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STARTING OFF ON THE RIGHT FOOT: BUSINESS FORMATION AND OWNER AGREEMENTS

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

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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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