Forums: Discussions for entrepreneurs and small business.

Hi!

I'm looking for help choosing the correct business entity for my business (LLC, S-Corp, or C-Corp).  My co-founder and I have come up with a rough outline of an agreement on how to structure ownership, but I'd love to hear if others can see any issues with it.

We want to split the equity in the company 45% (partner 1), 35% (partner 2), and 20% (reserved for future employees.)  For voting rights and dividend distributions (if any) the unallocated employee lot would be divided up 75% to partner 2 and 25% to partner 1 -- which means we start 50/50.  If the company changes ownership through a buyout the unallocated employee lot would also be divided up 75% to partner 2 and 25% to partner 1.

Partner 2 will be operating the business for a salary, while Partner 1 currently has plans to just contribute as an advisor/board member.   The business will likely be hiring 2-5 people over the next year, but we'd still have a healthy amount of earnings that I'm unsure how to pass along to the partners.   The business' income will be 'spikey' so it'd be great to retain some of the earnings as working capital to pay partner 2 and the handful of employees.   However, how can these earnings be distributed cheaply?   From my reading (I'm new at this) an LLC would be pass through, but I'm not sure how difficult it is to setup the structure outline above nor the limitations on retained earnings.  For the C-Corp, we'd have to find a way to put Partner1 on staff or deal with the double taxation of dividends (both partners and the corp will be in the top tax bracket.)  For an S-Corp, I see that we can pass through earnings, but I'm unsure how hard it is to retain working capital.

Is an S-Corp the right thing for this situation?  If it matters, Partner2 lives in and will be operating the business from Nevada while Partner1 lives in the much more costly locale of NYC.

Thanks for reading this far and any advice you can give a newbie entrepreneur!

Hi lostvegas

My firm is a business consulting firm specializing in startup's  and growth oriented  companies( www.janconsultinggroup.com).  We are located in the Metro NY area.  A discussion regarding your options concerning entity formation to meet both present and future objectives should be done on the phone and or a meeting. I would be happy to schedule a 1/2 hour complimentary telephone conversation to discuss this matter. If you are interested, please Email me with your contact information and we can schedule a mutually convenient time to speak.(mjanicki@janconsultinggroup.com).

Mike Janicki

Partner

The Jan Consulting group

LostVegas,

First of all you should remember that with any new venture you can't predict every possible turn of events. The good news is when it comes to incorporation you can easily correct your choices as your business develops and new needs arise.

Here is how you could structure your business now, and how you coul restructure it later on:

Since your partner is in Nevada you could easily form an LLC right there and enjoy the many benefits Nevada offers as far as liability protection, taxation, and ease of managing an LLC there (you will also save money on Registered Agent). You can have operating agreement stating all of what you mentioned, and any time you need to change the terms you will only need to amend your Operating Agreement.

As your business matures and you are thinking of various strategies such as adding investors (which you can still easily do with LLC) or giving your employees stock options you could still do all that with LLC, due to the flexibility of this type of entity.
Assuming you do great and your business attracts serious investors that require you for example to incorporate in Delaware you would be able to just form a new Delaware corporation, while preserving all the agreed upon in the LLC agreement.

As long as you are thinking about using an entity rather than a sole prop, I think you are headed in the right direction. You'll get lots of opinions. Your best bet is to pick one and start making money.

An S-corp would not be a good choice for you, because it does not have Flexible Profit Distribution benefit that an LLC or S-corp would have. The 2 options to pick from would be an LLC or a C-corp. If your business anticipates large profits and no losses, or you feel you would have a need to expand you business by giving out equity, then a c-corp would be good. But like myusacorporation said, at this time an LLC would be a good starting point for you.

Deciding for your business must result into smooth transaction. Business partners must agree to one ultimate decision that they can stand till end. And in my opinion, you better choose S-Corp because in S-corp allows the entrepreneur to protect his or her personal assets in the event of business failure. At least you can assure that everything is fair.