STARTING A BUSINESS? START HERE
A young business can be rather hectic. For that reason, it’s unsurprising that legal details and corporate formalities are often overlooked. But there’s tremendous value in preparation. Let’s review five tips that you can implement today to start creating value and protecting your investments. Still got questions? We’re got answers.
GET SERIOUS WITH YOUR PARTNERS
At the outset, new business owners (rightly) see the glass half full. Positivity is a coveted virtue but it can lead you astray when it comes to legal matters. After all, no partner has ever sued another because the business was making too much money or because they were getting along too well.
So when you negotiate a partnership agreement, focus on the gloom and doom. And here are a few (depressing) discussions, which should make their way into your partnership agreement:
Death or Incapacitation: What should happen in the event a partner dies or becomes incapacitated? Ensure bank accounts have more than one signatory to avoid cash flow interruptions. Finally, consider what happens to membership interests and shares at death- do the heirs automatically become voting partners?
Deadlocks: What should happen if there is a deadlock? Is a "shotgun" provision right for you and your partner? What if the business can't move forward? Can one partner force the dissolution of the business?
Restrictions on Transfer: Consider awarding preemptive rights to the founding partners. Can partners sell shares or interests to strangers? If you're a privately-owned company, at what price?
Dispute Resolution: Where do partners take their disputes? Should you be forced into binding arbitration or mediation? Is each partner liable for his or her attorney fees? Does everyone waive their right to a jury trial?
Draft a partnership agreement that makes sense for your specific situation and consult a lawyer on its enforceability. After all, there are certain things you can and cannot legally bind one another to. (Pro tip: Check out this article for a partnership agreement hack).
AVOID PRE-INCORPORATION EXPOSURE
New business owners often want to “test the waters” before getting serious with their venture. In other words, they start arranging commercial agreements before they incorporate or form their entity. They’ll “get to it”, they say to themselves.
But this is a crucial misstep. We form corporate entities to shield the owners from personal liability. However, this shield is entirely ineffective if you don’t use the company’s name to sign agreements or purchase assets.
To that end, please make sure all business is done in the business’s name- from day one. If it’s too late for that, then consult an attorney. One option is to have the company ratify previous acts to avoid pre-incorporation personal liability. Explore your options and make sure you’re covered.
PICK THE RIGHT STRUCTURE
There are countless articles online that explain the differences between corporate structures: LLCs, corporations, partnerships, limited partnerships, etc.- the list goes on.
If your choice is between an LLC and a corporation, the most significant difference is the tax treatment. There is virtually no difference in liability protection offered by an LLC that isn’t available in the corporate form. Most states allow ample flexibility in Bylaws and Operating Agreements so you can craft a corporate structure that makes sense for your operation or budget.
Always review your options with a lawyer and understand the commitment you’re making.
But remember that choosing the corporate entity is just one aspect. You should also consider where you will incorporate your business. To that end, we invite you to review our info on Delaware and Florida businesses.
PROTECT YOUR PROPERTY
A profitable sale might be your best exit strategy and you should prepare accordingly. A company’s property will include real, personal, and intellectual property and you should ensure that all assets are titled correctly. Everything should be in the venture’s name: from the domain registration to the services agreements. The assignment and assumption of property can be costly and lengthy, so do yourself a favor from day one. Put it all in the company’s name.
DEFINE YOUR RELATIONSHIP WITH “EMPLOYEES”
Please make sure that you understand the relationships you want to build with your service providers- before you sign any agreements. Are they employees? If so, are they “covered” or “exempt”? Are they independent contractors? If so, have you obtained the proper tax forms? Employment law issues often cause trouble for young ventures. And understandably so. But it’s crucial to appreciate the consequences of each employment classification, especially as it relates to the Fair Labor Standards Act and the relevant state statutes. Always consult a lawyer to find the most appropriate and cost-effective arrangement.
Still got questions?