Conjecture Investments, Entity Structure v3

8/3/2019 Conjecture Investments, Entity Structure v3

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conjecture

conjecture

The formation or expression of an opinion ortheory without sufficient evidence for proof. To conclude or suppose from grounds or

evidence insufficient to ensure reliability.


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Entity Options

Sole ProprietorGeneral Partnership (GP)Limited Partnership (LP)C-Corporation (C-Corp)S-Corporation (S-Corp)Limited Liability Company (LLC)Limited Liability Partnership (LLP)


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Sole Proprietorship

The business and the owner are one.

There is no separate legal entity and thus no separate legal person.

It has no existence apart from its owner.

The life of the business continues to exist as long as the business owner is alive.Once the owner dies, the sole proprietorship no longer exists.

Tax installments are due quarterly

RISKS:

The sole proprietor is personally liable for all debts and actions of the company.

RECOMMENDATION:Not Applicable

A Sole Proprietorship does not meets this teams objective being that we are morethan one.


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C-Corporations (C-Corp.)

A legal entity that is separate from its owners, stockholders

MUST create bylaws (i. e. how the corp. will operate) that cover items such asstockholder and director meetings, number of officers, and their responsibilities

The owners of the corporation are not personally liable for the businesses losses

Creditors may only look to the corporation and its assets for payment The owners have ultimate control of the corporation, but must elect directors who

in turn elect officers for the company

The directors make the major decisions, while the officers make the day-to-day decisions.

A corporations life is perpetual in nature

Ownership is easily transferred through the sale of stock, and new owners can beeasily added by the issuance of additional stock

The minimum franchise tax ($800) is due and must be paid whether thecorporation is active, inactive, operates at a loss, or files a return for a short periodof less than 12 months


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C-Corporations (cont.) RISKS/ISSUES:

Potential issue 1: Every time contributions are made to a corporation, shares mustbe issued. This must typically be done by an attorney and increases significantlyincreases operating costs.

Potential issue 2: There are strict rules that must be followed in order to maintainthe liability protection.

e.g. Regular meetings MUST be held and minutes of those meetings kept and maintainedto preserve the liability shield for its owners

Under Subchapter C ("C -Corporations") are taxed annually on their earnings, andthe shareholders are taxed on these earnings when distributed as dividends

RECOMMENDATION: Not Advisable

Double taxation and maintenance costs (stock distributions from partnercontributions) make this an unattractive option.


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S- Corporation (S-Corp)

Profit or losses of the partnership flow through to the partner

Each partner is responsible for paying taxes on their distributive share

May not exceed 100 shareholders

An S-Corporation does not pay federal income tax

Under California law, the S-Corporation is subject to a 1.5 percent tax on its net income andis a conduit similar to a partnership.

May be either of the three: Corporation, Partnership, or LLC.

An S-Corporation is taxed on its net income at a rate of 1.5 percent for California purposes

The life of an S-Corporation depends on what type of entity it is for state civil law purposes.

S-Corporations that are corporations or LLCs under civil law corporations must pay theannual $800 minimum franchise tax.


Maintenance costs (stock distributions from partner contributions) make this anunattractive option


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General Partnership (GP)

Two or more persons who agree to create a business and share the profits andlosses

A partnership exists as long as the partners agree it will and as long as there are atleast two partners

All partners are involved with operating the business

All of the partners share equal rights and responsibilities in managing the business

A formal, written partnership agreement is advisable.

Partners decide the structure of the organization and the distribution of profitsand losses

The cost to form a partnership is generally less expensive than forming acorporation



The partnership does not pay income tax. However, a limited partnership must

pay an annual tax of $800


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General Partnership (cont.)

RISKS:

Each general partner assumes full personal liability for the debts, lawsuits, andobligations of the partnership.

Any partner can bind the entire partnership to an agreement.

e.g. Dick can make an investment on behalf of the partnership which usesleverage and would obligate the partners to pay even if all the money in thepartnership was gone.

A partnership agreement will create a legal instrument for pursuing thewrongdoings of a partner. However, the liability incurred by the rogue partnerwould not be removed.


A general partnership carries more liability risks than other legal entities.


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Limited Partnership (LP)

Same as a General Partnership, but with the following partitions:

A limited partnership has at least one general partner and at least one limitedpartner. You can have multiples of each.(e.g. three GPs & two LPs)

The general partner (s) is responsible for managing the business affairs, while thelimited partner(s) provides only capital to the partnership

General Partners assume full personal liability for the debts and obligations of thepartnership

Limited Partners liability is limited to their investment in the business

RECOMMENDATION: Not Advisable Each of our team members will be active partners in the development of the

company. The purpose of the LP providing limited partners is not applicable toour team.


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Limited Liability Partnership (LLP)

The LLP form of ownership is limited in the State of California to persons licensedto practice in the fields of public accountancy, law, or architecture.

Partners can (not required) take an active role in managing the day-to-day affairs ofthe business

All the partners receive limited liability protection

A LLP remains in effect based on partners agreeing to a termination date.



An LLP pays an annual tax of $800.

RECOMMENDATION: Not Applicable

Not available to us because we dont qualify as professionals.


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Limited Liability Company (LLC)

Newer form of business entity

An LLCs life is perpetual in nature

An LLC is typically managed by its members

A legal entity that is separate from its owners (members).

Can elect to be taxed as either a C or S-Corporation. LLCs do not issue stock and are not required to hold annual meetings or keep

written minutes

A formal, written operating agreement is required in CA.

An LLC is formed by filing "articles of organization" with the California Secretary

of State prior to conducting business

The liability of the owners (members) of an LLC for debts and obligations of theLLC is limited to their financial investment each year.

Creditors cannot (typically) go after any of the owners unless the ownerpersonally guaranteed the credit or was personally responsible for the liability


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Limited Liability Company (cont.) Members of an LLC that are taxed as a partnership may agree to share the profits

and losses in any manner

An LLC that is taxable as a partnership can achieve both conduit tax treatmentand limited liability protection under civil law

Corporate LLCs will be taxed at the corporate tax rate of 8.84 percent and will besubject to a minimum tax of $800.

Partnership LLC s pay an annual tax of $800, andmay be subject to an LLC feebased on total income from all sources derived from or attributable to the state ofCalifornia.


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Limited Liability Company (cont.) RISKS: The operating agreement must be very thorough and cover all possible future

contingencies

RECOMMENDATION: Accept An LLC provides pass-through tax advantages

Limited liability; Members are only liable up to the amount of their investment


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Future Contingencies

Members leaving or joining

Members being divorced

Members dying

Rogue members

The rights and duties of members;

Contribution of cash, property, or services by members and other issues relating to capital structure;

Maintenance of accounting records and delivery of financial reports and tax information to the members;

Distributions of profits to the members;

Allocations of losses;

Management duties;

Meetings of members and managers;

Voting requirements;

Disposition or assignment of ownership interests of members; Termination, expulsion, withdrawal and admission of members;

Dissolution of the LLC;

Procedures for amending the operating agreement.

Members' percentage interests in the business

"buy-sell" provisions, which determine what happens if a member wants to sell his or her interest, dies, orbecomes disabled.


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Conclusion

Sole Proprietorships , Limited Partnerships, and Limited Liability Partnerships canbe eliminated immediately because they are not available

C-Corporations have the increased cost of issuing shares, the increased formalitiesand dont provide any benefits above an LLC

The two we can consider are General Partnership vs. Limited Liability Company

If we are committed to this idea for the long term and we intend to do anythingexcept securities, an LLC will need to be done before too long.

FINAL RECOMMENDATION:

Form an LLC Have a $2,500 expense ceiling for the operating agreement and State filing

Conjecture Investments, Entity Structure v3

Documents

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