When an entrepreneur launches a new venture, the legal issues related to forming and operating the business are often put on the back burner. The natural focus is on hiring employees, securing customers, and generating revenue. Unfortunately, failing to do some basic legal planning can result in costly mistakes, impaired growth, and even the untimely collapse of the business.
Here are practical tips that every new business owner should consider:
Create a company
Unless you want to put your personal assets at risk, create a company through which to operate your business. There are a number of options, including C corporations, S corporations, limited liability companies and partnerships. The right choice will turn on the nature of the business, the ownership and management structure, the desired tax treatment (including the elimination of “double taxation”), any applicable regulatory requirements and the exit strategy.
Maintain good corporate records
Understand the legal requirements and best practices associated with maintaining corporate records for your company. Once a checklist has been developed to guide you, the process is fairly painless. Poor record keeping, however, can lead to a host of problems and create significant liability for the company and its owners and managers.
Put someone in charge
Two individuals start a business and decide that each will be a 50 percent owner. That sounds good in theory, but rarely works in practice. No matter how cooperative the partners pledge to be, legitimate disagreements will inevitably arise. And when they do, a 50-50 ownership structure will guarantee deadlock. Encourage each owner to participate in the decision-making process, but invest someone with the power (through stock ownership, board control and/or contractual rights) to make the final call.
Raise money legally
Every new company requires some infusion of capital. If the company’s founders cannot personally finance those capital requirements, they may turn to third-party investors. In doing so, the company must conduct a private offering in compliance with federal and state securities laws. It is important to understand that these laws are triggered when even one share of stock is offered or sold to just one person. The laws dictate the manner in which prospective investors can be solicited, the contents of the documentation that must be provided, and any required regulatory filings. Securities law violations can jeopardize not only the offering, but also create civil and criminal liability for the company and its principals. Hire an experienced lawyer to help you navigate the process.
Protect your brand
As a company matures, its brand can become one of its most valuable assets. Think of Coca-Cola, Microsoft and Disney. Federal trademarks are the best way to protect and enforce your brand. Before launching your company or its new product, have an intellectual property attorney determine whether the names and logos being considered are available for use and, if so, what level of protection might be available. It is difficult enough to acquire brand recognition in the marketplace, so don’t risk being unable to use or protect the brand once that hard-earned recognition is attained.
Protect your other intellectual property
Apart from its brand, every company will have a certain amount of additional intellectual property. It might be a unique product, a novel way of doing business, a secret formula or a proprietary customer list. Make sure that your company both owns and protects its intellectual property. First, have both employees and consultants execute agreements that assign to the company all of the intellectual property they create. Without an agreement, your company’s latest and greatest idea may literally walk out the door without you being able to stop it. Second, consult a lawyer to determine how best to protect your intellectual property, whether through the use of patents, copyrights, trademarks, confidentiality and non-competition agreements, or otherwise.
Understand those contracts you are signing
How many times a week do you enter into contracts without reading the fine print — the ticket to the parking garage, the medical waiver, the cell phone agreement? Unfortunately, business owners are no different, often entering into critical company contracts without fully understanding their terms. They confirm that the basic deal points have been included, but then gloss over things such as representations and warranties, indemnities, and governing law and dispute resolution provisions. At best, those provisions may prevent the company from receiving the intended benefits of the contract. At worst, they may expose the company to significant and unexpected liability. Read and fully understand each and every contract before you sign it. Your company’s success (and survival) may depend on it.
Don’t hand out stock options like candy
To conserve cash while motivating employees to go the extra mile, some business owners are tempted to hand out numerous stock options. Whilethe dot-com era popularized this approach, you are encouraged to resist the urge. Employee turnover is inevitable. It is one thing to have a disgruntled former employee. It is another thing to have a disgruntled former employee who now owns a piece of your business.
Hire a good lawyer
Starting and growing a company is an incredibly difficult challenge. Hire a lawyer who understands and is willing to partner with your business. When you have an issue or problem, the best lawyer is one who has the expertise to understand the legal options, as well as the business sense to help you select the best one.