Starting a business is an exciting time, but it can also be a little stressful. There are many things to consider when it comes to creating your business, hiring your first employees, making sure you have the right tools in place, and opening up a shop. There are administrative issues as well as legal issues. As you begin this process, there are a few legal items to be aware of. You want to make sure you take care of them correctly and as soon as possible. That way, your business will have a strong start and you don’t have to worry about correcting legal issues later down the road.
Choosing the Right Legal Structure
One of the first and most critical decisions in the business startup process is choosing the proper legal structure. The structure will shape your personal liability for the company’s actions, tax liability, and funding opportunities. Each structure has its own state-based formation requirements. There are also different benefits and challenges to each legal structure. The most popular forms of legal structures include: sole proprietorship, partnership, C-corporation, S-corporation, and a limited liability company (commonly referred to as an LLC). It’s a good idea to work with a law firm familiar with business formation to determine which structure is right for the owner(s).
Drafting the Founder’s Agreements and Business Bylaws
If you’re starting a business with your friends or close colleagues, you may neglect to write out a Founder’s Agreement or your Business Bylaws. But these are essential business documents – they define the roles and responsibilities of each business partner, set forth company rules, and establish future policies and procedures.
A Founder’s Agreement, also referred to as a Shareholder’s Agreement, is a legally-binding document that defines the ownership of each business partner as well as their role within the company. The Founder’s Agreement describes the distribution of equity among the business’ founders and the length of time before the company’s shares fully vest. The document also details invested equity, projections, and goals. The idea is that the Founders Agreement will help avoid any ambiguity that might create management or relationship issues in the future.
The Business Bylaws provide guidance about the overall day-to-day operation of the business. Bylaws discuss the board of directors; corporate officers; board elections, terms, and roles; shareholder meetings; and how to remove officers if necessary. Generally, business owners will draft their bylaws when they create the business. These legal documents are part of the company’s corporate records and must be accessible to the IRS or state-based auditors. As the state government regulates corporations, and those rules may vary from state to state, it’s a good idea to have legal counsel help draft your Founder’s Agreement and Bylaws.
Acquiring the Proper Business License
In addition to choosing a legal structure and drafting founder’s agreements and bylaws, a new business owner should also be aware of their state’s licensing laws. Many states require a state license to operate a business or special permits to conduct daily business.
A business license is formal permission from your city, state, or the federal government to operate a business. Licensing requirements vary depending on where the business is located and the specific industry. Some states require a general business license to conduct any kind of business. Other states have requirements in place only for specific professions or industries. It’s important to note that registering a company with the Secretary of State is not the same thing as obtaining a business license. Once you’ve registered your business, you may need additional licenses or permits. Not having the proper documentation in place can lead to significant penalties and financial losses.
Have Questions? Contact Brian M. Douglas & Associates
If you have questions about business formation or succession, please reach out to one of our knowledgeable attorneys. We can walk you through the different state and federal requirements and help guide you through the decision-making process. You can contact us via phone at (770) 933-9009 or through our online contact page. We’re always happy to help.