Corporate world in the United States opens a variety of choices with respect to selecting the type of entity under which a company will be established. Aside from the basic compliance framework, there are multiple factors that will determine the most appropriate entity, providing substantial differences with respect to ownership, taxation and legal exposure, among others.
In the following report, we will evaluate the specific circumstances surrounding the conception and incorporation of “Cool Touch Cookware” (CTC) by Dawn Taylor, original designer of the company’s core product: innovative cookware.
Target Audience
The primary audience is Dawn Taylor and initial investors involved in the new corporation.
Preliminary …show more content…
As a result, it is recommended to limit personal liabilities by selecting a Corporation Type over a sole proprietorship or a partnership. (Product-specific Liability Insurance at this stage of the business and product development would come at a very high price and therefore, the cost/benefit for a simple entity type constitution is not justified).
The options are now limited to incorporate as an S Corporation, C Corporation or as a Limited Liability Company (LLC). The primary decisions regarding these options are based on the ability to assign ownership of the company and the way taxes are paid. While at this point is premature to determine the equity percentages and regardless of the type, it is advisable to Dawn to retain at least 51% equity as majority shareholder and therefore, retain the control of the company under her own …show more content…
Initially there are limitations by not issuing stock, but only having members , which requires more complex operating agreements. Also, the partnership nature of the LLC makes taxation work as a pass-through, transferring losses directly to individuals to be deducted directly on their tax returns. Starting the company, there will be substantial losses and it is preferable to keep them at the corporation. In addition, another minor disadvantage is that fringe benefits are corporate taxable and there will be salaried employees, possibly including Dawn.
Pass-through entities then, while viable and usable, are a less desirable alternative for the incorporation, leaving the incorporation of CTC as a C Corporation. This concept is also strongly supported by the recent Tax Cuts and Jobs Act (“TCJA”), which reduced the corporate tax to 21%.
With respect to the location of incorporation, following a common practice in the USA, it is recommended to become a Delaware C Corporation , which provides limited liability, ease of use, ease of setup, the ability to issue stock options, and tax benefits upon sale for many qualified small businesses. The legal framework regarding Delaware governance is optimized for reduced complexity in company management, making it the most common alternative for investors. It also reduces significantly the Operational Overhead and incorporation cost given its familiarity.