The organization’s business plan calls for the selling of the company to investors in five years. The time frame for development, growth and sales is somewhat short and thus creating a business form that will need to be redesigned in a short time is not efficient. Therefore, because the eventual plan is to sell the organization to investors in five years and because additional personal liability protection for the organizers, the corporate business form has been chosen. Going with the corporate form the organizers are choosing a form that will best match the long-range goals of the company, provide for personal liability protection and provide attractive benefits for ownership transfer in the near future.
While the assistance of a lawyer is not necessary to file the paperwork for corporation, consulting with experts in corporate law are needed to keep the Corporation in compliance with statutory rules. Professional help should also be obtained to deal with issues such as patents and copy rights. Since the founders being the former ChipeX employees, there is a chance that ChipeX would try to claim the design as theirs. Help will be needed from organizational experts and accounting experts to keep the organization running smoothly.
Legal & Regulatory Issues
There are many legal and regulatory issues that are considered in creating or modifying a business, most notably under the area of classifying the type of corporation, taxes, labor, real estate and permits and licenses, to name a few. Nevertheless, these issues are the most prevalent in establishing the new entity as a corporation.
According to Inc magazine, “Corporations are controlled primarily by the state, not federal, law.” Thus entity must contend with were to file paperwork in order to effectively gain an advantage in state law, in essence which state is friendly to companies. This decision alone, will determine the bottom line. Is this state going to tax high, require that the company adhere to strict environmental rules, provide financial assistance, if not, is the state going to interfere and to what degree. Normally, the creation of this new corporation will be in the state that this business entity was created. But keep in mind that the role of the venture capitalists is to be considered and how their interest to this company is going to fit in. After all, the venture capitalists are taking a risk in providing funding for this new venture.
The next issue to decide is the role of employees in the company. Of course, normally employees are paid for a service they render to the company; however, there are instances were an employee has experience and/or knowledge in a field that is needed by the company. Thus the company should provide a compensation package that would retain that service. Unfortunately, labor laws govern employers from local, state and federal laws.
The next issue to deal with is real estate laws and regulations. This company is going to require space for research, manufacture and shipping space to create this new chip. Thus the questions is should the company be leasing or buying property for this function. The answer will be to lease on a short-term. Plus, with leasing, the property come in compliance with environmental laws. There may be toxic and non-toxic waste that must be properly disposed of. Governments tend to be tough under this area of the law towards companies that create waste.
Lastly, the various permits and licenses that a corporation needs to conduct business in a state must be retained. For instance, the state of California, home too many tech companies, listed over 40 business licenses that must be retained in order to manufacture electronic equipment and do business in the state. They range from zoning, air emissions to corporate, water and OSHA permits.
Again, there are other issues that will need attention by the officers of the corporation, but in order to get this company going, these are the top legal and regulatory issues.
Business advice from a professional
Starting a business can be an overwhelming experience. That is why there are professionals that a person can rely on to start a business. First, a person needs to decide if the owners are going to start this venture alone or with partners. With ChipeX, Inc., there will be three business partners who already know the microchip business. Next the partners should write up a business plan so that everyone involved is on the same page. With the business plan there is an agenda, an idea on how to generate income, what expenses there will be, and known competitors. After making up a business plan, they should consider getting a lawyer to assist them with setting up the business. ChipeX wants to make sure they are not breaking any laws with starting the business or in the future. Now they need to decide on who will finance the business. Venture Capitalists will finance the business; fortunately, they have said they do not want to interfere with the operation. Now that they have financing, ChipeX may want to consider getting an accountant to keep the books.
The attorney(s) can draw up bilateral contract so each side knows what each partner have promised to each other. If the company is successful, they can decide to hire more people to keep up with demand. The attorney can help them with these business matters. The accountant can verify that the business is keeping track of all the income and the expenses.
Legal Entity Choice
The legal entity business type best suited for the organization of ChipeX is the corporate type. Though there are seven main business forms from which to choose, a few may be automatically disqualified. A sole proprietorship business form allows only a single owner and thus it cannot be used given the description of ChipeX’s business plan. General partnerships are disqualified based on the ownership requirement (51%) of the venture capitalist. A general partnership provides for all owners to be equal in ownership interest and further all owners are jointly and severely liable in the case that the partnership be sued. (The Legal and Regulatory Environment of Business) A second type of partnership, the limited partnership, may be an appropriate form; however, the limited partnership does not provide personal liability protection for the controlling interest in the company and is thus is not recommended. Finally, two main forms, comprised of four main components, remain. The corporation, s-corporation, limited liability partnership and limited liability company; all provide the attractive feature of personal liability protection. The main difference is in the ownership interest and in taxation. The s-corporation seeks to avoid double taxation, a serious issue with the corporate form, by treating the organization a (federal) non-taxable entity and allowing owners to report the taxes on their individual income taxes. The requirements to maintain this tax status are quite rigid and the risk of a tax court declaring an S-Corporation to be taxed as a corporation is very real. (The Legal and Regulatory Environment of Business)
The ChipeX business plan calls for the selling he company to investors in five years. The time frame for development, growth and selling is somewhat short and thus creating a business form that will need to be redesigned in a short time is not efficient. Therefore, because the eventual plan is to sell ChipeX to investors in five years and because additional personal liability protection for the organizers, the corporate business form has been chosen for ChipeX. Going with the corporate form the organizers are choosing a form that will best match the long-range goals of the company, provide for personal liability protection and provide attractive benefits for ownership transfer in the near future.
Conclusion
In essence, the three former employees of ChipeX, Inc. in forming a business to develop, manufacture and market a microchip for the next generation of personal computers and with the investment that the venture capitalist will provided should seek the advise of professionals and be informed in the creation of this company. The intent is the chip company to go public, or they sell to investors, within the next five years. They choose to go with a corporate business plan because of the company’s long-term goals, it provides for personal liability protection, and provide attractive benefits for the transfer of ownership in the future. Although they do not need to go through a lawyer to file the paper work for the corporation, the partners should obtain help from an accountant to watch out for investments and overhead. These decisions will help lead the company toward corporate success.
References
California Gold: Business Permits made Simple. http://www.calgold.ca.gov
Hertenstein, J, Marjorie B, Veryzer, R. (Jan 2005). The Impact of Industrial Design Effectiveness on Corporate Financial Performance. Journal of Product Innovation Management. Vol. 22, p3-21.
Potts, K. (2003, Oct 30). Starting a business: advice from the trenches. , 161. Retrieved Aug 20, 2005, from http://www.alistapart.com/articles/startingabusiness/.
Shedd, Morehead and Corley. Governance and Business Organizatons.
The Legal and Regulatory Environment of Business,13e. Chapter 11: Corporate Reed,
Unknown. (May 2000) Creating a Corporation. Inc.
