BUSINESS FORMATION 101

Co-Sponsored by SmartUp® & General Assembly®

Presented By Andrei D. Tsygankov, Esq.Entrepreneur & Attorney-At-Law

About Me• B.S. in Management from Georgia Tech• J.D. from Georgia State University College of Law• Current:

• Co-Founder and COO of SmartUp®

• Partner at Founders Legal™ (Bekiares Eliezer LLP)

• Former:• Managing Director & In-House Counsel for a group of companies that

focused on Export Management & Distribution of goods internationally

How This Presentation May Help You

• Building Your Company: Business Formation from a Legal Perspective• Why do you need a business entity?• What important options should you consider?• What do you need and when?• Doing things yourself vs. seeking help from a

professional

• Things to consider for Freelancers and Employees

What is a Business Entity?

An organization that is legally separate from its owners

Why do I need a Business Entity?

Personal Liability of Business Owner

CREDITOR

ENTITY

Why do I need a Business Entity?

1. Protects your personal assets (“Limited Liability”)

2. Entity lives on “forever”

3. Keeps things structured and organized• Better governance and control

4. Easier to raise capital and sell or transfer the business

What Type of Business Entity Do I Need?

• Corporation

• Limited Liability Company (LLC)

Corporation & LLC: Similarities

• Both are formed and governed under State Law• Both provide Limited Liability protection to their owners• Both can do essentially the same things

• Do business• Own property• Raise money

Corporation & LLC: Differences

• Structure CAN be different

• Governance CAN be different

• Taxation CAN be different

Corporation

• Rigid Structure

• Roles for individuals are defined by law and practice

• 2 Choices for Taxation• C Corporation (default)• S Corporation (option, if applicable)

Corporation: Formation

INDIVIDUALS NEW CORPORATION

Cash or Property

Shares of Stock

SHAREHOLDERS

Corporations: Structure

BOARD OF DIRECTORS

SHAREHOLDERS

CEO

COO CFO CTO

Corporation: Taxation

C Corporation• Default• Corporation files its own tax

return• Corporation pays tax on its own

profits• Shareholders pay tax ONLY on

the money they receive from the Corporation

S Corporation• Must file an ‘S’ election• Corporation files its own tax

return• Corporation pays NO tax on its

own profits• Shareholders pay tax

individually on their share of Corporate income

C-Corporation: Taxation

CORPORATE PROFITS

SH

SH

SH

CORPORATION’S TOTAL INCOME

Corporation pays 35% Federal income tax

Shareholders payincome taxes individually

Corporation pays dividend To Shareholders

$90 Net Profit$19.50$19.50$19.50$58.5 After Tax

S-Corporation: Taxation

CORPORATE PROFITS

SH

SH

SH

CORPORATION’S TOTAL INCOME

Corporation pays NO income tax

Each Shareholder paysincome taxes individuallyOn his portion of Corporate profits

Profits are ALLOCATED To Shareholders

$90 Net Profit

$30 $30 $30

C-Corp vs. S-Corp Taxation

C Corporation

35% on 1/3 Share of Corporate Tax + 20% Personal Tax on Qualified Dividends

S Corporation

39.6% Personal Tax on Amount Allocated

on $90 Net Profit

SH

pays $14.40 in Federal Income Tax

on $90 Net Profit

SH

pays $11.88 in Federal Income Tax

S-Corporation: Taxation

• To qualify for the ‘S’ Election:• No More than 100 Shareholders• All Shareholders MUST be U.S. citizens or lawful permanent

residents• 1 Class of Stock• Profits & losses allocated proportionally• No corporate shareholders (unless Qualified Subsidiary)

LLC

• Very versatile – can be structured in many different ways

• Roles of individuals are defined by the LLC

• 3 Choices for Taxation• Individual or Partnership• C Corporation• S Corporation

Entity Formation: LLC

INDIVIDUALS NEW LLC

Cash or Property

Ownership %OR

Units

MEMBERS

Structure: LLC

BOARD OF MANAGERS

MEMBERS

CEO

COO CFO CTO

Structure: Member-Managed LLC

MANAGING MEMBERS

CEO

COO CFO CTO

LLC: Taxation

Individual or Partnership• Default• LLC does NOT file a tax return• LLC does NOT pay taxes on its

own income• Members pay income taxes

individually on share of LLC income

LLC “Check the Box”• File IRS Form 8832 • Taxed as C Corporation• Taxed as S Corporation

LLC: Partnership Taxation

LLC’s PROFITS

M M M

LLC’s TOTAL INCOME

LLC does NOT file a tax return LLC does NOT pay income tax

Members payincome taxes individuallyOn the profit ALLOCATED To them

Profits are ALLOCATED tothe Members, even if no Distribution is made

$90 Net Profit

$30 $30 $30

Things You Can Do

• 1. Decide on the Name of Your Business Entity

• 2. Obtain any Professional Licenses you may need

• 3. Form Your Company With the Georgia Secretary of State

Name Your Business Entity

• Consider:• Is the name available in Georgia?• Is a suitable internet domain name available? • Have others registered Federal or State trademarks with

that name?• Is anyone else using the name somewhere?

Name Your Business Entity

A Corporation must have ONE of the following terms in its name:• Corporation or Corp.• Company or Co.• Incorporated or Inc.• Limited or Ltd.

An LLC must have ONE of the following terms in its name:• Limited Liability Company or LLC• Co. Ltd.

Name Your Business Entity

If I name my company:

Andrei’s Auto Muffler Supply and Alpaca Emporium, Inc.

That is the name I have to use.

Form Your Business Entity

Georgia Secretary of State• http://sos.ga.gov/

• Select ‘Corporations’• Select ‘File Online’

• Register and login to the cGov360 Business Filings system

Things You Can Do Continued

AFTER You Form Your Entity…• 3. Obtain Your EIN (Tax ID) from the IRS

• www.irs.gov • Apply for Employer ID Number

• 4. Give Notice of Formation in the County Newspaper (‘Legal Organ’) • Give Notice in County where the Principal Office or the Registered Agent

is located• The Notice must be run for 2 consecutive weeks, and the cost is $40.00

Things You Can Do Continued

• 5. Register with the Georgia Department of Revenue• Online registration• Check to see which specific registrations your business needs

• 6. Register with the Georgia Department of Labor• Before you hire your first W-2 Employee

• 7. Obtain a Business License from the City or County

Things You Can Do Continued

• 8. Set Up Internal System for Accounting and Bookkeeping

• 9. Open Bank Account(s) for the Entity• Use Entity’s full name and EIN

• 10. Set up Office, Equipment and any other necessary items

Get Professional Assistance With…

Corporation• Shareholder Agreement• By-Laws• Board Member Resolution

Forms• Shareholder Consent

Forms

LLC• Operating Agreement• Manager Resolution

Forms (if applicable)• Member Resolution &

Consent Forms

Get Professional Assistance With…

• Intellectual Property Assignment Agreements (for Founders)

• Vesting Agreements (for Founders and Very Early Employees)• Restricted Stock or Unit Grant Agreements • IRC Section 83(b) election

• Non-Disclosure Agreement

Get Professional Assistance With…

• Human Resources:• Employment Agreements (with IP Assignment & Restrictive Covenants)• Independent Contractor Agreements (with IP Assignment & Restrictive

Covenants)

• For your Website or Application:• Terms & Conditions• Privacy Policy• End User License Agreement (EULA)

Additional Considerations

• Secure your Intellectual Property (Consult with an IP Attorney)• Patents• Trademarks

• Plan for Taxes (Consult with a CPA)

• Consider if you need business insurance

For Freelancers

• Form a Single Member LLC • Taxed as disregarded entity or S-Corporation• Member-Managed Structure

• Obtain a quality Services Agreement that protects you• Make sure your customer signs it

Considerations for Employees

• Employment Relationship

• Restrictive Covenants

• Intellectual Property

• Stock Options

Considerations for Employees

Employment Relationship• At Will unless agreed to otherwise

• Employer can fire you at any time• Employee can leave at any time

• Employer must abide by employment laws• OSHA, Workers’ Compensation, Minimum Pay Requirements

Considerations for Employees

Intellectual Property• Works for Hire• Assignment to Employer• Employer’s rights in works that Employee creates

• Within the Scope of Employment• Using Employer Resources• Using Employer Time

Considerations for Employees

Restrictive Covenants• Non-Compete• Non-Solicitation• Non-Hire• Non-Disparagement• Non-Disclosure

Considerations for Employees

Stock Options• Understand what you are getting• Understand the tax implications• Understand the vesting schedule (if any)• Look for:

• Surrender• Buy Back Provisions (‘Claw Back’)

My Contact InfoAndrei Tsygankov, Esq. Andrei@smartuplegal.com800-530-4983@Smartup_

ATLANTA TECH VILLAGE Suite 5553423 Piedmont Road, NEAtlanta, GA 30305

To schedule a consultation with me please visit www.smartuplegal.com and click consult!