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Starting Off on the Right Foot: Business Formation and Owner Agreements

Learn about business entity forms, owner agreements, and governance in partnerships, corporations, and LLCs. Find out about money concerns, governance differences, exit strategies, and valuations to protect your business interests.

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Starting Off on the Right Foot: Business Formation and Owner Agreements

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  1. STARTING OFF ON THE RIGHT FOOT: BUSINESS FORMATION AND OWNER AGREEMENTS James P. O’Sullivan & May Lu Tiffany & Bosco, P.A.* Camelback Esplanade II, Third Floor 2525 E. Camelback Road Phoenix, AZ 85016 (602) 255-6017; (602) 255-6032 jpo@tblaw.com; mlu@tblaw.com * Offices in Phoenix, AZ and Las Vegas, NV

  2. Disclaimer • Information presented here is general information. • Choice of the right legal strategies for your business depends on your fact situation and how the law and market conditions apply to that situation. • Consult professional advisors such as your accountant, insurance professional and business attorney.

  3. INTRODUCTION • Why Bother?

  4. CHOOSING A BUSINESS ENTITY FORM • Comparison of Business Structures Chart

  5. Available Legal Forms • Sole Proprietorship • Partnerships • Corporations • Limited Liability Company

  6. Sole Proprietorship • Limited value, considering allowance of one-member LLC in Arizona and many other states

  7. Partnerships • General Partnership • Limited Liability Partnership • Limited Partnership

  8. General Partnership • In a general partnership, all partners subject to personal liability! • Innocent Partner Still Liable • “Thelma and Louise” Rule

  9. Limited Liability Partnership • If general partnership or limited partnership, easy and wise to switch to LLP

  10. Limited Partnership • Still need at least one general partner • Usually ‘money’ person and ‘manager’ • Unlimited liability for general partner

  11. Corporations • ‘S’ Corporation • ‘C’ Corporation

  12. C Corporation • Default whenever a corporation is created • Limited liability for shareholders • Corporate Formalities

  13. S Corporation • Tax Election of a C Corporation or Limited Liability Company • Protection still the same

  14. S Corporation • Relatively confining requirements • Corporation of state or U.S. territory; • Limits on who can be shareholders; • No more than 100 shareholders; • Only citizens or residents of U.S. may be shareholders; • Only one class of stock (can have voting/non-voting).

  15. Limited Liability Company • Limited Liability – Even for one member • Ability to Elect Federal Taxation as Corporation or Partnership • History of LLC Statutes

  16. Limited Liability Company Management Member-managed Manager-managed Very Flexible Organization No Annual Reports in AZ Typically, Less Formalities to Operation than Corporations.

  17. Arizona Corporation Commission www.cc.state.az.us Search Corporations, LLCs, Trade Names, & Trademarks Check Name Availability Forms, Instructions, and Fees

  18. Arizona Secretary of State http://www.azsos.gov/business_services/filings.htm Search Partnerships, Trade Names & Trademarks Checklist for Limited Partnership Filings Applications for Trade Names & Trademarks Forms, Instructions, and Fees

  19. OWNER AGREEMENTS • Different Types, But Similar Issues: • Partnership Agreement (Partnership) • Articles of Incorporation, Bylaws, Shareholder Agreement (Corporation) • Articles of Organization, Operating Agreement (Limited Liability Company)

  20. Money Concerns • How does money come in? • Debt (Personal Guaranties) • Equity • “Sweat” Equity

  21. Money Concerns • How does money come out? • Return on Investment • Profits and Losses • Compensation to Owners/Employees

  22. Governance and Management • Differences Among Business Entity Forms • Board of Directors, Officers and Shareholders • Partners • Managers and Members

  23. Governance and Management • You’re not the boss of me! (Are you?) • What duties and rights do the parties have? • A.R.S. Section 10-732

  24. Governance and Management • When, Where and How Do They Meet? • What Must They Do to Act?

  25. Records and Oversight • Access to Internal Information • Audits • Financial Reporting • Tax

  26. Protection From the Outside • Insurance • Indemnification • Restrictions on Transferability • Spousal Provisions/Consents

  27. Grounds for Business Divorce • Breaches • Dissolution • Release from Guarantor • Indemnification • Security for Payment

  28. Exit and Termination • Triggering Events • Death, Disability • Divorce • Termination • Tag Along/Bring Along • Non-Compete/Trade Secrets

  29. Exit and Termination • Call Right? • Right of First Offer/Refusal? • Buy-Sell Rights? • Shotgun?

  30. Valuation of Business • Book Value • Fair Market Value Determined by Appraisal • Fixed Initial Price + Annual Increase Based on Earnings/Other Factor • Amount Offered by Bona Fide 3rd Party Purchaser • Value on Company’s Earnings * Some Multiplier

  31. Payment Terms • Cash • Promissory Note • Cash and Promissory Note • Life Insurance/Disability Insurance Proceeds

  32. Security for Payment • Pledge of Stock • UCC Lien • Against assets of the company and/or owner • Personal Guaranty

  33. Saving the Marriage(or at least the business) • Alternative Dispute Resolution • Informal Negotiations • Formal Negotiations • Mediation • Arbitration

  34. Saving the Marriage(or at least the business) • Litigation • Restraining Order/Injunction

  35. More Legal Considerations • Notices • Choice of Law • Attorneys’ Fees • Attorney Representation Provision

  36. QUESTIONS?

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