by Justin Tollefsen | Feb 3, 2015 | Company Formation, Tax Issues US
Although many company founders are reluctant to take the plunge into creating a corporate entity, often putting this step off for as long as possible, there are some good reasons to consider forming as soon as possible. Holding Period Stock Value The IRS will look at the time between forming and value given for stock at that time, and the company’s value at any financing or liquidity event. Hypothetically, if founders gave $.01 of value for their shares at formation, and they receive a funding round that values the company at $.50/share a week later, they need to be able to convince the IRS in an audit that they created enough value in the company in that one week to warrant the 50x increase in the value of the company. In a situation like this, your company is more than likely to arouse the suspicion that you sold yourselves shares at below market value. The General Partnership Many states, including Washington, have ratified some version of the Uniform Partnership Act (UPA). Washington’s is codified as chapter 25.05 of the Revised Code of Washington. Although the preferred form of entity for most startups is a C corporation, a founder should also be attentive to the provisions of the UPA or its equivalent in his or her state. The reason for this is that many of these acts contain provisions similar to the following from RCW 25.05.055: (1) Except as otherwise provided in subsection (2) of this section, the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not...
by Justin Tollefsen | Sep 17, 2013 | Business Law, Company Formation, Entities WA, Washingon State
Introduction Delaware has long been considered the jurisdiction of choice for startups pondering incorporation. Reasons frequently given for this include a well developed body of corporate law and experienced court of chancery to hear business cases, efficient procedures for filing and reporting and, importantly, institutional investor familiarity with Delaware law. But should these factors necessarily preclude an early stage company from organizing as a corporation in their home state? In this post, I provide a basic outline of key distinctions between Delaware and Washington startup incorporation, allowing the reader to evaluate where they align and diverge and educate themselves as to which might provide the best fit for their new company. As always, it is advised that you consult with legal counsel when forming a company to provide advice relevant to your specific needs. DE Advantages WA Advantages DE Disadvantages WA Disdvantages Investors may demand it. Because most funders are simply more familiar with Delaware companies and the Delaware General Corporation Law (DGCL), they may insist that your company reincorporate before they consider an investment, though this may not be as common with Washington companies as it is with companies domiciled in states such as California. Developed and predictable case law. The Delaware Court of Chancery, a trial-level state court from which appeals are sent directly to the Delaware Supreme Court, has jurisdiction over corporate law matters concerning Delaware companies. Because of the high degree of specialization in this court, there is a much more developed body of case law for attorneys to consult for guidance in the event of a conflict. The Court of Chancery also makes a...
by Justin Tollefsen | Sep 4, 2013 | Business Law, Company Formation
I get this question a lot. Most recently, a friend of mine was contemplating starting a company with a friend of his, and had several questions about entity formation, IP protection, when to file for patents, stock distribution, and “anything I left out that I need to be thinking about”. This particular friend had been through the process of building a company before, and based on his subsequent questions it was clear that he already had an answer to his first one: there are a lot of issues in starting a new venture that seem simple at first blush, but that can create thorny issues down the road if not contemplated and handled correctly during a company’s formation. Planning for these issues early on is part of the value of a lawyer to a startup company’s founders. Blueprints for Your Success there is real value in talking to an experienced attorney at the formation stage just to make sure that all documents are prepared and executed correctly. I encourage founders to look at their formation documents as their blueprints, and to not underestimate the importance of solid and professionally developed formation docs. You just can’t trust everything that you find online, and there is real value in talking to an experienced attorney at the formation stage just to make sure that all documents are prepared and executed correctly. Filing services are not qualified to give an entrepreneur the nuanced advice that they need in making decisions about how a company should be set up to best attract investors and, down the road, acquirors. If you use a document filing...
