Start Your Own Corporation: Why the Rich Own Their Own Companies and Everyone Else Works for Them by Garrett Sutton

(Scottsdale: RDA, 2001), 250

General Notes

  • Insurance is always your first line of defense. Limiting liability protects you in the worst case scenario.
  • Entity structure can help limit liability to protect personal assets and segregate assets in different businesses if you are sued and they are awarded a settlement
  • Your goal is to not be a "rich target" for lawyers coming after you: segregate assets in entities (perhaps in different states to create more hoops to jump through), encumber assets (with debt) to reduce equity at risk, and be diligent in following corporate formalities.

Chapter 1 - Entity Menu

  • C-corporation
  • S-corporation
  • Limited LIability Company (LLC)
  • Limited Partnership (LP)
  • General Partnership, disadvantages of which include:
    • termination if one partner dies/leaves/bankrupt
    • difficult to sell
    • self-employment taxes
  • Sole Proprietorship, disadvantages of which include:
    • only one owner allowed
    • difficult to sell
    • terminates at death
    • audit risk
    • no limited liability

Chapter 2 - Good Entities

Good Entities (14)

Term Corporation LLC Limited Partnership
Owner Shareholder Member General and Limited Partner(s)
Senior Management Chairman of the Board, CEO, President Manager(s) General Partner(s)
Org doc filed with state Articles of Incorporation Articles of Organization Certificate of Limited Partnership
Operational road map Bylaws Operating Agreement Limited Partnership Agreement
  • if LLC, your business card should say: “manager”
  • use “LLC” when signing your name and on all promotional materials (15)
  • you should prepare and file annual minutes for your LLC (27)
  • benefits of LLC (29)
    • liability protection
    • flow-though entity
    • flexible profit distribution
    • umlimited ownership and flexible management
  • an LLC can serve as a general partner of a limited partnership to limit general liability (30)
  • advantages of a limited partnership (34)
    • limited liability
    • retained management
    • restricted transfer
    • protection from creditors
    • family wealth transfers
    • flexibility
    • flow-through entity
  • hold your home LLCs in a Wyoming/Nevada LLC for better asset protection (36)

Entity Comparison (40-41)

Item C-Corporation S-Corporation LLC Limited Partnership General Partnership Sole Proprietorship
Personal liability for business debts No personal liability of shareholders No personal liability of shareholders No personal liability of managers or members General partner(s) personally liable (but can be LLC to limit); limited partners not personally liable General partners personally liable Sole proprietor personally liable
Who can legally obligate the business? Officers and directors Officers and directors Member (member-managed) or manager (manager-managed) Any general partner, not limited partners Any general partner Sole proprietor
Responsibility for management decisions Board of directors, officers Board of directors, officers same as above same as above General partners Sole proprietor
Ownership restrictions Some states require at least 2 shareholders >100 shareholders; no domestic/foreign entities or nonresident aliens allowed none At least one general partner and one limited partner required At least two general partners One sole proprietor
Start-up and ongoing formalities Articles filed with state; bylaws and annual meetings required Articles filed with state; IRS 2553; bylaws and annual meetings required Articles filed with state; operating agreement and meetings strongly recommended LP-1 filed with state; partnership agreement and meeting recommended No state filing; partnership agreement recommended None
Limits on transferability of interests Transfers may be limited by agreement or securities law Transfers may be limited by agreement or securities law; wrong transfers may cause loss of s-corp Unanimous or super-majority consent may be required Consent of all partners may be required Consent of all partners may be required Can sell business to another
Business effect on death or departure of owner Corporation continues Corporation continues Dissolution in some states unless vote to continue Automatic dissolution unless provided for in agreement Automatic dissolution unless provided for in agreement Automatic dissolution
Taxation of business profits Corporate profits taxed at corporate rates; dividends taxed at individual rates Individual rates, some deductions allowed for many pass through entities Individual rates unless elects corporate taxation Individual rates Individual rates Individual rate

Chapter 3 - Corporation of LLC?

  • S-Corp allows you to pay salary (with payroll taxes) and then flow through rest of distribution, so makes sense when you have large distributions

Chapter 4 - Nevada/Wyoming

  • use a Nevada/Wyoming corporation to provide services to your in state corporation to move proceeds to a no-tax state or make a loan to encumber assets

Chapter 5 - Charging Orders

  • A charging order is a lein, or right to receive distributions. Because they don't have control, you can limit distributions and make them wait for money. This makes you a weaker target. (77)
  • you may want to add a second LLC member to protect charging order status if needed

Chapter 6 - Crossing State Lines

  • keep your corporation alive for as long as possible, and instead of actually closing it just stop paying the annual tax

Chapter 7 - Benefit Corporations

  • Benefit corporations allow you to operate with additional considerations instead of just fiduciary responsibility to maximize profits for shareholders

Chapter 8 - Professional Corporations

  • professional corporations do not protect against claims of malpractice

Chapter 9 - Organizing Steps

  • Articles of incorporation, operating agreement, etc.
  • organize with a stable resident agent to be sure they will be around to notify you if you ever get sued

Chapter 10 - The Importance of Corporate Formalities

  • corporate formalities protect against an accusation that the corporation is just an extension of yourself:
    • annual filings
    • minutes of meetings
    • corporate notice (use LLC in name, materials, etc.)
    • separate bank account
    • separate tax returns

Chapter 11 - Business Tax Deductions

  • consult CPA and IRS Publication 334 "Tax Guide for Small Businesses"

Chapter 12 - Building Corporate Credit

Chapter 13 - Insurance

Chapter 14 - Joint Ventures

Chapter 15 - Raising Money

Chapter 16 - Voting Trusts

Chapter 17 - Know Your Directors/Officers

  • even if just you running your corporation you have duties to follow

Chapter 18 - Buy-Sell Agreement

Chapter 19 - Protecting from Scams

Chapter 20 - What Happens at the End

Chapter 21 - Seven Steps to Achieve Limited Liability

  1. Form a limited liability entity
  2. Use a reliable resident agent
  3. Perform required annual filings
  4. Prepare minutes of meetings
  5. Put the world on notice of your entity
  6. Maintain separate bank accounts
  7. Prepare separate tax returns