Monday, October 10, 2011

Starting an Entity: Minimum Capitalization

I am often asked, what is the minimum amount of capital you have to legally put in a company at the beginning.  The simple answer is essentially zero, but the reality is that you need to consider several questions to determine how to sufficiently capitalize your business.

First, as always, you need to choose the appropriate business structure based on the nature of your business, tax considerations, and whether you have or intend to have additional partners.

Second, once you have chosen the appropriate entity, you actually need very little to form the entity:

  1.  Corporation:  New York, for example, has the state filing fee to form the entity, plus a tax on the shares, but that share tax is only $10.00 if the shares are either "no par" and total shares don't exceed 200, or a low par entity, with a total capitalization not exceeding $20,000.

 2. Limited Liability Company:  In New York, there is the filing fee, there is no fee on the any membership interests that may be issued, but there is a draconian publication cost, which varies depending on the county of formation.  

Third, although there is no minimum capitalization requirement, the reality is you will need funds to (a) form the entity, and (b) a sufficient amount to start and operate the business. 

Fourth, if you plan on issuing shares or membership interests to 3rd parties within a relatively short time after formation, you may need to consider whether the low-priced shares/interests issued to yourself will have a negative impact on the valuation of the company in the eyes of potential investors.

Therefore, it is necessary for you to review your business plans with both an experienced business lawyer and your accountant.

No comments:

Post a Comment