What to Ask: Incorporation and Business Operations | John Kontrabecki, Esq.
UpCounsel attorney John Kontrabecki explains what every startup should be asking their legal team about incorporation and business operations4 min read
How do we plan our commitments for space needed to match our headcount and growth projections over the next 3–5 years?
Companies need to plan for growth instead of reacting to growth, and avoid making real estate commitments that do not match with their growth needs. They need to sign leases that met their current needs while giving them the flexibility to grown.
What kind and amount of insurance is adequate for our business?
Business is risky as it is and where you can shift the risk to an insurance company you should. The insurance needs of the company will depend on the activities of the company and the contractual obligations the company has that require the company to maintain insurance coverage.
What form of business entity should we use to conduct business?
This will depend on the business you are in, the sources of capital you will need to grow the business, the number of principals in the business, and the income tax issues facing your business and the investors who are backing the business.
What kinds of agreements and employment policies are needed with employees to avoid potential liability in the future?
This is important for a variety of reasons. You probably need your employment relationships to be flexible. At the same time, you do not want employees going to the Department of Labor Relations over policies that are not adequately documented. Disgruntled employee conflicts can be both time consuming and expensive to resolve.
What standard agreements do we need to conduct business efficiently with vendors and suppliers?
Standardizing contracts that are used in everyday business, from non-disclosure agreements to purchase orders to procurements contracts, is important in order to be able to move fast.
What is the best way a small business owner can protect personal wealth and assets from business risks?
There are several things they need to do. First, they need to select a form or legal entity that will confine the risk of the business to the business. Second, they must avoid signing personal guaranties. Third, they should not commingle their personal assets with their business assets, nor allow the appearance of commingling to occur. In this regard, they should NEVER conduct their personal banking with the same bank as their business. Whenever the business is sued, the attorney representing the plaintiff will name the business owners personally as defendants in order to gain litigation leverage over them. The only way to stop this from happening is to have a firewall between your business and your personal world.
What is the best way a small business can maximize its tax deductions? (Optional)
There are a variety of ways to do this. It all begins with the selection of the form of business entity. An S corp., LLC or limited partnership will allow tax losses to pass through to the individual tax returns of the business owner. Next, it is important to understand depreciation, amortization and investment tax credits and to maximize their use. Thirdly, knowing about and using net operating loss carry forwards is useful. Fourthly, capitalizing your business with a minimum of equity and using unsecured debt from the business owner will allow the owner to pull cash out of the business as a debt repayment.
What specifically are small business owners most confused about when you first meet with them?
Which form of entity to use and why.
How can quality legal services help a small business grow?
Business planning is a lot cheaper than litigation. If the small business owner gets set up properly with a view toward minimizing legal risk, they will avoid a lot of time consuming and expensive legal problems in the future.
How can quality legal services help small businesses save money?
By minimizing legal risk, avoiding taxes legally, and getting business advice from someone who has seen a lot of problems and knows how to avoid them.
How can small businesses maximize the value of their legal team’s services?
By getting advice informally before locking into a position so that the legal team can craft the outline of the solution before positions harden and the problems become more difficult to resolve.
Should business partners have the same amount of equity in a company? Why or why not?
Not necessarily. Equity can take the form of cash or sweat (expertise). It is a negotiated outcome where the relative importance of money vs. expertise is valued and weighed into the capital structure. Among the sweat equity players, it is also valued and weighed and it can be an important consideration in motivating people.
What are the top three things a small business owner should be aware of when purchasing an existing business?
Review the business's tax returns to determine profitability and if there is outstanding tax liability, Due diligence reviewing customer lists, sale records, advertising materials, and employee contracts, Determine why the business is for sale.
Do you have any other essential legal guidance for startups that you haven't already included in this survey?
A startup should try to develop a relationship with an attorney who is not always on the clock. This person should be as much business advisor as lawyer and should be able to informally know generally what issues the company will be facing going forward. A helpful word about unseen issues with an insight into the future is worth a lot to a startup.