1. Setting Up the CompanySetting Up the Company
Patterns of Entrepreneurship
Chapter 5

2. copyright 2003 Jack M. Kaplan
Session Outline
• What form of Ownership is Best
• Forms of Doing Business
• Setting Up a Proprietorship
• Setting Up a “C” Corporation
Getting Registered
• Choosing Legal Counsel
• Setting Up a Limited Liability Company(LLC)
• Setting Up a Sub. S
• Setting Up the Board of Directors
• Comparison Organization Charts

3. copyright 2003 Jack M. Kaplan
What form of Ownership is Best
• 1.How big can this business potentially become?
• 2. How much control do you need in the decision-
making process of the company?
• 3.How much capital is needed to start the
business?
• 4. What tax considerations are important?
• 5. In case of failure, to what extent are you willing
to be personally responsible for debts created by
the business?
• 6. Is it important that the business continue in case
of owner capacity or death?

4. copyright 2003 Jack M. Kaplan
Forms of Doing Business
• The legal form of the business:
• Sole Proprietorship,
• C-Corporation,
• S-Corporation,
• Partnership,
• or LLC) should be determined in light of
the business’ short- and long-term needs

5. copyright 2003 Jack M. Kaplan
Proprietorship
A sole Proprietorship is a form of business
that has a single owner and only requires
local business licenses to open.
Advantages:
. Simple to create
.Low cost start up fees
.No special legal restrictions

6. copyright 2003 Jack M. Kaplan
Proprietorship
• Disadvantages:
– Unlimited Personal liability
– Limited access to capital
– Lack of Continuity for the Business

7. copyright 2003 Jack M. Kaplan
Setting Up a “C” Corporation
• Choose the name of the business.
• Register the name with a state.
• Decide on the location of the company’s
principal office.
• Obtain a federal employer ID number SS-4.
• Establish the capital structure of the company.
• To open a bank account, ID number and
corporation seal are required.

8. copyright 2003 Jack M. Kaplan
Getting Registered
• Check on state availability of name
– call (609) 530-6400
• Costs $15.00 for one name
• Costs $20.00 for two names
• Reserve a name for $60.00 for 60 days
• Get an ID number
– call (800) 829-1040

9. copyright 2003 Jack M. Kaplan
Overview:
• Separate legal and tax entity.
• Shareholder liability limited to invested capital.
• Existence continues after shareholder’s death.
• Easier to raise capital.
Pros:
• Limited liability.
• Most appropriate structure for IPO.
• Tax benefits and stock option plans.
• Ease of transferability of interests.
• Structure that a venture capitalist requires.
Cons:
• Double taxation.
• High administration compliance costs.
• Directors are held accountable.
• Well defined corporate governance rules and laws to follow.
Setting Up a Corporation (C)

10. copyright 2003 Jack M. Kaplan
Choosing Legal Counsel
• Law firms handle a variety of legal matters,
including corporate, intellectual property, and
tax and employment issues.
• Attorneys often specialize in one of these
areas.
• Look for firms that are experienced with start-
ups from early stage to IPO.
• Avoid attorneys that do more work with
venture capitalists than start-ups.

11. Setting Up a Small Business
Corporation
(Sub S)Overview:
• A corporation, but with “flow through” tax benefits.
• As a corporation, Sub S is a separate entity and therefore has limited
liability for owners and stockholders.
• Limited to 75 owners, only one class of stock allowed, and no foreign
shareholders.
Pros:
• Liability protection.
• Enjoy corporation status, but owners pay the taxes.
Cons:
• Stringent rules necessary to maintain Sub S status.
• Qualification requirements necessitate administrative and cost burdens.
• If failure to comply with Sub S rules, tax consequences can be disastrous.
• Not eligible for qualified employee stock options.
• Investors cannot receive preferred shares as in a C Corporation.

12. Setting Up a Limited Liability Company
(LLC)
Overview:
• Relatively new form of doing business. Owned by “members”, not
shareholders.
• A combination of the best characteristics of corporations, partnerships, and
sole proprietorships.
Pros:
• Liability protection (a separate legal entity as in a C Corporation).
• LLC is not a tax paying entity (tax benefits to members).
• Statute meetings and minutes are not required.
Cons:
• Unlikely that a venture capitalist would invest.
• Cannot take the company public.
• Different shareholder interests result in complex operating agreements.
• All members must consent to transfer ownership.
• Some states have different management and member rules.

13. copyright 2003 Jack M. Kaplan
Setting Up a Partnership
• A partnership is usually defined as an association
of two or more people carrying on as co-owners of
a business for profit.
• Advantages:
– Easy to Establish
– Division of Profits
– Ability to attract partners
– Little Government Regulation

14. copyright 2003 Jack M. Kaplan
Setting Up a Partnership
• Disadvantages:
– Unlimited Liability of at least one Partner
– Capital Accumulation
– Restrictions of Eliminating General partner
– Potential for Personality and Authority Conflict

15. copyright 2003 Jack M. Kaplan
Choosing Counsel
• Problems are different - possibility of mixed
loyalties for the entrepreneur.
• A friend is a poor choice. Investors want to
deal with experienced lawyers.
• Avoid using the largest firm. Biggest is not
necessarily better.
• Select a firm that provides the basics and a
hands-on approach.
• Check the experience and credentials of the
attorney handling your matter.

16. copyright 2003 Jack M. Kaplan
Setting Up the Board of Directors
• Set the number of directors.
• Designate the initial board of directors.
• Determine whether the directors will be
elected by a plurality of the vote or
cumulative voting.
• Cumulative voting entitles each stockholder
to cast the total number of votes multiplied
by the total number of directors to be
elected and insures the minority has
representation of the board.

17. copyright 2003 Jack M. Kaplan
• Establish a procedure to fill vacancies on
the board.
• Designate the executive officers of the
company.
• Determine whether the officers should be
elected by the stockholders or appointed by
the board.
• Determine each officer’s title and
responsibilities.
Setting Up the Board of Directors

18. copyright 2003 Jack M. Kaplan
• Subscription Agreements
– Used for initial and subsequent capital contributions.
• Purchase and Sale Agreements
– Used for purchase of operating assets.
• Employment Agreements
– Given to senior executives.
• Confidentiality Agreements
– Used to protect existing and in-process intellectual property.
• License Agreements
– Covers any intellectual property that you use or license.
• Customer Agreements
– Basis for delivery of services (service companies only).
Legal Agreements

19. copyright 2003 Jack M. Kaplan
Business Organizational Structure
Comparison Chart
Characteristic C-Corp. S-Corp. LLC
Limited liability for all owners Yes Yes Yes
Owners can participate in management
without losing liability protection
Yes Yes Yes
Easy to form and without maintaining
extensive record keeping
Yes Yes No
Number of owners 2 or more 1-75 2 or more
Restrictions on ownership No Yes No
Double tax Yes No No

20. copyright 2003 Jack M. Kaplan
Business Organizational Structure
Comparison Chart
Characteristic C-Corp. S-Corp. LLC
Able to deduct business loss on
individual return No Yes Yes
Yes
Basis for loss includes owner’s share
of company debt in owner’s tax return No Yes
Can increase basis by “step-up”
election
Yes Yes Yes
Can specially allocate items of
income and expense
Yes Yes Yes
Contribute and distribute
appreciated property tax free
No Yes Yes

21. copyright 2003 Jack M. Kaplan
Summary Guidelines
• The key issues to consider are liability,
taxation, and corporate governance.
• The structure should be based on your goals
and objectives.
• You should consider an LLC or a Sub S for a
lifestyle/family business.
• If you plan to go public or raise venture
capital, consider a C Corporation.
• Consider the advantages in registering a C
Corporation in Delaware.

22. copyright 2003 Jack M. Kaplan
Setting Up Employer –Employee
Agreements
∀ • The employee cannot disclose any confidential
information about the company either during or
subsequent to employment.
∀ • They must return all materials that belong to the
company at the time of termination of
employment.
∀ • They cannot engage in a new business during
the period of employment without the consent of
the employer.
∀ • They will not compete with the company for
a period of time subsequent to employment.