mckasson klein logo By: Neil Klein Question: I want to start a business – what initial issues need to be considered? First, decide exactly what type of business you want to have and then write an outline or business plan. Second, decide if you want others to join you in your endeavor and, if so, in what capacity (e.g. partner, shareholder, investor or employee). Then map out a “corporate flow chart” as to who will do what at the new company, and designate key positions. Once you have the basics covered, decide where (in other words, what state in the U.S.) the company will be based – this decision will in turn determine what legal regime will apply to the proposed corporate format. Question: What type of legal entity should I use? There are several types of entities available, and the type you chose will depend on (among others) the size and scope of your intended business activities: For example, you could set up a business under your own name, and then file a dba (short for “doing business as”) statement in the county where you intend to operate, i.e. John Smith, doing business as Lightening Fast Copy Services. While this method may be cheaper than most, it will not insulate you from personal liability if things go wrong and you are personally sued for, say breach of contract. A prudent person will usually decide to form a corporation or a limited liability company (known as an LLC, and used often in businesses involving real estate), to insulate him or her from personal liability. This will allow the business to sign contracts, leases and documents in the company’s name, rather than in your personal name and capacity. You should discuss with your lawyer the proper “corporate vehicle” for you to use and how best to set it up. Question: Where should I register my business? Generally, you will be required by local state law do so in the state where your new business will be located. A simple filing with the Secretary of State (or similar official) in the particular state will usually be required, along with a filing fee. On the other hand, if a large venture is envisaged with many shareholders, i.e. if the company intends to “go public” down the road, it might be important to incorporate in the state of Delaware where there are favorable corporate and tax ramifications (discuss all tax issues with a tax lawyer or your Certified Public Accountant). Before you file your corporation in say, California, you have to come up with a suitable name that the Secretary of State will allow. Sadly, Coca-Cola, Virgin and Google will not be available; so, pick 2 or 3 unique names and then try to reserve that name. If it is taken, or would cause confusion to the public by being too similar to an already taken name, it will not be allowed. Assuming the name you want is available, you would file “articles of incorporation” (or if you are an LLC, articles of organization). Once your filing is accepted, you will be provided with a corporate number and an official document from the state advising you are now “in business.” If you will be doing business in more than one state in the US, say Texas and Florida, once your company is up and running, you will have to apply to the secretaries of state in both Texas and Florida to be allowed to do business in that state. This is sometimes called “being authorized to do business in that state as a foreign corporation” (“foreign” simply means not from that particular state i.e. from another state or another country), and will require a filing fee or annual payment. Question: What types of initial corporate documents do I need? By now, you should have decided on the shareholders (who will own a slice of the pie, depending on how much they put into the business – which can be time, money or assets); they in turn will appoint the directors (who are responsible for the “day to day” running of the company); and the directors will in turn appoint the officers of the company (President/CEO; Treasurer/CFO; and Corporate Secretary). The next step is to prepare bylaws and organizational minutes, which will set out the shareholders, directors and officers. Importantly, if you have more than one shareholder, it is strongly recommended that you have a shareholders agreement (also known as a “buy/sell” agreement). This document will set out how a departing shareholder can and should go about selling his or her shares if that person no longer wants to be part of the business. Be aware of the difference between authorized vs. issued stock: the former relates to how many shares the company may issue, and the latter relates to how many were actually issued – thereby determining who has the majority and who has a minority shareholding. Percentages will be important. (By the way, the word “share” is interchangeable with “stock.”) The company will need a “corporate minute book” to keep important documents, including share certificates, to be issued to the shareholders in proportion to their shareholding. Question: What other types of documents/items do I need to commence doing business? There are several: First, procure insurance to cover your intended business activities (get a good broker to help you). Consider liability and indemnity policies, such as employment practices liability; directors & officers liability; commercial general liability; professional errors & omissions; excess or umbrella; and other specific risk policies depending on the nature of your business. Second, if you intend to hire 5 or more employees, you should – at least in California – have an array of employment documents, such as (a) employee handbook and (b) employment forms (including application offer letter; consent to background check/drug testing; job description; evaluation form with measurable criteria; warning notices; and termination letter). Third, you should have a written lease agreement for your premises, with an option to renew for a further set term. Fourth, you need a form invoice and standard “terms and conditions” of sale for the widgets or services you intend to provide. These MUST include protections as to non-payment; applicable law; venue; jurisdiction; litigation, arbitration or mediation (or combination); and attorneys fees. A word on the “American Rule:” as opposed to other common law countries that automatically award reasonable attorneys’ fees to the winner or “prevailing party” in litigation, the rule in the U.S. is that they are NOT awarded, unless provided by (a) contract or (b) statute or applicable law. So, if you think you are honorable and will always do the right thing, then you should include such a clause in all your contracts. Question: Do I need an attorney’s help? Absolutely. There is an old saying – “penny wise, and pound foolish.” Stated another way, being cheap now will cost you later on! There are just too many issues that a lay person would not be aware of in starting a business. www.mckassonklein.com