Starting a new business?
If so, that's great! You can put your business on a sound legal footing from the very beginning. From choosing an appropriate business entity for your business to choosing product names that can be registered and protected as your trademarks, good decisions made early on can prevent significant problems in the future. Following are a few things to consider as you plan your venture.
1. Ownership and Control
It is critical to sort out who will initially own what interests in a business and what will be paid or done in exchange for those interests.
Also, how will ownership interests be represented and how will voting occur? How will appointments be made and elections conducted? What authorizations will be required to undertake which activities? How can ownership interests be transferred and to whom? What happens in cases of resignation, dissociation or death of an owner? How will compensation be determined?
The answers to these and many other questions regarding ownership and control must be documented in written agreements appropriate to the type of entity conducting the business. If no written agreements exist, then parties must live with statutory provisions (if any apply) or may find they are bound by oral agreements or implied agreements. The time to document understandings is at the inception of the business in order to avoid future problems.
2. What's your name?
Beyond being catchy and marketable, a business name should also:
be available for registration in the state of organization;
meet the naming requirements prescribed by the state of organization for the entity type;
be available as an Internet domain;
not conflict with trademarks (registered or common law) of other businesses;
be registered in most cases (and if eligible) as a trademark in the United States and other jurisdictions in which the business will operate.
Failing to adequately assess and clear the name you choose for your business can result in expensive and time-consuming renaming and rebranding in the future.
3. What do you want to be?
If you will be the only owner of the business, you can operate as a sole proprietor. However, a sole proprietorship is not a business entity—it's just you. If your business is sued or incurs any debt, you will be personally liable, and your personal assets will be at risk.
By creating a separate legal entity, you can separate yourself and your personal assets from your business. Although a variety of entities may be formed under state laws, most businesses are structured as either limited liability companies or corporations (either S or C). Choosing an appropriate business entity involves balancing many factors, including the nature of the business, ownership structure, funding considerations, tax issues, and disposition strategies.
4. Where is home?
If your business will primarily operate and sell its goods or services in a single state, it is simplest, and often most economical, to organize the business entity in that state. However, if the business will operate nationally or internationally, or if tax issues, anonymity of owners, investor considerations or other factors apply, then organizing in a state with more favorable laws may make sense. Delaware, Nevada Wyoming and other states are potentially attractive for organizing business entities, but the benefits to be gained come at the price of complexity. If you will be doing business in multiple states, you will need to qualify to do business in each state and register as required.
5. Forming an entity
A business entity comes into being when the documents required by the state of organization are completed and filed. In Utah, these are Articles of Incorporation for a corporation and a Certificate of Organization for an LLC. In addition, other documents, such as bylaws or an Operating Agreement should be prepared to govern the relationships of the owners and the operation of the business. Careful attention to the content of these documents will help maintain the business as a separate legal entity and will assist the business and its owners in navigating challenging situations as they arise. As time goes by, annual filings, minutes and amendments to governing documents should be completed promptly and completely. Although few business owners relish paperwork, those who are wise take care to ensure that their entities are well-documented and maintained.
Your entity will need a Federal Employer Identification Number ("FEIN") from the IRS. A FEIN will be necessary to open a bank account, process payroll, and file tax returns. If your company will sell physical products, you may have to collect and pay sales tax. For this, you will need to submit the appropriate application with the state. If the state of organization has a franchise or similar tax, you must provide for its payment.
7. Do you have a license for that thing?
The nature of your business will determine the licenses required for its operation. You may require licenses from federal, state, county and/or city governments. A partial list of licenses and permits that may be required includes:
Drug manufacturing (FDA)
Ground transportation (DOT)
Investment advising (SEC)
Meat products (FDA)
Selling alcohol, tobacco or firearms (ATF)
Professional and occupational licensing
Selling certain goods
Businesses that serve and/or makes food
Pools or spas that will have public access
Tattooing or piercing establishments
Tanning beds open to the public
Underground storage of gas for public access
Used oil collection sites
8. Take it to the Bank
You will need one or more business accounts. Work with your accountant to make sure accounts are appropriately organized and that necessary controls are in place. Control authorities should match those described in organizational documents where applicable.
9. Managing the Team
If your business will have employees, you will have legal obligations as an employer. You will need to deal with payroll and withholding taxes, unemployment insurance, anti-discrimination laws, OSHA regulations, workers' compensation, and wage & hour requirements. Adequately training your employees can help position your company to avoid legal challenges.
Facility and equipment lease agreements should be reviewed carefully. Terms included in the forms provided by landlords and vendors predictably favor those parties—sometimes shockingly. Make sure you understand every provision of the lease agreement, and be prepared to negotiate.
11. Good Housekeeping
An unavoidable part of running a business is record keeping. During your operation of the business, and especially when you are ready to sell it, your ability to locate and provide accurate records will be crucial. Putting good record keeping systems in place from the very start will pay dividends down the road. Records of different types should be retained for differing periods in accordance with a written policy adopted by your company. The policy should comply with all applicable laws. Here is a partial list of categories of records that may apply to your business:
Accident reports and claims
Contracts and leases
Corporate/organizational documents and records
Disaster preparedness / business continuity plans
Minutes and meeting files
Training materials/ records
Almost all business need forms of various kinds. Many forms, though simple, are contractual in nature, and you should make sure that they serve their necessary legal purposes and protect your company's interests. Examples include order forms, purchase orders and customer contracts.
Locating a form on the internet and repurposing it for your business without qualified legal review can result in disaster. Also, remember that your forms will make an impression—either good or bad—on your customers and others who receive them. In fact, poor form agreements can cause the other party to insist that you use their form of agreement instead, resulting in additional risk and cost to you.
13. Intellectual Property
Almost all businesses will develop "creations of the mind," such as inventions, literary or artistic works, designs, logos, names and images. The law offers protection of your exclusive right to use these creations via patent, copyright and trademark registrations. Other common law rights and protections are also available. Timely action is required to ensure that you preserve and protect your rights to the full extent possible. By the same token, you should take care to ensure that your products, services and other creations do not infringe on the rights of others. Failure to consider the impact of intellectual property rights on your business can result in substantial expense and aggravation.
14. A Piece of the Pie for Employees?
If you intend to provide ownership incentives for your employees, a written plan will be required based on the type of entity and nature of the equity interests. The plan must be carefully designed and take into account timing issues, vesting, tax implications and administrative requirements.
A lot to think about, but a methodical approach in the beginning will position your business for success. Allied Counsel would be pleased to assist.