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Equity, or ownership, is a company’s most expensive and most valuable asset. When splitting ownership, it is important to keep in mind that no one knows what the future may hold. You might expect that if you and your partner have equal ownership, that your work, time, or financial contributions will be equal. The reality, however, could be very different. You may end up bearing more of the workload than your co-founder and still have the same equity split. As the startup grows, each of your commitments and life priorities may change and your share of the equity split or your partners’ may no longer be representative of each of your contributions to the company.
Founders also have different ideas about the types of contributions they will be making, and this vision changes over time as the company grows. Some may envision taking an active role in daily operations and management, while others want to handle marketing, and some may prefer a more passive style of investment. It is important that the split in ownership be reflective of these styles. It takes time to understand these differences and how to work with them, and most startup founders do not have that degree of familiarity with each other, thus making a 50/50 ownership split a risk. Startup founders that negotiate longer are more likely to decide on an unequal split, as they have been able to discover and address important differences in their expected contribution levels.
Another risk with a hasty 50/50 ownership split is that it can lead to your startup falling apart fast. Compared to founders who took the time to establish a well thought and calculated equity split, those who neglected to have this discussion and chose to split equally shut down their companies significantly faster due to a fallout amongst the founders. This also applies to startup founders who are related to each other- they are more likely to spend less time negotiating equity, and in turn are also more likely to share equally and end up splitting faster. The consequences and tension of an ill established ownership split can be devastating for a startup.
A major consequence of implementing an equal ownership split is that it makes bringing in investors a lot more difficult- equal splits are sometimes seen as a sign of bigger issues within the startup. Investors tend to pay attention to the way co-founders divide ownership because it tells a lot about their experience level and engagement within the company. They may find an equal split to be impractical, and see it as an inability to negotiate seriously within and outside the company. Teams who quickly establish an equal ownership structure may face significant difficulty in raising their first round of financing, either in reduced ability to raise or in lower average valuations.
An equal ownership split between startup founders means that both partners have equal control and voting power. This inevitably leads to deadlocks and an inability to move forward on key issues, which at best could end up stalling the business. These stalemates can easily be avoided by having one founder maintain majority control, even through an almost-even split. This ensures one founder has majority voting power when it comes to important business decisions. Startup founders need to be able to compromise and negotiate for the good of the company.
Making these decisions can be overwhelming. Lloyd & Mousilli can help you implement the right ownership split for your startup. Our firm has the experience necessary to set your company up for success.
An LLC is a Limited Liability Company. It is a type of business structure that protects owners from being personally responsible for the company’s debts and liabilities. LLCs provide flexibility and certain benefits in regards to taxation. From an administrative perspective, they are not bound by certain requirements that are typical of corporations.
To form an LLC, you must file a Certificate of Formation with the Secretary of State. Lloyd & Mousilli specializes in corporate law and can assist you with this process. Additionally, we can prepare all necessary corporate documents to ensure your LLC is properly organized from its inception.
Your business name can be protected through a registered trademark. Trademarking your business name ensures that it is protected in connection with the goods and services you provide. Trademarking your name puts you in the best position to take legal action against infringers.
A trademark is a word, phrase, symbol, and/or design that distinguishes the source of goods of one party from another. By applying for a trademark in the relevant goods and services class, you are protecting your business name within your industry. In other words, another company offering the same goods and services under an identical business name would be committing trademark infringement.
Lloyd & Mousilli specializes in intellectual property and can assist you with the filing of your trademark application. We can help you determine which class of goods and services is most appropriate, advise on your overall trademark strategy, as well as preparation and filing procedures.
You can begin the trademark registration process by scheduling a free consultation with a Lloyd & Mousilli team member. If you would like to fast-track the process, you can complete our trademark intake form to provide us with the information we need to get started.
Incorporating a business is the process of forming of a new entity that is recognized as a separate “person” under the law. At the very early stages of your business, you will need to decide which entity is the best fit for your purposes. This is often overwhelming for founders and first time business folks. The three types of entities discussed in this article (C corporation, S corporation, and LLC) all partially shield the individual owners from certain types of personal liability. They each have varying benefits regarding fundraising and stock option grants. They also each result in different tax implications or benefits, and provide your company with greater credibility among investors, clients, and customers.
A C corporation is the standard corporation structure. An S corporation is a corporation that has elected special tax status with the IRS. Both of these corporate entity statuses share the following:
The advantages of C corporations are:
The disadvantage of a C corporation is double taxation:
When a corporation is originally chartered by the state, it exists as a C Corporation. It will remain a C corporation unless the company wishes to elect S corporation status.
The main difference between a C corporation and an S corporation is the taxation structure. S corporations only pay one level of taxation: at the shareholder level. To choose S corporation status, a tax lawyer or accountant may assist with filing IRS Form 2553 and ensuring all S corporation guidelines are met. Since S corporation election is not required at the time of incorporation as a C corporation, a company may wish to momentarily hold off on S corporation election in order to consult with an accountant or tax lawyer.
Startup companies will choose an S corporation if the founders wish the benefit of a flow through tax treatment. In other words, a founder can include business losses on their personal tax returns as deductions, which may be particularly attractive during the early stages of a company. A startup can elect S corporation status before the financing stage and revoke S corporation status at the time of a financing. However, S corporation status prevents a startup from having entity (other corporations or LLCs) or non-US citizen/resident stockholders.
The disadvantages of S corporations, unlike C corporations, are:
A limited liability company (LLC) blends elements of partnerships and corporate structures. An LLC is an unincorporated association that protects the liability of a company.
Startup companies often avoid LLCs because most technology startups seek to grant options to employees and consultants, and it’s very difficult to get professional investors interested in investing in an LLC. LLCs provide no standard or easy way to grant such options. A startup may convert from LLC status to a C corporation but, depending on the state, there may be statutory limitations or additional requirements in doing so. Consultancy and bootstrapped businesses, on the other hand, are often the best choices for LLC status.
Benefits of LLCs:
Disadvantages of LLCs:
You should consult with the Lloyd & Mousilli team if you have any doubts about the appropriate entity type for your business.
There are a variety of circumstances that could lead your business towards the decision to terminate your Texas LLC. For the purposes of this article, we are referring to a voluntary termination.
In order for the required Certificate of Account Status (discussed below) to be issued, your business needs to have up to date franchise tax filings in the State of Texas. These include the Public Information Report, and the No Tax Due Report. If you are unsure whether your business is up to date on its franchise tax filings, please reach out to your Lloyd & Mousilli attorney to assist you. Once these tax filings have been verified, it is time to formally request your Certificate of Account Status.
In order for a Certificate of Termination to be issued by the State Of Texas your business must attach a formal Certificate of Account Status to Terminate a Taxable Entity’s Existence in Texas. This form is referred to as 05-359 from the Texas Comptroller’s office. It is possible to make the formal request for a Certificate of Account Status by fax or regular mail, and generally has a relatively quick turnaround.
Once a completed Certificate of Account Status has been verified through the Texas Comptroller’s office, it is ready to be attached to the Certificate of Termination. This document is known as the 651 from the Texas Secretary of State’s office. This can be filled out online. Once submitted online, the IRS estimates roughly a 48-hour processing time.
If all of the tax reports are up to date, the process of termination is relatively painless. If you need help filing the appropriate paperwork or making sure you're following the law, book a no-cost consultation with Lloyd & Mousilli and we will make sure that your business fully and completely terminates existence under Texas law.
Founders have been known to set up LLCs at the earliest stages of their ventures for obvious reasons, including:
For more information, check out our article on What’s the Difference between a C Corp, S Corp, and LLC?
LLCs have some notable limitations and are not the best choice for accelerated growth startups for many reasons, including (but not limited to) the following:
Not so fast! You may run into some problems if you try to convert your LLC into a C corporation at a later date:
Several states actively compete for new business formations. The most popular, in no particular order, are New Mexico, Nevada, Delaware and Wyoming. Each state competes for a different part of the market and, unfortunately, there are many misconceptions.
The goal is to find the state which works for you. Below is a guide to how the states differ when it comes to price, privacy and asset protection.
Everyone is different, but we find the low cost and simplicity of a New Mexico LLC often make the difference for business owners.
Here is a brief overview of your options with a lengthier analysis further down:
New Mexico: With NM, you enjoy all the benefits of an LLC at a fraction of the usual cost. New Mexico acknowledges the corporate veil and provides the same limited liability as other jurisdictions. There are no annual fees or annual reports. In other states, periodic reporting is really just an excuse to collect fees on businesses. New Mexico skips this step, saving you time and money.
Delaware: DE is most famous for its Corporations. They offer hundreds of years of well-defined corporate case law to act as precedent. For large corporations such formalities are important. Small businesses do not benefit from these corporate laws however. The only difference most owners will notice are the significantly higher fees that Delaware levies on its companies. Their LLCs offer privacy, too, but are simply not worth the extra cost versus the other three states we cover. See Why Do Startups Incorporate in Delaware?
Wyoming: WY is a haven for asset protection. There are a number of debtor friendly laws for those seeking protection from personal creditors. These protections come at a price, however. Wyoming’s filing fee is twice that of New Mexico’s, plus there is a $50 annual report which must be signed by someone. This means if you want true anonymity, then you are stuck paying for an additional nominee service to handle the filing each year.
Nevada: NV is similar to Wyoming in being a haven for asset protection. They have a well-developed brand and their Secretary spends considerable sums on advertising the benefits of moving your company to Nevada. They have levered this brand value by increasing fees for eight straight years. This makes Nevada’s LLC one of the nation’s most expensive to start and maintain, just behind California. The Secretary also requires a list of members and managers which they do not publish… yet. In short, Nevada is not the best state for LLC privacy, it is the worst among these four.
Which of the above states appeals to you will depend on your situation. You may even select different states for different companies and operations. Large corporations will enjoy the familiarity of Delaware, asset protection specialists will utilize Wyoming, and those wanting a simple and inexpensive solution should choose to form an LLC in New Mexico.
New Mexico is best suited for small businesses, cost conscious investors and privacy minded individuals. They are a good fit for internet businesses, consulting, real estate and other location independent businesses.
Price: New Mexico LLCs are the cheapest anonymous LLC in the USA. There are no annual reports which saves hundreds of dollars over the life the company. You only need to maintain a registered agent in New Mexico.
Privacy: Members and Managers are not listed. Only the Organizer (us) has to list their name. With no additional annual reports there are also no additional chances for your name to be exposed or nominee services to pay for.
Asset Protection: New Mexico companies offer the same corporate veil as other states. This means you are not personally liable for the company’s debt - hence the “limited liability” in limited liability company.
With New Mexico, you enjoy all the benefits of an LLC at a fraction of the usual cost. In other states, periodic reporting is really just an excuse to collect fees from businesses. New Mexico skips this step, saving you time and money. The state is not well suited for large corporations, however. If you are a large company, then you should consider Delaware or Wyoming.
Delaware offers over a hundred years of well-defined corporate case law to act as precedent. They also have a dedicated court system for hearing business disputes called the Court of Chancery. This court system which ensures cases are heard quickly. However, if you a creditor is pursuing you, then the last thing you generally want is a fast track trial. They also do not have as favorable of asset protection laws. This combination makes Delaware ideal for large corporations, but not for small business.
For large corporations such formalities are important. It is also important to have a dedicated court system for complex matters. The only difference most small business owners will notice are the significantly higher fees that Delaware levies on its companies.
Price: There are several hundred dollars in fees, including a $300 annual franchise tax. The Secretary fee to change registered agents is $50. Again, large companies may not notice these fees, but small companies certainly will.
Privacy: Delaware allows anonymity and nominee officers. There are cheaper ways to obtain anonymity, though (New Mexico).
Asset Protection: Delaware companies offer the same corporate veil as other states.
You can obtain the benefits above for a much lower price elsewhere. Delaware has obtained a certain mystique because of the large corporations which reside there. However, you should not believe that Bank of America has the same needs as an entrepreneur. Find out more on Delaware Post Incorporation and Checklist here.
Nevada limited liability companies are among the nation’s most popular. This is due to great their asset protection features and even better marketing. Nevada remains one of the most popular states, but their sky-high fees have many second guessing.
Price: There are several fees to start an LLC, not all of which the Nevada Secretary of State is up front about. You may be mistaken into thinking they only charge $75, but within 30 days of filing you must pay additional fee, e.g. members/managers list and a business license tax.
Privacy: The same as the other states, anonymity is allowed. However, a list of Members and Managers must be provided to the Secretary. There is nothing to stop them from releasing this information at a later date, or suffering from a hack which would disclose this information inadvertently.
Asset Protection: Nevada became popular because of its asset protection. They provide the same corporate veil as other states, but also provide asset protection from personal creditors. Assets inside the LLC are not as easily accessible to creditors as personal assets.
The Nevada LLC certainly earned its popularity early on. Years of continual price increases have eroded its value however. Having to spend money before registered agent fees is an expensive pill to swallow. Those needing personal asset protection are often advised to consider Wyoming.
Wyoming companies have become popular as Nevada became less competitive. Wyoming does not market as extensively and is less well known. They also have a less developed financial system which can make establishing a bank account difficult.
Price: Wyoming charges $100, twice New Mexico, to form an LLC. They also charge $50 each year after and there has been talk of raising it. Plus, the annual report
Privacy: Wyoming does not list owners, managers, directors etc. There is an annual report which asks the name of the filer, thus necessitating the use of a nominee – further raising costs.
Asset Protection: Wyoming offers asset protection similar to Nevada.
While the choice of which state to form your LLC in is personal, you can always seek advice from your Lloyd & Mousilli team. Book a free consultation call here.
The high costs associated with registering and maintaining a Delaware LLC often make it a less than ideal choice for new entrepreneurs. Find out more on Delaware Post Incorporation and Checklist here.
Any LLC registered in a state other than California is a foreign LLC and would need a foreign qualification in California in order to transact intrastate business in California. California law classifies transacting intrastate business as the physical presence of company officers, employees, offices, or other facilities within California or if the business plans to develop extensive commercial relations within the state over a long period of time. However, your business does not need to be registered in California if your only connection to California is hiring independent contractors located in California.
You may not have any option other than registering your LLC in California or registering it as a foreign LLC in California if your online business hopes to solicit customers in the state. Failure to register in California can bar businesses from bringing lawsuits in the state. The inability to utilize California’s court system can be particularly detrimental to online businesses with valuable intellectual property prone to infringement. If you wish to register as a foreign LLC in California, then you must provide the same information needed to create an LLC in your state of incorporation and pay all the fees required to register and maintain an LLC in California.