THE LEGAL SIDE OF GETTING A BUSINESS UP AND RUNNING Presented By Teri G' Rasmussen, Partner and Vice

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THE LEGAL SIDE OF GETTING A BUSINESS UP AND
RUNNINGPresented By

Teri G. Rasmussen,Partner and
Vice Chair of Business Law Practice Group of
LANE, ALTON HORST, LLC
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Teri G. RasmussenPartner and Vice Chair,
Business Law Practice GroupLane, Alton Horst,
LLCtrasmussen_at_lanealton.com(614) 233-4753

• Lane, Alton Horst, LLC
• Two Miranova Place, Suite 500
• Columbus, Ohio 43215
• www.lanealton.com

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Teri G. Rasmussen

• Business Acquisitions and Sales
• General Corporate and Business Law
• Joint Ventures and Strategic Alliances
• Corporate Governance and Shareholder Disputes
• Contracts and Loan/Lease Documentation
• Business Formation and Financing
• Business Planning
• Creditors Rights and Debt Collection
• Business Bankruptcy and Insolvency
• UCC and Secured Transactions
• Commercial Finance
• Litigation
• Real Estate

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Teri G. Rasmussen

• B.A., with honors, 1981, University of Iowa
  J.D., cum laude, 1984, University of Michigan
• Bar AdmissionsSupreme Court of Ohio, 1984
• U.S. District Court, Southern District of Ohio,
  1984
• U.S. District Court, Northern District of Ohio,
  1993
• U. S. Sixth Circuit Court of Appeals,
  1997Professional AssociationsColumbus (Former
  Chair, Financial Institutions Committee),
• Ohio State (Former Chair, Subcommittee of
  Accounts, Payments, and Letters of Credit of
  Banking, Commercial and Bankruptcy Committee) and
  American Bar Associations
• American Bankruptcy Institute
• National Association of Women Business Owners
  (NAWBO)
• Executive Womens Golf Association (EWGA)

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EVERY Business Has a Legal Form

• If you dont make a Decision, the Law will make
  one for you.
• A one-person business will automatically be a
  sole proprietorship.
• A business with two or more Owners will
  automatically be treated as a general partnership

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The TYPE of LEGAL ENTITY Matters

• Level of Formality Required for Recordkeeping
• Level of Formality Required in Decisionmaking
• Effect of Death or Disability of Anyone Actively
  Involved in the Management of the Business
• Taxes Who Pays and How Much
• Ability of Business Creditors, Disgruntled
  Employees, and Others to Reach Personal Assets of
  Owner(s)
• Who Has Say in, or Control of Business and its
  Operations

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Customizing the Governance and Legal Structure of
a Business

• TYPE of LEGAL STRUCTURE
• matters less than
• SPECIFIC DECISIONS concerning relationships among
  owners, as well as the management and operation
  of the business

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• Selecting a Legal Form
• for Your Business
• IS NOT
• a Multiple Choice Test

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Factors to Consider in Choosing a Legal Structure

• How much record-keeping are you able and willing
  to do on a continuing periodic basis?
• What is YOUR tolerance for risk?
• What sort of risks are you most comfortable
  having?
• What sort of risks do you MOST need/want to
  avoid?
• How will the business be financed?
• Outside Investors and Creditors
• Personal and Family Funds

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Factors to Consider in Choosing a Legal Structure

• What sort of business risks are there in your
  industry or type of business?
• How much government regulation is your business
  generally subject to?
• Where will your business sell or provide good
  and/or services?
• Locally or within one state?
• Regionally?
• Nationally?
• Worldwide?

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Factors to Consider in Choosing a Legal Structure

• Short and Long Term Objectives and Goals
• Size and Character of Business in Three Years?
  In Five Years?
• Revenues and Sales
• Employees
• Number and Diversity of Ownership

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Factors to Consider When You Are Not the Only
Owner

• How well do you know your fellow owner(s) and can
  you really trust them?
• Compatibility of Owners in Temperament, Work
  Habits, Spending, Risk Tolerance, Etc.
• Strengths and Weaknesses of Fellow Owner(s)
  Could a Weakness Cause a Problem for the Business
  and How Can That be Guarded Against

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Factors to Consider When You Are Not the Only
Owner

• How Many Owners Will There Be?
• Will the owners be individuals or business
  entities?
• What Role, Responsibilities and/or Duties Will
  Each Owner Have? How will these be Shared or
  Allocated?
• Will any owner(s) or group of owners have veto
  power with respect to certain specific issues?

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Factors to Consider When You Are Not the Only
Owner

• Are you the money person or the sweat equity
  person?
• What happens if an owner wants out of the
  business?
• Getting Investment Out of the Business
• Transfer, and Restrictions on Transfer, of
  Ownership
• What happens to ownership interest upon death or
  disability of owner?
• Will some owners get their investment back
  sooner than other owners?

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Basic Legal Structure Choices

• Sole Proprietorship
• Partnership
• Limited
• General
• Corporation
• C-Corp
• S-Corp
• Limited Liability Company (LLC)

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Basic Types of Ownership Interests

• Partnership Partnership Interest
• Corporation Shares of Capital Stock
• LLC Membership Interest

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Limitations on Number of Owners

• One Owner -
• Can be Sole Proprietorship only if an Individual
• Can be a Corporation or LLC.
• Cannot be a Partnership
• Two or More Owners
• Can be Partnership or LLC
• Can be Corporation
• S-Corps Cannot have More Than 75 Shareholders
• Cannot be Sole Proprietorship

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Special Restrictions on Ownership of an S-Corp

• Limited to 75 Shareholders
• Only U.S. Citizens May Be Shareholders
• C-Corps Cannot Be a Shareholder
• Cannot Have other S-Corps, LLCs, Partnerships or
  many types of Trusts as Shareholders

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Sole Proprietorship Background and History

• No separate existence from owner.
• Business assets in owners personal name
• Owner signs contract in personal capacity
• If owner dies or becomes disabled, so does
  business
• Profits and losses from, as well as expenses of,
  business included on individual income tax return

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Weighing the Sole Proprietorship Alternative

• Advantages
• Maximum authority and control
• Simplest and least expensive to start just find
  a location and open the doors
• Appropriate for very small service business not
  likely to borrow much money and not likely to be
  sued
• Business losses can offset income from other
  sources

• Disadvantages
• Death or Illness endangers business
• Growth limited by personal energies
• Obtaining financing and investment may be
  difficult
• Personal and business affairs easily mixed

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Weighing the Sole Proprietorship Alternative Tax
Considerations

• Business profits of a sole proprietorship can be
  taken only as salary and wages which are subject
  to both income tax and self-employment tax.
• Business profits of a corporation could also be
  taken as dividends or distributions not subject
  to self-employment tax.

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Sole Proprietorship Responsibilities

• While sole proprietorships are the simplest and
  most easily formed business structure, you still
  have legal responsibilities.
• There may be local registration, license or
  permit laws required to make the business
  legitimate
• Visit the website of the 1st Stop Business
  Connection, a program sponsored by the Ohio
  Department of Development's Small Business
  Development Centers and the U.S. Small Business
  Administration where you can download a tailored
  FREE business information kit containing the
  basics all businesses must know and the
  state-level regulations and forms specifically
  for your business.
• http//www.odod.state.oh.us/onestop/index.cfm

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Purpose of Forming Partnership

• Nothing more than a common law contract between
  owners
• To operate broad-based business
• To share in the responsibilities of management
• To divide the profits realized from the
  enterprise

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Partnership Characteristics

• Almost any management and profit-sharing
  arrangement can be agreed upon among the partners
• Must have at least two partners at all times
• Joint Venture or Strategic Alliance differs from
  true partnership because it is generally limited
  to an isolated and particular transaction.

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What to Include in Partnership Agreement

• Name of Partnership
• Contributions to Partnership Made by Each Partner
  and When Made
• Allocations of Profits and Losses Draws
• In proportion to interest?
• Distributions only at end of year?
• Regular periodic draws?
• Responsive to financial needs of each partner?
• Individual Authority of Each Partner to Bind
  Partnership
• Partnership Decision-making Procedure
• Management Duties, or Absence of Same, of Each
  Partner
• Admission of New Partners
• Effect of Withdrawal or Death of Partner Buyout
  Procedures
• Dispute Resolution Process

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General Partnership Definition

• Ohio law defines a general partnership as
• an association of two or more persons to carry
  on as co-owners, a business for profit
• Ohio Rev. Code 1775.05(A)

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Creation of General Partnership

• Can be accidentally created formation occurs
  whenever parties expressly or implicitly start
  sharing profits and losses and the management of
  the business
• Can be created orally no written agreement
  required, though recommended

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Distinguishing Characteristics of General
Partnership

• All of the Partners
• Manage the company together
• Have joint responsibility for all of Partnership
  debts
• Have authority to make contracts and decisions on
  their own for partnership

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Status of General Partnership

• Treated as a separate entity from its Partners
  for limited non-tax purposes
• Holds Assets in Name of Partnership
• Contracts Executed in Partnership Name
• Must File Separate Tax Return, but does not pay
  taxes
• Both partnership and general partners can be sued
  for partnership obligations
• Partners pay taxes on partnership income and
  report on their tax returns

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Limited Partnership

• Only valid if written and formed in compliance
  with statutory requirements
• One General Partner same responsibilities as in
  general partnership
• Other Limited Partners Have limited rights in
  exchange for limited liability for partnership
  debts

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General and Limited Partnerships Comparison

• General Partnership
• All Partners Participate in Management
• Dissolves upon death or withdrawal of any partner

• Limited Partnership
• Limited Partners Must Not Be Involved in
  Day-to-Day Operations
• Dissolves only upon death or withdrawal of
  General Partner
• More Complex than General Partnership

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Weighing the Partnership Alternative

• Advantages
• Two (or more) heads are better than one
• Income passes through to Partners
• Management Structure Flexibility
• No qualification requirements for doing business
  in other states

• Disadvantages
• Difficult to get rid of bad partners
• More Expensive to form than sole proprietorship,
  especially in case of limited partnerships
• Difficult to transfer ownership interest
• Hazy line of authority in general partnership
• Cannot have both management responsibilities and
  limited liability

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Usefulness of Partnership Alternative

• General Partnership is obsolete except in very
  special circumstances
• Owner is particularly concerned about
  deductibility and capital gains treatment of
  continuing payments to retiring partners (IRC
  736(a))
• Important that business not be treated as entity
  for tax purposes (e.g. oil and gas investments)
• Limited Partnership duplicated and supplemented
  by LLC alternative

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Corporations

• C-Corp - for larger more mature businesses,
  especially those publicly held, and for those
  anticipating making initial public offerings
  (IPO) of capital stock in the near future
• S-Corp for smaller privately held businesses
  with less than 75 owners, all of whom are
  individuals

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Formation of Corporation

• Corporation has NO owners until stock shares have
  actually been issued to owners by the
  Incorporator.
• Corporation IS NOT validly formed until
• Shareholders elect Directors
• AND
• Directors appoint Officers.

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Corporation Formation Procedure

• Articles of Incorporation are signed by
  Incorporator, who may or may not become a
  Shareholder, and filed with the Secretary of
  State.
• Incorporator receives subscriptions and payment
  for shares and issues them to owners.
• Incorporator calls first meeting of Shareholders
  to elect Directors, adopt Code of Regulations,
  and transact any other business.
• 4. After Shareholders elect Directors, Directors
  pass resolution appointing Officers.

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Corporate Governance

• Shareholders have no authority to control
  day-to-day management or business operations
• Shareholders elect Directors
• Board of Directors set general policy
• Board of Directors appoint Officers such as
  President, Vice President, Treasurer, and
  Secretary
• Officers manage day-to-day operations of company
• Officers are answerable to Board for their actions

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Distinguishing Characteristics of Corporations

• Ownership interests are known as shares or
  stock and are freely transferable to anyone
  else unless shareholders otherwise agree
• Shareholders are not liable for company
  obligations except under highly unusual
  circumstances, but the company itself will be
  held liable
• Existence continues even after departure of
  original owners or key individuals

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Comparing Corporations to Partnerships and Sole
Proprietorship

• In comparison with partnerships or sole
  proprietorships
• Extensive record-keeping required
• Employees, including the owner(s), able to
  participate in various types of insurance,
  profit-sharing, and other benefits otherwise not
  available
• More Flexible approaches to taxation
• More complicated and expensive to form

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Weighing the Incorporation AlternativeEffect
Upon Personal Liability

• Remaining Unincorporated
• Sole proprietors and general partners are
  subject to unlimited personal liability for
  business debt or law suits against their company.
  Creditors of the sole proprietorship or
  partnership, including ordinary suppliers,
  vendors, and other trade creditors can bring suit
  against the owners of the business and can move
  to seize the owners homes, cars, savings or
  other personal assets.

• Incorporating
• Helps separate your personal identity from that
  of your business. Once incorporated, the
  shareholders of a corporation have only the money
  they put into the company to lose, and usually no
  more as a result of being a shareholder.

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Limited Liability Myth

• Insulation from all potential liability and
  become immune from lawsuits? Unfortunately
• Banks and other lenders typically require
  personal guarantees of owners
• Accidents and injuries to others resulting from
  the business are covered by insurance or owner
  remains personally liable for his own personal
  actions.

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Where Limited Liability Really Does Come In Handy

• EXAMPLE
• Kevin is the owner of a small manufacturing
  business. When business prospects look good, he
  orders 50,000 worth of supplies and uses them in
  creating merchandise.
• Unfortunately, there's a sudden drop in demand
  for his products, and Kevin can't sell the items
  he's produced. When the company that sold Kevin
  the supplies demands payment, he can't pay the
  bill.
• As sole proprietor, Kevin is personally liable
  for this business obligation. This means that the
  creditor can sue him and go after not only
  Kevin's business assets, but his other property
  as well. This can include his house, his car and
  his personal bank account.

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Weighing the Incorporation AlternativeCredibili
ty of Business

• Adds Credibility. A corporate structure
  communicates permanence, credibility and stature.
  Even if you are the only stockholder or employee,
  your incorporated business may be perceived as a
  much larger and more credible company.

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Weighing the Incorporation AlternativeTax
Advantages Available

• Tax Advantages Deductible Employee Benefits.
  Incorporating usually provides tax-deductible
  benefits for you and your employees.
• Even if you are the only shareholder and employee
  of your business, benefits such as health
  insurance, life insurance, travel and
  entertainment expenses may now be deductible.
• Corporations usually provide an increased tax
  shelter for qualified pensions plans or
  retirement plans (e.g. 401Ks).

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Weighing the Incorporation AlternativeAttractin
g Capital and Financing

• Incorporated
• Capital can be more easily raised with a
  corporation through the sale of stock.
• Investors are more likely to purchase shares in a
  corporation where there usually is a separation
  between personal and business assets.
• Some banks prefer to lend money to corporations.

• Unincorporated
• With sole proprietorships and partnerships,
  investors are much harder to attract because of
  the inability to have control without personal
  liability.

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Weighing the Incorporation AlternativeDisclosur
e of Ownership

• Incorporated
• Can offer anonymity to its owners.
• Example If you want to open an independent
  small business of any kind and do not want your
  involvement to be public knowledge, your best
  choice may be to incorporate.

• Unincorporated
• If you open as a sole proprietorship, it is
  nearly impossible to hide the fact that you are
  the owner.
• As a partnership, you will most likely be
  required to register your name and the names of
  your partners with the state and/or county
  officials in which you are doing business.

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Weighing the Incorporation AlternativeCentraliz
ed Management

• Incorporated
• With a corporations centralized management, all
  decisions are made by your board of directors.
• Your shareholders cannot unilaterally bind your
  company by their acts simply because of their
  investment.

• Unincorporated
• With partnerships, each individual general
  partner may make binding agreements on behalf of
  the business that may result in serious financial
  difficulty to you or the partnership as a whole.

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Weighing the Incorporation AlternativeTransferr
ing Ownership

• Incorporated
• Ownership of a corporation may be transferred,
  without substantially disrupting operations or
  the need for complex legal documentation, through
  the sale of stock.

• Unincorporated
• Cannot sell sole proprietorship as a going
  concern, i.e. can only sell individual assets
• Partnership may dissolve generally not easily
  transferable

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Close Corporations

• A close corporation is a special sort of
• S-corporation designed for businesses with only a
  few owners.
• Allows owners by agreement to bypass many of the
  usual formalities required of corporations,
  thereby simplifying management of company affairs
• Requires a written agreement complying with
  specific statutory requirements (Ohio Rev. Code
  1701.591)
• Often has restrictions on ability of
  shareholders to transfer ownership

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Impetus for Emergence of Limited Liability
Company (LLC)

• Arose from Desire
• of business owners and investors
• To combine the limited liability protection
  provided by corporation law with
• Advantageous income treatment available to
  Partnerships
• BUT WITHOUT
• Management issues of Limited Partnerships
• S-Corp Restrictions on Type and Number of
  Shareholders Permitted

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Statutory History of Development ofLimited
Liability Company (LLC)

• Relatively recent legal form of business allowing
  owners to take advantage of the benefits of both
  the corporation and partnership forms of business
• First statute enacted in Wyoming in 1977
• Gained popularity after IRS ruled LLC could be
  treated as a partnership for federal income tax
  purposes (IRS Rev. Rul. 88-76)
• Ohio has allowed since 1994
• Single member LLC permitted since 1997
• Written Agreement Not Required Default
  Provisions of Ohio Rev. Code 1705.13 would govern
• Now available in all 50 States

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Types of Limited Liability Company

• Manager Managed
• Similar to Corporation with only a single Member
  or small group of selected Members in control of
  management of business and affairs of company
• Member Managed
• More like a Partnership with all Members actively
  participating in management of company and it
  business affairs

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Limited Liability Company Characteristics

• LLCs are not corporations or partnerships, but in
  many ways offer the best of both.
• Many small business owners and entreprenuers
  prefer LLCs because they combine the limited
  liability protection of a corporation with the
  flexibility and pass through of a sole
  proprietorship or partnership.
• LLC can choose to be taxed as either a
  corporation or partnership

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Limited Liability Company Characteristics

• Unlimited number of Members with any mix of
  individuals and business entities
• Management Participation without loss of Limited
  Liability Protection
• Flexible allocations and distributions of profits
  and losses
• Flexible Control and Governance
• Minimal Statutory Formalities Required
• Taxation Options Can choose to be taxed either
  as corporation or as a partnership

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LLC Formation Procedure

• LLC is validly formed when its Articles of
  Organization are filed with the Ohio Secretary of
  State.
• 2. If LLC does not have an Operating Agreement,
  Ohio law will apply certain default provisions
  regarding its governance and the operation of its
  business.

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Manager Managed LLC

• Manager(s) selected and replaced in whatever
  manner agreed upon by Members
• In general, Manager(s) make all decisions
  concerning the companys business, operational,
  and financial affairs without input or prior
  approval of Members
• Some major substantive decisions still reserved
  to Members
• Manager does not have to be a Member
• Any number of Managers permitted

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Member Managed LLC

• Ohio statutory provisions govern unless displaced
  by provisions of a written Operating Agreement
• Can vote by headcount, pro rata Membership
  Interest, or any other system agreed upon by the
  Members
• A Members management voting rights do not have
  have any relationship to that Members ownership
  interest

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Weighing the LLC Alternative Similarities to
S-Corp

• Both LLCs and S-Corps offer their owners limited
  liability protection and are both pass-through
  tax entities.
• Pass-through taxation allows the income or loss
  generated by the business to be reflected on the
  personal income tax return of the owners. This
  means that if you have business losses you want
  to use to offset other income you might have from
  another job or from your spouse's employment, for
  example, you can claim those losses on your
  personal income tax.This special tax status
  eliminates any possibility of double taxation for
  S corporations and LLCs

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Weighing the LLC Alternative Differences From
S-Corp

• LLCs are more flexible in the way profits can be
  distributed
• An S-corporation can only have one class of stock
  and your percentage of ownership determines the
  percentage of pass-through income.
• LLC can have many different classes of interest,
  and the percentage of pass-through income is not
  tied to ownership percentage. The pass-through
  percentage can be set by agreement of the members
  in the LLC's operating agreement.

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Weighing the LLC Alternative Comparison to
Limited Partnership

• Limited Partnership must have at least one owner
  with unlimited liability LLC does not.
• Consequence For total limited liability,
  additional corporation or LLC must be formed to
  be the required general partner
• Limited Partnership must have at least two
  owners LLC can have just one.
• Consequence An individual could establish an LLC
  to hold property he or she plans to use for
  gifting purposes in the future, but have that
  entity ignored for federal income tax purposes
  until the gift is made (at which point it becomes
  a partnership for tax purposes)

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Special Advantages of LLC

• If you're thinking about forming an "S"
  corporation
• An "S" corporation is taxed in the same way as an
  LLC, but it has some restrictions on
• the number and types of shareholders,
• how profits and losses can be allocated among the
  owners, and
• The kinds of stock they can issue to investors.
• The LLC has none of these restrictions

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Special Advantages of LLC

• If you're thinking of forming a partnership
• A partnership is taxed in the same way as an LLC
  but
• doesn't offer the limited liability without
  giving up management responsibilities to all
  partners that an LLC offers to all its members.

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Special Advantages of LLC

• If you're planning to start a business that will
  hold real property that will appreciate
• C corporations and their shareholders are
  subject to tax on the appreciation when assets
  are sold or liquidated
• An LLC and its members are not subject to this
  double taxation

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Special Advantages of LLC

• If you're forming a business in which you'll have
  investors who will want to be paid back their
  investment before the other owners receive
  anything
• Instead of being restricted to dividing up
  profits proportionate to the percentage of
  ownership (as in a corporation), an LLC allows
  members to decide what share of the profits and
  losses each owner will receive.

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Decision Points in Selecting Legal Structure of
Business

• ECONOMIC
• Allocation of Profits and Losses
• Distribution Entitlement and Order
• MANAGEMENT and
• DECISION-MAKING
• OWNERSHIP TRANSFERS

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Economic Decision Points Allocation of Profits
and Losses

• Unless Otherwise Agreed by Owners
• General Partnership Divided equally among
  partners regardless of relative amount of
  contribution
• Limited Partnership Based upon relative value
  of contribution not yet returned to partner
• Corporation Divided on a pro rata based on
  number of shares held
• LLC Divided on a pro rata based on membership
  interest held

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Economic Decision Points Distribution
Entitlement and Order

• Unless Otherwise Agreed by Owners
• General Partnership Partners entitled to
  receive profits as they occur
• Limited Partnership Partners have no right to
  receive any distributions until they withdraw or
  partnership dissolves
• Corporation Directors have discretion to
  determine when dividends will be distributed
• LLC Members have no right to receive any
  distributions until they withdraw or company
  dissolves

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Practical Criteria

• 1. How many owners are there and who are they?
• 2. What is the current and anticipated personal
  and business relationship between the owners?

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Practical Criteria

• Are you the dominant, subordinate, or equal owner
  in the business?
• Money Owner or Sweat Equity
• Controlling Ownership Interest
• Controlling Vote

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Practical Criteria

• 4. Are some or all of the owners actively
  involved in the day-to-day operations of the
  business?
• 5. Are owners relying on the business as their
  primary source of income?

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Practical Criteria

• 6. What is procedure for making important
  business decisions and who makes them?
• One owner or group
• Headcount or Pro Rata

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Practical Criteria

• What is exit strategy for realizing investment
  in the business?
• Voluntary Amicable Departure
• Dispute Among Owners
• Occurrence of Certain Events
• Achievement of Designated Benchmarks
• Death of Owner

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Practical Criteria

• 1. How many owners are there and who are they?
• 2. What is the current and anticipated personal
  and business relationship between the owners?
• 3. Are you the dominant, subordinate, or equal
  owner in the business?
• Money Owner or Sweat Equity
• Controlling Ownership Interest
• Controlling Vote
• 4. Are some or all of the owners actively
  involved in the day-to-day operations of the
  business?
• 5. Are owners relying on the business as their
  primary source of income?
• 6. What is procedure for making important
  business decisions and who makes them?
• 7. What is exit strategy for realizing
  investment in the business?
• Voluntary Amicable Departure
• Dispute Among Owners
• Occurrence of Certain Events
• Achievement of Designated Benchmarks
• Death of Owner

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Agreements Among Owners

• Partnership Agreement
• Close Corporation Agreement
• Buy-Sell Agreement
• Operating Agreement

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Ensuring an Exit Strategy

• Push-Pull
• Right of First Refusal
• Cross Purchase
• Puts
• Calls

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WITHOUT A BUY-SELL AGREEMENT..

• Minority Owners Have Little or No Opportunity to
  Exit Business Without Substantial Loss
• Unless the business as a whole is being sold to
  a third party, owners wishing to leave the
  business in general have no right to demand that
  the company or the other owners redeem their
  ownership interest by buying the departing owner
  out at any price. Nor does the company or other
  owner have any responsibility to help find a
  replacement owner willing to buy the ownership
  interest. Thus if no purchaser can be found, the
  owner wishing to sever his ties with the business
  has no way to obtain the value of his investment.
  

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Push-Pull Exit

• In two person businesses, a push-pull clause
  sets up a procedure allowing either owner to buy
  out, or be bought out by, the other owner.
• If Tom decides he doesnt want to continue in
  business with Kate for any reason, or for no
  reason, Tom has a decision to make. He must
  determine whether he
• wants to continue running the business, but
  without Kate, or
• would rather move on and leave Kate with the
  business.

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Push-Pull Buy-Out

• Suppose Tom elects to buy Kate out and run the
  business by himself. He must then come up with
  the purchase price at which he is willing to buy
  all of Kates ownership interest. At that
  juncture, Kate has two choices.
• Kate can accept Toms offer and sell out to him
  at the price offered
• Tom offers Kate 100,000 for her ownership
  interest. Kate accepts and sells her ownership
  interest to Tom for 100,000.
• Kate can decide to buy Tom out at the same price
  Tom had offered to her.
• Tom offers Kate 100,000 for her ownership
  interest. Kate rejects the offer and must then
  pay Tom 100,000 for his ownership interest.

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Push-Pull Sell-Out

• If Tom would rather end his ownership of the
  company, he notifies Kate of the price at which
  he is willing to sell all of his ownership
  interest.
• Tom tells Kate he wants 100,000 for his
  ownership interest
• Kate then chooses between accepting Toms request
  to become the sole owner of the business
• Kate pays Tom 100,000 for his ownership interest
• and having him buy her out at that same price.
• Kate rejects Toms offer. Tom must then pay her
  100,000 for her ownership interest

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Exit Through Puts and Calls

• In businesses with more owners, a put or call
  option requires the purchase or sale of an
  owners ownership interest by the company or
  other owners upon the occurrence of certain
  predetermined events or achievement of particular
  benchmarks.

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Cross Purchase

•    Your Family Can Receive the Benefit of Your
  Investment Upon Your Death or Disability Without
  Argument
•  
• Under a cross purchase provision, owners agree
  that on a pro rata basis they will purchase the
  ownership interest of a disabled or deceased
  owner at an agreed predetermined price or based
  upon a specified formula. Sometimes owners agree
  to purchase life insurance on one another to
  provide a source of funding for this obligation.

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Right of First Refusal

• You Can Control Who the Other Owners Are or Will
  Be
•  
• A right of first refusal allows the company or
  fellow owners to match an offer made by a third
  party for the ownership interest. Provisions
  requiring owners to be active in the business or
  preventing them from having full voting rights
  unless all or a certain portion of the remaining
  owners agree can ensure that owners share a
  similar philosophy or that the business stays in
  the family.

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Business Structure Options Available to Sole Owner

• Cannot Be Partnership
• Corporation
• Must Ensure Proper Formation Procedure Followed
  to Be Valid
• Must Comply with Formalities Required by Law on
  an Ongoing Basis
• Limited Liability Company

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Business Structure Options Available to Equal
Owners Both Involved in Operations of the Business

• General Partnership
• No Limited Liability Protection
• Few Formalities Required
• S Corporation
• Difficult to Merge into LLC
• Governance and Growth Limitations
• Limited Liability Company
• Can mimic partnership management without losing
  limited liability protection
• No Limitations to Subsequent Merger
• Can later easily add members with differing
  equity and management rights

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Business Structure Options Available to Multiple
Owners with Differing Equity and Management Rights

• General Partnership
• All Owners Participate in Management
• No Limited Liability Protection
• Limited Partnership
• LLC has same and additional beneficial
  characteristics
• S Corporation
• Multiple classes of owners not permitted
• Voting Rights Must Reflect Extent of Ownership
  Interest
• Limited Liability Corporation
• Unlimited Flexibility

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Making a Business Work From a Legal Standpoint

• Make some preliminary decisions about how
  business will be run.
• How will major decisions be made among owners?
• Which owners will be actively involved in the
  business?
• Under what conditions will there be new owners?
• Answers will guide but NOT require selection of
  particular structure.

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Making a Business Work From a Legal Standpoint

• In most cases, choice is really between
• For One Owner - LLC and Sole Proprietorship
• For Multiple Owners - LLC and S Corporation
• Contents of Governing Documents is Crucial
  Regardless of Choice Made

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• Choosing a Legal Structure for a Business is Less
  About the Nature of the Business Today Than
  Planning for Facing Challenges Lying Ahead.