LBLHD – The Corporate Law Blog for Collectibles-Focused Businesses
[i.e. “law-ble-head”]
If you are an avid collector of sports cards, gaming cards, comic books, bobbleheads, autographs, classic vinyl, or authentic entertainment relics, you likely saw the massive boom to the purchase (and prices) of collectibles of all kinds that occurred during the COVID-19 pandemic. Though the quarantine rush has since slowed to some degree, with many prices reaching a plateau or even falling a bit, the overall market of collectibles has, in the aggregate, continued to grow quite rapidly. To be sure, it is expected that the market for sports cards is expected to increase from under $5 billion in 2019 to $62 billion by 2027, due to a compound annual growth rate (“CAGR”) of 28.76%. Suffice it to say that being a collector, whether by trade or hobby, remains a strong, if niche, market.
As with any industry, the potential for growth attracts the potential for new innovation. With such a vast collection of imaginative and creative entrepreneurs in the collectibles space (with which us nerds at Cara Stone feel the most relatable), it is important to protect the collectibles startup from a legal perspective. However, it can be difficult to know where to even start. The below narrative provide some helpful information on choosing an entity type when converting an amazing fantasy of a collectibles-focused startup into action.
Your First Mission: Forming the Company… But Which???
Whether you are opening a brick-and-mortar combination Magic and coffee shop, pressing comics, or implementing the world’s most secure block chain authentication service for tracking ownership of game used bubble gum buckets (all of which we encourage you to do), the risk of liability should always be front of mind. There are myriad ways in which businesses are exposed to claims, many of which can catch the founders by surprise. From simple slip-and-fall injuries to major data breaches, there remains a multi-verse of risk potential for any business, which only expands with great success. And, with great success comes great corporate responsibility to ensure that your most prized Stan Lee doodle among your collection cannot be seized and liquidated to pay creditors and claimants.
Though there are several legally nuanced choices incumbent upon the collectibles-focused business founders, a key initial question that must be asked (whether you are conscious of it or not) is: What type of entity should we form? This question alone can lead down a wormhole of questions, folding your own consciousness into itself… What is the difference between a limited liability company (“LLC”) and a corporation? Why are all these other collectibles-focused startups formed in Delaware if we live in Metropolis? Is there a Delaware on Krypton? Did I close the garage door? –We’ve seen it a thousand times. The truth is that the founders should take their time to consult with an attorney experienced in early-stage corporate projects, as they will have a wealth of knowledge to help guide you in choosing the best entity type for your collectibles-focused business concept. The number of startups, collectibles-focused or otherwise, that could have saved a lot of time, effort, stress, and money probably outnumbers those that took the plunge and engaged with an experienced startup attorney. An early consultation with an experienced corporate attorney and a little bit of seed money for your startup’s formation needs can literally be the difference between closing on an eight-figure preferred stock financing and complete disaster—even if the founders successfully form an entity!
Choosing the Right Set of Entity Superpowers
Once you have consulted with your attorney (!!!), in most circumstances, founders of collectibles-focused companies are going to choose between an LLC and a corporation. Both LLCs and corporations provide their officers, directors, managers, and owners with protections against personal liability. Whether a founder of a collectibles-focused startup chooses to form an LLC or a corporation depends greatly on the founders’ financial goals, derived from recommendations of their tax professionals, and the practicalities of oversight of the founders.
Corporations: The Classic Choice
In the case of the collectibles-focused startup that seeks to grab a large market share, whether through B2B solutions or far reaching B2C sales, the single most used entity type will be a corporation formed in Delaware. There are a few reasons for this. First, by forming a corporation, the founders are implicitly agreeing to a greater degree of corporate oversight. In most jurisdictions, corporations require at least an annual stockholders meeting, though many companies will choose to require quarterly meetings of the board of directors as well, and may provide additional period updates to the stockholders to keep them apprised of the company’s progress. The additional formalities create a more robust ongoing record of the company’s activities, which fosters greater transparency.
Second, the corporation is more attractive to sophisticated angel investors and venture capital firms. Along with the greater transparency described above, there can be tax benefits to purchasers of new shares of stock in small businesses through qualified small business stock (QSBS) purchases. QSBS treatment can be a huge incentive for investors upon a successful exit.
Third, with respect to corporations formed in Delaware, the courts in the State have a very well-developed understanding of corporate law, which in turn creates a legal landscape that is better understood by sophisticated companies and investors. Put another way, the courts in the State of Delaware are a bit more predictable than in other states. To some degree, there are also certain ways in which the laws of the State tend to favor corporate success without overcomplicating corporate formalities. As an example, the State of Delaware does not require public disclosure of the officers of a corporation. Conversely, a corporation formed in the State of California does, and requires that the company update that information annually. Such a requirement isn’t exactly onerous, but fewer formalities to address means fewer companies getting penalized for not doing so.
So, if the founders of that game used authentication technology start-up have gather together, identified engineers to bring on board, and have an eye towards a few angel groups and VC firms to fund their beta version, their attorneys are probably going to urge them to form a corporation in Delaware.
LLCs: Your Friendly Neighborhood Entity
In the alternative, where a smaller group of founders are either self-funding or keeping the group of investors at a lower level than the most sophisticated of VCs, with less of an eye towards exit, their legal and financial advisors are more likely to suggest an LLC as their entity of choice. LLCs typically do not require any periodic meetings of the members or managers of the LLC, such that corporate formalities are pretty minimal. Additionally, LLCs can be treated as passthrough entities for tax purposes, which avoids the dreaded “double taxation” of distributions to the owners of the company conundrum characteristic of corporations (where there is tax of income to the corporation, and then subsequently tax of income to the stockholders upon distributions or dividends).
It should be noted that, although it still might make sense in most cases to form the LLC in Delaware to take advantage of the tried-and-true court system, the company’s legal and tax advisors may or may not consider that advisable. The choice of venue issue for LLCs can be somewhat nuanced, especially for brick-and-mortar shops.
So, if the founders are opening up a single coffee shop that doubles as a manga distributor and reading lounge, their tax and legal advisors will most likely steer them towards an LLC, so that they can spend a greater portion of their focus on handling day-to-day operations, and avoid adverse tax consequences at the company level.
The Best Way to Start is to Start!
Whatever your goals are for your collectibles business, the best way to get started is to start. Our team of avid collectors is excited to talk about all things bobblehead, records, rare literature, or whatever your passion may be.
[i.e. “law-ble-head”]
If you are an avid collector of sports cards, gaming cards, comic books, bobbleheads, autographs, classic vinyl, or authentic entertainment relics, you likely saw the massive boom to the purchase (and prices) of collectibles of all kinds that occurred during the COVID-19 pandemic. Though the quarantine rush has since slowed to some degree, with many prices reaching a plateau or even falling a bit, the overall market of collectibles has, in the aggregate, continued to grow quite rapidly. To be sure, it is expected that the market for sports cards is expected to increase from under $5 billion in 2019 to $62 billion by 2027, due to a compound annual growth rate (“CAGR”) of 28.76%. Suffice it to say that being a collector, whether by trade or hobby, remains a strong, if niche, market.
As with any industry, the potential for growth attracts the potential for new innovation. With such a vast collection of imaginative and creative entrepreneurs in the collectibles space (with which us nerds at Cara Stone feel the most relatable), it is important to protect the collectibles startup from a legal perspective. However, it can be difficult to know where to even start. The below narrative provide some helpful information on choosing an entity type when converting an amazing fantasy of a collectibles-focused startup into action.
Your First Mission: Forming the Company… But Which???
Whether you are opening a brick-and-mortar combination Magic and coffee shop, pressing comics, or implementing the world’s most secure block chain authentication service for tracking ownership of game used bubble gum buckets (all of which we encourage you to do), the risk of liability should always be front of mind. There are myriad ways in which businesses are exposed to claims, many of which can catch the founders by surprise. From simple slip-and-fall injuries to major data breaches, there remains a multi-verse of risk potential for any business, which only expands with great success. And, with great success comes great corporate responsibility to ensure that your most prized Stan Lee doodle among your collection cannot be seized and liquidated to pay creditors and claimants.
Though there are several legally nuanced choices incumbent upon the collectibles-focused business founders, a key initial question that must be asked (whether you are conscious of it or not) is: What type of entity should we form? This question alone can lead down a wormhole of questions, folding your own consciousness into itself… What is the difference between a limited liability company (“LLC”) and a corporation? Why are all these other collectibles-focused startups formed in Delaware if we live in Metropolis? Is there a Delaware on Krypton? Did I close the garage door? –We’ve seen it a thousand times. The truth is that the founders should take their time to consult with an attorney experienced in early-stage corporate projects, as they will have a wealth of knowledge to help guide you in choosing the best entity type for your collectibles-focused business concept. The number of startups, collectibles-focused or otherwise, that could have saved a lot of time, effort, stress, and money probably outnumbers those that took the plunge and engaged with an experienced startup attorney. An early consultation with an experienced corporate attorney and a little bit of seed money for your startup’s formation needs can literally be the difference between closing on an eight-figure preferred stock financing and complete disaster—even if the founders successfully form an entity!
Choosing the Right Set of Entity Superpowers
Once you have consulted with your attorney (!!!), in most circumstances, founders of collectibles-focused companies are going to choose between an LLC and a corporation. Both LLCs and corporations provide their officers, directors, managers, and owners with protections against personal liability. Whether a founder of a collectibles-focused startup chooses to form an LLC or a corporation depends greatly on the founders’ financial goals, derived from recommendations of their tax professionals, and the practicalities of oversight of the founders.
Corporations: The Classic Choice
In the case of the collectibles-focused startup that seeks to grab a large market share, whether through B2B solutions or far reaching B2C sales, the single most used entity type will be a corporation formed in Delaware. There are a few reasons for this. First, by forming a corporation, the founders are implicitly agreeing to a greater degree of corporate oversight. In most jurisdictions, corporations require at least an annual stockholders meeting, though many companies will choose to require quarterly meetings of the board of directors as well, and may provide additional period updates to the stockholders to keep them apprised of the company’s progress. The additional formalities create a more robust ongoing record of the company’s activities, which fosters greater transparency.
Second, the corporation is more attractive to sophisticated angel investors and venture capital firms. Along with the greater transparency described above, there can be tax benefits to purchasers of new shares of stock in small businesses through qualified small business stock (QSBS) purchases. QSBS treatment can be a huge incentive for investors upon a successful exit.
Third, with respect to corporations formed in Delaware, the courts in the State have a very well-developed understanding of corporate law, which in turn creates a legal landscape that is better understood by sophisticated companies and investors. Put another way, the courts in the State of Delaware are a bit more predictable than in other states. To some degree, there are also certain ways in which the laws of the State tend to favor corporate success without overcomplicating corporate formalities. As an example, the State of Delaware does not require public disclosure of the officers of a corporation. Conversely, a corporation formed in the State of California does, and requires that the company update that information annually. Such a requirement isn’t exactly onerous, but fewer formalities to address means fewer companies getting penalized for not doing so.
So, if the founders of that game used authentication technology start-up have gather together, identified engineers to bring on board, and have an eye towards a few angel groups and VC firms to fund their beta version, their attorneys are probably going to urge them to form a corporation in Delaware.
LLCs: Your Friendly Neighborhood Entity
In the alternative, where a smaller group of founders are either self-funding or keeping the group of investors at a lower level than the most sophisticated of VCs, with less of an eye towards exit, their legal and financial advisors are more likely to suggest an LLC as their entity of choice. LLCs typically do not require any periodic meetings of the members or managers of the LLC, such that corporate formalities are pretty minimal. Additionally, LLCs can be treated as passthrough entities for tax purposes, which avoids the dreaded “double taxation” of distributions to the owners of the company conundrum characteristic of corporations (where there is tax of income to the corporation, and then subsequently tax of income to the stockholders upon distributions or dividends).
It should be noted that, although it still might make sense in most cases to form the LLC in Delaware to take advantage of the tried-and-true court system, the company’s legal and tax advisors may or may not consider that advisable. The choice of venue issue for LLCs can be somewhat nuanced, especially for brick-and-mortar shops.
So, if the founders are opening up a single coffee shop that doubles as a manga distributor and reading lounge, their tax and legal advisors will most likely steer them towards an LLC, so that they can spend a greater portion of their focus on handling day-to-day operations, and avoid adverse tax consequences at the company level.
The Best Way to Start is to Start!
Whatever your goals are for your collectibles business, the best way to get started is to start. Our team of avid collectors is excited to talk about all things bobblehead, records, rare literature, or whatever your passion may be.
