ABOUT THE CLASS This class will help early stage teams understand the most common business structure (Sole Proprietorship, Partnership, Corporations, and Limited Liability Company) and help to determine why that structure best suits the company's needs. Get an understanding of the key decisions that need to be addressed in developing and launching a company through documents such as Articles of Incorporation, By-Laws, etc. Explore indicators that companies can look at in order to decide if they need trademarks/patents. THE TAKEAWAYS To obtain an understanding of the different types of business structures along with their respective strengths and weaknesses. To help companies decide which structure best fits their specific needs. To highlight the importance of trademarks/patents and other beneficial legal protections. ABOUT THE INSTRUCTOR, Robert Schroeder Rob Schroeder is an Associate at Jones Day. His practice focuses on corporate and transactional matters, including domestic and international mergers and acquisitions, private equity buyouts, venture capital financings, securities law compliance, and general corporate counseling. His experience also includes advising clients on fiduciary duties and addressing shareholder rights and duties. He advises clients in a variety of sectors, including technology, communications, energy, manufacturing, retail, and financial services. PRESENTED BY, The Dallas Entrepreneur Center The Dallas Entrepreneur Center (DEC) is an entrepreneurial support system dedicated to bringing together the resources, support and opportunities that Dallas-area entrepreneurs need to start, build and grow their businesses. Launched in 2013, the DEC connects entrepreneurs, corporations, investors, educators and other business and community leaders in order to advance the economic interests of the Dallas community. Learn more at thedec.co.

1. DEC Education:DEC Education:
Setting up a Business Structure
September 10, 2013p ,
Robert A. Schroeder
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2. DEC Education: Setting up a Business Structure
Agenda
• Introductions
• Overview
• Business StructuresBusiness Structures
• Forming a Business Entity
• Founder and Investor Agreements• Founder and Investor Agreements
• Intellectual Property
Q&A• Q&A
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3. DEC Education: Setting up a Business Structure
Overview – What is a Business?
Founders
Intangible
Assets (ideas
Physical Assets
(equipment,
inventory, etc.)
Cash
Investors
Business
Lenders
Assets (ideas,
patents, etc.)
inventory, etc.)
Employees BusinessEmployees
ServicesProducts
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4. DEC Education: Setting up a Business Structure
Overview – Why Establish a Business?
• Launching a product or serviceg p
• Creating intellectual property
• Having more than one founder/investorHaving more than one founder/investor
• Hiring employees
• Obtaining financing• Obtaining financing
• Starting a capital gains holding period
Establishing ownership rights and governance• Establishing ownership rights and governance
procedures
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5. DEC Education: Setting up a Business Structure
Overview – Primary Business Types
• Sole Proprietorship (no entity)p p ( y)
• Partnership (general or limited)
• Limited Liability CompanyLimited Liability Company
• Corporation (C-corp or S-corp)
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6. DEC Education: Setting up a Business Structure
Sole Proprietorship
• Simple, no formation paperworkp , p p
• Single decision-maker
• No protection against personal liability; personalNo protection against personal liability; personal
assets at risk; consider good umbrella insurance
policy
• No ability to grant equity interests; hard to raise or
borrow money
A id d bl i i /l i d• Avoids double taxation; income/losses incorporated
into your personal tax return; must withhold and
periodically pay employment and income taxesp y p y p y
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7. DEC Education: Setting up a Business Structure
Partnership
• Multiple owners (partners); shared financialp (p );
commitment
• Generally simple to establish
• Avoids double taxation; respective portions of
partnership profits and losses passed through to
partnerspartners
• Partnership files informational return; partners
responsible for taxesresponsible for taxes
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8. DEC Education: Setting up a Business Structure
Partnership
• General Partnershipp
• Joint liability; liable for partners’ actions
• Personal assets at riskPersonal assets at risk
• May be established accidentally
• Limited Partnership• Limited Partnership
• General partner is personally at risk
Limited partners have limited liability• Limited partners have limited liability
• Established by filing certificate of formation
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9. DEC Education: Setting up a Business Structure
Partnership
• Partnership agreement establishes ownership andp g p
decision-making procedures
• Partnership agreement may range in complexity
• Comprehensive agreement can reduce risk of
partner disagreements and disputes
• May be hard to raise money from investors
• Complicated to grant equity interests to employees
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10. DEC Education: Setting up a Business Structure
Limited Liability Company
• Permits one or more owners (members); shared( );
financial commitment
• Provides limited liability exposure to members
• Generally simple to establish with state filing
• Can avoid double taxation by electing to be treatedy g
as a partnership for tax purposes
• LLC files informational tax return; members
ibl fresponsible for taxes
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11. DEC Education: Setting up a Business Structure
Limited Liability Company
• LLC/Operating agreement establishes ownershipp g g p
and decision-making procedures
• LLC agreement may range in complexity; but flexible
• Comprehensive agreement can reduce risk of
member disagreements and disputes
• May be hard to raise money from investors
• Somewhat complicated to grant equity interests to
lemployees
• Requires annual state filings
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12. DEC Education: Setting up a Business Structure
Corporation
• Permits one or more owners (stockholders); shared( );
financial commitment
• Provides limited liability exposure to stockholders
• Can be simple to establish with state filing
• Requires annual state filingsq g
• Documentation can become complex
• Must maintain state prescribed procedures (board ofMust maintain state prescribed procedures (board of
directors, officers, meeting minutes, etc.)
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13. DEC Education: Setting up a Business Structure
Corporation
• “S-Corp” Electionp
• Available if less than 100 stockholders
• All stockholders must be U S individuals (orAll stockholders must be U.S. individuals (or
certain trusts and estates)
• Restricted to one class of stock; does not permitp
preferred stock
• Treated as a partnership for tax purposes
• Employee-owner should receive reasonable
comp or earnings may be taxed as wages
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14. DEC Education: Setting up a Business Structure
Corporation
• Considered a “C-Corp” if not an “S-Corp”p p
• Permits multiple classes of stock
• Subject to taxation at corporate level and onSubject to taxation at corporate level and on
distributions
• Typical entity structure expected by ventureyp y p y
capital and other institutional investors
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15. DEC Education: Setting up a Business Structure
Corporation
• Certificate of incorporation and bylaws establishesp y
ownership rights and decision-making procedures
• Provides well recognized governance structure
(board of directors and officers)
• Comprehensive documentation can reduce risk of
stockholder disagreements and disp tesstockholder disagreements and disputes
• Investors are familiar with and expect to invest in
corporationscorporations
• Stock options are available to provide to employees
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16. DEC Education: Setting up a Business Structure
Entity Related Considerations
• Do you expect to have investors? If so, what type ofy p , yp
investors (family, angel, VC, etc.)?
• Do you expect to have employees?
• Will you issue equity to employees or consultants?
• Do you expect to sell the business?y p
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17. DEC Education: Setting up a Business Structure
Entity Related Considerations
• Tax pass-through versus corporationp g p
• Will the business generate net income soon or
are losses expected?
• Will you have personal income from other
sources to offset losses against?
• Will the business retain earning or distribute them
to the owners?
C id i l l• Consider corporate tax rates at income levels
expected; consider reasonable compensation
from corporation to shareholders as employees.p p y
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18. DEC Education: Setting up a Business Structure
Forming a Business Entity – Where?
• Delaware
• Most common state for incorporation/formation
• Well established case law including with respectWell established case law, including with respect
to director and officer fiduciary duties
• Efficient formation and annual report processesp p
• Investors often insist on Delaware
• Need to establish an agent for service of processNeed to establish an agent for service of process
• Become qualified to do business in Texas (and
other states where operating)
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19. DEC Education: Setting up a Business Structure
Forming a Business Entity – Where?
• Texas
• If operating in Texas, may be simpler to deal with
only one state (no need for an out-of-state agent,
no out-of state franchise taxes, etc.)
• Investors not as familiar with Texas law; but
similar to Dela are la in man respectssimilar to Delaware law in many respects
• Other states or countries
J i di i h b i i l d• Jurisdiction where business is located
• Cayman Islands
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20. DEC Education: Setting up a Business Structure
Forming a Business Entity – How?
• Choose a name
• Check Secretary of State for availability (Texas
and, if applicable, Delaware and any other states
you plan to operate)
• Preliminary screening for intellectual property
(trademark) infringement search(trademark) infringement search
• In-depth infringement analysis if preliminary
screen seems clearscreen seems clear
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21. DEC Education: Setting up a Business Structure
Forming a Business Entity – How?
• Create and file certificate of incorporation/formationp
• Pay incorporation/formation fees
• Identify and engage agent (for forming an entityIdentify and engage agent (for forming an entity
outside your business location and in-state if desired)
• Create partnership agreement, limited liabilityp p g y
company agreement or bylaws
• Establish record keeping (initial board and
h h ld l i k ifi )shareholder resolutions, stock certificates, etc.)
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22. DEC Education: Setting up a Business Structure
Forming a Business Entity – Who?
• Legal counselg
• Experienced attorney can address specific
concerns (suitability of structure; founder or
investor protections; IP; stock options; etc.)
• Caution regarding online providers
• Very low price
• Generic documents
• Limited or no advice on suitability of structure and
related matters
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23. DEC Education: Setting up a Business Structure
Founder and Investor Agreements
• Ownership Arrangementsp g
• Dividend/distribution/liquidation allocations
• Preemptive Rights to maintain ownership levelPreemptive Rights to maintain ownership level
• Transfer restrictions
Right of First Refusal for co investors– Right of First Refusal for co-investors
– Co-Sale Rights to tag along in sales
Drag Along Rights to facilitate sale of company– Drag-Along Rights to facilitate sale of company
• Information Rights
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24. DEC Education: Setting up a Business Structure
Founder and Investor Agreements
• Governance Matters
• Rights to appoint directors/managers
• Indemnification rights for activity performed asIndemnification rights for activity performed as
director, manager, partner, officer, etc.
• Protective provisions requiring consent to takep q g
certain company actions (e.g., incurring debt, sale
of company, major acquisitions, changing line of
business etc )business, etc.)
• Non-compete provisions
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25. DEC Education: Setting up a Business Structure
Founder and Investor Agreements
• Documented in a variety of documentsy
• Certificate of Incorporation or Bylaws (Corp)
• Shareholder Agreements (Corp usually)Shareholder Agreements (Corp usually)
• Limited Liability Company Agreement (LLC)
• Partnership Agreement (Partnership)• Partnership Agreement (Partnership)
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26. DEC Education: Setting up a Business Structure
Issuing Debt and Equity to Investors
• Subscription Agreement / Stock Purchasep g
Agreement
• Securities Laws
• Limitations on advertising and soliciting investors
• Accredited Investors
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27. DEC Education: Setting up a Business Structure
Intellectual Property
• Considerations Before Setting up a Business
• Ownership of your intellectual property
– Universities, existing/prior employers, g p p y
– Friends, mentors, advisors
• Existing employment agreementsExisting employment agreements
– Employment and confidentiality agreements
– Proprietary information agreements -– Proprietary information agreements -
assignment of inventions / right to IP
– Non-competition / non-solicitation agreementsp g
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28. DEC Education: Setting up a Business Structure
Intellectual Property
• Transferring IP to your businessg y
• Technology assignments from founders
• Developing new IP within your businessDeveloping new IP within your business
• Proprietary information agreements with
employeesp y
• Consulting agreements with IP assignments
• Licensing IP to and from othersLicensing IP to and from others
• University IP policies
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29. DEC Education: Setting up a Business Structure
Intellectual Property
• Protecting Intellectual Propertyg p y
• Use confidentiality agreements
• Mark confidential material as “confidential”Mark confidential material as confidential
• Enforce registered intellectual property
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30. DEC Education: Setting up a Business Structure
Intellectual Property
• Registering Intellectual Propertyg g p y
• Patents
• TrademarksTrademarks
• Copyrights
• US Patent and Trademark Office• US Patent and Trademark Office
• US Copyright Office
Non US Agencies• Non-US Agencies
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31. DEC Education: Setting up a Business Structure
Thank you
• IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that
any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to
be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii)
promoting, marketing or recommending to another party any transaction or matter addressed herein.
Di l i Thi J D t ti id t d i f ti l l i d d l t f• Disclaimer: This Jones Day presentation provides comments and information on legal issues and developments of
interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is
not intended to provide legal advice. Participants should seek specific legal advice before taking any action with
respect to the matters discussed herein.
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