Legal Services for Startups and Small Businesses
If you are the owner of a startup company, it is imperative that you start out on the right foot with the business formation. Therefore, the first decision you will make with your small business lawyer is what legal entity makes the most sense for your business. There are several different entity types you could consider for your business. For example, you could operate as a sole proprietor, a corporation, a limited liability company (LLC) or a partnership. Discuss with your business lawyer the pros and cons of the different entity types as they relate to your business.
KHNETIC Legal offers reasonably priced flat-fee services for startups and small businesses to attempt to help such companies spend their dollars efficiently. It is probably a good idea when you are starting out to take advantage of the Intellectual Property Services we offer to protect the value of your business. KHNETIC Legal can also provide you with assistance on basic employment matters and independent contractor issues.
Formation of a Limited Liability Company (LLC) for Startups
KHNETIC Legal offers affordable and fast formation of your limited liability company. This includes filing the documents to create your LLC in the applicable state, as well as drafting an Operating Agreement. This service includes verification that the name you choose for your LLC is available. We can also file IRS Form SS-4 to obtain an EIN for your LLC. If you decide to have your LLC treated for tax purposes as an S-Corporation, we can complete (and you would file) IRS Form 2553. If you elect to have your LLC treated for tax purposes as a C-Corporation, we can complete (and you would file) IRS Form 8832.
What is a Limited Liability Company?
A limited liability company is a legal entity, separate from the persons that have an equitable interest in the LLC. The persons that own an interest in an LLC are called members. An LLC provides a formal business structure for your small business. The LLC is registered at the state level.
Why Form an LLC?
If the LLC is properly managed, it will provide personal liability protection, tax advantages, and survivability to its members. Consulting with KHNETIC Legal as your small business and startup lawyer will assist you in operating your LLC to provide maximum personal liability protection. Any person conducting business as a sole proprietor will benefit by forming an LLC. Forming an LLC with multiple members with an operating agreement will greatly assist in misunderstandings and conflicts among the members. The operating agreement will contain the percentage of ownership and authority of the members as well as how the business is conducted. It is to your benefit to have an operating agreement when the business first starts. At such a time there are no disagreements among the members. If any issues arise in the future, the operating agreement will dictate how they are handled.
The LLC provides flexibility in ownership. Unlike an S-Corporation, an LLC permits different classes of members. An LLC also provides flexibility in management. An LLC can be “member-managed” or “manager-managed.”
Another benefit to the creation of an LLC is that the LLC will survive if you become incapacitated or deceased. This will allow your family to receive the benefits of the LLC.
An LLC is flexible in the tax treatment of the entity. You can elect to be treated for tax purposes as a “disregarded entity.” This means that the LLC is a pass-through entity, where profits, losses, and expenses flow down to Schedule C of your personal Form 1040. An LLC can make an election to be treated for tax purposes as a C-corporation or an S-corporation. The decision on such elections should be done through consultation with your small business attorney and your accountant.
Forming a Corporation for Startups
A corporation can be either a C-corporation or an S-corporation. The equity owners are referred to as shareholders. or stockholders. C-corporations are taxed at the corporate level, which means that the corporation itself pays taxes. C-corporation shareholders or stockholders are also taxed on any dividends they receive. An S-corporation is a pass-through entity, like an LLC, so that profits, losses and expenses pass-through to the shareholders or stockholders. S-corporations can only have one class of stock and are limited in the number of shareholders they can have, as well as who can be a shareholder. You may be able to save on paying self-employment tax (if your S–corporation has enough profits). Any amount over reasonable salaries paid to shareholders of the S-corporation is not subject to self-employment taxes.
Corporations provide personal liability to third parties. However, the members must follow proper corporate procedures in operating the business or they may be subject to “piercing the corporate veil.” This would permit third parties to hold the shareholders personally liable for any liability of the corporation. Seek the advice of a small business lawyer regarding how to operate to avoid anyone from piercing the corporate veil.
Corporations survive the shareholders and provide a tool to pass on the business to beneficiaries.
Steps to Incorporate
In order to form a corporation, Articles or a Certificate of Organization are filed with the state. The Articles will contain information with respect to the authorized number of shares, par value of the shares, the separate classes of shares if any, the registered agent or registered address, the principal place of business and the business purpose of the corporation. Corporations have initial resolutions by the incorporator (usually the small business lawyer that forms the corporation), who appoints the members of the Board of Directors. The Board of Directors has organizational resolutions. In some states, including Pennsylvania, a corporation is required to advertise its incorporation in two publications (a newspaper of general circulation and a legal publication).
A corporation has bylaws that govern how the corporation is managed, dissolved, how Directors are elected or removed and other issued affecting the corporation.
If there is more than one shareholder, you should have a shareholders agreement. This is similar to the operating agreement of an LLC and usually has a “buy/sell” provision that addresses the right to sell to another party, and the right of first refusal for other shareholders to buy the selling shareholders shares. The shareholders’ agreement will also contain language that governs how the shares are to be valued.
Capitalization Package of Startups Legal Services -these are some of the agreements we can draft for your business
- Founders Restricted Stock Purchase Agreement
- Stockholders/Shareholders Agreement
- Prepare Stock Certificates
- Stock Option Plan, Award document and Agreements
- Restricted Stock Award and form of Restricted Stock Agreement (includes Statement regarding Section 83(b) election and a form to make such election)
- Prepare and file state securities filings for stock issuances to Founders
- Angel Round of Financing – the first round of outside money, with the exception of friends and family. Your angel round will include the following documents:
- Convertible Note Term Sheet, Purchase Agreement and/or Note
- Keep it Simple Security (KISS)
- Simple Agreement for Future Equity (SAFE), with various terms regarding discounts, caps and MFN clauses
- Angel Round of Financing with Priced Equity
- Venture Capital Rounds – rounds of financing after the angel round. Any series of venture rounds includes the following documents:
- Term Sheet
- Stock Purchase Agreement
- Investors’ Rights Agreement
- Management Rights Letter
- Right of First Refusal and Co-Sale Agreement
- Voting Agreement
- Indemnification Agreement for Officers and Directors
Startups Seeking Venture Capital
I have the experience to help startups that are seeking venture capital as a means of funding their business. I can advise you regarding what venture capitalists will be looking for in your presentation to them. This will result in a higher likelihood of your business being funded by venture capitalists. Furthermore, my experience will assist your business by working out the terms of the investment. This would involve negotiating and drafting the investment documents and getting the investment closed. In my past capacity as General Counsel of a venture fund, I have also worked with startups on successful exit strategies. This experience can be of great value to your business.
Some Considerations in Choosing Entity Type
There are several factors to consider in the business formation stage when choosing the appropriate entity. Some examples of the factors to consider is the flexibility of the entity, ease of transferring interests, tax considerations and protection from personal liability. For startups that have a goal of seeking venture capital, the choice of an entity may differ. In addition, you should discuss with your business lawyer ways to prevent third parties from putting your personal assets at risk. Your business lawyer will be able to assist you with putting systems in place to help provide you with such protection.
Call today to energize your business and move forward into the future. 610.524.3250