The business entity

The company is going to be organized as a privately held California corporation. In effect, the government wants us to be a corporation, and there is not enough reason to buck it.

The argument against a general partnership, in brief, is that any general partner can commit all the assets of the company. Furthermore, the general partners have to stand behind the company's commitments not only with their shares of the partnership, but with everything they own. The partnership agreement may name some managing partners who are the only ones authorized to act for the company, but the company could still be bound by unauthorized actions!

A limited partnership is hardly better. The law is not absolutely clear, but it is likely that limited partners who took any active part in the business would be declared general partners as soon as any litigation started, which reduces this to the previous case.

So a corporation it is. Here's a really crude outline of the procedure:

After registering the corporation with the state, the people who are doing the grungework appoint themselves as the Board of Directors and do assorted necessary paperwork. Part of this paperwork is a plan for the issuance of stock.

Then we hold a grand meeting at which we issue shares of stock in return for cash, notes, and other things. We immediately hold a stockholders' meeting to approve a stock option plan, and to elect a new Board if we want to. At that point we're officially in business.

The shares will be common voting stock, representing a fractional interest in the company, just like General Motors stock (though with a few little differences):

• Each share entitles you to one vote at a stockholders' meeting. This vote actually means something, which is more than you can say for GM stock.

• If the company folds up, the stock represents your cut of whatever is left over after paying the creditors. If that amount is negative, you're not liable for the difference beyond any amount that you may still owe on the stock purchase.

• If we sell the whole operation to another company or the public, the stock represents your cut of whatever is paid for the business assets. Employment by the successor company, of course, is a separate matter.

• You can't take your shares to your broker and sell them. It may even be illegal to sell them to your neighbor or to anyone else outside the company. Of course, after we're successful, we might go public and sell shares for a fantastic price like The Two Steves (Jobs & Wozniak of Apple). Even a public offering of new stock might not allow you to sell old stock publicly, but that decision would be up to the stockholders.