Set up your startup for present needs and future growth

Is an Oregon business corporation the best structure for your new company?

Is an Oregon business corporation the best structure for your new company?

While several different business organization structures are available to entrepreneurs, the choice usually comes down to incorporation or limited liability company organization. Both share (at least to some degree) certain characteristics that may suit a new venture well.

In each type of entity, the liability of founders is limited, allowing a shield for personal assets against business claims. Each may be more attractive to potential investors than other structures. And each offers continuation of existence as well as the ability to share profits with others who can help in managing and growing the new enterprise. This post will briefly examine the benefits and drawbacks of setting up as an Oregon business corporation. We are happy to answer further questions in a complimentary phone consultation.

Key legal and business issues for corporations

Registration
An Oregon corporation comes into legal existence by filing Articles of Incorporation with the Secretary of State and paying a filing fee (currently $100 for domestic business corporations). This document contains the corporation’s name, the name of its organizer, and its business address. It specifies the number of shares that the new corporation is authorized to issue. It may include the names of the corporation’s initial Board of Directors.

Each year, the corporation must renew its business registration by filing an Annual Report (which also currently has a $100 filing fee).

Governing Document
Bylaws provide a framework for the corporation to manage its business. Don’t think of this important document as a day-to-day “operations manual” with guidelines for officers on subjects like handling customers, developing products, working with employees, or many other managerial tasks. Instead, corporate bylaws specify matters such as how the Board of Directors and the corporation’s officers will be elected, their titles, powers, and voting rights, and the manner in which they will set and conduct corporate meetings.

Bylaws should also describe what happens if a new director must be named or a founder wishes to leave the organization. And they (or related agreements between the founders) should specify how founders will be compensated with equity, including the total shares they may receive and when those shares will vest.

Limited Liability
Unlike sole proprietors or general partners, corporate officers and shareholders are protected from unlimited liability. While this does not mean that they cannot be sued or subject to creditors’ claims, it does generally protect their personal assets (homes, cars, savings, etc.) against such claims. Unless there is some legal reason to disregard this shield (called “piercing the corporate veil”), Liability is limited to the loss of paid-in investment in the corporation.

Management and Control
Corporate officers manage both day-to-day operation of the corporation and strategic decision-making involving products, markets, and growth. They are overseen, advised, and appointed by a Board of Directors, which is made up of directors elected by the shareholders.

Taxation
A corporation pays taxes on its income. If it pays some of that income to shareholders as dividends, then the shareholders (including founders) pay taxes on that same income. This “double taxation” can be one reason to consider an alternate business structure, such as a limited liability company or a corporation electing to be taxed under subchapter S of the Internal Revenue Code. (We’ll discuss that in another post).

But if other business reasons for incorporating are present (ability to attract investment capital, protection from personal liabilities, ability to continue as a business in the event of the death or withdrawal of one or more of the founders), then potential tax burdens should not necessarily lead you to rule out a corporate structure. Startups, for example, often do not pay dividends. Instead, they retain earnings to reinvest in continued growth. Founders may be paid as salaried employees (an ordinary and necessary business expense that may result in valuable tax deductions).

Like the other considerations discussed above, corporate taxation is just one factor in the decision to choose a type of business structure. An Oregon business corporation may be the best form for your startup’s current needs and future plans. Or you may be better served by organizing an LLC. Working closely with startup legal counsel (as well as establishing a business relationship with an experienced accountant) can help ensure you select the best business organization for your new venture.

Dane Johnson
djohnson@inspirationspaceship.com