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ScottyMacEsq
ScottyMacEsq, Attorney
Category: Legal
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Experience:  Licensed Texas General Practice Attorney
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Advice on what kind of corporation to set up?

Resolved Question:

Advice on what kind of corporation to set up?
Submitted: 1 year ago.
Category: Legal
Expert:  ScottyMacEsq replied 1 year ago.

ScottyMacEsq :

Thank you for using JustAnswer. I am researching your issue and will respond shortly.

ScottyMacEsq :

Can you tell me what type of business this will be? How many owners will there be? Will they all be American citizens / permanent residents? How "big" will the company be?

Customer:

Here's the info in its most simplistic form: my husband has an LLC and has 1 partner. They have an expedient need to raise some capital and want to sell "six $5,000" parcels in one week. We live in Louisiana. I have done quite a bit of work in the legal field... but not necessarily corporate work. I just want to make sure that everything is done correctly.

ScottyMacEsq :

Would they be selling these to investors in exchange for interests in a company (i.e. Stock)? Or would it be outright?

Customer:

Oops, wasn't finished. (1) what state should we incorporate? (2) how do we change his LLC to a corporation? (3) what type of corporation... S or C? (4) what do we need to know (or do) to sell this stock?

I helped him prepare a "First Right of Refusal" document for his family and friends who have previously invested.

Customer:

Stock. In the document we prepared, he stated that there would be 30,000 shares available @ $1.00/share. I told him he couldn't do that because the company isn't worth $30,000 at this point and he would have to say "no par value." Am I correct?

ScottyMacEsq :

So to be clear, the LLC currently has the land, they want to sell the parcels, but in a form of stock. Would the purchasers be individuals or other legal entities (such as trusts, other companies, etc...)?

Customer:

Hmmm, maybe "parcels" is NOT the right term... There is no land. They want to sell 6 "units" of stock to raise $30,000./

ScottyMacEsq :

Parcel would not be the right word in such a situation... What type of business is it? And would these investors be close family members? Or would it be open to the public?

Customer:

The purchasers are all individuals at this point... family and friends who have previously invested in the company. He just wants to give them a first right of refusal for one week until he opens it up to other people (entities).

Customer:

Would it help to read the draft of the "First Right of Refusal" that we prepared?

ScottyMacEsq :

I see. An S corp can only be sold to real people. Other entities can't hold S corp stocks. Furthermore, there can only be one class of S corp stock (meaning that there could not be any preferred vs common stock, etc...).

ScottyMacEsq :

No, that probably wouldn't help, as it wouldn't likely make a difference in the consideration.

ScottyMacEsq :

A C corp (while having dual taxation rather than pass through taxation) does have a lot more flexibility in offering stocks for investment, as any individual or entity could be an investor.

ScottyMacEsq :

It's also more flexible for profit sharing purposes, and allows earning to stay in the business so it could grow.

Customer:

My husband's company is called American Solar and Wind Technologies and it is the marketing arm of a wind turbine development company.

ScottyMacEsq :

If he's offering investments that are meant to be easily transferable, the C corp would be the best way to go about it.

ScottyMacEsq :

Investing in an LLC or S corp makes transferring more difficult.

ScottyMacEsq :

As for converting an LLC into a corporation, that's quite involved. Here's a link that explains the process: http://www.nolo.com/legal-encyclopedia/converting-llc-corporation-s-corporation-louisiana.html

ScottyMacEsq :

It's not difficult, but there are a lot of steps.

Customer:

Okay... let's say we need to form a C corporation. What do we do next (it looks like you're already ahead of me) and how long would it take? We want to get the basics down now (like what KIND of corporation) and WHERE (like Delaware, Nevada, Louisiana) but if we make a mistake (or two)... would it be difficult to correct it later?

ScottyMacEsq :

If you were to file outside of Louisiana, you would need to do a merger (which is more complicated, and you should ABSOLUTELY get a lawyer to handle such a situation). That's because filing outside of the state would mean that you're starting a NEW company, and to roll the current company into the new one would require a merger .

ScottyMacEsq :

Now if you were to do that, I would suggest Delaware. That's the most friendly to C corporations, and is in the top for LLCs.

Customer:

Would that perhaps be the BEST thing to do... start a new company instead of trying to convert?

Customer:

And get a lawyer? lol... we were just hoping that we could handle the documentation ourselves.

ScottyMacEsq :

That's entirely up to you. Starting a new one would be more costly, and you would need to weigh the costs versus the benefits. I certainly could not do that with the limited information that I could glean from you now.

ScottyMacEsq :

I understand. And you could if you were to stay in Louisiana.

ScottyMacEsq :

That's why it would be cheaper to just convert.

ScottyMacEsq :

(rather than merge into a new entity formed outside of the state)

ScottyMacEsq :

Hope that clears things up a bit. If you have any other questions, please let me know. If not, and you have not yet, please rate my answer AND press the "submit" button, if applicable. Please note that I don't get any credit for my answer unless and until you rate it a 3, 4, 5 (good or better). Thank you, XXXXX XXXXX luck to you!

Customer:

Just to make sure I understand your advice... we should CONVERT the LLC to a "C" Corporation and get a Louisiana lawyer. Wait a minute... I think you said that if we CONVERT that we could do it ourselves? But then that would mean a Louisiana corporation and I thought a Delaware corporation would be best. I'm still confused.

ScottyMacEsq :

Yes, if you convert you can do it yourselves, that would be a Louisiana corporation. I said that IF you form a corporation in another state, Delaware would be best.

ScottyMacEsq :

Not that you should form in Delaware.

Customer:

And you didn't answer my question about $1.00 par value vs. "no par value."

ScottyMacEsq :

Sorry, I had forgotten about that. Thank you for bringing it up (that was about 15 minutes ago)....

ScottyMacEsq :

As to par value, if there is not any money to cover that, then it would have to be less than $1.00

Customer:

If we do form a Louisiana corporation, can we change it later to a Delaware corporation.

ScottyMacEsq :

So it's true that if the company is not worth $30,000, then the par value for 30,000 shares could not be $1. That would be an inadequately capitalized company (which is not a good thing, as it could provide a basis for shareholders to sue).

ScottyMacEsq :

You can "change" it later to a Delaware corporation, but that would still require a merger.

ScottyMacEsq :

That is, a NEW company would need to be formed in Delaware that would "purchase" the entire LA company, issuing equal numbers of stock to the stock holders, etc...

ScottyMacEsq :

It's complicated, which is why a merger should use a lawyer to assist.

Customer:

okay, I think I have it now. For expediency, we can merge the LLC to a C Corporation in Louisiana and then change later to a Delaware corporation if warranted? Right?

ScottyMacEsq :

Yes, but again, the "change" to a Delaware corporation is through a merger. It can't just be changed administratively (i.e. By telling Louisiana that it's now Delaware, or "moving" it...)

ScottyMacEsq :

So it would still require a merger to complete that "change", but it could be done.

Customer:

A little confused about the terminology "convert" and "merge" but my understanding is that TODAY we could CONVERT the LLC to a Louisiana C Corporation and then later... get a lawyer and MERGE to a Delaware corporation? Now do I have it?

ScottyMacEsq :

Yes.

Customer:

THANK YOU SO VERY MUCH!!

ScottyMacEsq :

The LLC can change to a Corporation in Louisiana.

ScottyMacEsq :

But it cannot change without a merger into a NEW company that has been formed in DE.

ScottyMacEsq :

My pleasure. If there's nothing else, please rate this answer. Please note that I don't get any credit for the time (~35 minutes) and effort that I spent on this answer unless and until you rate it a 3, 4, 5 (good or better). If you feel that I have gone above and beyond in this answer (my average answer is about 10 minutes) bonuses are greatly appreciated. Thank you, XXXXX XXXXX luck to you!

ScottyMacEsq, Attorney
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Experience: Licensed Texas General Practice Attorney
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