Starting a Business
As any entrepreneur will tell you, starting a business requires a lot more than simply a good idea. While no business will be successful without a “good idea” there are many pitfalls along the way that you will encounter. Intelligent business planning and formation can help avoid many of these issues and vastly improve the odds of success. Attorneys can play a key role in this process as both legal protection and organization, which can pay huge dividends later on. Attorneys do not only facilitate the company’s success but they can also mitigate the damage if the business is unproductive.
The first step in the process of starting a business is what type of entity you will become. There are a variety of legal and tax implications associated with this decision. How many people are involved, what type of business the company conducts, and the plans for raising capital should all be considered. Individuals who choose not to legally organize their company default to a sole proprietorship, which carries with it substantial risk as it does not differentiate between the individual and the company exposing the individual to personal liability for company actions.
Once the entity is decided, the company must formally register with the state and obtain all necessary licenses and permits required to operate. Companies should also file for an Employer Identification Number through the IRS and retain a qualified bookkeeper. Other initial start-up issues, depending on the type of company and may include stock certificates, securities issues, patents, trademarks, copyrights, tax issues, employment agreements, licensing (such as liquor licenses or health inspections), zoning, and others. An attorney can spot potential problems prior to their fruition to either mitigate or avoid them completely.
Any business should also rely on an attorney for its contracts. An attorney should review any contracts coming into and draft all the contracts going out of the company. While most people think of contracts as between the company and another party, perhaps the most important contract of all is the governing agreement, which is between the partners of the company. Depending on the structure of the entity these may have different names such as operating agreement or partnership agreement, but they all perform the same functions.
The first and primary function is to dictate how the company will be run. The agreement outlines who owns what, what happens if the company makes money, what happens if the company loses money, how equity in the company is transferred, etc. It also is where ownership percentages, if there are any managers, and other information about the company is found. This puts a plan in place and avoids conflicts between partners later because the agreement controls how the company is run.
The second purpose of these agreements is to retain the corporate form. Single member LLCs are in a much stronger position to be recognized as such if they have an operating agreement. Companies may have their liability shield “pierced” if they do not have a strong operating agreement that all the partners adhere to. Even though single partner companies may not need an operating agreement to govern decision-making, they should still have one in place to protect their status as another type of entity.
It is often difficult to see the financial practicality of an attorney at the outset. This is a matter of perspective however because retaining an attorney is like making an investment in your business. An investment does not pay dividends immediately like a consumer product. An investment proves its worth over time. When the issues an attorney was hired to address appear, that is when the value becomes apparent.