they should make an 83-b election.  To not do so could turn into a lot of tax due to the IRS over the years the stock will vest.  We’ll discuss how it works and how to make the election here.

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Vesting the Founder’s Stock

This is a very important topic to ensure that your startup continues to be controlled by founders dedicated to its cause.    What you want to avoid is a situation where a group of founders form a startup and each hold a similar percentage of the issued shares – without any restrictions on such shares.   If only one or two of the original founders continue working for the corporation, and the rest stop, and either get other full-time jobs, move away, leave the country, etc., then the founders that are still around can be stuck and essentially handcuffed from making certain corporate decisions.  If the corporation, as most due, requires the majority of the issued shares to take certain actions, and the corporation brings in other people from the outside as shareholders and/or directors (usually investors), then the founders who have stuck around will have essentially less of a say in major corporate actions.  And if there is a liquidation event, then the founders who have left will get paid without having to put in the hard work.

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