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Forming Llc Vs Corporation - PDF

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					  Session 108

    Top Ten
   "Gotchas"
   Regarding
Incorporating or
Forming an LLC

                   TUE
                9:10am
                                 Moshe Meppen
                                Sr. Product Leader
                        MyCorporation.com an Intuit Company


Mr. Meppen is the product development and product management leader for the
MyCorporation division at Intuit, and is responsible for the technology, engineering, and
user experience of MyCorporation’s online offerings.

Previously, Mr. Meppen served as Director of Sales and Marketing for Interlink
Electronics, Inc. where he pioneered the adoption of electronic signature technologies at
Wells Fargo Bank, Charles Schwab, State Farm Insurance, Farmers, and Prudential
Financial. He also served as founder and CEO for NearCom Technologies where he led
the creation of secure video monitoring technologies for home and enterprise use. Mr.
Meppen has a BA from the University of California at Santa Barbara and an MBA from
Pepperdine University.
       #1 - Corporate Formalities
Relevant Background Facts:
•   Naming a Registered Agent
•   Filing Annual Reports
•   Giving Notice of Annual Meetings
•   Holding Annual Meetings
•   Documentation (Minutes)

What to do if this Happens:
•   Maintain an effective calendaring system
•   Document Official corporate meetings

Implications:
•   Out of compliance/Good-standing
•   Corporate Veil “pierced”
•   Expensive to reinstate




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       #1 - Corporate Formalities – Marta
    Marta owns a corporation where she and
    her husband are the only shareholders.
    They also operate as the directors and
    officers. She received a notice from the
    state that her corporation was not in
    good standing.

    After calling the secretary of state she
    realized that she and her husband needed
    to file an annual report with the state
    containing all of the information that is
    required by statute since they were the
    officers and directors of her corporation.

    After compiling the proper records, filing
    more paperwork with the state, and
    paying additional fees and penalties she
    is now back in good standing.




       #2 – Registered Agent Required

Relevant Background Facts:
•   All states require businesses to maintain a registered agent.
•   Required to accept legal and official documents on behalf of a business.
•   A RA (that is distinct from the business itself) allows the business a certain
    amount of separation from the public.
What do you do if this happens:
•   Name the agent for service of process on the legal filings (Articles) and/or
    Statement of Information/Annual Report.
•   If a third party is offering the service, ensure that the fees are timely paid so
    that the RA service is maintained.
Implications:
•   The corporation/LLC will be out of good standing without meeting the state’s
    official requirements.
•   Documents such as franchise tax notices, annual reports & official legal notices
    may not be received by the corporation/LLC.




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    #2 – Registered Agent - Bob
 Bob recently changed the registered
 agent that he was using for his business.
 This was a big decision because he had
 been using the same registered agent
 since he started his company.

 However, he forgot to update the
 registered agent information that was in
 his articles of organization. He didn’t
 realize he was supposed to file another
 form to update his registered agent
 information with the new name and
 address.

 Not only is he now out of compliance with
 the state, but he was just sued by a
 company who was unable to serve his
 company because the information on his
 articles is out of date. This certainly
 means more time and money to get back
 in compliance and could cause some legal
 problems if he fails to respond to the
 lawsuit in time.




    #3 – Corporation vs. LLC
Relevant Background Facts:
• Formed an LLC because it seemed simpler
• Intent to go public
• Cannot go public with LLC as entity
  type
What do you do if this happens:
• Dissolve & re-form OR
• Prepare & file a conversion
Implications:
• Expensive
• Time consuming




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       #3 – Corporation v. LLC - Michael
    Michael started the company “Cool Blue
    Glow Video Games, LLC” with the intent
    that he would grow the company and
    then take it public.

    Since this was a start-up, and he was
    trying to save money, he did everything
    himself and thought that an LLC would be
    the best option since it was easier to
    form and didn’t require as much
    paperwork during the year to maintain.
    He failed to realize that only a for-profit
    corporation can offer stock publicly.

    Since he has been operating his company
    for two years his only options are to
    dissolve his LLC and reform it as a
    corporation, or to file a conversion. Both
    these processes require a lot of
    paperwork and more money than it
    would have been to just form a
    corporation to begin with.




       #4 – Missing the “S-Corp” Deadline

Relevant Background Facts:
•   For an existing corporation, the election to become an S-Corp is due by
    March 15th
•   For a new corporation, the election must be file within 75 days after the
    corporation begins conducting business, acquires assets or issues stock
    (whichever is earlier).
What do you do if this happens:
•   An S-corp election may be filed as soon as you remember, but will not be
    effective until the following year.
Implications:
•   Potentially double-taxation (taxed as a C-corp) until the following year.




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     #4 – Missing the “S-Corp” Deadline - Suzie

    Suzie Sato just started a new corporation
    that offers knitting products. She wants
    to change the regular “C-Corporation”
    into an “S-Corporation” to reap the
    benefits of having all the profits and
    losses pass directly through to her.

    With all of the affairs that come from
    starting a new company and getting
    things running smoothly she didn’t
    submit the IRS Form 2553 until three
    months after she starting purchasing
    stock using her corporation.

    Suzie missed the 75 day deadline for new
    corporations to file their “S-Corp”
    election so now she will have to operate
    her company as a regular C-Corporation
    for another year and may face taxation
    twice. Once for corporate profits and
    again for any dividends paid to her as the
    sole stockholder.




         #5 – Failure to Qualify as an S-Corp

Relevant Background Facts:
•   In order to remain eligible for S-Corp tax advantages
    the company must always meet the following
    requirements:
     –   it must be a domestic corporation;
     –   it must have no more than 100 shareholders;
     –   all shareholders must be individuals, estates,
         or certain exempt organizations or certain trusts;
     –   the shareholders must be US citizens;
     –   the corporation must have only one class of stock; and
     –   the corporation’s calendar year must end on
         December 31st.

Implications:
•   If these requirements are not met, the S-Corp
    will be subject to the C-Corp taxation scheme and
    double taxation.




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    #5 – Failure to Qualify as an S-Corp

    Ahmed recently immigrated to the
    United States and since becoming a
    resident alien is excited to start his
    own business.

    He recently formed a corporation
    with his wife Helene and has filed IRS
    Form 2553 to become an S-
    Corporation. This seemed like the
    best option for tax purposes since
    they want all of the profits and losses
    to pass through to them personally.

    He did not realize he needed to be a
    U.S. citizen however, and since he is
    only a resident alien his S-Corp status
    was denied. He now only has a
    regular C-Corporation and faces the
    prospect of being taxed twice.




       #6 – Someone else using your name

Relevant Background Facts:
•   A corporate name is reserved and protected when the corporate documents are filed
    at the state level.
•   The corporate name does not protect a logo or brand name (trademarks & corporate
    names are distinct).
•   The corporate name is being used as a trademark in association with goods and/or
    services
•   A third party has the same name in another state.
What do you do if this happens:
•   Prepare in advance by undertaking a comprehensive search for availability of the
    business name – especially if the plan is to use it as a brand name (trademark)
•   Speak with trademark counsel about the options:
•   Talking with the other entity using the same name?
•   Rights available to each party
Implications:
•   Exclusive use of the corporate name/brand name may more limited than anticipated.




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     #6 – Someone else using your name

    Nathaniel Smith has been selling his
    delicious hot dogs made with his
    signature buns and sauce from a
    cart since he was in high school.

    Everyone in his small town knows
    about “Nathan’s Hot Dogs” and they
    are so popular that Nathanial
    decided to open a large scale hot-
    dog-only restaurant and call it
    “Nathan’s Hot Dogs.” As his
    restaurant grows and he is
    approached to start selling is
    signature buns and sauce in stores,
    he receives notice of a lawsuit by
    the Nathan’s hot dog people in New
    York.

    Being that he is from a small town,
    Nathaniel is shocked to find out that
    someone else has already been
    using that name and that now he is
    in the unpleasant position of totally
    changing his branding after it has
    been doing quite well for him.




        #7 – Filed a Delaware Corporation

Relevant Background Facts:
•   Filed an LLC in Delaware
•   Understood Delaware to have the most favorable
    business/corporate laws.
•   Business is based in California
What do you do if this happens:
•   Local state laws may require the business to be
    “foreign qualified”.
•   Pay taxes in the business’ home state & the state of
    incorporation.
Implications:
•   Paying taxes in two states
    (even though based only in 1).
•   Subject to litigation in multiple jurisdictions.
•   Time & money to be qualified to do business in 2
    jurisdictions.




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       #7 – Filed a Delaware Corporation

    After doing some research of her own,
    Taysha figured that forming her new
    corporation in Delaware would be the
    best option because of the tax benefits
    they give to businesses.

    She forms her company as a Delaware
    corporation to take advantage of the
    favorable tax structure even though
    her company is based in California.
    When tax season comes around her
    business has been doing very well.

    To her dismay, however, her
    accountant informs her that she is
    subject to taxation in both California
    and Delaware because her business
    actually operates in California but is
    incorporated in Delaware. What’s
    more, she has been served with a
    trademark lawsuit by another
    corporation and finds out her
    corporation is subject to the
    jurisdictions of both Delaware and
    California.




       #8 – DBA Filing Required?
Relevant Background Facts:
•   Official corporate name is not the same as the business name. (i.e., Intuit =
    official corporate name, but Quickbooks is business name)
•   Whenever a name other than an individual name or the name of the
    corporate entity is used, a “doing business as” (“DBA”) must be filed.
What do you do if this happens:
•   File DBA documents at the relevant county/state agency.
•   Publish all DBA documentation, where necessary.
Implications:
•   Checks made out to the business name cannot be cashed without a DBA.
•   Filing a DBA may take some time (especially when publication is required).




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               #8 – DBA Filing Required?

    Javier runs his own photography
    studio out of his home. He is one of
    the most sought after photographers
    for weddings, senior class pictures,
    and family portraits.

    He recently decided to call his studio
    “Forever Photos” and to start
    charging a little more to capitalize on
    his popularity. After receiving his
    first check he goes to the bank to
    deposit it but realized that since it is
    made out to “Forever Photos” he
    can’t put it into his account. The
    bank informs Javier that he needs to
    file a DBA in order to deposit checks
    made out to “Forever Photos” into his
    account.

    This is going to take some time since
    Javier’s state requires publication of
    the DBA. It could be weeks before he
    is able to deposit the checks from his
    photo jobs.




       #9 – Relevant & Updated Governing Documents


Relevant Background Facts:
•   Corporate Bylaws & LLC Operating Agreements are
    a critical mechanism for governing the entity.
•   Failure to update these documents can
    result in confusion among shareholders/members.
What do you do if this happens:
•   Always document business re-organization,
    changes, and official discussions by updating
    the Bylaws & Operating Agreement.
•   Often if there is confusion/disagreement over
    the governing documents, a lawyer or mediator will
    be required to aid in the interpretation.
Implications:
•   Ambiguous governing document clauses can lead to confusion & expense.
•   Failure to document business agreements in writing can lead to inaccurate &
    out-of-date governing documents.




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      #9 – Relevant & Updated Governing Documents

    Ken has been on the board of directors for a
    corporation for about 15 years. Recently
    two members of the board stepped down in
    order to spend more time with their families.
    Before this happened, the board had decided
    to leave these board positions empty and
    reduce the size of the board of directors.

    The big problem was that this was not
    recorded in minutes and was not added to
    the corporate bylaws or amended as part of
    the articles of incorporation. Now, a young
    and very wealthy investor in the city who
    has heard about the stepping down of the
    board members is using his recent purchase
    of a lot of shares as an opportunity to try
    and get involved in the affairs of the
    corporation. He has been told the board has
    been reduced, but the company’s records
    indicate otherwise.

    This is leading to a now public dispute over
    the operation of a very profitable publicly
    traded company. Lawyers have been hired
    and a fight is ensuing to see what is really
    going on here.




        #10 – Business Licenses Required?
Relevant Background Facts:
•    Depending on the type of business and location,
     multiple business licenses may be required to
     comply with governmental regulations.
•    Business licenses are distinct from corporate/LLC
     filings.
•    Different governing agencies oversee varying
     types of business licenses.
What do you do if this happens:
•    Utilize available services to evaluate business
     license requirements needs.
•    File for necessary business licenses as soon as you
     become aware of the requirements.
Implications:
•    Failure to register appropriately can result in
     penalties and prevent you from operating your
     business.




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      #10 – Business Licenses Required?

    Sandra has recently set up a limited
    liability company for her new nail salon
    and beauty shop. She knows it was
    done correctly because her attorney
    brother did all of that for her.

    Her store is stocked and she has all of
    the equipment she needs. The night
    before she if ready to open for
    business, she is informed that she
    doesn’t have the necessary business
    licenses for her state and county to
    operate a shop that does nails and hair.
    Now Sandra will have to delay her
    opening for weeks while she gets the
    necessary licenses.

    This will cause her some financial
    difficulties since she will be paying for
    her stock, equipment, and lease even
    though she isn’t bringing in any
    money.




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