What to Ask: Incorporation and Startup Tips | Tom Shnaider, Esq.
Starting a new business? UpCounsel attorney Tom Shnaider explains what every startup should be asking their legal team about Incorporation and Startup Tips4 min read
When should I form a business entity for my new venture?
One of the main purposes of forming an entity, such as an LLC or corporation, is to protect current and future assets. Since forming an entity comes with a cost, formation can be delayed a bit; however, the trigger should be when you start doing business with any other person or company. For example, if you are developing a product on your own, you can likely hold off forming a company. However, as soon as you hire a service provider, are ready to enter into any contract, or start selling your product/service, it is time to form the company. It may take up to eight weeks to have a state approve your company, so make sure to plan ahead.
Should I operate as a sole proprietor, partnership, LLC or corporation?
Sole proprietorships and partnerships do not offer any protection for personal assets, and are almost always a bad idea. The benefits of an LLC are that it offers the best protection for personal assets and is much easier to manage than a corporation. However, a corporation offers the most flexibility in terms of fundraising and venture capital. Choosing the correct entity can save you a lot of time and money in both the short and long run, so it is worth obtaining a detailed consultation not only from an attorney, but also from your CPA if you have a complex personal financial structure.
When it comes to forming an entity, should I do it myself, use a discount service such as LegalZoom or Clerky, or use an attorney?
The most important aspect when forming an entity is to have custom documents (such as an operating agreement or bylaws), and only an attorney can ensure that yours would be well-suited for your business, both in the short term and long term. Discount entity formation services certainly have their usefulness, but you will find that the generic documents provided by such companies would need significant revision that in the long run would cost you much more than the reasonable pricing offered by UpCounsel attorneys.
What are the best ways to protect my personal and business assets?
In addition to forming the correct entity, you want to ensure that you enter into appropriate contracts with all other individuals and companies with whom you do business. This includes proper terms of service and privacy policies for your website, good agreements with your service providers and any co-founders, suitable customer contracts, non-disclosure agreements, and good lease agreements. Additionally, obtaining the right insurance for your business is very important.
When should I get an attorney involved in my business?
Immediately! You don't need a lot of money to hire an attorney. Waiting too long may lead to mistakes that will be more expensive to fix than getting an attorney to help you get it right the first time. A good attorney will provide a consultation to make sure you know what to expect in the near future and will help you prioritize your legal needs. Additionally, a good startup attorney can help you formulate a good business plan and model to help you operate efficiently and raise funds if needed. Startup attorneys are sensitive to budget constraints and typically can offer very affordable solutions.
What is the best way a small business owner can protect personal wealth and assets from business risks?
Form an LLC or corporation as soon as possible, with documents that are customized to your business.
What specifically are small business owners most confused about when you first meet with them?
Types of company and contracts needed
How can quality legal services help a small business grow?
A good attorney will help with having an efficient business plan tied to proper legal services.
How can quality legal services help small businesses save money?
Fixing mistakes is often much more expensive than having an attorney help from the start and get things done quickly and economically from the outset.
How can small businesses maximize the value of their legal team’s services?
The client and attorney should be very clear as to what services will be needed in the near future, prioritizing them, together with associated costs.
Should business partners have the same amount of equity in a company? Why or why not?
Equity structures vary from client to client. It is important to have a firm understanding of each founder's expectations and memorialize the relationship on paper to avoid any miscommunication in the future.
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?
Finding the right attorney and having him or her involved early on is crucial and will save the client time and money both short term and long term. An attorney can help the client prioritize legal needs and often for less money than the client may think