Your Business-Your Passion
What are some key differences in business structures and which one is best for you:
There are several structures you can use when setting up your business. In order to determine which one would be best for you, the following is a brief overview of each of several different types. The main factors that come into play when choosing a business structure are flexibility, liability, taxation, control, and complexity of structure. Here we briefly touch on how each is owned, the liability you face, and what type of tax scheme is used. All of these factors should help you to determine what type of entity to set up.
Sole Proprietor: is a one-person owned business. It opens you up personally to all liability should you be sued. You are taxed personally for all business income in this structure.
Partnership: this entity is owned by two or more individuals, and there are two types: a general partnership, where all is shared equally; and a limited partnership, where only one partner has control of its operation while the other person (or persons) contributes to and receives part of the profits. Partnerships carry a dual status as a sole proprietorship or limited liability partnership (LLP), depending on the entity's funding and liability structure. Each partner has the same personal liability as the sole proprietor unless you form a limited partnership, which limits that liability. Partners also must pay self-employment tax unless they are limited partners.
Limited Liability Company (LLC): a business structure that is made up of one or more people (single-member vs multi-member LLC). Owners (members) of a LLC are not personally liable under most circumstances for the LLC.
Corporations: a corporation can be made up of one or more people. The owners are not typically personally liable as the corporation is a separate legal entity from its owners. A corporation can sue or be sued, sell stock for ownership interest, and buy or sell property. There are many types of corporations to consider when deciding how to best establish your corporation:
C corporations, owned by shareholders, are taxed as separate entities. Since C corporations allow an unlimited number of investors, many larger companies file for this tax status.
S corporations, designed for small businesses and avoid double taxation, much like partnerships or LLCs. Owners also have limited liability protection
B corporations, otherwise known as benefit corporations, are for-profit entities structured to make a positive impact on society. Proving a long-term commitment to supporting environmental and social movements, your company can be awarded B corporation status.
Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection. Closed corporations, sometimes referred to as privately held or closely held companies, have more flexibility compared to publicly traded companies. Stocks associated with this type of corporation are not publicly traded.
Open corporations are available for trade on a public market. Many well-known companies are open corporations. Each corporation has taken ownership of the company and allows anyone to invest.
Nonprofit corporations exist to help others in some way and are rewarded by tax exemption. Some examples of nonprofits are The YMCA, Goodwill Industries International, and Catholic Charities USA. These types of business structures have the sole purpose of focusing on something other than turning a profit.
Regulation D Private Placement Memorandums (PPMs):
What is a Private Placement Memorandum (PPM)?
A private placement memorandum (PPM), also referred to as an offering memorandum or offering document, is a key legal document used for the primary purpose of attracting a select set of outside investors. The PPM is used in a private company and does not refer to public offerings, and it is a transaction that is not registered with the U.S. Securities and Exchange Commission (SEC). Registration for public company offerings is a much more painstaking and expensive endeavor.
If you are a company looking to raise money (i.e. an “issuer”), a PPM offers protection for the company that sells unregistered, private securities. A lot of private offerings are transacted pursuant to Rule 506(b) of Regulation D of the Securities Act of 1933. If you are in compliance with the terms of Regulation D, then you can be confident that your offering is actually a private transaction, which acts as a safe harbor exemption to having to register with the SEC.
When you fail to meet the requirements of Regulation D your transaction may be deemed to be a public transaction, and then you would have to spend the money to register with the SEC. Failing to use an attorney that knows how to draft your PPM in a way that keeps your transaction private could end up costing you and your company a lot more money and unwanted stress.
A PPM gives potential investors an in-depth view of the company they are considering investing in. It thoroughly goes over the company’s financials, the terms of the offering and, maybe most importantly, the associated risks of investing in the company. The PPM discloses everything that an investor would need to know to have confidence investing in your company. A properly drafted PPM will contain many other sections of disclosure.
Disclose, disclose, disclose! A PPM should disclose everything, even potential unforeseen events that may affect your company.
There are many online PPM creators, but do not be fooled into thinking that a proper PPM can be produced without thorough conversations with an attorney that can customize a PPM to your specific company’s makeup and its funding needs in mind. With a PPM, like so many other legal documents, you truly get what you pay for. Our firm has had to fix so many PPMs and other transactional documents because of hasty decisions that led clients to use of an online creator that had either no or virtually no relationship with the client or their company, and they did not understand fully the company needs. Do not fall into that trap. We often tell our clients that it is better to spend the money to do it right the first time rather than spending even more to fix or redo it later.
Do I Need a Private Placement Memorandum (PPM) to fund my Startup company?
Many new company owners and executives are under the mistaken belief that they need a PPM any time they need to raise more funds to meet growth objectives. That is a mistaken belief for several reasons. For instance, your company may not be able to take advantage of the safe harbor that Rule 506(b) offers because you are seeking too many potential investors or the manner in which you solicit investors may cause your company to fall into a public offering of securities. Often times companies will unwittingly send offers to potential investors in different states without complying with each states securities laws. This can be a costly mistake for your company. A professionally trained PPM attorney will help your company avoid these pitfalls and advise your company on whether a PPM is even a good fit for what the end goal is for the company.
Beware of fraud and misrepresentation.
Regardless if you are able to take advantage of Rule 506(b) safe harbor protections or not, you will never be free from liability if you commit fraud or make misrepresentations to your investors. No matter where you get your PPM, antifraud rules apply. It will not matter how thorough and professionally prepared your PPM is, you will be on the hook legally. This will ultimately be much more expensive then just doing it right the first time.
Rule 506(b) allows your company to raise money from unaccredited investors, though you’re then required to provide specific information, which is comparable in the type and range as information required in registered offerings with the SEC. Thus, beware of how you present the information.
PPMs: are they worth the money?
A lot of attorneys may claim to know how to create a PPM for a business client. However, there are many that have never actually created one without using some online software to help them fill in a bunch of blank spaces. That is not how we create PPMs for our clients. Having an experienced securities attorney create your company PPM may cost much more than you would anticipate. $9,000 -- $16,000 is fairly inexpensive, and it is usually with a business attorney that bills at bargain rates and you have done a lot of the work. It is our experience that most PPMs in this price range are not usually based on a thorough understanding of where all the variables of the company goals are fully understood because there typically is not even a personal face-to-face attorney-client relationship. We thrive on our personal relationship with each of our clients and get to know every detail before drafting such an important legal document. While a well-prepared PPM can cost a lot of money, given the associated risks of using private securities to raise capital, the cost should be worth it to a conscientious founder or executive that does not want to run afoul of serious securities laws. We consider such a PPM as a necessary type of insurance to protect you and your company.