Legal Insight. Business Instinct.

Entity Structuring & Organization

In recent years the kinds of entities used by businesses have proliferated. They include corporations with C tax status, corporations with S tax status, limited liability companies, general partnerships, limited liability partnerships, limited liability limited partnerships, and business trusts. Most of these entities can be formed by filing a rather simple document with the appropriate secretary of state. However, that simple statement belies the complexity of these entities.

For instance, the LLC or limited liability company articles of organization is a simple one page document, but the LLC itself is one of the most complex of all entities. A key factor in creating or operating any business entity is to properly structure the capital. Capital can consist of cash, property, or intangible assets such as trade secrets, know-how, or opportunities. It is important that the capital asset be transferred to the entity and that a value be assigned to them. There are a number of ways to fairly easily assign a value to the intangible assets. The capital structure defines many legal rights and it is important that it be properly set forth. It is inappropriate to assign arbitrary percentages of ownership that are not directly related to contributed capital having a defined value. The Idaho LLC law contains no statutory provisions on capital structure.

This has resulted in many LLC’s having an undefined or vaguely defined capital structure. Voting or control rights can be assigned consistent with the capital structure or can be assigned independent of the capital structure. Control issues should not be used to control or limit capital. Idaho’s law on LLC’s assumes one vote per person regardless of capital structure. It assumes every owner has equal leadership authority. Because the Idaho LLC law makes no sense in a business setting, every Idaho LLC needs an operating agreement written by an experienced business attorney who knows how to deal with capital and control issues. The Idaho LLC law also imposes more stringent duties on members of the LLC than on a corporate shareholder or director. The fiduciary duties and conflict of interest issues must be dealt within the operating agreement. However, in many instances the Idaho law does not allow an LLC operating agreement to change the statutory standards. Often that leads to using a corporation rather than an LLC.

We have extensive experience in Idaho, Washington, and Delaware corporations, LLC’s and partnerships and the tax rules that apply to the formation, operation, and governance of these various entities.

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