Normally, when a business individual or group decides to start a new business, it is because they have a concept that, based upon prior experience and coupled with some source of working capital, they believe will be successful.
This is an exciting moment. However, in order to enhance the likelihood of success, the new business owners must address several legal items concurrently with or immediately after creating the company’s business plan in order to avoid disputes and limit liability in the future.
A legal to-do list consists of:
- Administrative items
- Choice of operating entity
- Documentation of the respective rights, responsibilities, and duties of the owners and managers.
When starting a business, a checklist should be created of required start up items. Examples:
- Licenses, permits, trademarks – virtually all companies are regulated by a state, county or municipality and require a permit or license
- Insurance – all businesses should be insured for Hazard and Liability. Some also require Worker’s Compensation
- Bank account – you will need a Federal tax ID number from the IRS; and possibly a copy of your articles of organization
- An accountant – As soon as possible you should hire a company accountant. Accountants are very helpful with many areas of advice and will be essential for both yearly tax returns and advising your bookkeeper/comptroller.
- Leases – If you are leasing your company offices, pay careful attention to the term of the lease, the obligations you will be required to pay in addition to base rent; and whether a personal guarantee will be required.
- Payroll services – Oftentimes this type of a service is very helpful to a new company.
- First year matters – Two items to calendar are the Annual Report filing with the Secretary of State, along with the filing fee before May 1st; and the annual meeting of the shareholders/members which should be properly noticed and scheduled each year; and with written minutes prepared to memorialize all decisions made.
Choice of Operating Entity
For most privately owned businesses with more than one owner, the choice is either a Sub-S Corporation or a limited liability company. I like limited liability companies for ease of creation, flexibility of membership rights and responsibilities, favorable tax treatment, simple operating structure and excellent asset protection from creditors.
Documentation of Owner’s Rights and Management Structure
Whether you choose a limited liability company or a Sub-S Corp, you should enter into an agreement, before commencing business, between the owners. In a limited liability company the document is called an operating agreement; in a Sub-S Corp, a shareholders’ agreement.
The operating agreement should clearly set forth what each owner (they are called members in an LLC) is required to contribute to the company by way of cash, property and/or services. The management of a limited liability company is by a manager or managers. If there is more than one manager, the operating agreement should specify how disagreements between managers are resolved.
If one member holds a majority of the ownership, the operating agreement should clearly state which decisions can be made with a majority vote, and which require the vote of 100% of the voting members.
If one of the members is essentially the financial partner, the operating agreement should clearly define what the financial obligations are of that member; and conversely, what de facto control the financial partner has over the company.
Ensuring that the administrative checklist is completed; the proper entity is selected and created; and an operating agreement which clearly defines ownership and management rights, responsibilities and duties is signed by all parties, contributes greatly to the likelihood of success and avoidance of company and ownership problems and disputes in the future.