Important Things to Consider Before Starting a New Business
As an attorney with a practice focusing on Business Law and Estate Planning, I have met a fair share of individuals who have started businesses without doing the proper legwork and without knowing what they were getting themselves into. Before long, problems with business partners, legal issues, and money issues throw the business into a downward spiral, ending what could have been a successful venture. Eventually this leads them down the path of litigation. It is my job to help my clients start off on the right foot, ensuring their success in whatever business venture they choose. Below I have listed a few things that you should think about when starting a new business.
1. Business Plan
Before starting your business, it is essential to create a strong business plan. A business plan could range from a few pages, to hundreds of pages. Having a great business idea isn’t enough; you have to have good business plan to address your business concept, financial figures and your market. It should outline the company’s vision, and should be structured so that it attracts investors, partners and even vendors. People want to be in business with someone who has a plan on how to make their idea successful, not just someone with a good concept.
2. Naming your Entity
When creating an entity, one of the first things you have to do is select a name that is not currently owned or being used by another entity. You can do a name search at the Secretary of State website. The last thing that you want to deal with is a lawsuit demanding that you change the name once you have started your business.
3. What type of Entity do you need?
Notice the headline states what type of entity “do you need” and not what type of entity do you want. Quite often I have individuals who come to their consultations to create a “Corporation”, without understanding what that means. For example most people don’t know that a C Corp., has double taxation and might be a bit too much for most start-ups. Knowing what type of entity is best for you is important because different entities have different advantages and disadvantages and are also taxed differently. Although both the LLC and S Corp offer pass through taxation, and offer some form liability protection, there are some differences that could impact your choice. Speak with a business attorney and a CPA to determine what is the best option for you.
4. Different documents that you will need
Depending on the type of entity you create; you will need to file the Articles of Incorporation or Organization with the Secretary of State. You will also have to file the Statement of Information. Depending on the structure of your company and the number of members/directors, you will need to draft Corporate Bylaws or an Operating Agreement, which will provide your business with a concrete framework on how to function. Just as the Articles are important for the creation of the entity, the Bylaws and Operating Agreement are crucial for the internal governance of the entity.
Operating Agreement
- An LLC’s Operating agreement is entered into between all of the members (owners) of the new LLC. As the owners of the LLC the members have the ability to determine how they want their company to run. The operating agreement can be as complex or as simple as the members want it to be. Generally the operating agreement will set forth the initial members contributions, responsibilities, accounting details and can also include details about the tax issues related to the LLC.
Corporate Bylaws
- Corporate Bylaws are similar to the Operating Agreement and determine how the Directors of a corporation will essentially run the company. Under California Corporations Code Section 212, corporation’s bylaws must set forth(,) among other thing(s), the number of corporate directors and how the corporation can add or remove a director. The Bylaws must also include: (1) time and place for shareholder and director meetings, (2) compensation and qualification for directors, (3) creation of financial statements to the shareholders.
5. Avoiding conflict
Be Proactive!! This is your business. I don’t know anyone who decides to start a business, intending and expecting it to fail. If you are, then stop and go get a 9 to 5 job. Maybe being self-employed is not for you. However, if you feel like you are ready to take the next step, do it right the first time. A lot of people go into business with their friends and family members without having the proper contracts and agreements in place. STOP. For the sake of your family and friendship, do the right thing, and make sure that you have all the necessary partnership and business agreements in place. Doing so will avoid conflicts that could arise from running a business. If you outline your individual roles and have a plan in place, you will save yourself a lot of money, a lot of trouble and guide your business down the path to success.
Good luck with your new business venture.