Updated: March 2, 2022
Starting your own business is an exciting but often daunting time. Entrepreneurs quickly realize that there is much more that goes into operating a successful business than having a transformative idea or a great product. Knowing where to start can go a long way in making the startup phase a smoother experience by helping to minimize bumps in the road and potential for future liability for business owners.
The first step for aspiring business owners should be 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, for example, a partnership, corporation or limited liability company (commonly referred to as an 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 much 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 number of investors. Conversely, LLCs can provide benefits to owners through “pass-through” taxation. “Pass-through” or “flow-through” taxation means that income made by the business flows straight to the owners or investors. Flow-through taxation allows the owners to avoid double taxation (that may be 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 requires shareholders to report their individual profit and loss on individual tax returns. As entity selection will have significant tax ramifications, it is advantageous to consult with an experienced attorney when making this decision.
In the unfortunate event of a lawsuit against the company, an entity that is properly formed, set up and well-maintained can help keep the owners from being held personally liable. While there are advantages and disadvantages to all types of entities, forming a C-corporation or LLC may help limit your liability even further.
Another important task in opening a business involves obtaining a Federal Tax Identification Number (also known as an EIN), which is typically necessary for tax and banking purposes. Keeping a separate account for your business, including separate books and records, is crucial. Managing company funds separately from personal funds is a strong step in ensuring that you are properly preserving the liability structure of the company and therefore, should not be held personally liable if the company’s autonomy is challenged in court.
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 mentioned above, owners should make sure to keep an up-to-date and accurate cap table. The company’s cap table represents 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.
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:
The answers to questions like these will not only provide a roadmap for the new business as it opens but should also protect against unwanted surprises in the future. A proper plan will consider potential variables once the business is underway. 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.
A 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 and distinguish themselves from competitors. There are also factors with legal ramifications to consider when selecting a brand name. Business owners should consult an experienced intellectual property 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, it is advisable that you register the name/mark with the United States Patent and Trademark Office (USPTO).
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 could also increase the value in the future 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.
It goes without being said that in today’s digital world, a website can play many different roles in the company’s business operations. Whether it is a storefront for customers to discover and purchase products or the source of the company’s services itself, the website is an important tool to be considered seriously. There are factors to think about from both the aesthetic and legal side when launching a website.
This is not an exclusive list of topics that need to be considered when starting a new business. There are numerous decisions to deliberate while you are trying to get the business off the ground, like target demographics, or how to keep a balanced budget and handle the company’s bookkeeping. By considering the items listed above, you can launch your business in ways that will provide value and protection in the future. An experienced corporate attorney can help guide you through the major considerations in getting your new company off the ground.