One of the reasons that limited liability companies have become so popular as an alternative to corporations is that the state laws governing LLCs are so much more liberal in terms of formal requirements for documenting company decisions. For the most part, LLCs are free to shape the management provisions in operating agreements in the manner desired by the parties. Corporations, in contrast, are required by statute to adhere to certain procedures in their operation. In particular, the corporation’s Board of Directors must formally approve certain acts, such as issuing new shares or entering into a significant contract, and this approval must be documented, either via minutes of a board meeting or unanimous written consent of the board. [Read more…]
More than once since I formed Andrew Abramowitz, PLLC, I’ve been asked “What’s the ‘P’ in PLLC?” The answer is “professional.” New York requires that business entities engaging in one of the professions regulated at the state level (e.g., law, medicine, architecture) be conducted in a special professional form of the entity, so corporations are called PCs and limited liability companies are called PLLCs.
In the most basic sense, these entities are like the non-professional version of each: they offer limited liability for shareholders/members (though those individuals remain liable for “any negligent or wrongful act or misconduct”) and pass through taxation for PLLCs and PCs that elect to become S-corporations. However, there are a couple of important differences that those working with these entities should be aware of:
- Unlike non-professional entities that can be formed immediately upon a filing with the Department of State, there are other hoops to jump through, depending on the profession. For my law firm, I had to submit evidence to the state that I was in good standing with the state bar.
- Each shareholder/member of the entity must be a licensed practitioner of the applicable profession. This restricts the ability of the entity to seek outside equity financing from passive investors, and also restricts the entity from being able to issue equity to service providers as compensation. This rule isn’t universal – Australia permits outside equity investment, and there have been calls to permit it here, as described in this New York Times article.
Particularly for complex and important transactions in a company’s life-cycle – mergers and acquisitions, institutional funding rounds, joint ventures, etc. – it’s typical that the transaction process start with the preparation of a non-binding (usually) term sheet or letter of intent. These documents are no more than a few pages long and are more informally drafted than definitive agreements. The purpose is to set forth just the big picture terms of the deal. For example, a term sheet for an investment round would list the amount being raised, type of security, price per share/unit and various terms of the security (e.g., dividends, management rights, transfer restrictions). But it would not get into, for example, detailing the company representations about its business that will eventually be contained in the definitive purchase agreement.
There are some attorneys who think that the term sheet/LOI is a wasted step and that the parties should proceed immediately to drafting definitive documentation if they are interested, but I think it’s useful for everyone involved to get the most important substantive terms out on paper and make sure the parties have a meeting of the minds about them before getting lost in the weeds of negotiating the provisions of definitive agreements. This is not to say that those provisions aren’t important, but the more open issues there are at a particular time, the more likely it is that the parties will get sidetracked and lose sight of the important parts of the deal.
I mentioned earlier that most term sheets and LOIs are non-binding. Even so, there are typically provisions within the document that are expressly binding, just not the core business terms of the deal that are subject to further negotiation. Terms that are typically binding include confidentiality, governing law and (if applicable) exclusivity provisions. There are some cases, however, where the whole term sheet or LOI is stated to be binding, often when the parties want to start business activities right away, though there are still provisions detailing how the parties will go on to draft and negotiate definitive agreements.
I blogged last year about an IPO for a football player – the public offering of a share of the right to receive 20% of Arian Foster’s future football-related income. There is a movement afoot now to introduce this concept in a much broader way: the sale of a share of future earnings as a means for college students to finance their education, as an alternative to incurring student debt. The current state of affairs is summarized in this Slate article. [Read more…]
I’m often asked whether a newly formed New York-based business should incorporate (for a corporation) or organize (for an LLC) in New York or Delaware. If the company will actually be doing business in New York, there is no advantage from the perspective of filing fees of using Delaware, because the company will then have to qualify to do business in New York and therefore pay two states’ fees. In many cases, my advice is to simply go with New York, but there are several factors that may, depending on the situation, argue in favor of Delaware: