Business Start-Up Law
Over the years, Romano Law has helped with the launch of many startup companies. We are sensitive to the needs of entrepreneurs. Our focus is to advise founders on typical matters such as raising capital safely, how to protect their intellectual property and to accelerate their growth sensibly.
WHAT YOU SHOULD KNOW BEFORE STARTING A BUSINESS
Regardless of your industry, creating a limited liability entity is one of the safest ways to do business. Romano Law’s diligent team of startup lawyers are thoroughly versed in the nuances of business law and can help you make the most of your liability shield and avoid legal liabilities interfering with your personal life.
Beyond forming a limited liability entity, our legal team provides experienced advice and appropriate corporate documents for new businesses.
Every startup will eventually need to hire employees. The best practice to protect both the prospective employee and the startup in an employment relationship is through an employment agreement. These agreements typically detail, at the very least, the employee’s job title, job description, and expected compensation.
Perhaps what is most important for a startup is the “work-for-hire” provision in an agreement. Work-for-hire agreements ensure that the rights to any intellectual property developed by the employees, during the scope of their employment, belong to the business, and not the employee. These agreements tend to be “at-will,” meaning the relationship can be terminated by either the employer or the employee for any reason or no reason at all. Later down the line, some startups may make key employees “for cause” meaning they can only be terminated for specific “causal” events. Documenting these relationships properly protect all involved parties, particularly in the case of a potential dispute.
Employee Manuals / Employment Handbooks
When a startup is thinking of hiring employees, the time is right to draft an employee handbook. The handbook should document the general employment policies and standard practices of the company, such as disciplinary policies, overtime procedures, policies surrounding privacy, use of technology, and confidentiality of the startup’s trade secrets. Employee handbooks also need to comply with state and federal laws regarding family and sick leave, discrimination, workplace safety, and sexual harassment. For an employee handbook to best protect the interests of the startup, it is not enough to be well-written before the startup hires employees. The handbook needs to be updated regularly to stay compliant with federal, state, and local laws.
Independent Contractor Agreements
Startups are likely to work with independent contractors before hiring employees. Although independent contractors work on projects for the startup similar to the employees of the companies, the independent contractors are in business for themselves, rather than working directly for the startup. Independent Contractor Agreements document the relationship between the contractor and startup by laying out the terms such as the specific project to work on, the compensation, and similar “work-for-hire” language to transfer any intellectual property developed by the contractor to the company.
It is important to respect the contractor’s independence when working with one. Despite the title of an Independent Contractor Agreement, the startup’s treatment of a contractor is what governs whether the worker is considered an independent contractor or an employee. If the startup exercises supervision, direction and control over the contractor, it is more likely that worker will be considered an employee, not an independent contractor. Startups should be careful when working with contractors to not only protect their trade secrets, but to make sure they treat their contractors with the separation the law requires.
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MULTIPLE OBJECTIVES, ONE PLACE
We know that entrepreneurs often wear many hats and we are no different. We can assist you with a wide range of legal issues related to starting a business. We offer practical advice in areas such as:
- Corporate Governance
- Trademarks, Copyrights and Intellectual Property
- Commercial Real Estate Leases
- Employee Benefits and Compensation
- Buying or Selling a Business (Mergers and Acquisitions)
SELECTING AN ENTITY
The first step in launching a startup is to select a business entity. Our team of startup lawyers can help you decide on the type of entity which best suits your needs. Business entities typically include some combination of centralized governance, limited liability, and either “double-taxation” or “pass-through” taxation. The appropriate type of entity depends on the intended strategy of the new business.
A C-Corporation (or “C-Corp”) is perhaps the most well-known business entity. A C-Corp is an entity, created by but separate from its owners, formed to pursue the common goal of shareholder profit. For many purposes, a C-Corp is considered its own separate legal person – the entity can enter into contracts, own assets, and hire employees. C-Corps have a number of attractive features: control of a C-Corp is highly centralized, a C-Corp might exist perpetually, and C-Corps also grant limited liability to their shareholders. There is also a great deal of law surrounding C-Corps, which provides predictability that can encourage investors to contribute to the startup early on. However, that same body of law can make C-Corps more cumbersome to navigate, particularly for a corporation with relatively few shareholders. C-Corps are also “double-taxed” – meaning the corporation as an entity is taxed on its earnings if any, and those same earnings are taxed once shareholders receive that profit as a dividend.
C-Corps are formed through the filing specific documents with a state’s Department of State. The Articles (or Certificate) of Incorporation formally create the corporation – the Articles operate as the business’s charter, outlining the business’s basic information, governance structure, initial stock authorization, and identification of the statutes by which the corporation is formed. The Bylaws, in combination with the Articles of Incorporation, set out the mechanisms by with the business runs; when annual meetings are, how shareholder voting works, and how business decisions are made, among other things. The Director’s Initial Resolutions and Shareholder’s Initial Resolutions ratify the procedures that went into incorporation, list the initial corporate officers, and allocate the stock authorized by the Articles.
Two more documents do not need to be filed with the Articles, Bylaws, and Initial Resolutions, but are just as pivotal for a startup to have. The Shareholders’ Agreement lists the rights and obligations for the company’s shareholders; it describes how shares are priced and transferred (or restricted from transfer), and is a method for ensuring civility among a startup’s initial shareholders through listing clear procedure and providing methods of dispute resolution. Finally, small and privately owned C-Corps might use a Subscription Agreement to facilitate a sale of stock with a specific private investor, and the accompanying terms governing price, quantity, confidentiality, and return on investment.
S-Corporations operate in most ways indistinguishably from a C-Corp. The defining feature of an S-Corp is that its shareholders have filed a federal election with the IRS to alter how they are taxed. Rather than face double-taxation, S-corps elect to have their profits “flow-through” the corporate entity directly to the shareholders. In this manner, earnings of an S-Corp are only taxed once they reach the shareholders as profit. Startups considering filing as an S-Corp should note that, to properly file as an S-Corp, they may need to file an S-Corporation election with the Department of State of their respective State in addition to the same filing with the IRS.
Benefit Corporation (B-Corp)
As discussed above, a traditional C-Corp has the primary purpose of maximizing profit for its shareholders. A New York Benefit Corporation, or B-Corp, in contrast, is required to focus both on traditional business purposes, and serving the “general public benefit.” The New York Business Corporation law defines the “general public benefit” as a material positive impact on society and the environment. This means that, in addition to making decisions in light of shareholder profit, the directors of a B-Corp are required to consider how their decisions impact the corporation’s employees, customers, the community, and the local and global environment. B-Corps may also set out a “specific public benefit” the corporation will focus on or create in addition to assisting the general public benefit. The BCL lists such sample specific public benefits as creating jobs or providing services to low-income or underserved individuals (outside of the jobs created by the corporation normally), preserving the environment, or improving human health, among others.
The BCL also creates an additional reporting requirement specific to B-Corps. In addition to the financial disclosures of material information C-Corps must make to their shareholders, B-Corps must also generate an annual benefit report. This report is to be judged from the standard of a third party, and must list the ways the B-Corp pursued creating a general public benefit (and any applicable specific public benefits) for the previous year, or any circumstances which hindered the B-Corp’s pursuit.
Limited Liability Company (LLC)
The limited liability company, or LLC, is a relatively new entity in comparison to the C-Corp, but has become a very popular entity for startups because of its flexibility. An LLC combines the limited liability of a corporation with the taxation structure of a partnership. This means that its owners (called “members”) are insulated from the LLC’s debts, while any profit the LLC makes is “flow-through,” similar to an S-Corp, by default.
LLCs are created by the prospective members filing Articles of Organization with the Department of State. The Articles of Organization lists the LLC’s basic identifying information. While initial resolutions are not mandatory for an LLC, it is good practice to to file accompanying Members’ Initial Resolutions and Managers’ Initial Resolutions, formally ratifying the Articles and the company’s formation. Finally, while not mandatory but highly recommended, a startup LLC needs to draft an Operating Agreement. An Operating Agreement is the document which details the structure and operation of the LLC; it species, among other things, how the LLC is managed, how decisions are made, how profits are split between the members, how new members can be join or leave the company, how membership interest is transferred, and how to resolve disputes which arise. The Operating Agreement is highly customizable, which offers more flexibility than a C-Corp, but that flexibility can also mean these documents need to be heavily negotiated to ensure it meets the startup’s needs, both immediately and in the future.
BALANCING A BUDGET
Starting a new business can become expensive. You need to balance legal costs with the expense of running your operations. Understanding this, we put together a simple, Flat Fee Formation package that provides value and cost certainty. Our Flat Fee Formation packages typically include all of the following services:
1. Discuss your specific intentions for the business;
2. Help you select a company name likely to gain approval from the Department of State;
3. Draft the appropriate founding documents for your new company:
- Certificate of Incorporation
- Shareholders’ Initial Resolutions
- Director’s Initial Resolutions
- Shareholders’ Agreement
- Subscription Agreement
Limited Liability Company (LLC)
- Articles of Organization
- Member’s Initial Resolutions
- Managers Initial Resolutions
- LLC Operating Agreement.
4. Prepare and file federal and state S-Corporation elections (if applicable);
5. Obtain a Federal Tax Identification Number (also known as an EIN) for the new company, which is typically necessary for tax and banking purposes;
6. Cover all third-party fees (including state fees) for the expedited formation of the LLC or corporation;
7. Cover all third-party fees associated with fulfilling the New York State publication requirement for LLCs (if applicable);
8. Provide startup legal advice;
9. Provide a memorandum summarizing important steps to take to preserve the entity’s limited liability status; and
10. Answer your questions startup questions related to the LLC formation or incorporation.
Romano Law understands that every business is unique. We customize our legal services to suit your specific needs.
We look forward to helping your startup grow.
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