What do all these entities do?

This introduction will make it easier for you to come up with questions that will help you select the best alternative for your specific situation. There are almost always other issues that will come up if someone makes a three-year plan, for example. These issues could include financing, compensation, control (which doesn’t have to be the same as management or splitting profits), and long-term capital gains. Some other sticky issues involve getting someone out of the company, voluntarily or involuntarily, as well as a process for cashing out their interest. That question is partly answered by the corporate form you choose, but it can be modified by a separate agreement.

Partnerships

1. Partnerships fall into three general categories: general, limited, and limited liability partnerships. The third, the LLP, is usually reserved for professional firms such as law, accounting, or medical practice firms. It’s probably not relevant for most people. General partnerships are structures in which each partner is personally liable for all the debts of the partnership. That’s often not a good idea if the partners want to keep their house, etc. Limited partnerships, which protect the limited partners from personal liability, aren’t as good an option as they may seem in most cases because a general partner is still required. To prevent personal liability in this situation, an entity is usually the general partner. For most typical businesses, if you’re going to form an entity so you can use an LP, there’s little need to complicate the structure when the entity can simply own/run the business in the first place. The one advantage of a general partnership is that it requires no formalities to set up or administer except for an additional filing at tax time.

Verdict:

Not a great choice; last alternative unless there are special circumstances such as investment partnerships where the management is making investment decisions with the investor funds. Examples: real estate, venture capital, or hedge funds.

Corporation

2. The next choice to consider is a corporation. In part to achieve the substantially valuable goal of insulating shareholders from corporate liabilities, corporations require a fair amount of corporate formalities, including regular board and shareholder meetings, separate bank accounts, formal salaries, and separate tax returns. While the corporation can elect Subchapter S treatment, so that its income flows to the shareholders directly and is taxed on their returns, like a partnership, whether the added formalities are worth the effort depends on the size and structure of the business’s ownership. When outside investors are involved, a corporation becomes a better choice.

Also: depending on the size of the business, there may be tax advantages to the traditional corporation tax structure (which means regular corporate tax reporting). If the shareholders/managers want to load up on benefits, e.g., health care and retirement plans, through the business, it needs to be explicitly discussed with the accountants as well to confirm the specific requirements. However, even if they decide that corporate taxation is preferable, it is often possible to achieve the same results through an LLC.

Verdict:

Best choice when outside investors are involved. The difference between this outside money and that of an investment partnership is that investors in a corporation expect their money to be used by the corporation to pursue its business plan, not to make investments in other companies.

Limited Liability Companies

3. LLCs, or limited liability companies, are a hybrid form of corporate structure that combines the best aspects of partnerships and corporations with few of their disadvantages. It provides corporate-type insulation from personal liability for owners with the opportunity for pass-through taxation. Each owner of an LLC is called a member and if the formalities are observed (namely, LLC meetings, separation of business and personal funds, and sufficient capitalization or insurance to meet normal/expected liabilities), the members will not be personally liable for debts of the business. In terms of taxes, an LLC can choose to be taxed as a partnership or as a corporation. This provides a great deal of flexibility, especially if the members’ needs change over the course of the business.

Verdict:

Flexible entity that is expanding to cover most small businesses that used to be partnerships or sole proprietorships.

Finally, you should note that regardless of what corporate form you choose, if bank financing is required, for example, there is almost no way that a bank will lend money without personal guarantees and collateral. So, even though picking a different corporate form might protect against many of the debts of the company, perhaps the most substantial liabilities, at least in the beginning, are likely to remain with the principal individuals involved.

Here’s my edited answer:

As someone who’s represented dozens of startups, closed probably 100 venture deals, and cleaned up too many small companies to count, there is in fact a right way and wrong way to do this.

The best way, if you’re planning on a software company that will be seeking traditional VC money, is to form a Delaware corporation, taxed as a C-corp, that owns and develops the IP (the software). That structure works for VCs without creating problems.

Here are some quick points:

1. Using an S-corp or LLC taxed as a partnership means that there can be leftover tax liabilities. It’s not worth the trouble to diligence them, so you’ll just end up either killing the deal or hopefully putting the existing entity behind a chinese wall and having it be a shareholder in a new — yep, Delaware c-corp.
2. Profit sharing with employees can be done in many ways, but stock options are straightforward and well-understood both by VCs and software engineers. There’s a plethora of information available to everyone on how to value, structure, exercise, and pay tax(!) on them.
3. Ownership, management, and governance can be turned into sticky problems. Using a standard structure like the DE C-corp helps everyone focus on the actual issues instead of the wrapper.

The only realistic alternative, if you have substantial other income that could be sheltered and sufficient skills and funding to bootstrap for a while, would be to use one of the alternate structures (LLC w/partnership taxation) deliberately so as to harvest tax losses while you are developing to the point that you will seek VC funding and then execute the chinese wall maneuver I described earlier.

Think of it this way: it’s hard enough to have a great idea, start executing it, interest a VC, and close funding. Why would you let something like an uninformed legal entity structure jeopardize your deal? As you can tell, I’ve taken companies down several of these paths. Some are way better than others.

Short answer: you should probably just buy insurance instead.

Entity types to consider include the corporation (with S- or C- taxation), limited liability companies (LLCs), partnerships, sole proprietors, and a few other entities with specialized application (such as the limited liability partnership for law firms).

The reason these entities exist is for limited *liability.*

The decision path to entity formation and selection should start with risk analysis and risk management. The two significant questions that you have to answer to decide whether this is the right course for you are: “What is my potential liability? and “What do I have to protect?”

What is your potential liability?

For example, if you’re going to be writing articles or conducting information research for corporate clients, then your primary risk is going to be from a generic commercial litigation issue. Based on the types of problems you’re most likely to encounter, errors and omissions insurance is the general type you would want to consider. If you are doing work where it is difficult to have lots of liability, either because it’s non-dangerous (e.g., designing websites) or you can contractually exclude much liability, then you’re almost certainly better served spending $500-$1000 a year on errors and omissions-type insurance.

If you are doing work where you can cause damages (anything dealing with people’s bodies or repairs to dangerous items), you definitely need to start with insurance and then look at your remaining liability exposure.

What’s your loss exposure?

Finally, if you’re just not that well-off, then spending an extra $1000 of time and effort and money to protect miniscule net worth might just not be worth it. If you have a home with equity and savings and retirement accounts, then, after you get sufficient insurance you can re-address this sort of question.

Once you’re properly insured (since not being sufficiently insured is one route to evaporating the limited liability protection you’re trying to establish by forming an LLC or other entity in the first place), then you can start analyzing the right entity for your purposes. If you’re going to be a single person in the business, then an LLC is usually the right place to start and end.

If your situation is different than the plain-vanilla model I described, then you should contact a lawyer with specific corporate experience. Your CPA doesn’t regularly address these issues of entity selection and may likely focus too much on the tax aspects, which is the wrong way to approach the issue (particularly since it’s easy to get the tax treatment you want these days with various entity types). Tax issues get addressed before you finally decide on an entity type.

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Since I’m a New York lawyer, I happened to notice someone in NY asking about LLCs:

With specific respect to NY LLCs, there is a publishing requirement that is just a pain in the neck, and so I recommend using a service to do the actual filings and publications. That is different from having them draft the actual LLC operating agreement, and any decent services would allow you to provide them with your own operating agreement. If you choose to do that piece yourself (again, only really a good idea if it’s just you in this business), then Nolo provides well-written guides.

1. If the culture change doesn’t lead to better metrics, what’s the point for the business? The metric might be reduced employee turnover, but “engagement,” “excitement,” and “commitment” should all lead to some kind of improvement in productivity, customer satisfaction, or even revenue. And each of these should be connected to its actual impact on the free cash flow creation attributed to your corner of the business. If you don’t know what’s improving, you need to figure that out before moving ahead too much. In terms of reasons change is slow, almost as strong as “if it ain’t broke, don’t fix it” is “if you’re gonna fix it, you better fix it.” Indeed, they’re probably two sides of the same coin, or maybe even the same side of the coin.

2. Employees need security. Unless you have control over their jobs, they, as you, have reason to fear changes that will inevitably, in their minds, be used to blame them for poor future results. If you want more power in this regard, put your job on the line and negotiate for more budget/P&L control. Put your compensation at risk, and then your employees may feel more open. The Ranger/Infantry version of this is “lead from the front.” Employees take their cues from the top, and there are lots of levels of “top” in a big company.

3. Companies don’t “get it.” They can’t, any more than the Army can “get it.” Parts of the Army get it (special operations) most of the time, but then you realize that even then, it’s about individual leaders. When lots of good leaders find and develop more good leaders, you get organizations that are set up for success, but that’s just opportunity, not a guarantee. So if you get it, then you bring your team along bit by bit and show them “the Mark way” and why it’s better, demonstrably better, than what they were doing before. (NB: this ties to the “what metrics are improving?” point.)

My personal “favorite” leader, the one guy I will follow anywhere if he tells me it’s important , says it very clearly: you lead people, you manage things.

(For those who might not understand the Army, here’s a more famous version of the same thing: be the change you wish to see in the world.)

This is brilliant insight. Just brilliant. If there’s a post like this in every 20 or 50, this blog is worth reading.

The deep message here is about core competencies (I just saw a reference to an article about companies outsourcing their core competency — have to find it and will update this post later) and how companies can, should, and ultimately will have to rethink how they do business so that they are competing where their competitors are weak and partnering with strong partners to eliminate/avoid/counteract their own competitive weaknesses.

Here’s a deeper background on the topic:

• Marketing/networking (all “keeping in touch” that doesn’t get put into folders for Pam, the boys, and my brother/sister-in-law/twin nieces).
• ASD will be a new folder to collect autism-related items, separated into REED, Dylan, 30seats, and client-specific folders (same rationale as above).
• Under a “Business” folder, I’ll track these:

1. Client/project-specific folders
2. Admin for everything that is business admin-related and doesn’t go elsewhere.

• Nonprofit for my work on various charitable efforts (including Allegheny and other autism efforts)
• Usernames to keep password emails all in one place. (Still seems easier to find that FedEx username without having to look through tracking notices.)
• Z-Quicken for everything that’s an e-receipt, order confirmation, or payment (I use the “Z-” prefix to keep it at the bottom of the list).

Putting the list down on paper does make me feel happy about the impending reorganization. As for waiting-fors, actions, etc., we use the NetCentrics GTD plug-in for Outlook, so it creates a few extra folders. My biggest reason for not putting stuff in an “action” folder for emails that have to be checked is the sense, proven by my experience, that I will ignore that bucket and it just becomes another black hole. Things need to be handled, and my goal is to use the plugin to take emails with embedded tasks and turn them into actual tasks rather than move them to a different pile.

As I scan the inbox now, there are 187 messages, 2 unread. 1 is a furniture ad I’ll delete shortly and one is a BCC from me. There are probably 30 messages related to a blast I sent out yesterday related to Dylan’s CBS appearance. I’ll get caught up on those today and get back down to 100 by COB today. The rest that require more work: I recognize that I need to frame them into tasks, and I want that burden right in front of me, whether it’s things to read, track, or respond to. In many cases, for those items where I’m writing things such as this post, I prefer to just handle them by writing the post (or at least starting it and adding a link) rather than going through an intermediate step of creating a “BLOG xyz” task in Outlook. (I promise I’ll break that habit soon!)

In any event, I thought that this brief explanation will be helpful to some of you. My recommendation is that you consider attending one of People-OnTheGo’s “Total Organization” workshops by my colleague Pierre. The ToolsMap (™) is absolutely amazing, and even now, years later, I think it’s terrain completely untouched by anyone else in the productivity field.

Intro

I recently participated in this introductory webinar about PlanPlus Online, a new FranklinCovey offering.

#1 – Weekly & Daily Planning w/ PlanPlus Online – Monday, March 9, 2009

I took most of these notes during the webinar, but I also signed up for the free trial, clicked around for literally 15 minutes or so, and I got an immediate sense of where the system fits in, at least in terms of there being nothing particularly new and different.

In general, PPO is a service, not standalone or server-based software. It doesn’t seem to me like anything terribly new or exciting is involved. They have basically taken the Outlook add-in or standalone version of PlanPlus and ported it to the web. This technique might be new to PlanPlus, but it’s years behind incarnations of basecamp and backpack, gmail, and any number of similar options (yes, I know PPO is different, and I’ll discuss where it fits later).

It’s online only (no offline access — which is why we chose Groove a while ago). They apparently have a mobile portal for accessing your data and will sync with Outlook and some other systems.

Planning

The presenter spent quite a bit of time on the values/goals discovery and integration that has long been the hallmark of PlanPlus (indeed, really of FranklinCovey, indeed really of Stephen Covey). They have a quiz-like interface for extracting values, getting quick answers to questions so that they’re more instinctive answers. This format is different from what I’ve seen from the PlanPlus add-ins for Outlook that I’ve used for a number of years. This segment of the webinar is the first real signal that the service is likely intended for people who are new to the PlanPlus world and perhaps are not familiar with years of productivity literature and practice that has come before this product.

The presenter went through the weekly planning and daily planning exercises according to the PlanPlus model (nothing here is new, which is part of why I was underwhelmed).

There is a nice implementation of the planning model in the software: goals each allow for different steps, and much like the standard tasks,you can drag that step (or task) right onto the calendar as either an appointment or as a daily task (one that’s tagged to a specific day and sits in a mini-tasklist under each day’s column in a weekly calendar view). This function looks much like the desktop version; a nice demonstration of what web software can look like these days.

There is also a way to get task summary & detailed views of the progress (and actual tasks) by people on the team/company list. That makes the business version a decent prospect for managing teams when organizations are all working off this system. Keeping teams coordinated with less overhead administrative reporting effort is a huge challenge in every company. The dilemma here, of course, is that the cultural shift needs to occur that has people updating tasks with their progress. But that can be built in from the start, which is where I imagine most successful PlanPlus Online customers coming from: using the service as the first system in a [new] organization or group where there are no processes to revamp.

Versions

The service comes in different versions that add functionality for things like CRM and explicit business contact handling. The sales & business versions include a more robust (and complicated) contact list by breaking it down into “organizations” and “contacts.”

The sales tools look like a standard web CRM tool or like SugarCRM (which is free and open source but a standalone application). It allows you to categorize people as opportunities, or leads and track their progress through a sales funnel.

The business version I trialed also had some integrated email marketing tools, that allows you to create an email (or series of emails) and send them out from the tool itself as either an email blast or a “drip” marketing campaign, on some predetermined schedule (such as day 1, day 3, day 6, day 11).

Those are clearly suitable for certain uses, and the integration probably better suits some people and firms than using a pure CRM add-on such as SugarCRM.

Who’s it for?

Much like choosing to use any online system that involves multiple people using the same tools, this service might make sense as an implementation from scratch of such tools, but with the Outlook overhead that exists, and no real offline access, I don’t see this particular product as a game-changer. It might take on that role for people who are still using paper FranklinCovey planners, but those people probably aren’t using anything electronic now and have little basis for comparison. And, in any case, they’ll have to re-enter most of their information — that’s a Friday review from hell!

As for the methodology, there’s nothing new here vs. what they’ve always talked about in terms of how to work the system. That’s not a criticism; it’s an explanation. The PlanPlus system has a lot of benefits in terms of the vast support for it and the years of experience in the market, for both the company and the users.