Starting your own business is an exciting but often daunting time. There is much more that goes into operating a successful business than a transformative idea or a great product. Simply knowing where to start can go a long way in making the startup phase a smoother experience while also helping to minimize bumps in the road and potential liability for business owners down the line. An experienced corporate attorney can help guide you through all of the major considerations in getting your new company off the ground.
1. Selecting an Entity & Formation
A major first step for aspiring business owners is selecting the type of business entity that makes the most sense for them and the business. Making the appropriate filings in the state(s) where the company intends to do business can be a relatively quick process. However, it is important to thoroughly consider the different options of entities ahead of time, like a partnership, corporation or limited liability company (LLC). Relevant topics to consider are the tax classifications of each entity and the expected sources of funding for the company. C Corporations can grant a lot of flexibility in raising capital for the company and its owners, as they can raise funds by issuing a potentially unlimited number of shares to an unlimited amount of investors. Conversely, LLCs can provide benefits to owners through “pass-through” taxation. “Pass-through” or “flow-through” taxation means that money flows through the entity to the owners. Flow-through taxation allows the owners to avoid double taxation (applicable to C corporations) because the owners are taxed, and the entity is not. It may also make sense for a business to make an S corporation election, which allows a company to be taxed differently. Because entity selection can have such significant tax ramifications, it’s always recommended for business owners to seek guidance from an experience accountant to choose accordingly.
In addition to the potential tax and capital raising advantages, one of the major added benefits of forming LLCs is the ability to limit business owners’ liability. In the unfortunate event of a lawsuit against the company, an entity that is properly formed and set up and well-maintained can help keep the owners from being held personally liable.
2. Drafting the Company’s Corporate Documents
Coinciding with the formation of a new entity, founders should prioritize drafting and executing the internal corporate documents, like the LLC Operating Agreement or Shareholders Agreement and Bylaws of a Corporation. These agreements will lay out how the company is going to be run and who has the power to perform certain actions. An operating agreement will also describe how profits and losses will be disbursed to the company’s owners. These are important aspects of a business to have locked in, so there is no uncertainty once the business starts operating and begins to generate revenue and profits.
Along with the corporate documents, owners should make sure to keep an up-to-date and accurate cap table. The company’s cap table represents all the outstanding membership interests or securities in the company, including who owns what amounts and how much (whether cash or services) the various owners have contributed. Whether owners are looking to sell the business down the line, or are considering making distributions, it is vital to have a cap table that reflects the company’s current ownership.
3. Develop a Business Plan
While developing a business plan encompasses various marketing and product development initiatives, it should also take a broad, holistic approach. Founders should contemplate everything from financial projections to corporate culture. Some of the key questions to consider include:
- How do they want the company to be run? In some instances, the founders make up some or all of a Board of Managers or Directors, who have the power to make all of the operational decisions for the company. Other decisions, under state law or the company’s corporate documents, may require a vote of the shareholders. These are important elements to consider not just while drafting the Operating or Shareholder’s Agreement, but also at a foundational level, when the founders are determining who will be handling the day to day operations and making major decisions on behalf of the company.
- Who will oversee what? What is the hierarchy of roles within the company and who reports to who? Owners should also make important employment considerations, like whether they will be employees themselves or only act (and earn distributions) as shareholders, and whether the company will be hiring full-time (w-2) employees or independent contractors.
- What type of culture do the owners want to cultivate and how will team members communicate with each other? This is an even more important consideration in the current work-from-home climate caused by Covid-19. Imperative ideas to think about include whether the dress code is more casual or professional, and is an open-door policy encouraged or are employees (or contractors) incentivized to work more independently. Will the company use some form of internal messaging system or rely solely on phone, email and text?
The answers to these questions will not only provide a roadmap for the new business to begin ramping up but should also protect against surprises. A proper plan will consider potential variables once the business is underway, and while no one can predict the future, founders should have a rough idea of where they want to be in 6 months, 1 year, 5 years, etc. and how they are going to get there.
4. Creating a Brand Name or Logo
Another major factor to consider when starting a business is the company’s brand name and logo. Founders want their brand names to be unique and new, so that they can stand out and be memorable to the business’ target market. The very best brands are able to distinguish themselves from competitors. Equally as important, there are other factors with legal ramifications to consider when selecting a brand name. Business owners should consult an experienced IP attorney to assess whether their desired brand name can be afforded trademark protection or is at risk of infringement. If your brand name meets certain requirements, like specification of words and how they appear (sizes, colors, fonts, etc.) you can have some trademark rights under common law. However, to have the most protection it is recommended that you register the name/mark with the United States Patent and Trademark Office (USPTO).
Returning to the idea that owners want to have a memorable brand name for the business, it should also be helpful to know that creating a “strong” trademark often correlates with a strong brand. The stronger a company’s brand/mark is, the more likely it will be afforded trademark protections. A trademark is considered to be “strong” when it is unique, and often can be considered arbitrary or fanciful. A fanciful mark is one that is completely made up (like “Adidas”). Contrary to arbitrary or fanciful marks, “weak” marks are often merely descriptive of a product or service, or are common terms that other businesses and individuals should also have the right to use.
Registering your trademarks and other intellectual property (like company owned copyrights) not only acts as protection for the business and its products or services, but it could also increase its value down the line if the owners ever wish to sell the business. Registered intellectual property, and the rights that come with it, are often major assets included in merger and acquisition transactions.
5. Launching a Website
Another key first step for a new business is to launch a website. The website can play many different roles in the company’s business operations. Whether it is a major source for the marketing of the business’ services, provides a marketplace for customers to purchase the company’s products or it is the source of the company’s services itself, the website is an important aspect to get right. There are various factors to think about from both the aesthetic and legal side when launching a website.
- Color Scheme & Style. The founders should consider what message is most appropriate to send to consumers through the design of the website. Does it make sense to have a fun and edgy aesthetic or a more buttoned-up and professional look, like for a law firm or financial services company.
- Terms of Service. The company’s website should have well-drafted and easily accessible Terms of Service (also known as Terms and Conditions). The Terms of Service act like a contract that governs the relationship between the user and the website. It lays out what uses of the website are authorized, what uses are not. The Terms explain the limitations of liability for both the company and the users and set out how any disputes that arise in connection with the website’s use may be resolved.
This is not an exclusive list of topics that need to be considered when starting a new business. There are countless items to think about in trying to get the business off the ground, like what type of employees to hire and developing a comprehensive employee handbook or how to keep a balanced budget and handle the company’s bookkeeping. That being said, by starting with the basics and considering the items listed above, along with the guidance of an experienced corporate attorney, you can make sure to start your business the right way to provide value and protection in the future.
This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.