Embarking on entrepreneurship is thrilling yet challenging. Beyond a brilliant idea or product, running a successful business demands strategic navigation. Knowing where to begin can mitigate hurdles and future liabilities, making the startup journey smoother.
Selecting an Entity
The first step is to select the suitable type of business entity. Establishing and maintaining the right entity structure can offer business owners limited personal liability. Completing state filings to register a company is a relatively quick process. However, prior to this, it’s crucial to thoroughly evaluate entity options such as partnership, corporation, or limited liability company (LLC). Factors like tax implications, funding sources, and employee incentives are pivotal considerations.
- C-corporations offer extensive flexibility in capital raising through share issuance to investors and providing incentives to employees in the form of shares or options. However, C-corporations are subject to double taxation, with income taxed at both entity and shareholder levels.
- Conversely, LLCs offers the benefits of “pass-through” taxation, where profits flow directly to owners without entity-level taxation. However, LLC owners typically cannot be paid as employees themselves; rather, they receive a share of the profits or guaranteed payments.
- Alternatively, both LLCs and C-corporations can elect S-corporation status, enabling shareholders to report profits and losses on individual tax returns. Notably, an S-corporation is a tax treatment instead of a form of legal entity, with restrictions such as the number and class of the shareholders to consider (Read More: S-Corporation vs. C-Corporation: Which One is Best for Your Business?)
Given the substantial tax implications and alignment with your business requirements, seeking counsel from attorneys and tax advisors is prudent before finalizing your entity selection.
Filing Formation Documents and Drafting Corporate Documents
Once you decide on the type of entity, the next step is to file the appropriate formation documents with the state where you will operate the business. Depending on the type and state of entity, this formation document may be called Articles of Organization (for an LLC) or Certificate of Incorporation (for a corporation).
Next, founders should prepare the internal corporate documents, like an operating agreement for an LLC or shareholders agreement and bylaws for a corporation. These agreements typically lay out how decisions are made, who has the managerial powers, and how profits and losses will be disbursed. In addition, owners should make sure to keep an up-to-date and accurate cap table. The company’s cap table represents the outstanding equity interests in the company, including the ownership percentage and contribution (whether cash or services). Whether owners are looking to sell the business down the line or are considering making distributions, it is vital to have a cap table that reflects the company’s current ownership.
Obtaining an EIN and Opening a Bank Account
Another important task in opening a business involves obtaining a Federal Tax Identification Number (also known as an EIN), which is typically necessary for tax and banking purposes. Keeping a separate bank account for your business, including separate books and records, is crucial. Managing company funds separately from personal funds is a strong step in preserving the liability structure of the company and avoiding personal liability.
Developing a Business Plan
When crafting a business plan, it’s crucial to take a comprehensive approach, covering areas from financial forecasts to organizational culture. Key considerations include:
- Governance structure: Determine who will make operational decisions and how major choices will be voted upon.
- Role hierarchy: Define roles within the company and clarify reporting lines, including decisions on employee status and hiring practices. It’s also important to consider whether the company will hire W-2 employees or independent contractors and prepare the appropriate employment agreements.
- Cultivating culture: Establish a strong ethical framework, especially crucial in remote work environments, covering areas like diversity, inclusion, and compliance.
- Futureproofing: Anticipate future challenges and opportunities, setting milestones and strategies for growth.
Addressing these aspects not only provides a roadmap for startup success but also safeguards against potential pitfalls down the line.
Creating a Brand Name or Logo
A major factor to consider when starting a business is the company’s brand name and logo. Founders want their brand names to be unique and new, so that they can stand out and be memorable to the business’ target market and distinguish themselves from competitors. Business owners should consult an experienced intellectual property attorney to assess whether their desired brand name can be afforded trademark protection.
The stronger a company’s brand/mark is, the more likely it will be afforded trademark protections. A trademark is considered to be “strong” when it is distinctive. One way to determine distinctiveness is to see whether the mark is arbitrary or fanciful. For example, a fanciful mark is one that is completely made up (like “Adidas”). Contrary to arbitrary or fanciful marks, “weak” marks are often merely descriptive of a product or service or are common terms used by many other businesses.
While a mark generally has common law trademark protection when the mark is used in commerce, registering your trademarks provides a stronger protection for the brand. You will have the right to use ® symbol in connection with the mark and the ability to recover certain damages for infringement. Additionally, registered intellectual property, and the rights that come with it, are often major assets included in merger and acquisition transactions.
Launching a Website
In today’s digital era, a website holds pivotal significance for business operations. Whether serving as a storefront or delivering services, it’s a crucial tool deserving serious consideration. Factors encompass aesthetics and legalities alike when launching a website.
- Design: The founders should consider what message is most appropriate to send to consumers through the design of the website. Does it make sense to have a fun and edgy aesthetic or a more buttoned-up and professional look, like for a professional services company? Do I have the copyright to use certain components of the website design?
- Privacy Policy: If you will be collecting data from your website, you may want to have a privacy policy. A privacy policy outlines which data the website collects, how the data is used, and whether/who/how that data will be shared. The privacy policy must be compliant with applicable laws, such as the GDPR in the European Union and CCPA in California, depending on where the data is collected or where the customers are located.
- Terms of Service: A company’s website should have well-drafted and easily accessible Terms of Service (also known as Terms and Conditions). The Terms of Service act like a contract between the user and the website. It lays out what uses of the website are authorized, the limitations of liability, how disputes may be resolved. If the website provides e-commerce capabilities, the terms should also include a shopping and shipping policy. If users can post content on your website, it is also worth considering incorporating a take-down mechanism in your Terms.
Conclusion
This is not an exclusive list of topics to consider when starting a new business. Factors such as target demographics, budget management, and bookkeeping are also crucial. By addressing the mentioned points, you can set a foundation that adds value and safeguards for the future. Contact us today, and our experienced corporate attorney can help guide you through the major considerations in getting your new company off the ground.
Photo by Glenn Carstens-Peters on Unsplash
