Startup founders often times just want to focus on building a product, but there are advantages to setting up a corporate structure early on. In this lecture Poornima Vijayashanker covers the various types of corporate structures that exist, and other things to consider such as equity and board of directors.
You can watch the lecture here: http://youtu.be/S7Ov-rsgTdk
Insurers' journeys to build a mastery in the IoT usage
Lecture 5: Structuring a Corporation
1. Duke ECE 490L: How to Start New Ventures in
Electrical and Computer Engineering
Poornima Vijayashanker
poornima@femgineer.com
Jeff Glass
jeff.glass@duke.edu
Akshay Raut
ar118@duke.edu
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10. Duke ECE 490L
• Partnership: where owners are members. Members maybe individuals, other
LLCs, and foreign entities.
• Tax Structure: all LLC income, losses, deductions, and credits flow through
to the owner. Earnings are taxed once.
• Types of Businesses: any except loans, insurance, and non-profits.
• Disadvantages: cannot issue shares fore investment purposes.
• Disclaimer: check state requirements and federal tax regulations.
LLC
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11. Duke ECE 490L
• Individual entity: separate from its owners, owners become shareholders.
• Shareholders are only liable to the extent of their investment - personal assets
are not on the line like in an LLC or sole proprietorship.
• Debts are also responsibility of corporation.
• Advantages:
• Limited liability - instead of purchasing liability insurance.
• Raising capital is easier because you issues stocks for sale. Investors like
the prospect of earning dividends from profits.
• Avoid taking out a loan and paying high interest rates.
C-Corp
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12. Duke ECE 490L
• Advantages:
• Also appealing to employees who get stock options.
• Company can deduct fringe benefits offered to shareholder employees
as a business expense. (Fringe benefit is life insurance, health/disability
insurance, medical expenses not paid by insurance).
• Disadvantages:
• Double taxation: after deducting business expenses, salaries, fringe
benefits, and interest payments, C-Corp must pay taxes on profits at
corporate level. If distributes profits as dividends, then individuals must
pay tax on personal tax return. Can avoid by re-investing profits back into
business.
C-Corp Continued
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13. Duke ECE 490L
• Disadvantages:
• Bureaucracy and Expenses: stockholders and board of director
meetings, must hire lawyer and accountant to handle stock plans.
C-Corp Continued
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14. Duke ECE 490L
• Plan to pay dividends?
• Limited liability, income flows through to individual tax returns, and tax-free
merger benefits. Limit of 100 shareholders. Don’t pay federal corporate taxes.
• Everything is passed through to the owner, can also get assigned losses to
report on tax return.
• Cannot deduct fringe benefits like a C-Corp but employees who are not
shareholders may receive benefits without paying taxes.
• Pay vs. profit sharing. Offering a low salary and compensating via profit will
raise a flag with IRS. IRS may require payroll taxes to be filed for total income of
stockholder.
S-Corp
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15. Can you convert from a C-Corp to an S-Corp?
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16. Yes, but when you convert you become subject
to gains tax. This issues comes up in the first
10 years when a C-Corp sells an asset that has
built in gains when S election was made.
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17. Duke ECE 490L
Corporate Structure Advantages Disadvantages
LLC Tax benefits for owners.
Limited options for raising
capital.
C-Corp
Limited liability, raising capital,
and tax deductions on fringe
benefits.
Double taxation.
S-Corp
Pass through profits and
losses to owners tax return.
Cannot deduct fringe
benefits.
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19. Equity: an ownership interest in a
corporation in the form of common stock or
preferred stock.
Also total assets minus total liabilities also
called shareholder’s equity.*
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* InvestorWords
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20. Asset: is any property owned by the
corporation. Includes but is not limited to
money, real estate, and equipment.*
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* Law Depot: Corporate Forms FAQS
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21. Debt: aka corporate bond, is a bond issued
by a corporation to raise money in order to
expand its business.*
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* Wikipedia - Corporate Bond
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28. Common Stock: A security that represents ownership in a
corporation. Holders of common stock exercise control by
electing a board of directors and voting on corporate policy.
Common stockholders are on the bottom of the priority
ladder for ownership structure. In the event of liquidation,
common shareholders have rights to a company's assets
only after bondholders, preferred shareholders and other
debtholders have been paid in full.*
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* Definition of Common Stock
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29. Preferred Shares: A class of ownership in a corporation
that has a higher claim on the assets and earnings than
common stock. Preferred stock generally has a dividend
that must be paid out before dividends to common
stockholders and the shares usually do not have voting
rights.
The precise details as to the structure of preferred stock is
specific to each corporation. However, the best way to
think of preferred stock is as a financial instrument that has
characteristics of both debt (fixed dividends) and equity
(potential appreciation). Also known as "preferred shares".*
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* Definition of Preferred Shares
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30. Vesting: period by which an employee
earns shares in a corporation.
Typically startup employees have a 4-year
vesting period. Each new allotment of shares
is subject to a new vesting cycle, golden
hand-cuffs.
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31. Cliff: period of time that a startup employee
must serve the company before any of their
shares are considered vested.
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35. Duke ECE 490L
• Cheaper to incorporate.
• Well verse in business matters.
• The Chancery Court does not use juries, and it’s better because
corporations don’t want juries deciding complex business issues. Judges are
more capable.
• Large body of corporate law to help avoid legal entanglements.
• 30% of revenue comes from franchise tax, which the state has invested
into technology to keep processes running smoothly and provides timely
service.
Benefits of Incorporating in Delaware
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37. Duke ECE 490L
• You don’t have to live in Delaware or have your company HQ’s there.
• You can have a company with a 1-person executive team and 1 board
member.
• Even if you are based in Delaware but don’t do business, you don’t have to
pay corporate tax. You do have to pay franchise tax.
• If you have already incorporated in another state, you can still incorporate
there!
Incorporating in Delaware
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39. Franchise tax: domestic stock or non-
stock for profit corporation incorporated in
the State of Delaware is required to pay
annual tax.*
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* How to Calculate Franchise Taxes
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41. Minimum is $75 for using the Authorized
Shares method and minimum tax of $350 for
corporations using the Assumed Par Value
Capital Method. *
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* How to Calculate Franchise Taxes
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43. Duke ECE 490L
• If you have shares!
• Responsible for managing corporation’s business and affairs.
• Main responsibilities:
• Develop strategic planning process
• Selecting and directing management team
• Protecting shareholders rights’
• Ensuring legal compliance
Board of Directors
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