Looking Ahead: Organize Your Business Based on Exit Strategy

When choosing a legal structure to operate a new business venture, business owners often choose a legal structure based on finances or popularity.  For example, a business owner may automatically choose an Inc. structure (C-corp or S-Corp) because every major corporation in America is a Inc.  They may choose a LLC (Limited Liability Company) because it is affordable, relatively easy to set up, and only needs one member to be viable.

Although the above reasons to choose a business legal structure are not bad, they are just not the best reasons.  I previously discussed choosing a legal structure based on your company’s unique circumstances.  These principles still hold true.  But I also want to stress the importance of choosing a legal structure based on your company’s exit strategy.  Choosing the wrong legal structure can effect whether you can sell your company, merge with another company, or form a partnership or joint venture with a larger company.  Below are a few scenarios business owners should consider when choosing a business legal structure and an exit strategy:

1. Selling your company as an exit strategy – If your goal is to become acquired by a much larger corporation, the most favorable legal structure is to organize as a LLC or C-Corp.  Why?

• Interest or ownership in a C-Corp is easy to transfer because a C-Corp can issue an unlimited amount of shares and shareholders can transfer their ownership with no problem.
• Interest or ownership in a LLC also can be easily transferred.  Ownership is represented by member unit certificates and can be transferred with no problem.

However, having a S-Corp and an exit strategy of selling your company could pose a problem.   The reason is:

• S-Corps cannot be owned by another C-Corp, other S corporations, LLCs, partnerships, or many trusts.

So owners of a S-Corp would have to reorganize the business as a C-Corp or LLC in order to sell the business.

2. Merger as an exit strategy.  The same rules apply when contemplating a merger. Usually a merger of two companies involves an offering of the more valuable stock for the less valuable stock.  C-Corps can easily offer and sell stock and a LLC can always transfer interest in the LLC to another entity.  However, a S-corp can not have more than 100 shareholders and as discussed above the C-Corp nor the LLC can own stock in a S-Corp.

3. Joint Venture/Partnership – A joint venture or a partnership simply involves a joint venture or partnership agreement outlining the details of the new joint venture or project.  Usually the parties detail how much each will contribute to the project, management and/or execution of the project, how profits will be divided and exit strategy.  Because a joint venture usually does not involve buying and selling of stock or transfer of ownership, any type of business entity can engage in these type of agreements without restrictions.

Remember to always consult a corporate or business attorney or CPA before choosing a business entity.  Choosing the wrong legal structure can hinder your company’s growth and success.

About the Author
Latoicha Givens is the founder and a member of the firm Phillips Givens, LLC. Ms. Givens practice includes represention of start-ups, small, and mid-sized businesses in intellectual property matters, specficially, trademarks, copyrights, and licensing issues. She is the author of IPLAW101.com, a blog covering Intellectual Property issues specifically trademark law - trademark registration and infringement; Domain Name Disputes: Cybersquatting; Licensing and Intellectual Property issues in New Media.
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