BUSINESS FORMATION 101
Co-Sponsored by SmartUp® & General Assembly®
Presented By Andrei D. Tsygankov, Esq.Entrepreneur & Attorney-At-Law
About Me• B.S. in Management from Georgia Tech• J.D. from Georgia State University College of Law• Current:
• Co-Founder and COO of SmartUp®
• Partner at Founders Legal™ (Bekiares Eliezer LLP)
• Former:• Managing Director & In-House Counsel for a group of companies that
focused on Export Management & Distribution of goods internationally
How This Presentation May Help You
• Building Your Company: Business Formation from a Legal Perspective• Why do you need a business entity?• What important options should you consider?• What do you need and when?• Doing things yourself vs. seeking help from a
professional
• Things to consider for Freelancers and Employees
What is a Business Entity?
An organization that is legally separate from its owners
Why do I need a Business Entity?
Personal Liability of Business Owner
CREDITOR
ENTITY
Why do I need a Business Entity?
1. Protects your personal assets (“Limited Liability”)
2. Entity lives on “forever”
3. Keeps things structured and organized• Better governance and control
4. Easier to raise capital and sell or transfer the business
What Type of Business Entity Do I Need?
• Corporation
• Limited Liability Company (LLC)
Corporation & LLC: Similarities
• Both are formed and governed under State Law• Both provide Limited Liability protection to their owners• Both can do essentially the same things
• Do business• Own property• Raise money
Corporation & LLC: Differences
• Structure CAN be different
• Governance CAN be different
• Taxation CAN be different
Corporation
• Rigid Structure
• Roles for individuals are defined by law and practice
• 2 Choices for Taxation• C Corporation (default)• S Corporation (option, if applicable)
Corporation: Formation
INDIVIDUALS NEW CORPORATION
Cash or Property
Shares of Stock
SHAREHOLDERS
Corporations: Structure
BOARD OF DIRECTORS
SHAREHOLDERS
CEO
COO CFO CTO
Corporation: Taxation
C Corporation• Default• Corporation files its own tax
return• Corporation pays tax on its own
profits• Shareholders pay tax ONLY on
the money they receive from the Corporation
S Corporation• Must file an ‘S’ election• Corporation files its own tax
return• Corporation pays NO tax on its
own profits• Shareholders pay tax
individually on their share of Corporate income
C-Corporation: Taxation
CORPORATE PROFITS
SH
SH
SH
CORPORATION’S TOTAL INCOME
Corporation pays 35% Federal income tax
Shareholders payincome taxes individually
Corporation pays dividend To Shareholders
$90 Net Profit$19.50$19.50$19.50$58.5 After Tax
S-Corporation: Taxation
CORPORATE PROFITS
SH
SH
SH
CORPORATION’S TOTAL INCOME
Corporation pays NO income tax
Each Shareholder paysincome taxes individuallyOn his portion of Corporate profits
Profits are ALLOCATED To Shareholders
$90 Net Profit
$30 $30 $30
C-Corp vs. S-Corp Taxation
C Corporation
35% on 1/3 Share of Corporate Tax + 20% Personal Tax on Qualified Dividends
S Corporation
39.6% Personal Tax on Amount Allocated
on $90 Net Profit
SH
pays $14.40 in Federal Income Tax
on $90 Net Profit
SH
pays $11.88 in Federal Income Tax
S-Corporation: Taxation
• To qualify for the ‘S’ Election:• No More than 100 Shareholders• All Shareholders MUST be U.S. citizens or lawful permanent
residents• 1 Class of Stock• Profits & losses allocated proportionally• No corporate shareholders (unless Qualified Subsidiary)
LLC
• Very versatile – can be structured in many different ways
• Roles of individuals are defined by the LLC
• 3 Choices for Taxation• Individual or Partnership• C Corporation• S Corporation
Entity Formation: LLC
INDIVIDUALS NEW LLC
Cash or Property
Ownership %OR
Units
MEMBERS
Structure: LLC
BOARD OF MANAGERS
MEMBERS
CEO
COO CFO CTO
Structure: Member-Managed LLC
MANAGING MEMBERS
CEO
COO CFO CTO
LLC: Taxation
Individual or Partnership• Default• LLC does NOT file a tax return• LLC does NOT pay taxes on its
own income• Members pay income taxes
individually on share of LLC income
LLC “Check the Box”• File IRS Form 8832 • Taxed as C Corporation• Taxed as S Corporation
LLC: Partnership Taxation
LLC’s PROFITS
M M M
LLC’s TOTAL INCOME
LLC does NOT file a tax return LLC does NOT pay income tax
Members payincome taxes individuallyOn the profit ALLOCATED To them
Profits are ALLOCATED tothe Members, even if no Distribution is made
$90 Net Profit
$30 $30 $30
Things You Can Do
• 1. Decide on the Name of Your Business Entity
• 2. Obtain any Professional Licenses you may need
• 3. Form Your Company With the Georgia Secretary of State
Name Your Business Entity
• Consider:• Is the name available in Georgia?• Is a suitable internet domain name available? • Have others registered Federal or State trademarks with
that name?• Is anyone else using the name somewhere?
Name Your Business Entity
A Corporation must have ONE of the following terms in its name:• Corporation or Corp.• Company or Co.• Incorporated or Inc.• Limited or Ltd.
An LLC must have ONE of the following terms in its name:• Limited Liability Company or LLC• Co. Ltd.
Name Your Business Entity
If I name my company:
Andrei’s Auto Muffler Supply and Alpaca Emporium, Inc.
That is the name I have to use.
Form Your Business Entity
Georgia Secretary of State• http://sos.ga.gov/
• Select ‘Corporations’• Select ‘File Online’
• Register and login to the cGov360 Business Filings system
Things You Can Do Continued
AFTER You Form Your Entity…• 3. Obtain Your EIN (Tax ID) from the IRS
• www.irs.gov • Apply for Employer ID Number
• 4. Give Notice of Formation in the County Newspaper (‘Legal Organ’) • Give Notice in County where the Principal Office or the Registered Agent
is located• The Notice must be run for 2 consecutive weeks, and the cost is $40.00
Things You Can Do Continued
• 5. Register with the Georgia Department of Revenue• Online registration• Check to see which specific registrations your business needs
• 6. Register with the Georgia Department of Labor• Before you hire your first W-2 Employee
• 7. Obtain a Business License from the City or County
Things You Can Do Continued
• 8. Set Up Internal System for Accounting and Bookkeeping
• 9. Open Bank Account(s) for the Entity• Use Entity’s full name and EIN
• 10. Set up Office, Equipment and any other necessary items
Get Professional Assistance With…
Corporation• Shareholder Agreement• By-Laws• Board Member Resolution
Forms• Shareholder Consent
Forms
LLC• Operating Agreement• Manager Resolution
Forms (if applicable)• Member Resolution &
Consent Forms
Get Professional Assistance With…
• Intellectual Property Assignment Agreements (for Founders)
• Vesting Agreements (for Founders and Very Early Employees)• Restricted Stock or Unit Grant Agreements • IRC Section 83(b) election
• Non-Disclosure Agreement
Get Professional Assistance With…
• Human Resources:• Employment Agreements (with IP Assignment & Restrictive Covenants)• Independent Contractor Agreements (with IP Assignment & Restrictive
Covenants)
• For your Website or Application:• Terms & Conditions• Privacy Policy• End User License Agreement (EULA)
Additional Considerations
• Secure your Intellectual Property (Consult with an IP Attorney)• Patents• Trademarks
• Plan for Taxes (Consult with a CPA)
• Consider if you need business insurance
For Freelancers
• Form a Single Member LLC • Taxed as disregarded entity or S-Corporation• Member-Managed Structure
• Obtain a quality Services Agreement that protects you• Make sure your customer signs it
Considerations for Employees
• Employment Relationship
• Restrictive Covenants
• Intellectual Property
• Stock Options
Considerations for Employees
Employment Relationship• At Will unless agreed to otherwise
• Employer can fire you at any time• Employee can leave at any time
• Employer must abide by employment laws• OSHA, Workers’ Compensation, Minimum Pay Requirements
Considerations for Employees
Intellectual Property• Works for Hire• Assignment to Employer• Employer’s rights in works that Employee creates
• Within the Scope of Employment• Using Employer Resources• Using Employer Time
Considerations for Employees
Restrictive Covenants• Non-Compete• Non-Solicitation• Non-Hire• Non-Disparagement• Non-Disclosure
Considerations for Employees
Stock Options• Understand what you are getting• Understand the tax implications• Understand the vesting schedule (if any)• Look for:
• Surrender• Buy Back Provisions (‘Claw Back’)
My Contact InfoAndrei Tsygankov, Esq. [email protected]@Smartup_
ATLANTA TECH VILLAGE Suite 5553423 Piedmont Road, NEAtlanta, GA 30305
To schedule a consultation with me please visit www.smartuplegal.com and click consult!
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