Pre-Formation Considerations

Forming a new company is usually a time of excitement for the founders at the potential and possibilities of the new business concept. “Seed money” is usually tight. No one wants to consider the possibilities of a death or disability among the founders, and a substantive dispute among shareholders seems inconceivable. Unfortunately, for most businesses, these events occur on a regular basis. Without proper planning and written agreement on the course of action, a thriving business can be quickly pulled apart by a death or a simple disagreement among the shareholders. These contingencies are above and beyond the standard incorporation package offered by CPA’s and in software packages. It does cost money to create the documentation necessary to cover these events, but it costs much more to deal with them in the future.

Do you want to be in business with your partner/shareholder’s spouse or children? There are many legal cases of businesses that find themselves overrun with the children of a deceased shareholder – each wanting something different from the company, and all feeling they are entitled to “their share”. How will you handle the many unwritten agreements you and your deceased partner had worked out between yourselves? Without documentation and proper implementation there is no agreement in the eyes of the law!

How will the business be valued on a death or sale to the remaining partner? The valuation of a small business is nefarious at best, with each party using the value methodology that suits their position. It is very common to have two partners claim that the business is either worth nothing or $15M, depending on whose ox is pulling the cart…

It’s cheaper to incorporate in Nevada, because they have no income tax. It is cheaper if you are a Nevada business doing business in Nevada. It is more expensive to operate a business in Oregon that is incorporated in Nevada. You are still legally required to report income from Oregon operations and pay tax on that income. A Nevada corporation operating in Oregon is a “foreign corporation” that is subject to much higher fees than a “domestic corporation”.


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