LLC or Corporation? Choosing the Right Entity for Your Startup

One of the first questions to address during the startup process is whether to incorporate as a limited liability company (LLC) or corporation. Both entities provide the benefit of liability protection and the ability to issue equity to investors and service providers.

But these entity type have different strengths and weaknesses depending on the specifics of your business.

Below are the key factors when choosing between these two corporate forms:

• Taxation. LLCs are taxed as pass-through entities, which means they are not taxed at the entity level. This enables the distribution of profits to owners on a tax-free basis. Of course, owners still have to report the profits on their personal tax return but the LLC itself does not pay tax on those profits. Likewise, this enables the pass-through of losses, which, especially in the early stages of a business, can be advantageous to founders who are bootstrapping or raising capital through debt and have other income to offset. Some of these advantages can be secured through a corporation electing to be taxed as an “s corporation.” But maintaining that election comes with restrictive requirements - such as limits on the classes of stock and shareholders - that aren’t suitable for growth-oriented companies. Corporations, on the other hand, enable the carry-forward of losses and the issuance of qualified small business stock, which have significant tax advantages. In short, analysis of the tax implications can involve a wide range of considerations particular to your business plans and objectives.

• Capital Raising. Many institutional investors are prohibited from investing in pass-through vehicles like LLCs or have strong preferences against them. For this reason, companies planning to seek institutional growth capital often incorporate as or convert into corporations.

• Equity Compensation. Both LLCs and corporations can issue equity to service providers but corporations can generally do so more efficiently. While LLCs can issue options, they cannot issue incentive stock options, which are tax favored options for employees. Because LLCs are generally taxed as partnerships, when they issue equity interests to team members, they must issue K-1s to recipients and maintaining capital accounts for them. The tax complexities can multiply quickly.

• Flexibility. While corporations are highly efficient, LLCs are highly flexible. The governance and ownership structure of an LLC is largely determined by the contract among its owners, giving the parties latitude to accommodate different business needs and scenarios.

• Legal Predictability. Corporations are the most well-established legal form for the conduct of business. Corporate governance matters and the legal principles that apply to them are well developed, providing important predictability and guidance in the conduct of a business.

For emerging growth companies with the clear intention to raise institutional capital and scale with large teams, formation of a c-corporation is almost always the most efficient and effective legal entity for the job.

For others, the choice of entity can be a more complex and nuanced decision. We always advise making the choice of entity decision in consultation with legal and tax advisors based on the specific plans for your business.

Preparing for California's New Consumer Privacy Act

The California Consumer Privacy Act of 2018 (“CaCPA”) was signed into law by former Governor Brown in June 2018.  CaCPA was passed quickly by the California legislature in the wake of the Facebook/Cambridge Analytica revelations, the General Data Protection Regulation (“GDPR”) in Europe, and a proposed California ballot initiative that would have been much more difficult to amend.  

Even if your business has taken steps to comply with GDPR, the CaCPA imposes additional obligations and responsibilities and provides new rights for California consumers.  These new requirements require immediate planning and action in anticipation of the law’s effective date on January 1, 2020.

The following is a brief summary of the law’s key provisions and steps that affected businesses should consider taking in consultation with legal counsel.

BUSINESSES SUBJECT TO CACPA

CaCPA applies to for-profit entities that do business in California and either (i) generate annual gross revenue in excess of $25 million; or (b) receive or share personal information of more than 50,000 California consumers; or (c) derive at least 50 percent of its annual revenue from selling the personal information of California consumers. A “California consumer” for purposes of CaCPA is a natural person (not a corporation) who is a California resident, whether the individual is currently inside or outside of California. 

In addition to businesses already subject to CaCPA, emerging growth companies with growth projections or business models that are likely to render them subject to CaCPA in the future should consider implementation of technical architecture and internal processes and procedures to facilitate for eventual compliance.

EXPANDED RIGHTS OF CALIFORNIA CONSUMERS UNDER CACPA

Under the CaCPA, California consumers have been given a broad set of rights with respect to the collection of their personal information, including the following:

·       The right to know the categories of personal information a business has collected about that consumer;

·       The right to know the categories of sources from which the personal information is collected;

·       The right to know the business or commercial purpose for collecting or selling personal information;

·       The right to know the categories of third parties with whom the business shares personal information;

·       The right to access the information which has been collected and used during the twelve months preceding the request;

·       The right to have the information deleted (subject to certain exceptions); 

·       The right to opt-out of the sale of personal information;

·       For consumers between the ages of 13 and 16, the affirmative obligation to obtain an opt-in for the use and sale of personal information; and

·       The right to be protected against discrimination in price and quality of goods for exercising the rights under the CaCPA.   (Note: This provision means that a consumer cannot be denied goods or services or charged a higher price if the consumer exercises their privacy rights.  However, the CaCPA also allows your business to charge different prices or provide different levels of service “if the difference is reasonably related to value provided by the consumer’s data.”  Companies should therefore proceed with caution and in close consultation with legal counsel when implementing differential pricing or offerings based upon the collection of personal information.)

EXPANDED DEFINITION OF PERSONAL INFORMATION

Significantly, the definition of “personal information” under CaCPA is broader than similar U.S. laws and generally mirroring the definition of personal data under the GDPR. 

Under CaCPA, personal information “means information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” 

The list of items which constitute personal information goes beyond names, addresses and Social Security numbers and includes IP addresses, on-line identifiers, geolocation data, internet or electronic network activity information such as search history and inferences drawn from that information used to create a consumer preference profile. 

EXPANDED REMEDIES IN THE EVENT OF SECURITY BREACHES

One major new development under CaCPA is a private right of action for security breaches.  Under the CaCPA, any California resident whose unencrypted or unredacted personal information has been exposed due to a failure to maintain appropriate security can bring an action against the business.  A class action is possible if enough plaintiffs wish to aggregate their claims.   Although there are procedural steps which a plaintiff would have to go through before bringing an action, failure to adequately secure personal information under CaCPA may result in significant liability for California businesses.

CaCPA also imposes monetary fines and penalties in cases of intentional violations of the CaCPA of up to $7,500 per violation.

WHAT STEPS SHOULD YOUR BUSINESS TAKE?

The CaCPA is undergoing amendment as regulators, the business community and consumer groups seek to resolve the ambiguities and inconsistencies resulting from the swift passage of the CaCPA.   However, given the increasing visibility of privacy issues, we anticipate many if not most of the law’s general requirements, as well as a general orientation of enhanced vigilance towards consumer data, will remain intact.  

In light of the significant potential liabilities associated with the CaCPA, growth companies engaging California consumers, including those projected to be but are not yet subject to CaCPA, will need to carefully plan for, establish and maintain safeguards, policies and procedures to ensure compliance with CaCPA and related laws.

Following are actions that businesses should consider taking in consultation with privacy counsel:

·       Review and Update Your Privacy Policy.  The CaCPA requires increased privacy disclosures at or before the point of collection to consumers to explain the categories of data to be collected and the purpose for which the categories of information will be used. These disclosures must be updated every 12 months.

·       Review and Update Your Website.  In addition to a link to your privacy policy, the CaCPA mandates that your business provide a “reasonably accessible and clear and conspicuous link” to the consumer’s opt out right on your website’s homepage.  This link must be entitled “Do Not Sell My Personal Information.”  Under this portion of your website, you must explain to the consumer that they have the right to opt out of the sale of their personal information and provide them with the means to do so (generally in the form of an “opt-out button”.) This link also must provide certain other required information about their privacy rights;

·       Review and Update your Terms of Use.  Your on-line Terms of Use often incorporate your Privacy Policy and set forth the terms and conditions on which your business provides its services.  The Terms of Use may also need to be revised to ensure compliance with the CaCPA.

·       Provide One or More Means for Consumers to Submit Requests.  You must provide, at a minimum, a toll-free telephone number for consumers to call to submit their requests for information under CaCPA.

·       Establish Consumer Information Request Response Procedures.  Your business must respond within 45 days to verifiable consumer requests for information and provide the requested information free of charge not more than twice in a twelve-month period.   You must develop a standard procedure to review, analyze and respond to consumer access requests.

·       Establish Data Collection Tracking Procedures.  You must put processes in place to track the information your business collects so that you can timely respond to requests for information and opt-out requests.  As stated above, the look-back period for an access request is 12 months.  Since the CaCPA will come into active effect on January 1, 2020, we are already within that 12-month period.   Many companies who have invested in developing IT infrastructure to track data collection and consumer requests in order to comply with GDPR will also need to develop mechanisms to track to comply with CaCPA.   If you did not need to worry about GDPR, you may need to worry about CaCPA and put those processes into place now.

·       Train Your Team.  Your team is an important part of the compliance effort.  The new law requires that your team be familiar with the new requirements so that personal information and relevant consumer inquiries are handled quickly and properly.

Our experienced data and privacy counsel is available to assist in your compliance efforts and provide advice and recommendations for complying with CaCPA as well as other applicable data privacy and security laws.  Please contact us if we can help.

DISCLAIMER

Please note the foregoing is not intended to be an exhaustive summary of the CaCPA or the steps to be taken to become compliant and is not intended as legal advice.  For customized recommendations and guidance concerning your California Consumer Privacy Act compliance, please contact us directly. 

This article was written by our data and privacy counsel, Lori Ross. You can reach Lori via email.

17 Incubators For Impact Entrepreneurs and Social Enterprise

Following is a list of accelerator and incubator programs specifically targeting founders and early stage ventures that address social and environmental challenges, in areas ranging from health care, to education, to poverty, economic opportunity and access to technology.  

These organizations are varied in who they serve and where they are located but they share one thing in common:  they offer structured programs designed to help mission-driven founders build organizations (for-profit, non-profit, or hybrid) that generate positive impact at scale.  

We are not able to vet these programs for quality, so do your own diligence and as always, consult with your team of trusted advisors before proceeding.  

Finally, we did our best to create a comprehensive list but please let us know if we've missed any programs. We'll do our best to keep this list current.   

Agora Accelerator, Washington, DC

Targeted to entrepreneurs who create social impact in Latin America and the Caribbean, this is an intensive, 6-month program providing businesses with access to the social, human, and financial capital needed to accelerate growth.

Boomtown Health-Tech Accelerator, Boulder, CA

A 3-month program in Boulder, Colorado focused on entrepreneurs who seek to bring positive impact to health and wellness around the world.

Cleantech Open Accelerator, Redwood City, CA

A 12-week series of intensive workshops and bootcamps to accelerate cleantech startups focused on Energy Generation; Energy Distribution & Storage; Energy Efficiency; Chemicals & Advanced Materials; Information & Communications Technologies; Green Building; Transportation; or Agriculture, Water & Waste. 

Conscious Venture Lab, Columbia, MD

A 4-month immersion program targeting entrepreneurs “using the power of purpose to transform capitalism.” Entrepreneurs must be willing to relocate to Columbia, Maryland for the duration of the program. Companies must be involved in one of the following industries: Cyber Security, Biotechnology, Tech enhanced Professional Services, Technology infrastructure, Hospitality, Consumer Products, 3D Manufacturing, Mobile/ Consumer Internet, Social Applications, and Gaming.                                   

Echoing Green Fellowship, New York, NY

Echoing Green invests in leaders who bring about positive social change around the world. Echoing Green offers three different fellowships. The Global Fellowship is for entrepreneurs "who are deeply connected to the needs and potential solutions that may work best for their communities." The Black Male Achievement Fellowship is for "entrepreneurs dedicated to improving the life outcomes of black men and boys in the United States." The Climate Fellowship is for entrepreneurs "committed to working on innovations in mitigation and adaptation to climate change." Non-profit, for-profit, and hybrid start-up companies are eligible for the fellowship.

Fledge, Various Cities  

With locations in Seattle, Lima, and Barcelona (and a program in Padova, Italy launching in 2018), Fledge offers a 10-week program of guidance, education, and mentorship, plus a large and growing network of support from past fledglings and hundreds of mentors. Applicants should be social impact, for-profit companies that consist of two or more individuals.

GoodCompany Ventures, Philadelphia, PA

Challenging social entrepreneurs to scope and quantify the opportunity that their innovation presents, refine their plan for execution and defend their capitalization strategy.  Over an intensive 12-week period, guides entrepreneurs through a series of expert and investor panels, tactical workshops, peer-to-peer critique, and one-on-one coaching, cumulating in an investor pitch event.  Also offers Climate Ventures 2.0, a 12-week program for entrepreneurs focused on innovations in climate adaptation and resilience, particularly impacting food, agriculture and water in urban areas.

The Global Social Benefit Institute (GSBI®), Santa Clara, CA

Provides social entrepreneurs with Silicon Valley mentors to prepare them for growth, with separate structured programs guiding entrepreneurs from idea-stage to scale. 

Halcyon Incubator, Washington, DC

Helping social entrepreneurs incubate and accelerate social ventures with the capacity for measurable social change. The Halcyon Incubator builds a community of support around the Fellows by bringing together a network of seasoned entrepreneurs and leaders in the government, nonprofit, and for-profit sectors. Ventures may be for-profit, nonprofit, hybrid, or undecided, as long as the core mission is to create measurable social change. 

Imagine H2O, San Francisco, CA

Focused on the water sector, Imagine H2O connects entrepreneurs with world leaders in the water sector, government, and social enterprise to help turn ideas into self-funding, high impact solutions.  IH2O's annual programs focus on themes representing entrepreneurial opportunities within water.  Entrepreneurs are selected to participate in Imagine H20’s annual innovation program and the winning teams get to participate in the business accelerator.

Impact Engine, Chicago, IL

An intensive 16-week accelerator program designed for mission-focused for-profit ventures in broad range of industries, from technology-enabled Internet and products-based companies across different sectors and countries. 

Los Angeles Cleantech Incubator, Los Angeles, CA

A non-profit, public-private partnership that helps promising companies deliver market-ready cleantech solutions.  Focused on products or services that advance sustainable or efficient use of resources.

Points of Light Civic Accelerator (CivicX), Regional

National accelerator program and investment fund focused on for-profit and nonprofit early stage ventures “that include people as part of the solution to critical social problems.” The 10-week, boot camp-style program convenes 10-15 teams in person and online with the goal of equipping each venture to seek investments and scale their social innovation that are working to create greater, more accessible pathways to economic opportunity in communities across the U.S.

Praxis Labs, New York, NY

Focus on Christian entrepreneurs, Praxis provides mentorship and expert networks for entrpreneurs committed creating cultural and social impact through their venture.  Though applicants must be Christian, their organizations are not required to have a religious affiliation.

Singularity University, Silicon Valley, CA

Designed specifically for startups tackling humanity’s grand challenges leveraging exponential technology. An 8 week on-campus program in Silicon Valley which early stage ventures for scale and impact.  

Unreasonable Institute, Various Cities

A wide network of accelerators, located across the U.S. and globally, focused on support entreprenenurs tackling significant social and environmental challenges.  Locally, San Diego Unreasonable Lab San Diego runs a 5-day accelerator for early/idea-stage, San Diego-Tijuana (Cali-Baja)-based entrepreneurs that are tackling financial, social, health, or environmental problems.  

Village Capital, Various Cities

Building communities of practice around entrepreneurs solving major global problems in agriculture, education, energy, financial inclusion, and health. Peer-selected investment model empowers entrepreneurs to become investors themselves, and our programs provide them with training and mentorship from industry experts, policymakers, business leaders, investors, and other entrepreneurs.  The program is structured around three 4-day workshops featuring sessions led by leading entrepreneurs, investors, industry experts, and the Village Capital teams. Programs are held in multiple cities throughout the United States.

This article was researched and written by BCL legal extern Stephanie Snively.