Editing Business Associations
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#Raising Capital | #Raising Capital | ||
<div>'''SOLE PROPRIETORSHIP'''</div> | |||
* <u>'''SP & 6 Factors </u>(Doesn't make out too well)''' | * <u>'''SP & 6 Factors </u>(Doesn't make out too well)''' | ||
** '''1. Liability''' | ** '''1. Liability''' | ||
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*** Only option is through borrowing money (incurring debt) | *** Only option is through borrowing money (incurring debt) | ||
<div>'''GENERAL PARTNERSHIP'''</div> | |||
* '''Association of 2 or more persons to carry on as co-owners, a business for profit''' | * '''Association of 2 or more persons to carry on as co-owners, a business for profit''' | ||
* Are consensual in nature | * Are consensual in nature | ||
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**** Often if small partnership, bank may ask for personal guarantee | **** Often if small partnership, bank may ask for personal guarantee | ||
<div><u>'''NON-CORPORATE LIMITED LIABILITY ENTITIES'''</u></div> | |||
<div>'''(1) LIMITED PARTNERSHIPS'''</div> | |||
* '''Have 1 or more General Partners & 1 or more limited partners''' | * '''Have 1 or more General Partners & 1 or more limited partners''' | ||
* LP's are a creature of statute | * LP's are a creature of statute | ||
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***** If fiduciary duties are breached, you cannot hind behind your entity | ***** If fiduciary duties are breached, you cannot hind behind your entity | ||
<div>'''(2) LIMITED LIABILITY PARTNERSHIP'''</div> | |||
* '''Designed for professionals that could experience malpractice liability''' | * '''Designed for professionals that could experience malpractice liability''' | ||
* <u>'''LLP & 6 Factors</u>: (Only Liability)''' | * <u>'''LLP & 6 Factors</u>: (Only Liability)''' | ||
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**** Entity itself is responsible (which is why many statutes require malpractice insurance) | **** Entity itself is responsible (which is why many statutes require malpractice insurance) | ||
<div>'''(3) LIMITED LIABILITY COMPANY'''</div> | |||
* Creature of statute- must file '''''articles of organization''''' filed with secretary of state (of state in qs) | * Creature of statute- must file '''''articles of organization''''' filed with secretary of state (of state in qs) | ||
* Has some attributes of a corporation & many attributes of a partnership | * Has some attributes of a corporation & many attributes of a partnership | ||
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* Creature of statute- Must file Certificate/Articles of Corporation/Corporate Charter | * Creature of statute- Must file Certificate/Articles of Corporation/Corporate Charter | ||
* <u>'''Corporation & 6 Factors</u>: (Makes out very nicely)''' | * <u>'''Corporation & 6 Factors</u>: (Makes out very nicely)''' | ||
* | ** '''1. Liability''' | ||
* | *** Quintessential limited liability entity (Exception- veil piercing) | ||
* | ** '''2. Management and control''' | ||
* | *** Publicly Traded | ||
* | **** Those who own the Corp (stockholders) are not often the people on board or officers | ||
* | *** Privately Held | ||
* | **** Stockholders wear all the hats | ||
* | ** '''3. Transferability''' | ||
* | *** Stock is considered personal property, and is freely transferable, so long as there are no contractual restrictions | ||
* | *** Public Corp | ||
* | **** Securities laws can impede the ability to transfer stock freely | ||
* | ** '''4. Duration ''' | ||
* | *** Perpetual existence, but there can be an end date put in the corp. charter | ||
* | ** '''5. Taxation''' | ||
* | *** <u>Election of Subchapter C</u>→ Double Taxation | ||
* | **** Pays Corp income tax at entity level | ||
* | **** If it distributes money through dividends, then shareholders must pay income tax on the dividend as well | ||
* | *** <u>Election of Subchapter S</u>→ Flow-through tax entity | ||
* | **** Each shareholder gets a Schedule K-1, allocating (not distributing) to them their share of profit or losses | ||
* | ***** Individual shareholder then has to report their own income on their own Form 1040 | ||
* | **** <u>'''Requirements to file under Subchapter S:'''</u> | ||
* | ***** '''1. Can only have up to 100 Shareholders''' | ||
* | ***** '''2. Identity of Individual ''' | ||
* | ****** Each shareholder must be an individual (a person) | ||
* | ****** Individual must be a US Citizen or Resident Alien | ||
* | ****** Individual can be a qualified estate or trust | ||
* | ****** Another S Corp can also invest into your S-Corp. | ||
* | ******* BUT a C-Corp cannot. | ||
* | ******** The moment a C-Corp invests into your S-Corp, you lose your S-Corp. election, and you'll be taxed as a C-Corp from that moment forward | ||
* | ********* You can have a Stub-Accounting period (1<sup>st</sup> part of year you're taxed as S-Corp, and 2<sup>nd</sup> part of year you're taxed as C-Corp) | ||
* | ******* Anyone that is not in the US cannot invest into an S-Corp either (because US gov't doesn't care about them) | ||
* | ******** So, you can just form an LLC | ||
* | ******** Also, just because you start off as one entity, doesn't mean you cannot switch to a different entity (Many LLC's convert to the corporate form) | ||
* | ***** '''3. Capital Structure'''- S-Corp can only issue 1 type of stock (common stock) | ||
* | ***** '''4. Subsidiaries''' | ||
* | ****** S-Corp CAN own shares in other corporations (S or C corp) | ||
* | ******* If S-Corp. can own 100% of another C-Corp, that C-Corp is a "'''''wholly owned subsidiary"''''' | ||
* | ******* If S-Corp. can own 40% of another C-Corp, that C-Corp is a "'''''partially owned subsidiary"''''' | ||
* | ****** BUT C-Corp CANNOT invest into a S-Corp | ||
* | ***** <u>Policy Justification of S-Corps</u>—Gov't trying to promote entrepreneurialism, and the creation of new corporations | ||
* | ****** Foster new business, give it a tax break, and only when it becomes more successful (grows and succeeds), does it need to pay that double taxation to the government | ||
* | ** '''6. Raising Capital''' | ||
* | *** Tremendous Flexibility | ||
* | *** Can borrow money from a bank too, but typically issues securities | ||
* | *** Issues <u>One or more of three types of Securities</u> | ||
* | **** '''1. Debt Securities''' (Borrowed Money) | ||
* | ***** '''''(1) Bonds''''' | ||
* | ****** Long term IOU (30 years) | ||
* | ****** Also tend to be secured/collateralized | ||
* | ***** '''''(2) Debentures''''' | ||
* | ****** Also long term IOU (20-30 years) | ||
* | ****** NOT collateralized | ||
* | ***** '''''(3) Notes''''' | ||
* | ****** Short term (3-7 years) | ||
* | ****** May/may not be collateralized | ||
* | ***** Claims of debt security holders are CONTRACT CLAIMS | ||
* | ***** Also, upside potential is capped at the interest rate in the contract | ||
* | **** '''2. Preferred Stock''' | ||
* | ***** Contract claimants | ||
* | ***** Del- Certificate of Designation sets out terms | ||
* | **** '''3. Common Stock''' | ||
* | ***** Residual claimants (they get what is left) | ||
* | ***** Last in line if things go bad, BUT 1<sup>st</sup> in line when things are good | ||
{| align="center" cellpadding="10" cellspacing="10" | {| align="center" cellpadding="10" cellspacing="10" | ||
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***** Across the board→ In corp. charter | ***** Across the board→ In corp. charter | ||
**** But, it's not unusual for an investor to say "by contract I want preemptive rights, so that I get preemptive rights and the other holders do not" | **** But, it's not unusual for an investor to say "by contract I want preemptive rights, so that I get preemptive rights and the other holders do not" | ||
***** Individually→ Contractually | ***** Individually→ Contractually | ||
==CORPORATE FORMATION AND LIABILITY ISSUES== | ==CORPORATE FORMATION AND LIABILITY ISSUES== |