Q: Setting up a holding company to allow for 100% ownership of future locations
I am opening a brick and mortar location in CO, with investors lined up. Naturally, they will request some equity in the company.
How can I setup a situation where I end up owning the overall brand, so that several years from now I can open additional locations in other states and/or countries, without the original investors being involved?
While this reply is not legal advice specific to your situation, the following generalizations may be useful to anyone opening a business in Colorado under circumstances similar to yours.
Selecting a business structure is a key business decision. Business structures can be changed over the life of the business, and subsidiaries and affiliated companies can be formed, but selecting the right structure in the beginning will save time, money, and frustration.
One business structure with a good balance of features is the limited partnership and its variants. Limited partnerships are collaborations of two or more participants, but with at least one participant operating the business in detail and at least one participant with a role limited to influencing broad strategy and providing capital. The general partner is the one with day-to-day control and command of the company decisions. The limited partner has a very limited power to vote on specific issues, and exists generally to provide capital. It is reasonable to think of limited partners as silent investors. The limited partners are rewarded for participation through the terms in a partnership agreement. Special versions of the limited partnership, called limited liability limited partnerships, can further enhance the liability protections of both participants.
Corporations are welcome to serve as either a general partner or as a limited partner in a limited partnership in many states.
In other situations, the formation of a for-profit stock corporation may offer an advantage. Stock can be issued or sold to investors to raise capital, and the stock offered can have no voting power. While a non-voting shareholder is not without rights, a non-voting shareholder generally cannot influence the day-to-day operations of the corporation. Further, a non-voting shareholder would have no rights to the intellectual property of the company. The value of the share is based on the market for those shares and any dividends the shares might provide.
Forming stock corporations to provide a structure for investors must be done carefully. Certain formalities and safe-harbor rules of the SEC must be observed. In many cases, the choice of business entity is a matter of tax optimization. Consult a business formation or corporate finance attorney before beginning your collaboration with your investors.
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