By: Charlene Avis and Neil Klein
Considering starting your own business but unsure of what steps to follow? We talked to attorney Neil Klein to get the down-low.
Charlene Avis: If I want to start a business—what initial issues need to be considered?
Neil Klein: First, decide what type of business you want and then write a business plan. Second, decide whether you want others to join you and in what capacity (partner, shareholder, investor, employee). Then map out who will do what, and designate key positions.
Decide in which U.S. state the company will be based—this will determine what legal regime applies to the proposed corporate format.
CA: What type of legal entity should I use?
NK: There are several types available. The type you choose will depend on the size and scope of your intended business activities:
You could set up a business under your own name, and file a dba (“doing business as”) statement in the county where you intend to operate, i.e. John Smith, doing business as Lightning Fast Copy Services. While this method is cheaper than most, it will not insulate you from personal liability if you are personally sued.
A prudent person will form a corporation or a limited liability company (LLC) to protect against personal liability.
Discuss with your lawyer the proper “corporate vehicle” for your purposes and how best to set it up.
CA: Where should I register my business?
NK: Generally, an application and filing fee with the Secretary of State in the particular state where your business will be located will be required.
If a large venture with many shareholders, you might incorporate in the state of Delaware where there are favorable corporate and tax ramifications.
Before filing your corporation, create a suitable name the Secretary of State will allow. If it is taken, or would cause confusion with an existing name, it will not be allowed.
If the name you want is available, file “articles of incorporation” (articles of organization for an LLC). Once your filing is accepted, you will receive a corporate number and an official document from the state.
If you will be doing business in multiple states, once your company is up and running, you must apply to the Secretary of State in each of those states. This requires a filing fee or annual payment.
CA: What types of corporate documents do I need?
NK: The shareholders (whose slice of the pie is determined by how much they put into the business) will appoint directors (responsible for the “day to day” running of the company). The directors will appoint officers (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. If you have more than one shareholder, a shareholders’ agreement or “buy/sell” agreement is recommended. This sets out how a departing shareholder should sell his or her shares if they no longer want to be part of the business.
Note the difference between authorized and issued stock: the former relates to how many shares the company may issue; the latter relates to how many were actually issued—thereby determining who has the majority and minority shareholding. Percentages will be important.
The company will need a “corporate minute book” to house all important documents, including share certificates, to be issued to the shareholders in proportion to their shareholding.
CA: What else do I need to commence doing business?
NK: You need insurance to cover your intended business activities. 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. If you intend to hire 5 or more employees, you should—at least in California— have an array of employment documents, such as an employee handbook, application form, offer letter, consent to background check/drug testing, job description, evaluation form with acceptable and measurable criteria, warning notices and termination letter.
You need a written lease agreement for your premises, with an option to renew for a further set term.
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 attorney’s fees.
A word on the “American Rule:” as opposed to other common law countries that automatically award attorney’s 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, you should include such a clause in all your contracts.
CA: Do I need an attorney’s help?
There is an old saying—”penny wise, and pound foolish.” Stated another way—goedkoop is duurkoop, which loosely translated means being cheap now will cost you later! There are just too many issues that a layperson would be unaware of when starting a business.