11/28/2017. Formation & Corporate. Governance in Pennsylvania. 9am to 10am COUNSELING SMALL BUSINESS CLIENTS FORMATION & CORPORATE GOVERNANCE

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1 COUNSELING SMALL BUSINESS CLIENTS Formation & Corporate Governance in Pennsylvania 9am to 10am The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA Selecting an Entity 2. Formation 3. Operating Agreements & By Laws 4. Annual Meetings, Minutes & Resolutions 5. Best Practices The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA Factors in choosing and Entity Type of business Cost and complexity of the Number of participants in the formation business Ongoing requirements Length of the business (compliance) Location Management and control Liability potential Transferability of ownership interests Financing and capital requirements The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA

2 a) Sole Proprietorships b) Partnerships c) Corporations ( C & S corps) d) Limited Liability Companies (LLC) The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA a) Sole Proprietorship Most common form of business organization (of the 17 million business entities in US 13 million are sole proprietorships) Easy to form; easy to control Unincorporated; only one owner Owner is solely responsible for debts and obligations of the business Income tax filing on a Schedule C; Self-employment tax; Quarterly payments The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA b) Partnership Relationship between two or more persons who join to carry on a trade or business No entity level taxes are paid. Tax return filing: Form 1065; Schedule K-1; Form 1040; Quarterly payments; Selfemployment tax Limited partners are subject to self-employment tax only on guaranteed payments The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA

3 c) Corporation Corporations are more complex and require compliance with more regulations and tax requirements Corporations are formed under state law Corporations are subject to tax as entities at the federal and state level; earnings distributed to shareholders as dividends are taxed at the individual level Corporations have a legal presence and life Can be taxed as a Corporation ( C-Corp) or a Partnership ( S-Corp) The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA d) Limited Liability Company (LLC) Are permitted/allowed by state law Owners have limited personal liability for debts and actions of the LLC Flexibility to split ownership, profits and control (majority doesn t necessarily rule) Owners are members ; can be individuals, corporations, LLCs, and foreign entities Single-member LLCs are permitted in some states including Pennsylvania The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA Taxation Method by Entity Corporation LLCs C Corp. S Corp. Partnership Disregarded Entity Subchapter K The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA

4 FORMATION Formation Methods Directly by the Attorney (see FINAL 2016 Business Guide.pdf ) Attorney uses a formation service (example M Burr Keim Co) Client forms using Legal Zoom Client forms directly The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA OPERATING AGREEMENTS & BY LAWS Operating Agreements for an LLC If none, goes to the default statute Can allocate Profits, Control, Ownership separately More flexibility to construct and agreement that meets the business goals of the client Buy Sell Provisions, death or disability of members Majority rule or Unanimous rule on major decisions The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA OPERATING AGREEMENTS & BY LAWS By Laws for a Corporation If none, risk corporate protection More formal, profits follow shareholder percentages Officers, Board of Directors and Annual Meetings Buy Sell Provisions, death or disability of shareholders Majority rule or Unanimous rule on major decisions The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA

5 ANNUAL MEETINGS, MINUTES & RESOLUTIONS LLC Annual Meetings are not required Resolutions should still be prepared for major events such as opening bank accounts, entering leases, major purchases, new executives, etc. The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA ANNUAL MEETINGS, MINUTES & RESOLUTIONS Corporation Annual Meetings ARE required Resolutions should be prepared for major events such as opening bank accounts, entering leases, major purchases, new executives, etc. The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA BEST PRACTICES Detailed Operating Agreement/By Laws Separate Bank Account for Entity Signature formality (ie Jane Doe, President or Jane Doe, Authorized Member) Leases, Franchise Agreements, Loans and other contracts in the name of the Entity The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA

6 BEST PRACTICES The Attorney needs to educate the client What they do is more important than the documents If you buy a lock to lock up your things, but fail to lock the door, do you blame the lock manufacturer for the loss? The client has a responsibility to lock the door and the attorney has a responsibility to teach them how to do it. The Philadelphia Building 1315 Walnut Street, Suite 1532 Philadelphia, PA