Reverse Veil Piercing: Another Reason to Pay Your Bills

By: Tamara B. Pow, Esq .

A recent California Court of Appeals case ( Curci Investments, LLC v. Baldwin ) means California LLC assets could be at risk for a member’s personal liability. Baldwin borrowed $5.5 million from an investment firm, as a predecessor to Curci Investments Inc. (“Curci”). Fast forward three years to the due date and Baldwin does not repay his debt. Curci files a lawsuit to collect the debt, but agrees to stipulate to an extension to allow Baldwin to pay his debt over time. At the end of that extension in 2012, Baldwin still does not pay back the investment firm, so the trial court in California files an Entry of Judgment against Baldwin for $7.2 million, including prejudgment interest and attorney fees and costs. In 2014, Curci files a motion seeking charging orders against some of the business entities that Baldwin may have invested in or been involved in some way. The court grants this motion for 36 entities which then made no distributions. The court then rules against Curci when Curci tries to access Baldwin’s assets through Baldwin’s LLC, in what is known as “reverse veil piercing.” The court was concerned with the possibility of harming innocent shareholders and corporate creditors, allowing judgment creditors to bypass standard judgment collection procedures, and using an equitable remedy when legal remedies are available. Most of all, however, the court ruled against Curci because it believed that reverse veil piercing was not available in California.

Here is the interesting part. Baldwin had previously formed and held interests in hundreds of corporations, partnerships, and LLCs, 36 of which were included in Curci’s motion seeking charging orders. The business in question is JPBI LLC, a Delaware LLC used for the exclusive purpose of holding and investing Baldwin and his wife’s cash balances. From 2006 to 2012, JPBI distributed roughly $178 million to Baldwin and his wife, (during which time Baldwin borrowed money, agreed to the stipulation to extend the date to pay the investment firm and was ordered by the court to repay Curci). To top it all off, Baldwin owned 99% of JPBI LLC, while his wife owned the remaining 1%.

All of that would mean nothing, however, without the applicability of reverse veil piercing, the inverse of traditional veil piercing. The trial court thought it to be unavailable in California, based on the decision of another case, Postal Instant Press, Inc. v. Kaswa Corp. (2008), which ruled that the veil of a corporation could not be pierced under certain conditions. However, in the timely appeal filed by the plaintiff, the California Appeals Court was able to differentiate that case from this one, ultimately remanding the case back to the trial court, with instructions to determine whether JPBI’s veil should be pierced. While the Appellate Court did not rule whether JPBI’s veil should be pierced, it did make clear that reverse veil piercing, which is the act of a collector satisfying the debt of an individual through the assets of an entity of which the individual is an insider, is available in California for several reasons:

First, the facts of this case allay any concerns the trial court had based on the previous case. Since Baldwin and his wife owned the entire company, and were in charge of when JPBI distributed money, there were no innocent shareholders involved. Additionally, Curci explored all avenues, and pursued other legal remedies, before filing the motion seeking charging orders. This satisfied the court’s concern that creditors bypass standard judgment collection procedures or other legal remedies.

Second, the previous case applied only to corporations, whereas JPBI is an LLC. Per the trial court, in reading the decision from the previous case, “A third party may not pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability.”

Third, Corporations Code § 17705.03, which Baldwin had used to argue his case, was read by the Appellate Court as the exclusive remedy for reaching the judgment debtor’s “transferrable assets,” not referring to his LLC’s assets.

Fourth, the Revised Uniform Limited Liability Company Act, from which the previous statute came from, included comments that the charging provisions “were not intended to prevent a court from effecting reverse veil piercing where appropriate.”

Next the trial court will have to determine whether Curci can in fact pierce JPBI LLC’s veil to use Baldwin’s assets to satisfy his debt. The court will have to determine this by evaluating the same factors that are applied in a traditional veil piercing case, as well as whether Curci has any plain, speedy, and adequate remedy at law.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Business Contracts – Beware of Third Party Beneficiaries -They May Not Be Missing Persons

By: Robert Hawn

As a business attorney with a Silicon Valley practice, I create a lot of contracts for many different kinds of companies. It never gets boring! One of the issues we sometimes worry about is whether there are any other parties that might have rights under these contracts. This concept, which lawyers refer to as a “third party beneficiary right,” is often disclaimed in the agreement. Job done, right? Well maybe not.

In January of this year, a Ninth Circuit Court of Appeals looked at whether third party rights exist where they have been expressly disclaimed in an agreement and decided that, the facts need to be examined further. Whether this case will expand third party rights, or will just be limited to its particular facts, remains to be seen. It does, however, caution business people to make sure of the deals they cut so that only the parties with whom they deal with in the contract will be the parties they have to deal with in court if the deal goes sideways.

For you fans of 80s Rock, this case involved the lead singer of the band, Missing Persons. The facts, however, are not just a simple case of walking in L.A., so pay attention.

Dale Bozzio, the lead singer of the band, brought suit against Capitol Records, and its corporate parent, EMI, to collect royalties based on what was argued to be a mischaracterization of the source of the record company’s revenue for the band. Like many bands, Missing Persons had created a “loan-out corporation.” This is a corporation that is used to cut deals with, among others, record companies. Under the contract, Bozzio, along with her other band mates, agreed that they would not bring any claims for royalties individually against the record company, but only against the loan out corporation. Problem was, the corporation was suspended when the band broke up and therefor had no standing to sue. So, a lower court looked at the contract and said no corporation, no lawsuit, and besides you agreed not to sue, so go away. Bummer. Bozzio appealed.

The Ninth Circuit looked a bit closer at the contract, and said not so fast. To make a long song into radio format, the Ninth Circuit looked at some other parts of the law and the contract and said that Bozzio could have her day in court. They were swayed by prior case law that seemed to imply that the fact that the corporation could not sue did not necessarily mean that someone claiming third party beneficiary rights under that corporation could not sue. They were also swayed by a clause, presumably created to protect the record company, that said that if the loan out corporation could not provide Bozzio’s services, that she would provide them directly. In addition, the Agreement provided for royalty payments individually under certain circumstances, which allowed the court to conclude that the record company may have accepted the concept of individual rights for Bozzio under the agreement, and that her standing as a third party beneficiary of the loan out corporation’s rights against the record company existed, notwithstanding her promise not to sue the record company directly.

So what is the takeaway? First, just excluding a person as a third party beneficiary might not do the trick. You need to look and see if there are any other provisions affecting those shareholders that might allow them to assert rights sufficient to allow them to sue you. This case is particularly interesting because a clause that was, in my opinion, created to help the record company (i.e., the clause that allowed the record company to get Bozzio’s services when the loan out corporation would not provide them) was used against the record company. Second, and probably most important, you need to keep in mind that the law in this area is fuzzy and fact dependent, and you have to consider these types of rights as you evaluate the risk of any deal.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

2016 Standard Mileage Reimbursement Rates

By: Tamara Pow

IRS Announces 2016 Standard Mileage Reimbursement Rates

The Internal Revenue Service has issued the 2016 optional standard mileage rates ( IR-2015-137, Dec. 17, 2015 ):

As of January 1, 2016, the rates for the use of a car, van, pickup or panel truck will be:

54 cents per mile for business miles driven (down 3.5 cents per mile from last year);

19 cents per mile for miles drives for medical or moving purposes (down 4 cents from last year);

14 cents per mile for charitable organizations (this rate is fixed by law).

Of course, taxpayers have the option of calculating the actual costs of using a vehicle rather than using these standard rates. However, if the taxpayer is claiming depreciation under MACRS (Modified Accelerated Cost Recovery System) or is claiming a Section 179 deduction for the vehicle, it may no longer use the business standard mileage rate for that vehicle. Also, the business standard mileage rate cannot be used for more than four vehicles simultaneously. Companies with four or fewer vehicles may use this rate, with the vehicles’ basis reduced by 24 cents a mile, which is the depreciation component of the rate.

A taxpayer may also claim parking costs and tolls, as well as state and local personal property taxes paid on a vehicle. (Kiplinger Tax Letter, Vol. 90, No. 26, December 18, 2015.)

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Show Me The Money – And Start With Your Revenue!

By: Jack Easterbrook

Technology lenders, asset based lenders, commercial lenders and factors always pay attention to a borrower’s revenue line – obviously the revenue line is critical for determining the income of the company and the amount and quality of the accounts receivable and contracts receivable collateral that will be available to secure a line of credit or loan. Many deals involving companies in the Silicon Valley and the San Francisco Bay Area now peg advance rates to revenue formulas or, alternatively, contain loan covenants that use the monthly or quarterly revenue numbers as key factors in the formulas for calculating compliance. Against this backdrop the Financial Accounting Standards Board issued ASC 606, which significantly changes the way many companies will recognize revenue in the future.** Although full implementation is still a few years out, the action begins in 2016 and may affect the credit analysis of lenders and the covenants and requirements in loan agreements. More is said about these points below.

ASC 606 and Changes in Revenue Recognition

Revenue recognition is presently a heavily rules driven process which can, depending on the accounting standards used, lead to different reporting results. In an attempt to narrow the differences between US GAAP reporting and IFRS revenue standards, ASC 606 was issued. It seeks to establish a principles-based approach to recognizing revenue using a multi-step process. While this process is still a work in progress, it will require companies to more clearly identify performance obligations under contracts, show how the contract price relates to the required activities under the contract and explain the assumptions being used in recognizing or deferring revenue in various accounting periods. ASC 606 also requires a significant amount of additional disclosure by management, allowing those reviewing financial information to assess the revenue recognition principles utilized by the company. Company management will exercise more judgment over the process but will need to explain itself.

Complete implementation of the new reporting under ASC 606 is required for 2018 financial reports for public companies and 2019 financial reports for private companies. However, companies will also need to look back and restate revenues consistent with ASC 606 principles for prior years beginning in 2016.

The Takeaways – the Potential Effects of the Changes in Revenue Recognition

So what does this mean to the lender? The pending implementation of ASC 606 potentially means material changes in revenue reporting by new and existing borrowers. Depending on their type of business, the effects on the lender may include the following:

● For growth companies with contract revenue, reported revenue is expected to adjust upward, at least initially, while deferred revenue diminishes, which means advance rates or financial covenants may need to be adjusted accordingly. A lender will need to understand how changes in revenue recognition principles affect each borrower, as it will affect them differently. If ASC 606 is going to have a material impact on a borrower, it inevitably means that more in-depth analysis of management’s underlying assumptions concerning future revenue will be required as they will have more latitude to make these determinations.

● If a loan extends into 2018 (2019 for private companies), lenders will want to consider whether the loan documents executed prior to that time need to provide for adjustments to loan covenants or advance rates to reflect the changes in revenue recognition. As many credit facilities are structured to mature in 1-2 years, this will become a larger issue as those dates get closer.

● The increased data collection, accounting costs and disclosures required of the company may materially impact the borrower’s administrative expense line. Lenders will want to determine what effect this might have on the company’s profitability and related effects on cash flow and any loan agreement financial covenants.

● Is the borrower on top of this? Company disclosures about the expected impact of ASC 606 are required going forward. Initially a company may be able to simply say it is evaluating the impact but that position can only be taken for a limited period of time.

Because revenue recognition is so critical in measuring the well-being of any business, lenders will want to assess how the pending changes caused by ASC 606 will affect the health of new borrowers as well as existing companies in their loan portfolio and begin to pro-actively plan whether any changes in the management of such credits are needed.

** The author is indebted to Rick Brounstein of CFO Network LLC for introducing him to ASC 606 and the issues potentially created by this new standard. The contents of this article, however, are solely the responsibility of the author.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Capital Structure For Start-Ups: Part 2

By: Robert Hawn

As a business lawyer in the Silicon Valley area of California, I find that one of the most important issues founders of a high tech start-up company have to consider is its ownership, or capital structure. As you grow your company, it is important to understand your percentage ownership of the company. The different types of equity incentives and funding instruments will have varying impacts to your ownership, and you need to keep this in mind as you grant options to your employees and accept funding from your investors.

In the last blog in this series , I discussed some of the basic concepts of determining the number of shares of outstanding stock, and the number of shares of fully diluted stock, to help explain how investors look at ownership in a company. To summarize, the number of shares of outstanding stock equals the number that are issued and held by a shareholder. The number of fully diluted shares, however, are the number of outstanding shares, PLUS the number of shares that can be issued on exercise of contracts that enable the holder to purchase shares, such as stock options and warrants.

When you are dealing with the typical family business, or owner operated business, outstanding shares and options are about as deep as you need to get. When you are dealing with a typical high tech start-up which has gone through a couple of rounds of financing, the situation can get a bit more complicated.

Let’s first look at how a commonly used angel funding vehicle can affect the process of determining the number of fully diluted shares. In very early stage companies, where there is not even a product, much less revenues or profits, it is almost impossible to determine the value of the company. As a result, angel investors often provide funds through a “convertible note”. In a convertible note, a company borrows money from an investor and provides a note, essentially a promise to repay. The note, however, can convert into shares that are issued in the next round of funding. The rate at which the note converts is based on the value of the shares in the next round. Essentially, the investors forgive their debt under the note in exchange for shares. The idea here is that once the company has some history, it will attract venture investors who know how to value early stage companies. By converting into shares issued in a round led by venture capitalists, the angel investors will piggyback on the valuation determined by the venture investors. To compensate the angels for investing early on, they often receive a discount on the purchase price set in the venture round (although the venture investors may try to limit this).

Using convertible notes creates some difficult issues in calculating the number of fully diluted shares. First, you don’t know how many shares will be issued on the conversion of the notes. This is because the rate at which the notes will be converted into stock is based on the per share price in the next round of financing. The share price, in turn, is based on the value of the Company. Because the venture investors have yet to determine valuation, you don’t know what the purchase price of the next round is. As a result, you don’t know the conversion rate of the note or, correspondingly, the number of shares that will be issued once the note converts.

Second, founders often cannot be convinced that the interest payments under the note should not convert. If interest converts, the number of shares issuable under the note changes daily as interest accrues. This results in the number of shares allocated to the notes to increase slightly each day, and the percentage of shares held by other stockholders, such as the founders, to decrease each day.

Let’s fast forward. You’ve now grown your company and created enough value and buzz to close a serious investment round, and all of your convertible notes have gone away. You now have investors who have purchased stock from your company. The stock they have purchased, known as convertible preferred stock , however, is a little different from the common stock you likely hold. One major difference is that convertible preferred stock can convert into the same kind of common stock you hold. This is convenient, because it allows you to determine the number of fully diluted shares by applying the conversion rate of the preferred stock against the number of outstanding shares of preferred stock, and generate the number of common stock equivalent shares. If you have an option plan, you can assume all of the options are converted into common stock. Once everything is reduced to common stock, you can count up the number of shares and that is your number of fully diluted shares. Pretty easy, huh?

At this stage, yes, but let’s fast forward even more. Because of some misfortunes, you had to take in investment funds as part of a “down round” (so named because the price of the preferred stock was down from the previous round). One common feature of convertible preferred stock in a start-up context is a device that protects the investor if there is a later down round. The device, often referred to as price-based antidilution, will change the conversion rate of the preferred stock issued in the earlier round. The change will, as you might guess, result in relatively more common stock being issued for each share of preferred. So, if there has been a down round, you need to account for the impact of this antidilution feature in determining the number of fully diluted shares. You can imagine this can get pretty complicated if your company has already done a number of investment rounds, each with different purchase prices, some of which may have an antidilution provision triggered in connection with a particular subsequent round, and some of which may not.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Sole Proprietorship – Is it right for me?

By: Serge Filatov

Many people here in San Jose and Silicon Valley have a dream of starting their own small business. Small business owners that are just starting out often come to me and ask if they can simply run their business as a sole proprietor to save on the cost of forming and maintaining an entity such as a corporation or limited liability company. Although there are some cases where it is fine to conduct business as a sole proprietor, the liability exposure to the business owner individually will likely require a business owner to look at creating a formal entity.

What is a sole proprietorship?

A sole proprietorship is a form of business in which the individual (or a married couple as community property) carries on a business as the exclusive owner and decision-maker.

Benefits of a Sole Proprietorship

There are several benefits to having a sole proprietorship.

First, sole proprietorships have low start-up costs. A sole proprietorship exists simply by an individual carrying on a for-profit business. There are no state registrations required for a sole proprietor simply because they are a sole proprietor (unlike corporations and LLCs). Of course, if a sole proprietor uses a business name other than his or her own name, he or she must register that assumed name (usually a DBA at the county level) although the sole proprietor should also consider whether that name is already in use by another business. Also, certain professions require licensing and the sole proprietor will still need to comply with all licensing requirements for him or her.

Second, sole proprietorships have no annual compliance requirements. Unlike LLCs and corporations which have numerous compliance requirements with the state, a sole proprietorship can simply conduct business without worrying about state compliance requirements.

Third, it is easy to keep track of accounting and prepare taxes for sole proprietorships. There are no accounting requirements for sole proprietorships so one must simply keep adequate records for tax purposes. Additionally, there is no need to prepare a tax return solely for the business because there is no separate entity.

Disadvantages of a Sole Proprietorship

There is one major drawback that comes with the simplicity and cost savings of a sole proprietorship. The drawback is personal liability. Unlike an owner of an LLC or a corporation, a sole proprietor is personally liable for all the debts and obligations of the business. This means that a creditor, to satisfy the debts of the sole proprietorship, can go after all of your assets, including your home. For this reason, and this reason alone, many individuals often choose to form a business entity. Without an entity, an individual leaves himself or herself vulnerable to unnecessary liability.

Another drawback for the sole proprietorship is that it is difficult for third parties to invest in the business. This is because there is no separate entity to invest in; the individual is the business. A further drawback is that since the owner and the business are basically one, it can be difficult to accurately establish financial results for the business separate from the individual owner.

Is a Sole Proprietorship Right for Me?

The answer to this question depends on your specific situation. Generally speaking, if you do not expect to grow the business or have investors, and are conducting a business that has minimal liability risk, you might consider a sole proprietorship. Even if there is some liability risk, obtaining insurance on your business could help minimize risk. However, obtaining insurance is not always easy, is not always affordable, and only provides protection up to the coverage limit and then only for items that the policy doesn’t exclude. Because the answer to this question depends so heavily on the exact circumstances of each person and his or her new business, you should contact a business attorney who can guide you through the decision-making process.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Capital Structure For Start-Ups: Part I

By: Robert V. Hawn

As a corporate attorney in San Jose, California, I help a lot of high tech start-up companies get up and running. One of the major decisions that requires a lot of time and discussion is how the new corporation should set up its capital structure. In this series of blogs, I hope to explain some of the basic issues and concepts to help founders understand how to approach building this important aspect of their new business.

Closely Held Corporations

Corporations are formed to enable founders to accept outside capital by selling ownership interests, or shares, in the corporation. Remember, stock is merely a share of ownership in a corporation. Shares that aren’t sold or otherwise provided to employees, investors, or others are held by the founders. So, one of the basic issues that a founder will want to know and keep track of is how much of their corporation they own. If you own all of the stock of a corporation, you own the entire corporation. If you just own a third of the stock, then you just own a third of the corporation. Simple, right?

The example above is typical of a corporation that is held by very few people. It is what lawyers refer to as a “closely held” corporation. A closely held corporation is typical where the stockholders are actively involved in the business. Stock rarely changes hands, and it is unusual for new stock to be issued. In that situation, it is easy to determine how much of a corporation each person owns.

Outside Investor

Now, let’s make things a bit more complex. Let’s say that our corporation has three equal shareholders, who bought their shares for $1 each, and an investor has agreed to put some money in the company. After discussion, which, of course should include advice from your corporate lawyer , you decide that the corporation is worth $300, and that the investor can hold ¼ of the corporation, or 100 shares, for $100. Before the deal is done, each shareholder owns 1/3 of the corporation or 100 shares each. There are 300 shares outstanding . After the deal is done, there are now 400 shares outstanding and each shareholder now only holds only ¼ of the corporation, although they still each own 100 shares. This reduction in percentage interest is called “dilution”. If it is a very important concept to remember. It is common to say that your interest in the corporation has been diluted from 33% to 25%, even though you hold the same number of shares. Make sure you understand it before you go on.

What is interesting about the dilution example is that the percentage of the old stockholder’s ownership has gone down, but the value of their ownership has remained the same. This is because the addition of the $100 in investment capital has increased the value of the corporation from $300 to $400. The old stockholder now owns ¼ of a corporation worth $400, and the value of the ¼ ownership remains at $100. (despite the “dilution”).

Stock Options to Key People

In a start-up corporation , the structure becomes a bit more complicated because certain types of interests are issued which can convert into stock of the corporation. Let’s see how that impacts the percentage ownership of each stockholder.

In our example, let’s say we want to provide an incentive to a key employee. One common approach is to provide an option. The cool thing about the option is that the employee doesn’t have to buy their stock until they can get some money for it. So, often, employees just hold onto the option and don’t turn it into stock (a process called an “exercise”) until they need to. By then, they hope the value of the stock has increased and they can make some money. One key concept is that if the option is never exercised, you never get stock, and there is no ownership interest in the corporation. In other words, an option does not represent ownership; only stock represents ownership.

You may want to determine ownership, however, if you are selling your corporation and you know the option will be exercised. So, how do you determine ownership where someone holds an option, but not the stock? Very simply, you assume that the person exercises their option and turns it into stock. Once you do that it’s easy to determine the percentages.

In the example above, let’s say our employee is provided an option for 20% of the corporation, or 100 shares. If you look at just the percentage of the ownership before the option is exercised, then each person holds ¼ of the corporation or 100 shares out of 400 shares. When the option is exercised, however, there are now 500 shares outstanding. Each stockholder holds 100 shares, or 20% of the outstanding stock.

The number of shares of stock determined assuming options have been exercised (among other things), is called the fully diluted number of shares. The fully diluted number of shares is an important concept because it is often used to set the value of a single share of stock in an investment deal. In the next blog on capital structure for start-ups, I will discuss how investor stock affects the number of fully diluted shares, and your percentage ownership.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Understanding the Benefits of Incorporating Your Business

Becoming an incorporated business has many advantages, including liability protection and ease of growth and transferability. However, incorporating a business requires payment of state franchise taxes, and fees to other professionals including attorneys and CPAs. If you are interested in incorporating your business, a corporate lawyer in San Jose can help you understand whether the benefits are worth the costs. Some of the most commonly cited benefits include:

corporate lawyer in san jose

Liability protection
As a corporate lawyer can explain, the assets of the owners of an incorporated business will not be subject to the liabilities of the business if proper formalities are followed. The required formalities include everything from making sure that proper corporate governance procedures are followed and documented, to making sure that the owners keep their personal activities separate from the corporation’s activities. On-going review by a corporate attorney can help you make sure that the liabilities of the incorporated business stay with the business so that your personal assets are shielded from the liabilities of the business.

Tax Issues
Corporations face a myriad of tax issues, and resolving these issues often requires you to choose between a number of trade-offs. For example, the earnings of an “S corporation” are not taxed, for federal purposes, at the corporate level. The earnings of a “C corporation”, however, are taxed at the corporate level. That may make an S corporation the entity of choice until you realize that the number and type of shareholders, or owners, of an S corporation are limited. This can create impediments to accepting outside funding for the company. In addition, shareholders of an S corporation may be taxed on their share of corporate earnings, regardless of whether the corporation actually distributes them their share of those earnings. It is important to have a corporate attorney and CPA who work closely together to help you determine the best corporation for you and your business.

Outside Investment and Sale
Corporations are designed to raise capital, and to allow the owners to invest in the business whether or not they are actively involved. If your business will need outside capital to get started, or to grow, the corporation is usually the preferred type of entity to use. If you decide ultimately to sell your business, a “sale” of a corporation to another corporation can be accomplished in a manner that will defer any tax on the sale until such time as you receive cash for your business.