Entities

The following information focuses on the laws of New York and Delaware business entities.

Ownership Requirements

Form of Equity & Restrictions

Organizational Documents

Tax Considerations

Liability

Management

Employee Considerations

Capital Raising

Strength

Weaknesses

Ownership Requirements

  • One or more shareholders are required.
  • There are no restrictions on the types of owners.

Form of Equity & Restrictions

  • Capital stock is held by one or more shareholders.
  • Types of Stock: Common Stock and Preferred Stock.
  • May have many different classes and series of stock with different rights.
  • Distribution must be proportionate with equity within classes of stock.
  • Preferred stock may have preferential distribution.

Organizational Documents

  • Formation Documents: Certificate of Incorporation filed with the secretary of the state in NY or Delaware.
  • Governing Documents: By-laws, Shareholder Agreements, Purchase Stock Agreements.

Tax Considerations

Taxed at both levels:

  • Corporate
  • Shareholder

Liability

  • Shareholder liability is limited to capital contribution.
  • Shareholders have limited personal liability.

Management

  • Governed by a Board of Directors.
  • Board of Directors designate Officers to manage the corporation on a day to day basis.
  • Major decisions must be approved by the shareholders.
  • Board of Directors may delegate to committees.
  • Less flexible than other entities.

Employee Considerations

Stock options may be granted to employees as incentives.
Other equity compensation can include:

  • Stock appreciation rights
  • Restricted stock
  • Restricted stock units

Capital Raising

  • This entity is most common for a public company.
  • LLC’s are converted to C-Corps before an initial public offering.
  • Raising Capital is through issuing equity and incurring debt.
  • Stock can be issued through private placements or
  • By having a public offering with stock that is registered with the SEC (Securities and Exchange Commission)
  • The number of shares can be increased by amending the certificate of incorporation.

Strengths

Preferred by investors and broad protection for shareholders and managers.

Weaknesses

Requires record keeping and corporate meetings.

C-Corporation

  • One or more shareholders are required.
  • There are no restrictions on the types of owners.
  • Governed by a Board of Directors.
  • Board of Directors designate Officers to manage the corporation on a day to day basis.
  • Major decisions must be approved by the shareholders.
  • Board of Directors may delegate to committees.
  • Less flexible than other entities.
  • This entity is most common for a public company.
  • LLC’s are converted to C-Corps before an initial public offering.
  • Raising Capital is through issuing equity and incurring debt.
  • Stock can be issued through private placements or
  • By having a public offering with stock that is registered with the SEC (Securities and Exchange Commission)
  • The number of shares can be increased by amending the certificate of incorporation.

S-Corporation

  • 1-100 shareholders.
  • Only US citizens or residents.
  • Certain trusts may be shareholders
  • Certain exempt organizations can be shareholders.
  • S-corp automatically converts to a C-corp if it does not meet S-corp requirements.
  • Governed by a Board of Directors.
  • Board of Directors designate Officers to manage the corporation on a day to day basis.
  • Major decisions must be approved by the shareholders.
  • Board of Directors may delegate to committees.
  • Less flexible than other entities.

Limited Liability Company (LLC)

  • 1 or more members.
  • 2 or more members required to be taxed as a partnership.
  • There are no restrictions on the types of owners.
  • Management is vested in the members
  • Members can delegate management to other members.
  • Members can designate officers to manage day to day operations.
  • Major decisions may need to be approved by members.

Limited Partnership (LP)

  • 1 or more partners.
  • There are no restrictions on the type of owners.
  • Management is vested in General Partners
  • General Partners can delegate management to other members.
  • Members can designate officers to manage day to day operations.
  • Major decisions may need to be approved by members.
  • General Partners may be limited by the Partnership Agreement.
  • Limited Partners may lose limited liability if they participate in management.

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