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Ultimately the end-product of the vision of any entrepreneur is a corporation of
which the entrepreneur owns at least 15 percent; hence, making
manifest the dream of the entrepreneur entails the Founding of
Corporation.
So
an invariant of the process of making manifest the vision is the act
of legally organizing the entity that will embody the
vision as well
as the mission.
Regarding creating the entity there are four primary entity types to
consider: Corporation, Partnership, Limited Liability Company, and
Business Trust.
- Corporations is a
fictitious entity with a legal personality and protected under the
law, and owned by any number of natural persons called associates,
who capitalize the operations for equity ownership stake in the
entity;
- Partnerships is a
fictitious entity but without a legal personality, and is
constituted by way of an agreement between natural persons
desirous of undertaking a business endeavor together;
- The Limited Liability
Company by default is a Partnership and is simply formed as a
result of agreement entered into by its associates who are called
Members; however, the entity is in essence a hybrid of the
Partnership and the Corporation entities
-
Business Trust is particularly interesting because it is a
fictitious entity without a legal personality but with has a legal structure that is a composite
or hybrid of a Limited Liability Company and of a Trust, and is
simply formed as a result of agreement entered into by its
associates who are called Beneficiaries
Of course not all types
are available in every state and every country, so the entrepreneur
will have to choose from amongst the different types available
within the country of which the entrepreneur is resident.
The
task of legally organizing business-entities, however, is demanding
of much deliberation on the entrepreneur, because of the myriad of
seemingly insignificant formalisms that are often overlooked but
come to adversely impact the entity at some future date if not
attended to during the organizing of the entity. Very often,
however, entrepreneurs run off to legalize organize a new entity
even before thoroughly appreciating the enormity of the task that
lies ahead. This should not been done. The avoidance of such
prospective issues should motivate the suggested deliberation.
Instead the
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entrepreneur should first and foremost undertake a
thorough and exhaustive conduct
Vision Analysis, and
from such analysis elicit the areas of potential crises and erect defences
against such prospective issues by comparative analysis of the
options for
leveraging as much as possible all loopholes attendant to every
legal entity available for adoption to the end of organizing of
venture entity
Corporations and
Partnerships have been around for a long time and have been so
exhaustively discussed in several books off the shelf that there is
nothing really informative to impart, and the reader could do better
to read up on that.
In the Limited Liability Company
equity positions are assigned to
the members in proportion to the amount of investment made. Being a
Partnership by default, often
the members are also the employees; however, the members may
during the First General Membership Meeting also opt to consign the
management of the entity to a formal management team, subject to
terms of the formation agreement. By the underlying legal structure
of corporation, the membership structure can be as varied as there
can be regular corporate stock-structures that can be designed. One of the advantages with this entity is that the entity can be defined
for tax purposes as a corporation, with the taxes paid by the entity
and then have the profits/losses distributed to the members or the
profits/losses can be distributed to the members and the taxes paid
by the members. This feature allows members to automatically
write-off their losses annually which is a good feature for
technology companies that may not generate profit for years while
the members continue to invest in the company.
In the Business Trust, there are no equity-stakeholders and the
financial benefits are held within the entity, but distributed
according to agreed terms of distribution. Most often this business entity is used for Mutual
Insurance Companies and Real Estate investment Companies.
Significant in this forms of application of the entity, is that the
customers are also the beneficiaries: Effectively, the funds are
invested in other business entities and the profits shared through
beneficiary arrangements as per the by-laws or its equivalent
adopted during the set-up. However, the Business Trust is not
available in every state in the USA and this may also be the case in
other countries. In the USA, Business Trust are
legal entities in the States of Delaware and Commonwealth of
Virginia [as of the writing of this report]. The Formation documents
can be easily got on the Internet.
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Equally of significance,
this form of business entity unlike others does not require the
setting of equity-shares prices. In that sense it makes it possible
for a group of people to come
together and invest as per ability at different stages of time.
Besides, this entity is particularly well suited to
cooperatives, as the investments do not have to be in cash, but
can be defined to be made in the form of a specific good of some
monetary value. Particularly noteworthy of this entity is
that the liabilities of the entity remains with the entity and the
liabilities of the beneficiaries also remain with the
beneficiaries.
This is very important when
people are forming businesses under conditions where the tax
liabilities and other debt issues of the investors are not known,
hence, each investor may invest without any concern about debt
obligations of the others hampering the survivability of the
business entity, as it would with all other businesses including the
Limited Liability Company.
Organizing the
Venture Legal-Entity
All considered, the choice
of an entity therefore is entirely at the discretion of the
entrepreneur although whenever possible the use of the Business
Trust is suggested.
All the same the following
approach is strongly recommended to be followed by the entrepreneur.
Irrespective of the choice of the venture-entity, the entrepreneur
must always create another company of the form of Business
Trust and make this Trust the owner of the venture-entity which
effectively is the operating company. This provides additional
layer of protection to the entrepreneur because law suits then stops
right at the corporation itself as the Trust structure eliminates
the flow-through of liability to the business owner in the event of
the puncturing of the corporate veil of liability shield. |
