The state in which you form your business may not seem important now, but it could have consequences in the future.  Administrative expenses, tax issues, attraction of future investors and simply the ease of governing your entity can all be affected by the state in which your entity is organized.

That being said, it is relatively easy to change the state of your company's formation.  As your business develops, the important thing is to periodically evaluate whether it continues to make sense to be organized in the state you originally chose.

There are three main issues to consider when determining where to form your business:

• Location of your business
• Tax issues
• Attracting investors

Particularly with new ventures, the location of your business should be a big factor in deciding where to organize.  Your business has to have a registered agent to receive service of process in each state where it operates.  If you organize in the state where your business is physically located, someone at your company can be the registered agent.  However, if you choose to organize in a state other than your "home" state, then you will have to use a paid service to act as your registered agent.  Generally, the fee must be paid for each state in which the service acts as your registered agent.  As you can imagine, this cost can add up quickly for a new business.

Clearly, a start-up business wants to keep its tax bill as low as possible.  Your company will have to pay state taxes in each state in which it operates.  While these taxes are unavoidable, the business can take steps to limit them.  For example, Delaware corporations are subject to the annual Delaware business franchise tax.  However, many states have no franchise tax, or at least a much smaller tax.  While there are certainly valid reasons to incorporate in Delaware, its franchise tax could hit a new corporation with a large tax bill that may be needless.

If you anticipate raising money from outside investors, Delaware might be a good state to choose.  Investors are generally comfortable with Delaware entities because of the certainty that Delaware's business statutes and courts provide. A lot of businesses have formed in Delaware, and that has led to detailed statutes and a well established body of case law.  Investors and businesses can use the relative certainty of Delaware law to plan their relationships in a way that hopefully avoids potential trouble areas and litigation.

We all know that a business owner has hundreds of decisions to make when starting a new venture, and the state of formation may seem inconsequential.  Yet, with a little forethought and periodic monitoring of its situation, a business could save itself a lot of hassle (and money) in the long run.

When you are choosing an entity there are a number factors you should consider.  For instance, you should think of how you would like to manage the business, protection against liability and your preferred tax treatment.  Below are brief descriptions of several business entities that may suit your needs and some of the advantages and disadvantages of choosing those entities.

Sole Proprietorship
The sole proprietorship is the simplest form of business.  A sole proprietorship is not an entity separate from you.  Though the sole proprietorship is a simple and convenient way to operate your business, you should beware, you will be exposed to unlimited personal liability if you operate your business as a sole proprietorship.  The owner of a sole proprietorship is directly and personally liable to creditors and other claimants. 

Corporate Entities

Corporation
A corporation is a business entity created under state law and is as an independent legal "person" apart from its shareholders and directors. A corporation's shareholders are generally not liable for the obligations of the corporation and are thus generally shielded from the corporation's creditors even if the corporation cannot pay its obligations.  Corporations must comply with statutory rules which are typically more restrictive and require considerably more formality than limited liability companies.

C Corporation
The distinction between a C Corporation and an S Corporation relates to the corporation's tax treatment.  Some of the advantages of a C Corporation are that ordinarily you may deduct the entire value of the fringe benefits offered to shareholders who also serve as employees, the number of shareholders the entity may have is unlimited and they may be either individuals, entities, U.S. residents or foreign.  C Corporations also have significant flexibility to carry corporate losses forward to future tax years.  But, operating as a C Corporation usually subjects you to double taxation, i.e., tax at two levels.  First, the net earnings of the corporation are taxed, and then, the shareholders will be taxed on the earnings of the corporation distributed to the shareholders.  For example, if a corporation issues dividends to its shareholders, it has already paid income tax on that money, but the dividends remain taxable as income to each shareholder. 

S Corporation
An S corporation is a regular corporation that has elected "S corporation" tax status. An S Corporation provides the limited liability of a corporation and the tax treatment of a partnership or a limited liability company.  With respect to non-tax considerations, the S corporation is essentially identical to a C Corporation.  The significant tax advantage with the S Corporation is that the corporation does not pay any income tax on its earnings.  Some disadvantages to an S Corporation are that only once class of stock is permitted and you must limit the shareholders to 100 individuals, none of which may be an entity (with the exception of estates and certain types of trusts) and none of which may be non-resident aliens.

Unincorporated Entities - Limited Liability Company
The limited liability company (LLC) has characteristics of both a corporation and a partnership. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of "pass-through" income taxation.  Unlike a corporation, few of the LLC statutory rules are mandatory and most of its governance is dictated by an operating agreement executed by its members  The management powers in the LLC can be retained by the members of the LLC or centralized within a board of managers (who may or may not be members).  Another advantage of the LLC is that its flexibility allows for much less administrative paperwork and record keeping than a corporate structure.  Some disadvantages of an LLC are that some investors are more comfortable with a corporate structure (although this may only be an issue once the company is ready to take on significant investors and not in the early stages of your business) and some creditors may require that you, and other members, personally guarantee a loan to your LLC. 

Partnerships

General Partnership
In a general partnership, each partner has full and equal control over the partnership.  The partnership is a "pass through" entity for tax purposes.  While partners have considerable flexibility in structuring their relationship, partners run a great risk of loss because there is no limitation to a partner's liability.  Partners have joint and several liability for the acts of each partner within the scope of partnership business. 

Limited Partnership
Under a limited partnership (LP), unlike a general partnership, the limited partners are not responsible for partnership debts, obligations and liabilities.  An LP may have an unlimited number of limited partners, but must have at least one general partner who is responsible for the management of the partnership.  The general partner remains personally liable for partnership debts, obligations and liabilities, but the general partner can be a limited liability entity to add a layer of protection to the individuals managing it.  Like the general partnership, the LP is treated as a "pass-through" entity.  A disadvantage of the LP is that the limited partners must be careful not to become engaged in the decision making of the business or they will run the risk of losing limited liability protection. 

Limited Liability Partnership
A limited liability partnership (LLP) is a variation of the LP which allows a limitation of liability without the restriction on active participation required with an LP.  Under an LLP, partners remain liable for their own acts and are generally not liable for the acts of others, unless the partner has acted negligently or committed misconduct.  As with the general partnership and the LP, an LLP is treated as a "pass-through" entity for tax purposes.

Bottom Line:  There is no "one size fits all" answer to the choice of entity question.  You should give careful consideration to your needs and the needs of your business before settling on an entity.  Since the factors in consideration may be significant and the tax analysis complex, it may be wise to consult your tax advisor or an attorney to assist you in the decision process. 

After an overnight flight from the U.S., we arrived in São Paulo, Brazil, the nation's largest city in the southern region of the country.  Brazil covers a very large area along the eastern coast of South America and includes much of the continent's interior region.  The county is equivalent in size to the continental U.S., but has less than two-thirds of the U.S. population.

Once we answered questions from the Brazilian hotel staff on the upcoming NFL season and the Indianapolis Colts, we meet with Scott Shaw, deputy senior commercial officer at the U.S. Consulate.  One of the main focuses for this trade mission is to learn about energy.  Brazil's advances in this area make it an ideal place to learn,  especially with São Paulo on the leading edge of energy independence.  The briefing provided a great overview of Brazil's energy programs and the impact they've made in energy advancement.

Brazil is 100 percent energy independent and they have virtually no carbon issues, which means they also don't have the cap and trade issues the U.S. is facing.  Seventy percent of Brazil's energy is from water.  The rainforests, which comprise about 98 percent of northern Brazil, help stabilize the atmosphere and environment and reduce manmade environmental impacts in the region.  In addition, Brazil doesn't use coal.  Another strong energy source for Brazil is ethanol with sixty percent of Brazil's ethanol being produced in São Paulo.  They've been using homegrown biofuels since 1973 and their ethanol is based on sugar cane.  Sugar cane is not a resource easily grown in the U.S. and our ethanol is based on cellulosic and corn ethanol.

Brazil is so committed to energy and global climate change that they have pledged that the 2014 FIFA World Cup soccer event will be carbon neutral.  The stadium currently under construction will use only solar energy.

After the briefing with the U.S. Consulate, we met with representatives of the Federação das Industrias do Estado de São Paulo (FIESP).  The FIESP is an industrial entity comprised of 127 industrial associations (which make up 42 percent of the industrial GDP).  The FIESP monitors and fosters business relations with countries worldwide.  Major projects for this group include renewable and sustainable energy, climate change legislation and solar energy for heating.

We then traveled to the Fundaçoa de Amparo a Pesquisa do Estado de São Paulo (FAPESP), which is the state of Sao Paulo Research Foundation.  FAPESP is one of the main funding sources for scientific and technological research in Brazil.  Funding is derived from a one percent tax to all employers and the board of directors is appointed by the government.  Even with the funding subsidized by the government, the group has autonomy in how they manage and invest the $350 million annual budget.

We were also able to meet with many Brazilian and São Paulo dignitaries at an evening reception hosted by the FIESP.  The reception again reinforced what we already learned .  Brazil, and São Paulo, has learned to use their environment to improve their country and the lives of their people, without harming the natural resources that provide so much.

Jerome Peribere is president and chief executive officer at Dow AgroSciences.

I enjoyed this roundtable as it was a prime opportunity to talk about culture, state of mind and values which shape a community and a company.  These topics are especially relevant as it has been fascinating to observe the quality of our employees at Dow AgroSciences in the recent months.  Not only have they had to cope with the potential consequences of the global recession like everyone else has, but in our case it hit close to home when The Dow Chemical Company, our parent company, mentioned that it was evaluating the possible divestiture of several assets including Dow AgroSciences.  Of course employees went through the process of being shocked and feeling uncertain, yet the Midwestern values of hard work and self determination quickly took over.  The realization that we are a solid, highly performing technology-based entity valued for the quality of our output quickly reboosted confidence and determination to succeed.  The strength of every company depends on the state of mind of its employees and their thinking, which in turn shapes the company culture and brings results.  If we engage employees, the values of our communities will come out strong and respond.

I'm forming a new entity for my business.  What are some of the key documents?

 

The three key documents for a new corporation are:

 

• Articles of incorporation
• Bylaws
• Shareholders' agreement (optional)

The articles of incorporation are filed with the secretary of state of the state in which you are forming your corporation. They contain some basic information about your corporation, such as its formal name, its registered agent for service of process, the number of authorized shares and the rights and preferences of any preferred shares.

 

Most states require a corporation to have bylaws. The bylaws generally set forth the following information: 

 

• the process for holding shareholders' meetings;
• the powers of the board of directors and process for holding board meetings;
• duties of officers and the process for appointment and removal of officers by the board.

A shareholders' agreement is not required by law but is often a good idea. It is an agreement between the shareholders of the company that governs the rights of the shareholders. A shareholders' agreement typically limits if and how a shareholder of the company may transfer his or her shares of stock. It may also contain the following provisions:

 

• Repurchase rights. Repurchase rights typically require the owners or the company to purchase a shareholder's shares in certain circumstances, such as death or permanent disability. A shareholders' agreement also will often require a shareholder to sell his or her shares of stock to the company or the other owners if the shareholder is fired for cause, voluntarily resigns or the breaches the shareholders' agreement.

 

• Preemptive, co-sale, tag-along and other rights. A shareholders' agreement may also provide for preemptive rights, rights of first refusal, tag-along rights/co-sale rights and/or drag-along rights. These concepts are discussed in the below blog post "I'm raising venture capital for my company and I can't understand half the jaron they are using. Can you help?"

 

• Corporate governance. A shareholders' agreement generally governs the manner in which the day-to-day operations of the company will be managed. For example, the agreement may require that significant management decisions require the consent of some or all of the shareholders or the board of directors. A shareholders' agreement may also establish the means by which the directors are to be elected.   

 

• Miscellaneous. Other matters that may be addressed in a shareholders' agreement include restrictions on competition, treatment of confidential information and dissolution of the company.

The IRS has announced a public hearing to take place on April 16, 2009, at 10 a.m. (EST), at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, D.C. for discussions concerning the proposed rulemakings on 26 U.S.C. § 3402(t), added by the Tax Increase Prevention and Reconciliation Act of 2005, that will require federal, state, and local government entities to withhold income tax when making payments to persons providing property or services.  The proposed regulations were published in the Federal Register on December 5, 2008 (73 FR 74082).   The effective date of Section 3402(t) was extended for one year by the American Recovery and Reinvestment Tax Act of 2009, so the section will now apply to payments made after December 31, 2011.  Ice Miller has prepared a summary of the proposed regulations.

Those who have submitted written comments and wish to make oral comments at the hearing must submit an outline of the topic of discussion and the amount of time to be devoted (signed original and eight copies) by March 25, 2009, to:
 
CC: PA: LPD: PR (REG-158747-06)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
 
Hand deliveries may be made between the hours of 8 a.m. and 4 p.m. (EST) to:

CC: PA: LPD: PR (REG-158747-06)
Courier's Desk
Internal Revenue Service
1111 Constitution Avenue, N.W.,
Washington, D.C.
 
Electronic deliveries may be made via the Federal eRulemaking Portal at http://www.regulations.gov.
 
Call Jean Casey at (202) 622-6040 for questions concerning the proposed regulations.  Call Richard A. Hurst at (202) 622-7180 or email at richard.a.hurst@irscounsel.treas.gov for questions concerning the hearing, submissions, or being put on the building access list.

Indiana's General Assembly has passed House Bill 1280, Energy Efficient Buildings, which requires the environmental quality services council (EQSC) to study whether public entities should be required or encouraged to seek to achieve energy and environmental design ratings in the construction and renovation of buildings and structure and related issues. The General Assembly adjourned sine die March 14.  The Speaker of the House and the President Pro Tem of the Senate have seven days after sine die to sign all bills, after which they are sent to the Governor's office.  Once a bill reaches the Governor's office, the Governor has seven days to take action (sign, veto, or let the legislation become law without his signature). March 28 is the Governor's final deadline for signing bills. A technical corrections day, if needed, is set for April 15.  Both houses would convene at 1:30  p.m . The bill originally required a building constructed or designed under certain public works contracts entered into after December 31, 2008  to be designed with the goal of achieving the United States Building Council's Leadership in Energy and Environmental Design (LEED) rating system, the Green Globes Two Globes level or equivalent standard under an accredited program.  It contained provisions regarding state energy purchases and Energy Star rated equipment. It allowed the Indiana  Economic Development Corporation to adopt rules regarding priority for economic development projects that met or surpassed LEED criteria. The EQSC will likely consider these types of issues in determining whether public entities should be required or encouraged to seek to achieve energy and environmental design ratings.