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GWarren For Business & Nonprofits
GWarren For Business & Nonprofits, Attorney
Category: Business Law
Satisfied Customers: 355
Experience:  30 yrs Counsel, AVP Corp Governance Fortune 100 finance/ins, Nonprofit Bds, law firm. OH NJ license
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If I am starting a corporation with two investors, one investing

Customer Question

If I am starting a corporation with two investors, one investing $200,000 and wants to work with me, and the other investing $600,000 who only wants to be involved in major decisions, what do you think is the best way to address interest in the company? I will be the manager as I am the one starting the business. I have nothing to invest hence the investors. What roles in the corp should the other players be? And how should we address if someone wants out? If the $600,000 wanted out it could kill the business. I know I need to hire a lawyer, but I am just planning at this point.
Submitted: 4 years ago.
Category: Business Law
Expert:  GWarren For Business & Nonprofits replied 4 years ago.
Thank you for contacting justanswer.


Compliments on your planning.


INTEREST IN THE COMPANY: You bring your management and business formation expertise to the corporation while the other investors bring funding/sweat equity and capital to the corporation. Those roles should be clearly discussed and spelled out in the formation governance documents for the corporation. A value can be placed on the sweat equity/management contributions as compared to the pure capital/monetary investments.


ROLES: Some investors do not want to be involved in the daily activities or governance of the company. You will need to determine that with your investors. You will want to decide whether the financial investors serve on the board of the company to govern it. You may certainly prefer that role for them rather than day to day management. You would need an executive, you as a managing member, president, Chief Executive Officer or Chief Operating Officer, however, if you serve as the managing executive, your monetary investors, if they are to be members of your governing board, could be Chair of that Board. An early candid discussion of roles should help allocate responsibilities and avoid later issues. Your investors could also be in the background serving only as financial advisors and not as board members or officers. They would still have their roles as investor/owners.


The allocation of the units (if an LLC, discussed below) or shares (if a C or S corporation) should be discussed and decided at the outset based on the contributions each of the owners bring to the company. Agreement at that early stage will avoid later problems. You may want to engage your lawyer in that dialogue to help mediate a fair ownership allocation and to listen to prepare the agreement and governance document of the company that would address later withdrawal of owners or dissolution of the company. Timing of withdrawal requests can be addressed under Minnesota law in an effort to avoid harming any ongoing business.


You may also find it helpful to contact SCORE, Counselors to America's Small Business at: http://www.score.org for free face to face locally in Minnesota or online counseling to assist your planning process. SCORE experienced volunteers in Minnesota or elsewhere can help you with your business plan, start-up and formation activities and other aspects related to starting your corporation.


That said, depending on the form of corporation you intend to start, your investors would either be unitholder/member owners if you form a Limited Liability Company (LLC) or stockholders if you form either a C or S Corporation. The contributions of the investors should be clearly identified in the formation agreement that your local attorney can help you draft. (If you do not have a business/corporate lawyer you may want to contact the local bar association lawyer referral service to identify local lawyers you can interview as to experience and fees in similar corporate formation matters.


Following is a direct link to the Minnesota Secretary of State to assist and guide you in starting your business:


http://www.sos.state.mn.us/index.aspx?page=92


Your formation documents, especially your bylaws (if a C or S corporation) or Organization governance documents if you form an LLC, should clearly provide for ownership rights and responsibilities. For example, those documents would state how the owner/investors would withdraw from the company.


Following is an example of an Operating Agreement for a Minnesota LLC that address withdrawal of member/owners' interests:


http://www.ilrg.com/forms/llc-opag-mem/us/mn


I know I have provided a lot of detail, however, hope it is responsive and helpful to your planning. If you would like further clarification, please let me know. Best wishes.

GWarren For Business & Nonprofits, Attorney
Category: Business Law
Satisfied Customers: 355
Experience: 30 yrs Counsel, AVP Corp Governance Fortune 100 finance/ins, Nonprofit Bds, law firm. OH NJ license
GWarren For Business & Nonprofits and 5 other Business Law Specialists are ready to help you
Customer: replied 4 years ago.
You are the BEST GWarren! Do you have a recommendation as to whether we should do a S or C or LLC? I was thinking C because it will protect the investors from liability better even though it is a double tax situation. I was also thinking of doing an LLC to purchase a building and leasing it back to the company to protect that from any banctrupcy.
Expert:  GWarren For Business & Nonprofits replied 4 years ago.
Thank you for your prompt ACCEPT and kind bonus.


While I can only provide information is this format, my typical recommendation is that businesses form as an LLC due to the ease of formation, potential for unlimited unitholders and personal pass through taxation, HOWEVER, given your situation with the investors, there may be advantages to a C Corporation that you may want to consider with your investors and legal counsel:


Addressing your concern about liability, an LLC properly formed and engaged in ongoing business should provide similar protection from financial and activity liability to investors (although I understand your view that with a C corporation their exposure would be limited to their investment shares). As long as officers or others representing an LLC always sign in their capacity (xxxx as an officer or owner of xxx, LLC, rather than personally) there should be adequate protection from others attempting to pierce the LLC corporate veil.


First, the C Corporation would provide flexibility as to when your fiscal year ends. That could be important if you prefer a fiscal year end that is not December for inventory or other tax planning purposes.


Second, rather than the individual allocation of profits through an LLC, a C Corporation could also enable you to avoid some double taxation if you do not pay dividends but rather pay salaries or consulting fees, interest on funds loaned to the corporation or retirement account contributions out of profits. You may need to consult your accountant or tax consultant as well as attorney in that regard.


A C Corporation can also include fringe benefits to employees that are deductible and may carry forward losses. An LLC or S Corporation, however, would allow you to allocate losses among the unitholder/member investors if you prefer allocation of losses each year.


Your plan to separately own a building through an LLC and lease it to the C corporation could be a way to separate assets and allocate the lease amounts as charges to the C corporation.


I hope the list of advantages/disadvantages above if helpful to your further discussions and review.


A further thought - reading a prior post, as it appears your business may involve building swimming pools (and my earlier career involved insurance defense of swimming pools regarding diving accidents and pool liners, depth marking etc.), there may be further liability advantages to a C corporation you may also want to discuss with your commercial liability insurance agent or broker.



Edited by GWarren For Business & Nonprofits on 12/3/2009 at 7:04 PM EST

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GWarren For Business &amp; Nonprofits
GWarren For Business & Nonprofits
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355 Satisfied Customers
30 yrs Counsel, AVP Corp Governance Fortune 100 finance/ins, Nonprofit Bds, law firm. OH NJ license