In my 40+ years of helping people start new businesses, I have identified several potential problems that entrepreneurs often overlook in their eagerness to get their business up and running. Businesses succeed because of a number of variables, not all of which can be foreseen. But many of the problems could have been easily avoided by consultation with a lawyer who understands the issues confronting a new venture.
The Entity That’s Best for You:
There are many ways to organize your business and each alternative has good and bad points. The most common choice is between a corporation or a limited liability company. A corporation limits your liability and increases your potential for raising capital. But a corporation also comes with strict reporting requirements and unfavorable taxation issues. A limited liability company, as its names suggests, also limits your personal liability and it comes with tax advantages, but there are restrictions on selling an interest in the LLC and the laws governing LLCs are not uniform across the country.
There are other choices and there are many factors that go into deciding which type of organization is best for your venture. Our website has some information to help in comparing corporations and limited liability companies.
Agreements between Partners or Shareholders:
You and a friend start a business. At the end of the first year, the friend decides that she wants out and she wants a check for all of the money and time that she invested. If you do not have a well-designed partnership agreement in place, this could mean dissolving the business.
It doesn’t matter what form of ownership you choose – a corporation, a limited liability company or a partnership – a formal agreement can anticipate problems and disagreements, and make working them out much easier, which is why I always strongly suggest having a partnership agreement in place early in the process.
Every business venture should consider what will happen if a partner decides to quit or if she dies or becomes disabled. The agreement also needs to cover the possible sale of a partner’s interest in the business and many other situations.
If you have ever watched “Shark Tank,” you will have noticed that the investors want to know whether there are patents or trademarks protecting the business. Securing the rights for your intellectual property – the product and its name and its logos – is crucial, as is ensuring that your ideas don’t infringe on the intellectual property of others. Trademarks are valuable assets that need protection. And don’t forget the web. If you plan for your business to have an Internet presence (and which new business doesn’t) you must secure a web address that best represents your business name or product.
If you neglect intellectual property issues, you could diminish your ability to secure financing and possibly create a legal quagmire that will jeopardize the future of your business. And it’s not only small businesses that need to pay attention to IP issues. Recently, Samsung was ordered to pay $930 million for infringing on Apple patents.
When two or more people go into business, disagreements about the direction of the entity are inevitable, so it is wise to plan for them before they arise. A diverse board of directors can provide a sounding board to guide business decisions, or the parties can agree to choose a neutral third party to resolve such disputes. A last resort is professional mediation, which is expensive, but it is better, and cheaper, than having a judge make the decision. The important thing is to keep the dispute out of the courts.
Dealing with Employees:
All levels of government have a layer of requirements for employers in their dealings with employees, and running afoul of those laws can be a nightmare for a new venture. There are so many laws regulating employment relationships, it is difficult to keep track of them.
Another worry is what happens if an employee works for you long enough to learn everything about your business and then quits. You need to protect your trade secrets and have non-compete agreements in place.
This, of course, is not a comprehensive list of considerations for a new business. Every new venture is unique and presents different challenges. But having a solid relationship with a knowledgeable business attorney can lessen the risks for an entrepreneur.