We get it…you have a new business in mind and can’t wait to get started. You can’t wait to share your ideas of your products or services to your desired audience and help to improve their life. This is exactly where every entrepreneur should be as they begin their new business.
But not so fast…without the proper “legal” foundation, your business (and dreams) could be taken away from you just as fast as they started. We don’t want to see this happen to you or any entrepreneur. To help you be as successful as possible, we put together a list of “must have’s” when it comes to your new startup. These are all critically important to set the right foundation to protect you as you move your business forward. Here they are…
Top 6 Legal Issues
1. Start with Structure
Start with understanding what you want to accomplish with your business so you can define the proper structure. Some may advise to pick a structure that is the “easiest” or the “most tax efficient” or even “what others are doing” in your industry. We recommend you think differently. Think about the business first…what is the best structure for the type of business you want to start. What will allow you to do the things you want to do and will help you grow your business as rapidly as possible.
After you have this structure in mind, then you can look at the other aspects to see if there are better ways to, say, maximize your tax benefits. For example, if you decide that an LLC or an “S Corporation” are both equally beneficial ways to structure your business, then look at the tax benefits of both and this might help you decide which direction to head. We just feel it is always in the best interest of the business to decide on the ideal structure first, then use qualifiers (such as tax benefits) to make your final decision.
It is also important to remember, you aren’t married to that structure forever. After your business gets rolling, you might decide there is a better structure for your future growth. While it may not be easy or inexpensive, it might actually be the best idea to make a change. Pick the structure that works best for your startup and then worry about the future when you get there.
2. How and where should you incorporate your business
This can be a bit trickier than just deciding the structure of the business. Unless you have special circumstances, it usually makes sense to incorporate in the state in which you reside and take advantage of what your state has to offer. The key is to look at what you want to do with your business and then seek out the best place to incorporate.
3. Protecting your Intellectual Property (IP) should be at the top of your list
As you are excited to let the world know about who you are and what you have to offer, put on the brakes until you have your Intellectual Property properly protected…or someone else might. Just because you created (or invented) something unique doesn’t make it yours, unless you can prove it in court. The best way to prove it in court is to have all the documentation in place to “prove” this IP is yours.
Take the time to go through your products and services and determine which areas need to be protected. Get those listed and protected before you reveal them to anyone. And if you need to get some “second opinions” about parts of your business, at least get some NDAs (Non-Disclosure Agreements) in place. These will help you in protecting your IP until it is ready to announced.
4. Decide who gets what and when
Unless you are doing something completely on your own, there will be others involved in your business…some more than others. These relationships need to be defined and documented up front before you start turning the crank and creating sales. Once the money starts to flow, it’s much harder to define these relationships. Do them up front with the people who are going to be involved in your business…even the ones with a minor role.
Everyone is excited in the beginning…but as the going gets tough (and it will) it is critically important to have documentation around the relationships people will have with the business. These can be ownership issues, stock issues, time invested in the business issues, and a host of others. Take the time to define these and gain everyone’s agreement before you open your doors and start collecting revenues.
It is also equally important to identify the “exit” process for those involved in the business in any way. If someone wants to exit (for any reason) this should be defined on how it will (or can) happen. This might be a difficult conversation to have but believe me, it is much more difficult when there is revenue and profits coming into the business. Often times a mediator or facilitator might be needed to work through this from an objective perspective. However it works for you and your team, this needs to be done.
5. Contracts, contracts, and more contracts
We know it’s fun to get started and move forward as fast as possible. But handshakes only go so far in business…especially new businesses. Doing your initial business on just a handshake is a recipe for disaster. It’s easy to get others excited about your new products and services and they may be part of the hype of getting into the market. But as time goes on, without a solid contract, the deals start to fall apart and disappear. And if you have built much of your business on these promises, you could find yourself falling short down the road.
If it’s worth putting a deal together with someone, it’s worth a contract. And it is also a much easier way to define exactly what both parties will be doing when there is a contract in place. As the saying goes, good fences make good neighbors, the same goes for contracts. Contracts make for good customers. Take the time, it will save you many hours (and dollars) down the road.
6. Employee policies and HR issues should be defined
A final area relates to the employees you are hiring or going to hire. Often times an entrepreneur is thinking of products and services and employees that believe in these. While this is an awesome start, it can lead to issues down the road as the business starts to grow and develop. Employees will have more demands and also want to be treated in certain ways. You are the owner and leader…you should define what you want and how you want employees to operate in your business.
This can start with something as simple as a clear definition of Values…what are the values we operate from in everything we do. It should also define basic HR issues around benefits and other issues that directly impact an employee should be clearly stated so there aren’t any misunderstandings. Having an employee who thinks they can come and go as they please as long as they get their work done might not fit with your expectation for your employees. Define what you want up front…everyone will be happier and understand what you expect and how you will reward them.
What to do next…
Since all of these are “legal issues” in some way, get in front of your business lawyer and map out a plan for how to address each of these areas. If you don’t have a business lawyer, get one. Don’t use your personal attorney for your business issues…get a business lawyer. For example, we created Your Concierge CounselSM strictly with this in mind…to offer very detailed and focused business services to businesses. Whether you use us or not, we can help you at least understand how to find the right business lawyer for you…just ask us and we’ll be happy to help you out.
Also, if you just want to better understand how you can minimize and lower your risks (which every business owner wants) then please read some more about risk management and how you can help determine your own risk. I’d also be happy to meet with you (complimentary of course) to discuss your own personal situation further and give you some insights about how you might want to proceed.
I hope you have found this helpful and given you a different way to look at your business. If it has, please share this with others inside your company and your colleagues who are running or leading other businesses. Our primary mission at Generations Law Group, LLP is to help everyone find productive ways to lower their business AND personal risk. This is just one way you can start to do this…but it will tell you a lot about you and what has happened over the past few years with regard to your business risk. Let’s make sure your risk is as low as it can be while you continue to grow.