Incorporate Your MLM Business Continued - Page Two

By Jeffrey Babener, © 2013
Corporate Housekeeping

Your attorney will need a variety of corporate housekeeping information.  For instance, information on the
anticipated number of employees in the coming 12 month period will be necessary for application for a federal tax
employer I.D. number.  Will the corporation have a fiscal year ending December 31 or at some other point in the
year?  Will the corporation be on a cash basis or accrual basis?  Will the corporation initially authorize salaries for
officers of the corporation?  What institution will be the corporate bank; who will be authorized to deal with the bank;
on what terms?  Will there be limitations on the borrowing power of officers or directors?  What will be the date for
the annual meeting of the board of directors and shareholders?  Who will be the registered agent?  (As a general
matter, your attorney will be the registered agent.)

Chapter S or C or LLC?

Will the corporation be a Subchapter S corporation, where income and losses flow through to shareholders and the
corporation pays no income tax?  Or will it be a standard Section C corporation where it does in fact pay income tax
and income is not placed on the shoulders of shareholders?  If the corporation will sustain major losses and
shareholders have other sources of income against which they wish to write off losses, a Subchapter S may be
appropriate.  Most businesses are not started with the idea of a loss, however, and most businesses do not
incorporate as Subchapter S corporations. In addition check on the LLC. Many states have approved use of the
Limited Liability Corporation (LLC) which combines the benefits of type S and C corporations. In a LLC, income
passes through and is taxed individually to shareholders, but only the corporation is liable for corporate debts and
obligations.

Shareholder Agreements  

Is there a method for preventing shareholder voting deadlock?  You may wish to discuss with your lawyer possible
pre incorporation shareholder agreements which govern the employment status of key shareholders or commit
shareholders to voting a certain way on specific corporate issues.

The Buy Sell Agreement

The first meeting with your lawyer is a good time to discuss buy sell agreements.  What happens when one of the
shareholders wishes to leave the business?  Under what circumstances should he or she be able to dispose of
stock to third parties?  As a general matter, in closely held corporations, either the corporation or other
shareholders are granted the right to buy the stock.  What circumstance should trigger the buy sell agreement:
death, disability, retirement, termination, or some other event?  Should the buy sell agreement be funded by "key
man" insurance that would fund the purchase of stock in the event of death of a key shareholder?  What will be the
mechanism for valuing stock: annual appraisal, book value, multiple earnings, arbitration or some other
mechanism?

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