Tips / Toolbox

What type of US company should you create
and in which state to register it.
Surviving the Downturn: "Aggressive PR
and communication are key"

What type of US company should you create and in which state to register it
A Primer on Entity Formation
Why form a limited liability entity (Corporation or LLC)?

A limited liability entity (a corporation or an LLC) provides both financial benefits and protection from liability. Among the financial benefits is the ability to deduct more business expenses from annual revenue when calculating taxable income than would be possible without an entity. Forming a limited liability entity also helps protect your personal assets in the event of a lawsuit or from debtors in a situation where your business’s liabilities exceed its assets. This means that as the owner of limited liability entity, your personal assets will not be placed at risk because of the actions of your company, provided you maintain the company's assets and activities separate from your personal ones This requires the corporation or LLC to: 1) make sure the company is adequately capitalized (it has the money necessary to cover the reasonably predictable legal and business responsibilities of the business); 2) that the company keeps clean accounting books and has accounts that are separate from the personal accounts of its owners or employees; and 3) that all legal documents are adequately maintained and the company complies with corporate governance laws.

Forming a corporation or LLC also usually makes it easier for a business to borrow money and to sell all or parts of the business in the future. It is important to note that the longer a business operates without a legal entity, the more complicated and expensive it becomes to transform it into one. For this reason it is very important to form a legal entity as soon as feasible.

What is the difference between an LLC and a Corporation?

A corporation is made up of three groups of people – the shareholders, the board of directors and the officers, although the same person can hold multiple positions. The board of directors is formally elected by the shareholders and represents their interests. It is the board of directors that hires the officers of the company, also known as the management. The management’s job is to oversee the day-to-day operations of the company. Major decisions, however, require the approval of both the shareholders and the board of directors. A corporate structure is thus a highly organized and rigid structure of governance that can often be quite burdensome. A corporation requires a slew of corporate governance documents that must be frequently updated. It also requires that annual meetings be held for shareholders and the board of directors.

LLC stands for "limited liability company". Generally it provides the same legal protections from personal liability as a corporation, however it is governed more like a partnership than a corporation. Whereas a corporation’s owners are called shareholders, the owners of an LLC are known as members. An LLC does not require a board of directors or even officers and can simply be managed directly by its members, if so desired. It can also be structured more like a corporation, with managers that are distinct from its owners. LLCs allow for significantly more flexibility than do corporations. For instance, the owners of an LLC can allocate distributions in whichever way they see fit. Even if the ownership of an LLC is split 60/40, the owners can decide to split the profits 50/50 - something that is not possible in a corporation without a significantly more complicated structure.

Should my business be a Corporation or an LLC?

If your business only has a few investors and you do not anticipate receiving outside financing in the near future, an LLC is probably best for you because of its flexibility, simplicity, and pass-through taxation (see below). This is especially true if you do not meet the S-corp election requirements (also see below). However, if you want a board of directors that is distinct from the officers and/or shareholders of the company, or if you are looking for institutional investors, then a corporation is probably a better form of entity because of its more organized and established structure of governance. There are also fairly complex differences on how franchise taxes are calculated for S-Corps and LLCs depending on the jurisdiction, revenue, and profit of the company, so you should consult with an attorney and/or accountant to see what fits your specific financial situation.

What is pass-through/flow-through taxation?

In a pass-through (or flow-through) entity, the entity’s income and expenses "pass through" the entity and are treated as the income and expenses of its owners. LLCs and S-Corporations (see below) are pass-through entities. This differs from a C-Corporation (which is the default form of corporation) which is taxed a corporate income tax at the end of the fiscal year in addition to the personal income taxes and dividend taxes that its owners and employees pay. Federal corporate income tax is about 15% to 35% of profits, and most states also have corporate income tax. This means after a C-Corporation has paid its expenses for the year, it will be taxed at least 15%-35% of whatever is left above the amount the company started with that year. If the company is an LLC or an S-Corporation, there is no corporate tax, and indeed the owners can even apply losses of the company against their personal income.

What is an S-Corporation and what are its requirements?

S-Corporations are corporations that elect to be treated as pass-through entities by the IRS by filing an S-Corp election. In order to qualify for S-Corporation status a corporation needs to satisfy several conditions, including the following: 1) all shareholders must be residents of the United States; 2) the corporation may only have one class of shareholders and may not have more than 75 shareholders; and 3) the company’s shareholders must be any of the following: individuals, estates, certain trusts, certain partnerships, tax-exempt charitable organizations, and other S corporations (but only if the other S corporation is the sole shareholder). This means S-Corporations may not be owned by other C-Corporations, LLCs, or foreign residents. If any of the requirements are not met at any time, the corporation automatically loses its S-Corporation status and will be treated as a C-Corporation.

What are the tax benefits of making an S-Corporation Election?

Many small business owners incorporate their businesses not only for legal protection, but also to reduce owners’ payroll taxes through S-Corp tax election with the IRS. One advantage of an S-Corp over a sole proprietorship, partnership, or disregarded entity is that it gives business owners the ability to reduce their self employment taxes. Any small business owner who has not made an S-Corp election and uses Schedule C for their personal tax return for 2010 is subject to both employer and employee FICA and Medicare payroll taxes at 15.3% up to $106,800, 2.9% Medicare for Schedule C net income greater than $106,800, and California SDI for 1.1% up to 93,316. If the owner of an S-corporation pays himself/herself a “reasonable salary”, the rest of the net income is not subject to these payroll taxes.

Can an LLC get the tax benefits of an S-Corp Election?

An LLC can be treated as an S-Corporation for tax purposes if it makes an S-Corporation election as long as the entity meets the IRS criteria to be taxed as an S-Corp, files an S-Corp election and gets approved by the IRS to be taxed as an S-Corporation. Without an S-Corporation election, single member LLCs default to be taxed as sole proprietors and a multi-member LLCs defaults to be taxes as partnership since they are considered “disregarded entities” unable to get the tax benefits of an S-corp election. However, if a single or multiple member LLC agreement meets the IRS criteria to be classified as an S-Corp (see above), and the S-corp election is filed and approved by the IRS, then for tax purposes (not legal purposes), the entity is treated like an S-Corporation.

Where should I form my entity?

This can be a very complex question. If you are looking to grow the company and get outside investment, then you should probably form an entity in Delaware. If your entity will have real estate holdings Nevada might also be a good option. Otherwise, it might make the most sense to simply form the entity in the state where you will be conducting most of your business.

Rimon offers the following flat-fee packages:

1.

Full organizational package (including Charter, Board Consents, Bylaws/Operating Agreement, etc.):

$900 plus state fees

2. Operating Agreement or Bylaws:

$700

THIS IS ONLY A SIMPLE OUTLINE. WE STRONGLY RECOMMEND YOU SPEAK TO A LAWYER TO LEARN WHAT IS BEST FOR YOU.

For a free consultation, or to learn more about our entity formation services, please contact us:

Email: info@rimonlaw.com

Telephone: 800.930.7271

Surviving the Downturn:
"Aggressive PR and communication are key"

Top

By Steve Schuster

Last October 9, Sequoia Capital hosted a now-famous meeting in Silicon Valley, with about 100 startup CEOs in attendance. The message to the portfolio companies was this: We are in a serious economic downturn. Immediate, decisive and swift action is required, along with frugal management of expenses. Cut spending. Cut fat. Preserve capital.

Among the tough words conveyed by Sequoia to their portfolio CEOs was this strong warning: "Nail your sales and marketing message. Pound your competitors’ shortcomings. Take the offensive. In a downturn, aggressive PR and communications strategy is key."

The down side of going dark is much greater than any short term savings experienced.

In bad economic times, all companies make budget cuts, and some will indeed make the hasty decision to cut public relations budgets. In the PR industry this is called "going dark," an immediate elimination of exposure for your company and its products or services. This impulsive decision has multiple negative consequences– not only will lead generation dry up when you "go dark," but the lack of media exposure will undermine the confidence of your existing customers and investors concerned with your company’s long-term viability and value. When you go dark the one thing people will notice about you is your absence!

When times are tough and business is slow, PR is the very last thing that ought to be cut. As the CEO of a PR agency, one might think I am biased in my opinions. So let me repeat that it was Sequoia Capital who mandated to their portfolio CEOs to "Take the offensive – in a downturn, aggressive PR is key."

Drive Sales with a Persistent Voice

Keep the market fully informed of your company's activities even, and especially when things get extremely tough. With other companies making the mistake of reducing their PR budgets, your own efforts can make even more of an impact. That is especially true for entrepreneurs who must stand out in the crowd to be noticed by VCs.

Evolve your company’s message to make the most of today’s economic conditions:

  • Find every possible attribute of your products that represents an ability to reduce costs for your customers.
  • Use your marketing budget to clearly demonstrate what sets you apart.

Branding in a tough economy matters, and one of the most important aspects of differentiation and success is developing a persistent voice through PR.

PR is also a major driver for sales, so don’t leave it to your sales team to have to educate potential customers about your product. Continue to invest in a good PR program so your sales team hears, "Yes, I’ve heard of you guys," when they make a cold call.

Solid PR positively impacts your online presence and SEO

As a measurable discipline with huge potential for strategic value-add, PR will be your secret weapon for designing and executing efficient, cost-effective marketing. One significant example of value-add is the positive impact a good PR program can have on search engine results, and visibility on search engines can be a critical component for any company today – driving leads, sales and vital business partnerships. High-quality PR-based content provides additional search engine exposure and is a source of in-bound links that search engines love.

Outsourcing PR is More Effective

Outsourcing PR to a good agency is always more effective and more cost-efficient than trying to get the job done in house. The right PR agency partner brings objective, strategic value to your business, especially around message articulation and focus, analyst and media outreach methodologies, and an out-of-the box view of how your technology fits in the larger market ecosystem context.

Furthermore, companies sometimes think they can create and manage the entire PR process including:

  • Maintaining all the contact databases
  • Writing the pitches, press releases, and articles
  • Reaching out to analysts, media and conferences

But these tasks get de-prioritized when PR goes “in house” and the distractions of corporate duties become overwhelming. Opportunities are missed that your agency will be on top of with an independent perspective that can be a deeply competitive advantage for your company.

Grab Market Share - NOW

Last March, Senior Associate Dean John A. Quelch of the Harvard Business School said, "It is well documented that brands that increase (marketing) during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times." Professor Quelch concluded, "Successful companies do not abandon their marketing strategies in a recession."

Steve Schuster is CEO of Rainier Communications, a leading U.S. technology-marketing agency that has been the creative force behind hundreds of PR campaigns for a wide variety of high-tech innovations from Fortune 500 to start-up companies. With BSEE and MBA degrees, Schuster served in various management-level roles throughout the high-tech industry. He launched Rainier in 1993 with a vision of providing technology companies with a credible resource for communicating "complex" technologies to the marketplace.

Rainier Communications is headquartered outside of Boston and has a business development office in Kadima, Israel.

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