Written by: Steven J. Fromm, J.D., LL.M. (Taxation)
The following provides a basic overview of the major non-tax considerations that clients need to address when determining the proper business entity to conduct their operations.
Legal Liability: Limited Liability Protection for Owners Against Entity Debt
This is one of the most important considerations in determining the proper entity for business operations. Individual investors in business do not want to put their personal wealth at risk due to business operations.
Raising Capital: Capital Structure, Public and Private Offering of Stock
If a client has an eye towards the future in perhaps going public or raising capital these needs have to be considered when determining the proper legal vehicle for operations.
Multiple Classes of Stock Needed or Permitted
If the client is going to need venture capital or funding from various parties, multiple classes of ownership may need to be employed to obtain the best result.
Ease of Transferability of Ownership Interests
Certain interests are easier to dispose of than others and the client may desire restrictions on transferability for business, competitive and practical reasons.
Stockholder, Partnership or Entity Buy-Sell Agreements
Clients often times want to control the corporation and to provide for the disposition of shares or interests in the company in the event of an owner's death, disability, retirement or separation of service.
Type of Business or Investment Activity Contemplated
The type of business whether it be a regular business, internet business, real estate activity or ultra-hazardous venture must be considered.
State Law: Is there well Established Body of Case Law, Special Tax Breaks or Multiple States of Operation?
Certain states are preferred in certain cases, such as Delaware, for their established body of case law or for tax reaons. Clients need to consider how operating in multiple states need to be handled and which state should be chosen for the state of incorporation.
This is just an overview and not nearly an all inclusive list as to the non-tax consideration involved in determining the proper legal entity for a business or investment venture.
Remember, the "devil is always in the details," as there are many technical steps and procedures that need to be taken depending on which entity is ultimately chosen. This gives you an idea as to why most astute business persons retain an experienced tax lawyer to assist them. This is not a task that should be undertaken without an experienced tax attorney who regularly deals with these details, complexities and is familiar with the technical areas of corporate and tax law.
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