Monday, July 16, 2007

[New Biz] "Incorporating" an Opportunity

So, I have a term sheet from the landlord, and things with the project are progressing rapidly. For a number of reasons, I need to start thinking about organizing a corporate entity for this business. This is one of the most basic things I counsel my start-up clients through--picking the right corporate entity for your business.

Clearly, this is not going to be a sole proprietorship because there is too much risk of getting sued and I do not want to be on the hook personally. For starters, I need to do business with a large number of vendors, I am going to be subletting office space to a large number of subtenants/licensees, I will eventually have employees, and there will be visitors coming into the space who could get injured.

But even more importantly, one of my goals with this business to build it with the intention that it can be sold down the road (even if I never do). I also may want to raise capital privately to grow the business down the road. Both would be tough to do this as a sole proprietorship.

That leaves me with two options: LLC or Corporation. The business is going to be operating in New York. As a LLC start up attorney, I know that even if I organize in a different state (i.e., Delaware or Nevada), I will need to qualify the organization in New York. Because New York requires LLCs to publish the formation of the LLC in a local and regional newspaper (which will run me about $1,600), I'm going to save my money and form a corporation. Perhaps if I had a partner on this project, I would have considered a LLC more carefully because of the flexibility in managing a LLC. But since it's just going to be me for now, I can get the same "flow through" taxation benefits through a corporation by making a S-corp tax election, and filing it with the IRS and the state.

Since I am only issuing shares to me, and not planning on taking on equity investors, when I formed the corporation, I just authorized a minimal number of shares of common stock at a small par value ($.001).

The state has a new online fill-in form to organize a business, but after looking at the form more carefully, I didn't really like it, especially since you couldn't choose a par value (can only select no par value stock). It was a little tricky to find and use as well.

By the way, when I filed my Certificate of Incorporation with the Secretary of State via fax, I requested 24-hour expedited service. If you get your documents in before 2PM, you will have your documents back the next day. If you do not elect to use this service, it can take 10 to 15 business days to process. The extra cost was $25--money well spent. FYI, you can also pay for same-day ($75) and two-hour expedited service ($150).

I filed, and got my response the next day. LFIS, Inc. is officially organized.

I applied for a tax identification number with the IRS, and made my S-corp small business tax elections with the state and federal government. I put together a quick set of bylaws, initial board minutes and stock certificates to make sure I have my "corporate formalities" covered, and I'm good to go!

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