incorporation from legal point of view
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Entity Formation BasicsEntity Formation BasicsEntity Formation BasicsEntity Formation Basics
By: Uzma Ahmad734.214.7720
By: Uzma Ahmad734.214.7720
Why should I think about forming an entity?Why should I think about forming an entity?
Formalization of activities and relationships
Branding/reservation of name
Insulation from personal liability
Value Maximization
The Corporate VeilThe Corporate Veil
Generally, shareholders are viewed as being distinct from the corporate entity
Generally, shareholders are not personally liable for the liabilities and obligations of the corporation
Piercing the Corporate VeilPiercing the Corporate Veil
Insufficient capitalization, lack of corporate formalities, nonpayment of dividends, insolvency, siphoning of funds by dominant shareholder, non-functioning officers, absence of corporate records, facade for individual dealings
Corporate formalities:• Board of director meetings, minutes• Good corporate records• No co-mingling of business and
personal assets
Corporate GovernanceCorporate Governance
Delineates the roles and responsibilities of directors versus officers
Independent directors, board committees with charters, related party transactions
Internal controls, effective disclosure
Accurate financial reports
Corporate GovernanceCorporate Governance
The Sarbanes-Oxley Act of 2002 -- public companies
Through various sources has become important for private companies:• Lenders• Grant-makers, government contracts• Insurers (D&O policy)• Best practices organizations• Venture capital investors
Good Corporate Governance = Maximization of ValueGood Corporate Governance = Maximization of Value
Commentators indicate that there may be an acquisition premium for companies that have good corporate governance
Minimizes post-acquisition integration costs
In any case, venture capital investors will diligence these issues and good corporate governance helps the target to distinguish itself
Entity ChoicesEntity Choices
Sole proprietorship
Corporation• Subchapter C corporation• Subchapter S corporation
Limited liability company (LLC)
Basic DocumentsBasic Documents
Articles or Certificate of Incorporation – filed with the state of incorporation
Incorporator resolutions/Board resolutions
Bylaws
Subscription Agreements and Stock Certificates
Stockholders Agreement (repurchase rights, rights of first refusal, drag-along, tag-along)
Confidentiality, Non-Compete and Assignment of Inventions Agreement
Other TopicsOther Topics
Roles of shareholders, directors, officers
Common stock and preferred stock
Angel investors and venture capital investors