choose a business entity: what’s the right fit for your client?

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1 Lexis Practice Advisor® Lexis Practice Advisor® Business & Commercial Choosing a Business Entity: What’s the Right Fit for Your Client?

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There are many details to juggle when you’re creating a new business entity—and a lot is riding on those details. When a client approaches you with their idea for an exciting new business venture, will you know which form of entity is the right choice? This complimentary webinar slides presented by the Lexis Practice Advisor® team, covers the pros and cons of different business entity types to ensure that you know which one is best suited for your transaction. We’ll also provide you with a three-step assessment to help you determine the right course of action while avoiding potential pitfalls. Don’t miss out on this important information! This Webinar slides covers: • The various types of entities available to you, including Sole Proprietorships, General Partnerships, Limited Partnerships, Limited Liability Partnerships, Corporations and Limited Liability Companies • The three basic questions you must ask when you begin to choose an entity • The best choice for entrepreneurs seeking venture capital financing, and other common scenarios

TRANSCRIPT

Page 1: Choose a Business Entity: What’s the Right Fit for your Client?

1Lexis Practice Advisor®

Lexis Practice Advisor® Business & Commercial

Choosing a Business Entity: What’s the Right Fit for Your Client?

Page 2: Choose a Business Entity: What’s the Right Fit for your Client?

2Lexis Practice Advisor®

WHERE DO I BEGIN WHEN CHOOSING AN ENTITY?

Three basic questions:

1. LIABILITY

2. COST

3. CONTROL

Page 3: Choose a Business Entity: What’s the Right Fit for your Client?

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LIABILITY

Page 4: Choose a Business Entity: What’s the Right Fit for your Client?

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LIABILITY

• To help you determine the best choice of entity, assess your client’s risk of liability.

• Your client’s appetite for dealing with legal paperwork and statutory formalities also factors into the liability analysis.

• Liability insurance is an option.

Page 5: Choose a Business Entity: What’s the Right Fit for your Client?

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COST

COST

MaintenanceEntry

Taxes Capital

Page 6: Choose a Business Entity: What’s the Right Fit for your Client?

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COST – 4 Factors

1. Entry Costs

•Filing Fees (State)•Filing Fees (Federal)•Licenses, Registrations and Permits•Publication Requirements

Page 7: Choose a Business Entity: What’s the Right Fit for your Client?

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COST

2. Maintenance Costs

•Upfront vs. Long-Term Considerations•Annual Reports /Statements of Information

Page 8: Choose a Business Entity: What’s the Right Fit for your Client?

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COST

3. Taxes

•Taxable Entity•Pass-through or Conduit Entity•Not-For-Profit Entity

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COST

4. Raising Capital•General Partnerships → Limited Ability •Limited Liability Companies → Limited Ability

Page 10: Choose a Business Entity: What’s the Right Fit for your Client?

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CONTROL

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CONTROL

• Ownership structure is key

• The number of owners drives business entity choice

• Control has both external and internal importanceo External: Third party perceptiono Internal: Flexibility and predictability

among owners

Page 12: Choose a Business Entity: What’s the Right Fit for your Client?

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REMINDERS…

It’s a balancing act!

Do your state homework!

Page 13: Choose a Business Entity: What’s the Right Fit for your Client?

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Sole Proprietorships

Step 1 – What is it?Step 2 – Liability → UnlimitedStep 3 – Cost → Minimal Entry and Tax,

High CapitalStep 4 – Control → Maximal

Page 14: Choose a Business Entity: What’s the Right Fit for your Client?

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Sole Proprietorships

Scorecard

Best Suited For:

• A sole proprietorship would be a good choice for someone who is looking to start a one-person business quickly and at a low entry cost. Their business should not have excessive outside investment needs and should be extremely low-risk. o Example: Assuming they could procure outside

malpractice insurance, an accountant may choose the sole proprietorship form of entity.

LIABILITY COST CONTROL- +/- +

Page 15: Choose a Business Entity: What’s the Right Fit for your Client?

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General Partnerships

Step 1 – What is it?Step 2 – Liability → UnlimitedStep 3 – Cost → Minimal Entry and Tax,

High CapitalStep 4 – Control → Maximal

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General Partnerships

Scorecard

Best Suited For:

• A general partnership would be a good choice for two or more individuals who are looking to start a business quickly and at a low entry cost. Their business should not have excessive outside investment needs and should be relatively low-risk. o Example: Assuming they could procure outside

malpractice insurance, an accounting firm may choose to operate as a general partnership.

LIABILITY COST CONTROL- +/- +

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Limited Partnerships

Step 1 – What is it?Step 2 – Liability → Both Limited and UnlimitedStep 3 – Cost → High Entry, Low Tax and CapitalStep 4 – Control → Maximal

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Limited Partnerships

Scorecard

Best Suited For:

• A limited partnership would be a good choice for a business in which there is a clear division between those providing labor and those providing capital. It would also be a good choice for a one-off venture or a venture that is limited in duration.o Example: Real estate ventures are often organized as

limited partnerships. Typically, an experienced property manager or developer serves as the general partner and outside investors provide financing for the project in exchange for a share of ownership as limited partners.

LIABILITY COST CONTROL+/- +/- +

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Limited Liability Partnerships

Step 1 – What is it?Step 2 – Liability → LimitedStep 3 – Cost → High Entry, Minimal Tax,

High CapitalStep 4 – Control → Maximal

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Limited Liability Partnerships

Scorecard

Best Suited For:

• A limited liability partnership would be a good choice for a professional service business that requires a state license in order to operate.o Example: Groups of attorneys, architects,

chiropractors, dentists and doctors are often organized as limited liability partnerships.

LIABILITY COST CONTROL+ - +

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Corporations

Step 1 – What is it?Step 2 – Liability → LimitedStep 3 – Cost → High Entry, High Tax,

Minimal CapitalStep 4 – Control → Mixed• Transparency in Governance (+)• Transferability of Ownership Interests (+)• Compliance (-)

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Corporations

Scorecard

Best Suited For:

• A C corporation would be a good choice for a business that requires strong liability protection and will be seeking venture capital financing in the near future. If the owners will initially be investing significant amounts of their own money and would like to write off losses (i.e. via a pass-through structure), then an S corporation may be considered.

o Example: A startup tech company that is looking to become the next social media success would likely choose the corporate form.

LIABILITY COST CONTROL+ +/- +/-

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Limited Liability Companies

Step 1 – What is it?Step 2 – Liability → LimitedStep 3 – Cost → Minimal Entry, Minimal Tax,

High Capital (but changing)Step 4 – Control → Maximal

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Limited Liability Companies

Scorecard

Best Suited For:

• A limited liability company would be a good choice for a business that (i) needs liability protection, (ii) wants to avoid dual taxation, and (iii) requires flexibility with respect to how the business is managed and allocations are made.

o Example: LLCs are ideal for real estate companies, because each separate property can be owned by its own, individual LLC, thereby shielding not only the owners, but their other properties from cross-liability.

LIABILITY COST CONTROL+ +/- +

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Top 5 Takeaways from Today’s Presentation

1. Sole Proprietorship – Should generally be avoided by entrepreneurs due to unlimited personal liability and high capital costs.

2. General and Limited Partnerships – Similar to a sole proprietorship and should generally be avoided by entrepreneurs due to unlimited personal liability and high capital costs. Limited partnerships may come into play in specific types of deals, but will generally not be used otherwise.

3. Limited Liability Partnerships – Solid choice for the professional business.

4. Corporation – A corporation should be the first choice for an entrepreneur that will be seeking venture capital financing. Trade compliance burden for liability protection.

5. LLC – Because of their flexibility, tax benefits and liability shield, LLCs are a very attractive option for many types of businesses, assuming venture capital financing is not needed.

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Q&A Session

Rob Cortes, [email protected]/practice-advisor