Business Formation and Choice of Entity

If you decide to establish a small business in Washington, DC one of your first decisions is to determine what type of business entity you want to be: sole proprietor, general partnership, limited partnership, limited liability company (LLC), corporation, etc. Each type of entity has legal and tax obligations and structures associated with it. Before you decide, you should consult with a business lawyer familiar with business laws governing your place of residence as well as your accountant.

A fictitious entity like a corporation, an LLC or a limited partnership is beneficial in that it limits your personal liability and it provides a certain amount of credibility. The benefits of establishing a sole proprietorship or general partnership (usually for businesses with limited liability exposure) are ease of formation and fewer tax obligations.

Our business attorneys can assist you in selecting the appropriate choice for your circumstances.

Other considerations in choosing your particular business entity include

• Can interest in the business be easily transferred?
• Does the business have continuity of existence after I am no longer owner?
• Can management of this business be centralized?
• Do we have the right number of investors and are they participating appropriately?
• Is our financing structure right for the long term?
• Does this entity fit into our estate planning goals?
• In which state should I form my business entity?
• Do I ever plan to take my business public through an initial public offering (IPO)?
• What kind of business and occupancy permits will I need?
• What type of investors do I have and what kind of agreement do I need among them?

The type of financing that you seek for your business can also influence your business entity choice. If you anticipate taking out a business loan or securing other types of outside financing you must have a business plan to verify your intent to run a successful business.

Obtaining equity financing can be a complex undertaking that involves compliance with federal and state securities laws. You should always consult a lawyer with experience in equity investment business law before relinquishing part of your business to an investor.

INVESTOR AGREEMENT CHECKLIST

1. Control of the Corporation/Limited Liability Company/Partnership The following actions will require what percentage of the investors to approve?

A. The default percentage is 80%. This should be increased or decreased
according to the number of investors, the percentage of shares each holds or
will hold.

a) amendment of the Corporation's Articles of Incorporation or Bylaws/the LLC Operating Agreement/the partnership agreement;
b) approval of a merger or consolidation;
c) sale of all or substantially all of the assets of the business;
c) dissolution of the business entity;
d) authorization to issue additional shares of the Corporation's capital stock or admit additional members to an LLC or additional partners to a partnership;
e) distribution of profits;
f) any loans to officers, directors, managers, partners or employees of the Corporation/LLC/Partnership or guarantees of their financial obligations in excess of one thousand ($1,000.00) dollars per annum;
g) transactions involving a conflict of interest, directly or indirectly, between the Corporation/LLC/Partnership and any officer, director, managers, partners or employee of the business;
h) approval of pension plans, retirement plans or other employee benefits;
i) approval of the Corporation's/LLC's/Partnerships's Annual Value.

B. The following matters shall be effected by the vote of holders of fifty-one (51%) percent of the issued and outstanding stocks or 51% of the LLC member shares or partnership interest:

a) increase or decrease the number of directors or managers;
b) approval of the Corporation's/LLC's/Partnership's annual budget, including but not limited to:

1) salaries of officers, managers, partners or bonuses in excess of any compensation set forth in any applicable employment agreement;
2) individual capital expenditures over ten thousand ($10,000) dollars, including capital leases and the acquisition of real estate.

c) removal of officers, managers.
d) No inter vivos transfers of stock or interest allowed. (In other words, no one can sell their stock or interest unless 51% agree.)

2. Shareholders/Members/Partners can use stock as collateral with 80% consent of others.

3. Right of first refusal granted. This means that if a shareholder/member/partner finds a buyer of his interest, the business has the right to buy him out at the same price the shareholder/member/partner found a buyer at.

4. Option to purchase stock or interest of terminated employees: applies to termination with or without "just cause"?

5. Option to purchase stock or interest of terminated employees:

2. If employee owns less than 20% & terminated with cause or quits, then the business has option to purchase.
3. If employee owns less than 20% & terminated without cause or disabled etc., then the business must purchase.
4. If employee owns in excess of 20% & terminated with cause, then employee has option to sell to the business.
5. If employee owns in excess of 20% & terminated without cause or disabled etc., then the business must purchase.
- The purchase price of the stock or interest shall be:

1. If employee owns less than 20% & voluntarily or for just cause terminated before 5 years, then book value.
2. Same but after 5 years & without just cause, disability etc., then higher of book value or annual value & insurance proceeds.
3. Same but termination with or without cause & owning in excess of 20%, then higher of book value or annual value & insurance proceeds.
4. When a CPA determines the annual value of the stock or interest, ratification thereof will be by majority of directors/managers & 80% of stock?
5. The business shall purchase insurance on lives of all owners?
6. Mandatory arbitration of all disputes and in what jurisdiction - DC, Virginia, Maryland.?
7. 80% vote required to terminate this agreement?