Forming The EntityRob LeChevallierAttorney at Law

Buckley LeChevallier, P.C.

What Factors Go Into Choosing the Entity?

1. The tax treatment and tort liability issues

2. Cost of maintenance of the entity

3. Size and complexity of the entity

4. Regulatory requirements that the local, state or federal government has placed on the proposed business activity

5. Protection of intellectual property

I. Limited Liability Companies A. Formation: LLCs are formed pursuant to

state statute.1. Name Availability Check

2. Articles of Organization 3. Apply to IRS for Employer Identification Number 4. Apply for Oregon Business Identification Number (BIN)5. City and County Business Licenses 6. Operating Agreement

B. Management:

1. Member Managed

2. Manager Managed

C. Tax Considerations:

1. Taxed as a Sole Proprietorship or Partnership

2. Taxed as a “C” Corporation

3. Taxed as an “S” Corporation

4. Self-Employment Tax Issues

Practice Tip: An S election must be “filed” with the IRS no later than 2 months and 15 days (75 days) after the date that the corporation has shareholders, acquires assets or begins doing business (whichever is the first to occur). Reg. Section 1.1362-6(a)(2)(ii)(C)

D. Capitalization:

1. How Much Is Enough

2. Capital Contributions

3. Additional Contributions

II. Corporations1. Name Availability Check 2. Articles of Incorporation 3. Apply to IRS for Employer Identification Number 4. Apply for Oregon Business Identification Number (BIN)5. City and County Business Licenses6. S Corporation Election

BylawsTypically the Bylaws of a corporation will cover the following specific issues:

(a) Board of Director Meetings

(b) Notice of Meetings

(c) Quorums

(d) Annual Meetings

(e) Special Meetings

Bylaws (continued)(f) Voting Rights

(g) Share Transfer Rights

(h) Directors

(i) Amendment

(j) Removal

Issuing StockThe following represent some basic steps to issuing stock correctly.(a) Determine how many shares the corporation has available to issue (b) Calculate the number of shares to issue to each shareholder based on the percentage ownership and number of shares(c) Prepare the stock certificates with the shareholders name, number of shares they own and the certificate number

Issuing Stock (continued)(d) Record in the stock ledger each certificate that has been issued

(e) Make sure to include a stock legend on the back of the stock certificate

(f) If desired send the stock certificates to each shareholder and obtain a receipt.

What is §1244 Stock?(i) The amount of money and / or property the corporation received for stock, a contribution to capital, and paid-in capital does not exceed $1,000,000.

(ii) A shareholder claiming a loss on the sale or exchange of Section 1244 Stock purchased the stock from the corporation as an original issue and is an individual or partnership

§1244 Stock (continued)(iii) The stock is either common stock or preferred stock

(iv) The stock was paid for with money or property, not services or other stock or securities

§1244 Stock (continued)(v) The corporation derived over 50% of its total gross receipts from sources other than rents, royalties, dividends, interest, annuities, or proceeds from sales or exchanges of securities either for the 5 years prior to the year in which the loss occurred or since the corporation’s inception, if it has not been in existence for 5 years.

Subscription AgreementA Subscription Agreement is a contract to purchase the shares of a corporation. These agreements are recommended even if there are only two (2) or three (3) investors (see the Appendix for a sample form of a Subscription Agreement).

B. Management

C. Taxation

1. “C” Corporations or Regular Corporations

2. “S” Corporations

D. Capitalization

1. Corporate Stock

2. Corporate Loan

IRC § 351 IRC § 351 is fairly straightforward: Gain or

loss is not recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in that corporation and, immediately after the exchange, the person or persons are in control (as defined in IRC § 368 ©)) of the corporation.

Side by side comparison of the advantages and disadvantages of an LLC, C Corporation, & S Corporation

LLC C Corporation S Corporation

•Limited liability for all members

•Flow-through income tax treatment

•Flexible with respect to capital structure

•Flexible with respect to distributions and allocations of profits and losses

• Flexible with respect to termination and existence

• Flexible with respect to transferability of membership interests

• Limited liability for all shareholders

• Free transferability of stock

• Stock can be publicly traded

• No self-employment tax on distributions

• No passive activity on loss restrictions

• Well established case law and history

• Limited liability for all shareholders

• No self-employment tax on distributions

• No passive activity loss restrictions

• Well established case law and history

Advantages:

LLC C Corporation S Corporation

• May be taxed as a corporation

• Members’ interests may be subject to transfer restrictions

• Member withdrawal or assignment of interest can cause dissolution

• Members interests cannot be publicly traded

• Distributions to members may be subject to self-employment taxation

• Potential for piercing the veil and finding members personally liable

• Limited case law and history

• Shareholders subject to double taxation

• Corporate formalities must be followed

• Corporate management structure is fixed

• Piercing of the corporate veil leads to personal liability

• Limited to 100 shareholders

• Limited in type of shareholder

• Limited to one class of stock

• Corporate formalities are required to be followed

• Corporate management structure is fixed

• Piercing of the corporate veil leads to personal liability

Disadvantages:

IV. Conclusion The objective of these materials is to

emphasize that the decision regarding the choice of entity is not one to be taken lightly. Deciding the proper choice of entity requires that one consider the unique facts and circumstances of each case, the client’s wishes, and the prospects for future change in the business.