Corporate Law FAQ
- A corporation is a legal business entity owned by Shareholders who hold Shares of Stock, who elect a Board of Directors to manage the business, and created by filing the formation documents in the state of incorporation. Corporations offer limited liability for the owners, well-known and structured but rigid governance (bylaws), and availability of pass-thru treatment for some Federal income tax purposes (S-Corp.).
- A LLC is a legal business entity owned by Members who hold Units of ownership, who can also have Managers (similar to a Board of Directors) to manage the business, and created by filing the articles of organization in the state of organization. Corporations offer limited liability for the owners, flexible governance and ownership structures, and pass-thru treatment for Federal income tax purposes.
- A partnership is a form of business arrangement consisting of two or more persons jointly carrying on business in order to achieve profit. In order to avoid unintended consequences by entering into a partnership, or improperly describing a business relationship as a partnership, it is important to understand what partnerships are, how they work and when you can use them. No formal documentation of ownership is required and it does not offer limited liability for the owners.
Forming a corporation or LLC gives your business its own legal identity allowing it to own property, have a bank account, make contracts, sue and be sued. The purpose of this is to shield owners from the liability of the business. A home, bank account, and other personal assets are protected. By contrast, in a partnership, the owners and the business aren’t legally separate and all owners and their personal assets are at risk.
A corporation generally has Articles of Incorporation. A corporation also has Bylaws that govern operation and management of the corporation. Lawyers recommend having a Shareholders Agreement or Buy-Sell Agreement to address conditions under which shareholders can sell their shares or new investors can become owners.
A LLC generally has Articles of Organization. An LLC may also have an Operating Agreement that combines the rules that govern operation and management of the LLC like bylaws, with the provisions typically found in a Shareholders Agreement or Buy-Sell Agreement to address conditions under which members can sell their ownership or new investors can become owners.
Regardless of the type of entity, states often have state-specific business license, unemployment registration, and taxation registration requirements.
A corporation is usually created by filing the Articles of Incorporation with the Secretary of State of any given State and paying the appropriate filing fees. A LLC is usually created by filing the Articles of Organization. A Partnership is formed when 2 or more people agree to do business together and to share in the profits and losses of a business. No registration is required to create a partnership.
Dissolving a corporation or LLC requires following the laws of the State of incorporation or organization. Steps include properly documenting the decision to dissolve the business, filing the necessary documents, and providing for the resolution of any debts or claims.
Sales of equity (ownership) in an existing corporation or LLC is a sale of securities, which is regulated by various state and federal law and requires registration, unless an exemption form registration is available.
There are many factors that go into choosing the best state to form your business entity, including, state income tax, presence of other businesses, experience of courts and judiciary, location of owners, executives or physical offices and facilities.
Yes. Businesses like Startups are inherently short of cash, so incentive “sweat” equity arrangements are preferred. Since early stage companies benefit by preserving cash, sweat equity compensation arrangements enable the company to halt the project if conditions change or the relationship is not working out well.
Stock appreciation rights are a type of incentive compensation based on increases in the stock over time. However, unlike options, there is no exercise price. Phantom stock benefits selected employees without giving away actual stock. Its value rises and falls with the company’s actual stock (or what the company is valued at, if it’s not a publicly traded company). Phantom stock is intended to incentivize hard work and loyalty. One form of phantom stock is Stock Appreciation Rights.
The key to successfully operating a business is managing the risks that arise from relationships with customers, employees, consultants and vendors.