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Harlem Biospace Seminar: Formation Jen Berrent
Daniel Doktori
January 27, 2014
Attorney Advertising
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Formation
Topics When should I form a company?
What entity should I use – LLC or corporation?
Where should I incorporate – Delaware or New York?
Should I use lawyers or do it myself?
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When should I form a company?
Benefits of Incorporation Limitation of liability
Issuance of equity – Founders
– Advisors and consultants
Ownership of intellectual property
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What entity should I use?
Overview of Structures Corporate Form
– Partnership
– Limited Liability Company
– Corporation
Tax Treatment – “Pass-through”
– No “pass-through”
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What entity should I use?
Partnership Tax: “Pass-through” tax treatment
Liability: Not all owners have limited liability
Flexibility: Flexible structuring
Owners: No limit on number or types of owners
Investors: Not an investor-favored form
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What entity should I use?
Limited Liability Company Tax: “Pass-through” tax treatment
Liability: All owners have limited liability
Flexibility: Flexible structuring
Owners: No limit on number or types of owners
Investors: Historically, not an investor-favored form
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What entity should I use?
Subchapter S-Corporation Tax: “Pass-through” tax treatment
Liability: All owners have limited liability
Flexibility: Extremely rigid structuring (only one class of equity)
Owners: Limit on number or types of owners
Investors: No practical way to take investors
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What entity should I use?
Subchapter C-Corporation Tax: No “pass-through” tax treatment
Liability: All owners have limited liability
Flexibility: Rigid structuring
Owners: No limit on number or types of owners
Investors: Investor-favored form
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LLC v. Corporation
Best for small number of shareholders where flexibility in structuring is a key benefit
Good for companies with cash flow that will be distributed (e.g., investment funds, service companies)
Good for companies that do not care about retaining net operating losses
Best for companies looking to raise money and scale quickly
Good for compensating employees, consultants and advisors
Allows for the use of net operating losses
Must be a c-corporation to go public
LLC C-Corporation
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Where should I incorporate?
Delaware Best known corporate law
– e.g., few New York lawyers know NY corporate law!
Most reasonable and flexible corporate rules – e.g., NY corporate law requires unanimous consent for
stockholder actions not taken at a meeting
Better liability protections for stockholders – e.g., top 10 stockholders in NY corporations are liable for unpaid
wages
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Should I use lawyers or do it myself?
Use lawyers unless you are forming a single-member limited liability company Need to be careful of many legal regimes
– Corporate law
– Tax law
– Securities law
Lawyers are less expensive and more accessible than you think
© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/code-of-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP