What to Think About When Starting a New Business
By Len Margolis, Small Business Lawyer serving Plano and Frisco Business Owners
A good analogy for what is involved – whether with a startup or with a small business that is already off the ground but is taking a new turn or has yet to face some of the issues – is moving a household from one state to another. Consider the number of entirely different issues needing to be handled – from the moving itself, to your children’s schools, to new drivers licenses, church, service trades, shopping places, repairs and renovation, doctors and other specialists, banking and dozens of other details – and all of them coming from different directions. Fortunately, while analogous in needing to face opposite directions simultaneously, the scope of issues needing to be confronted by the new or developing business owner is definable and controllable, provided you are prepared to deal with them and have assistance to consider what is involved.
Each business startup has its own set of very specific issues, as well as those which are of universal concern. The items set out below do not apply to all new businesses, but they are the most commonly encountered requirements needing answers. However, each business will have another 25% of issues unique to it and to its owner. There are therefore no form documents to complete that, once the blanks are filled in, might magically get the business off the ground and into flight.
If, in getting through all this, the temptation to do it yourself overwhelms the advice of experienced observers of the process, you might want to rethink that. As was succinctly stated in an article in Forbes Magazine entitled “What Should All First Time Entrepreneurs Know Before Starting Their Very First Business?”:
A few things not to skimp upon.
If you need professional help, get it. Don’t be tempted to hire your teenage nephew, or do it yourself. This is akin to being your own lawyer and equally disastrous. You don’t have to pay a fortune – just keep your requirements simple and emphasize quality over quantity. Don’t worry about letterheads or compliment slips or custom email footers or any of that c**p until you’re making money.
That said, below are a “few” things to bear in mind as to matters needing to be addressed:
The traditional, and much advertised way lawyers (and accountants) start the discussion is to focus on the type of entity which is best to use (corporation, limited liability company, general partnership, limited partnership, limited liability partnership, Sub-S corporation). But in fact, for most people, this is easily determined, and spending too much time explaining all the distinctions is a good way to simply add up time. We can explain why quite simply and take you quickly through all the determiners.
Naming the business, registering it, and protecting the name locally, and if necessary, regionally, or even nationally.
IF YOU HAVE EMPLOYEES:
- Deciding whether you wish to subscribe to the workers compensation program or not. (Texas is one of the few states where you have a choice).
- Creating good employee contracts, whether very simple or more comprehensive.
- Protecting yourself against employees leaving you to start a competing business. There are possibilities here which don’t run afoul of the continually changing restrictions on non-competition agreements.
- Providing employees with an employee handbook, and protecting yourself against general liability to employees.
VENDOR LIABILITY PROTECTION
Protecting yourself against liability to vendors by reviewing vendor contracts and/or your or their order forms.
CUSTOMER & CLIENT LIABILITY PROTECTION
Protecting yourself (just in case) as to customers and clients (without needing to pay insurance premiums, assuming even that insurance is available).
INTELLECTUAL PROPERTY PROTECTION
Beyond choosing and protecting a name, locking down any other intellectual property of the business, including patents, trademarks, and copyrights. Where intellectual property is a vital part of the business, if the competition files a patent, your new business could end up owing fees or even not being allowed to sell its product, which no new business can afford. But whether your business is high or moderate tech or pottery, intellectual property can matter.
Of course, there is stuff you will be handling yourself: your logo, tagline, and website are utterly essential – they are the first impression you’ll make to most people, and your only message while you are not there. If you sell face-to-face to businesses, add business cards to that list.
IF YOU HAVE PARTNERS:
You will want to document, after discussion or negotiation, the following:
- Who will be running the daily affairs of the business as a whole, or particular segments, who has authority to make important decisions, and when, if ever, does everyone have to be on board?
- If there is ever need for additional cash, how is it to be raised and who is responsible for what? This is one of the most vexing matters which arises not only in start-ups but also with other early-phase businesses, and there are many ways of handling and resolving the need in advance, by discussion and documentation. We lay out the alternatives and you pick a flavor which works.
- If there is to be a separation, the time to address how the divorce is to be handled is at the outset. The analogy here is a pre-nuptial agreement, which is wise to address even at the risk of telling your love that you choose to be prudent.
Working with your accountant, if necessary, in providing for your accounting, and he/she working with you on maintaining proper legal books to insulate you as an individual from legal liability.
HOME OR LEASE
- If you are planning to lease, you owe it to yourself to read our two short articles on small business leases – Leases without Lawyers.
- If you plan to initially work from your home, both local government ordinances as well as HOA (if applicable) requirements must be consulted. We have successfully fought over-eager or out of control boards of directors who have sought to prohibit home businesses where the same are permitted.
IF YOU HAVE INVESTORS:
- What their “deal” is needs to be documented, and likely negotiated. Guaranteed that this often changes over the course of discussion and papering-up. A good attorney can help keep the deal on track with those changes, at least where the proposal to invest is not a misunderstanding in the first place due to failure to have confronted core questions.
- The “additional cash required” problem is as important here as it is when it is active partners who face the issue (see “If you have partners” above).
- Investors will also require some major input as to certain management decisions, controls, reporting, and the right to take certain actions in certain named circumstances, in order to protect their investment, and all this, including just what those circumstances are and what the consequences might be, needs to be negotiated and documented.
- Overlooked in the do-it-yourself “penny-wise” handling of many small business startups (or, worse yet, where the investor’s draft document is blithely accepted–“we’ve done it before”, “this is our necessary form before we write you a check”, or “it’s standard”) is your need to negotiate and document a way to buy the investors out in certain friendly or unfriendly circumstances. Obviously it can only be at a price and on terms which are mutually acceptable. The investors may also want the right to force you to buy them out. All these and other terms need to be discussed.
If there are regulatory requirements, occupational rules, city requirements, or zoning provisions, apart from the home business rules referred to above, these also need to be addressed.
Finally, another quote from that Forbes article cited at the beginning of this discussion:
Startups are hard. And if you’re a rookie founder, things could fall apart easily. So how do you make sure you don’t make dumb mistakes as a first-timer? Act like a startup. Forget about fancy offices, fast cars and fat expense accounts. Your wallet is your company’s life-blood. Practice and perfect the art of being frugal. Watch every dollar and triple-check every expense. Maintain a low overhead and manage your cash flow effectively. . . . If you need professional help, get it. Don’t be tempted to hire your teenage nephew, or do it yourself. This is akin to being your own lawyer and equally disastrous.
We provide a complete set of services for startups and small businesses that may all be necessary to set your business on the right track. To discuss your business with an experienced startup and small business attorney in Frisco, TX, please call 972.294.0200, or submit an inquiry online.