Legal Question in Business Law in Maryland

Re: I need help with forming a legal entity

I am an attorney with 21 years of experience in helping establish technology based ventures.

I usually recommend that my technology clients establish a Delaware LLC. Why an LLC, and not an S Corporation? Because the S-Corporation will significantly impair your ability to raise money from investors. S-Corporations cannot have partnership or corporate shareholders. Almost all venture capitalists and angel investors are corporaions or partnerships. You cannot have two different classes of stock in an S-Corporation. Yet venture capitalists and angel investors always demand the creation of a superior class of stock.

Why an LLC and not an C-Corporation? Because most business ventures intitally lose money, before they turn positive. The LLC will allow you to write off business losses from your personal income tax, but the C-Corporation willl not.

Why Delaware and not Maryland? It is much easier for a disgruntled investor to petition a Maryland court to break up a Maryland LLC, than it is for a disgruntled investor to petition the Delaware Court of Chancery to break up a Delaware LLC. Any member of a Maryland LLC may petiton the District of Circuit Court to break up a Maryland LLC on the grounds that it is acting inconsistently with either its Articles of Organization or its Operating Agreement. In contrast, the Delaware Limited Liability Company Act only allows a disgruntled member of an LLC to petition the chancery court to break up the business if it fails to follow its operating agreement. Also in Delaware, you can waive break up litigation entirely, if you provide the investors with alternative mechanism that is fair.

Also Delaware's court system is better for businesses than is Maryland's. Almost all business disputes, and all technology disputes are heard by the Court of Chancery. There are 5 judges, and no juries. Each judge writes over 800 opinions per year on busines and technology matters.

In addition, you need to consider the securities law implications of raising capital. Individuals, officers, and directors who participate in offering of securities are personally liable to investors, and the government for any false or misleading statements or omissions made in the offering. The liability is both civil and criminal.

In order to avoid this laibility the Securities Act of 1933 (the 33 Act) and well as various state securities laws require that you disclose all material information to any investor, prior to receiving a check. This is often done in form of a prospectus.

Furthermore, the securities offering must be structured so that it is not a public offering. It is probably possible to structure the offering within Rule 505 or 506, and therefore the offering will not be a public offering. But I would need much more facts from you to make this determination. Also all unaccredited investors in any 505 or 506 offering must receive a prospectus.

Re: I need help with forming a legal entity

You ought to form a Limited Liability Company (LLC). It's relatively simple and inexpensive to do so. As the name suggests, by doing business this way you protect your personal assets from exposure in the event of financial difficulties. An attorney can assist you in preparing the LLC charter and thereafter an operating agreement that sets out the rights and obligations of the members of the LLC.