Selecting the Right Entity for Your Tech Startup

Nebraska, and neighboring Midwest states, have developed a reputation as the “Silicon Prairie,” a prime location for technology startups. The recent tech startup boom in the Midwest can be attributed to the lower cost of living, knowledgeable tech labor force, and willingness of the community to embrace the startup. For many of these startups, besides the intense need to develop and protect the technology, a common issue is picking the right business entity structure.

 

In picking the right entity for the startup, several considerations should be weighed, including the need for liability protection, how the company will fund operations, and the most beneficial tax status. For example, if a tech startup is developing a product that will take a substantial period to produce, and likely need multiple rounds of equity financing involving institutional investors, with other funding coming through debt, the demand for classes of shares, preferences, and conversion rights, may require that the startup to form as a C-corporation, with corresponding tax status. On the other hand, if the startup only intends to have one round of equity financing, through a “friends and family” offering, a limited liability company may be appropriate, providing additional flexibility to select tax status.

 

Picking the right type of entity is important for the success of a tech startup, with many considerations to weigh. Ultimately, as facts change, it may be possible to change the structure of your company, but initial selection should not be taken lightly and can reduce problems as your company grows.

© 2017 Vandenack Weaver LLC
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IRS Issues Final Regulations for Foreign Owned Single Member LLCs

The Internal Revenue Service (“IRS”) issued final regulations that will increase reporting requirements for certain foreign owned single member limited liability companies (“LLC”). When a single member LLC is formed, for federal tax purposes, it is a disregarded entity by default. This means that income, loss, and subsequent tax obligations will pass through the entity to the owner. The final regulations change the default rule when a LLC is wholly owned by a foreign person, requiring the LLC to be treated as a domestic corporation separate from its owner.

By having these LLCs treated as a domestic corporation, separate from its owner, the LLC must obtain an Employer Identification Number (EIN) and annually file an information return, Form 5472. The LLC must also maintain records of reportable transactions with the foreign owner or foreign related parties. Ultimately, the IRS believes that this will ensure that disregarded LLCs aren’t used by foreign owners to shield assets from the IRS.

Although this change is designed to prevent abusive practices, this has a practical impact for foreign owners of a domestic LLC, ultimately increasing administrative requirements. For further information, the IRS regulation can be found at the following address: https://www.irs.gov/irb/2016-21_IRB/ar19.html

© 2017 Vandenack Weaver LLC
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What Law Governs Contracts With Foreign Entities?

A Business FAQ with Mark A. Williams.

The law that governs every contract is usually the law that the contract says. In  most agreements, there will be a provision in it that says if we get into a dispute, here is the law that is going to apply. If the contract does not say that, then there is a little bit of a problem. Every state has some laws and there are federal treaties with other countries, and those laws and treaties are supposed to work out whether it is the law of your state or whether it is the law of the foreign jurisdiction that is going to apply.

The important thing to think about is if you are going to do business with a company in another country, you really need to  make sure that in your contract, you specify what law is going to apply and what jurisdiction lawsuits are going to happen in so that if there is a dispute, you know how it can get resolved.

© 2014 Parsonage Vandenack Williams LLC

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Nebraska Secretary of State’s Office Will Now Accept Amended Biennial Reports at Any Time

Effective July 18, the Nebraska Secretary of State’s office will allow Nebraska LLCs to correct or amend their biennial reports at any time. As a result, LLCs will be able to update public records containing their business addresses more easily. The fee to amend or correct the LLC’s biennial report is $10.00. If your business has changed locations since your last biennial report was filed, you may wish to take advantage of the new amendment rules.

© 2014 Parsonage Vandenack Williams LLC

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When Should I Use an LLC vs. a Corporation?

A Video FAQ with Mark A. Williams.

A corporation cannot be used if you want to be taxed like a partnership. An LLC, or limited liability company, can elect any kind of tax treatment. So if you want the ultimate flexibility in how you are going to be taxed, the limited liability company is definitely the way to go. Also, a limited liability company gives you greater flexibility in determining the rights of the various types of owners.

Now a corporation, on the other hand, has been around for a very long time so there is a good established set of law and rules that apply to corporations. So for some people, the comfort of knowing exactly what they are getting into outweighs the flexibility that the limited liability company might provide.

© 2014 Parsonage Vandenack Williams LLC

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Can an LLC Have Different Classes of Investors?

A Video FAQ by Mark Williams

An LLC, or Limited Liability Company, can have multiple classes of investors. It is very common that the operators of the business might have certain rights that are different than somebody who just makes an investment of money. So when you structure an LLC, you have the flexibility to create as many classes of ownership as you want so that everyone has the right type of rights and the right types of obligations to make sure that that business is a success.

© 2014 Parsonage Vandenack Williams LLC

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What Is an LLC and Why Should I Form One?

An LLC is a limited liability company and forming a limited liability company is basically to run a business out of or to own real estate or some other type of property. So if you are going into business or you are buying property as an investment, an LLC is one type of entity that you could look at forming, along with a corporation or a partnership. The pros and cons of those different business entity types are numerous, so you really have to get good counsel to make those decisions.

© 2014 Parsonage Vandenack Williams LLC

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