Entity Formation and Structuring
The most basic question is the type of entity that should be formed when starting a business — either a Limited Liability Company (LLC), S Corporation, C Corporation, Professional Corporation, or Partnership (of course, there are other types too). The importance of forming the right entity cannot be understated. No single entity type is right for every business. Encore Law Group works closely with its client to determine the best legal structure that is consistent with the client’s business objectives (both short and long term) and legal concerns, while providing the best tax advantage. In determining the best entity to form and where to form it, we also consider the ownership of the business, the management structure, the operating needs of the business, as well as the long-term goals of the business, whether they are to sell the business, transfer the business to the next generation within the family, or seek venture capital or other financing.
Shareholders’ Agreements and LLC Operating Agreements
A Shareholders’ Agreement (for Corporations) or an Operating Agreement (for Limited Liability Companies) is a critical document for any entity. This is because it outlines the agreement between the business owners and can avoid misunderstandings that can lead to time-consuming and costly disputes. Oftentimes individuals start a business and form an entity, but either neglect to discuss important issues or do not reduce their agreement to writing. For example, what happens when three individuals form a company and, within a few months of that, one of the individuals does not fulfill on his or her commitment to provide certain services to the company or devote his or her full business time to the company? Can that person be removed or penalized?
Encore Law Group works closely with its clients to draft Shareholders’ Agreements and Operating Agreements that mitigate future disputes that can be fatal to a business. Below are some issues that can be addressed by these agreements:
- Ownership Percentages
- Capital Contributions
- Cash Distributions
- Management and Control
- Breaking Deadlocks
- Time Commitment
- Restrictions on Competition
- Buy-Sell Provisions
- Inspection and Reporting Rights
Corporate governance deals with how an entity operates and makes decisions. A corporate or LLC structure has many benefits, including potential tax savings and liability limitation. Along with these benefits come many duties. Proper corporate governance is imperative in operating a corporation or LLC. Lack of proper governance and failure to observe corporate formalities can hurt the business as well as expose its owners and directors or managers to liability and further tax obligations. This includes ensuring that decisions made by the Board of Directors or LLC Managers are done properly, the required annual meetings are held, and records of meetings are maintained. Encore Law Group works with the principals of a business to ensure that proper corporate governance and formalities are observed and the corporation or LLC is protected from potential problems with its owners, directors or managers, and state and federal regulatory bodies, any of whom may try to “pierce the corporate veil.”
Both family-owned and owner-operated businesses often are managed informally and important topics are not addressed until there’s a problem. One of these issues is what happens when one of the owners of the business dies or chooses to retire, resign or for other reasons is unable to continue to actively participate in the business. Problems arise when there is no plan in place when this happens and the family members or owners have to decide what happens with the business going forward, who will run the business, and what to do with the interest of the person who is no longer involved in the company. This often results in disputes that can harm the business irreparably. Encore Law Group guides and advises its clients in developing, drafting and implementing a clearly defined succession plan that protects a business when the unexpected happens, and that is consistent with the estate plans of the principals. We protect our clients by taking the uncertainty out of the future management of the company.