For most new entrepreneurs, the idea of navigating down their own path causes a whirlwind of emotion. They experience excitement, anticipation and elation along with feelings of nervousness, fear and confusion.
The future is unknown for everyone, but entrepreneurs, especially first time entrepreneurs, live in the unknown. This is because business formation is more experimental than definitive. Entrepreneurs have many questions to answer regarding the operational aspects of their business.
Some of the first and most prudent questions are the ones not asked. They are the ones that protect you, your family and your other interests if something should go terribly wrong. But, they are related to the legal structure and organization and are often overlooked.
Luckily, of all the questions that the entrepreneur must ask, these first questions can be the most universally definitive. Certainly, the legal process of business formation can be much easier to decide on than market research strategy, sales strategy or networking strategy.
Nevertheless, legal consultation from a licensed professional is extremely important. As many entrepreneurs learn early, their time is their most important commodity. In many cases, their time is better spent on revenue generation and customer acquisition than on gathering the information necessary to be competently represent themselves.
As with anything, not all legal representation is created equal. Finding an attorney that fits your needs and understands your vision is the most important thing that you can do for your business and for yourself.
With that in mind, we have compiled a list of questions to ask your attorney (and yourself) to bring your entrepreneurial dreams to life.
Let’s start with the most critical question…
QUESTION 1 - Do I need to form a corporate entity (and if so which is the right one for me)?
The entity you ultimately choose will greatly affect your liability, taxation and record-keeping burden.
Generally, the answer to whether need to form a corporate entity will be yes, so before you go into your attorney's office or schedule a call, familiarize yourself with the different entity types.
Here is short summary of the most common forms of business entities available to entrepreneurs.
Sole proprietorship - This is very common entity and very easy to form. It requires almost no legal input before starting. You decide how it will be run and can change your business on a whim. However, there is one huge downside, the owner is personally liable for EVERYTHING done by the business. Some of the risk can be mitigated with insurance depending on your industry.
Partnership - If you have a cofounder or are starting a business as husband and wife this might be the structure for you. Two or more people must agree to share the profits or losses of a business. The primary advantage is 'pass through' taxation. Meaning that each of partner will report any income or losses on their individual income tax returns. One disadvantage is that like sole proprietorships, each partner is personally liable for the financial obligations of the partnership. However, if the entity has been formed as a limited partnership, then it will will enjoy limited liability.
Corporation - You may have heard some debate in the news about corporations being treated as people. This is true insofar as corporations having similar rights. When a company is established a separate entity is created. This entity is distinct from the owners. This means that unless the corporate form is abused, the business entity must be sued separately from the owners.
However, there are a couple of disadvantages. First a corporation can be expensive to form. Second a corporation requires extensive record-keeping. Third a corporation will taxed and the owners are taxed in what is know as ‘double taxation.’ Note this is not applicable if it is an S corporation (the S is for small), because S corporations allows for pass through taxation.
Limited Liability Company - If you want a lower cost, easier to manage entity that still has the advantages of limited liability the LLC might be the right structure for you. The two main advantages of an LLC are that it allows profits and losses to pass through to the owners like in a partnership or S corporation. Second, it allows for limited liability. Meaning its owners are protected from lawsuits like corporations.
LLCs have gained a lot of traction in the last couple of decades, but there are not right for everyone.
QUESTION 2 - Do I have all my business licenses?
Every business needs some form of license or permit to operate legally. But, license and permit requirements vary depending on the type of entity, type of business, and location. Make sure all of these are in place BEFORE you open your doors to customers and clients. Use the resources below or contact an attorney to make sure you are compliant.
Federal - You can visit the the U.S. Small Business Administration (SBA) website to make sure that you are complying with all federal guidelines. What Federal Licenses and Permits Does Your Business Need?
State - You will have to visit the state's website where you plan to do business to check the requirements. The SBA provides a helpful link to each state’s website. What State Licenses and Permits Does Your Business Need?
Local - You may need separate city or county permits depending on where you are doing business. The local Chamber of Commerce is the best place to start. Give them a call and ask about local licenses and permits or check their website.
Additionally, there are many professional services that you can reach out to handle your business licensing needs or you can call a professional startup attorney.
QUESTION 3 - How do I fund my business?
Most small businesses need money to operate. Here are some common sources of capital for startups.
Friends and Family - There is a saying that the first people to fund a new company are friends, family, and fools. This should be your first stop when looking for funding.
SBA Loans and Grants - The SBA has a number of loan programs designed for business owners. The Basic 7(a) Loan Program is the most common type of loan. Click here to see if you qualify.
Crowd Sourced Funding - You have undoubtedly heard of Kickstarter or similar crowdfunding sites. These sites allow anyone from anywhere in the world to invest a small amount of money in exchange for a product or service.
Angel of Venture Capital - Venture capitalists (VCs) invest in high-risk, high-growth startups which traditional financial institutions (banks) can’t. Angel investors are wealthy individuals who invest just before entrepreneurs would qualify for VC funds.
Here is an article explaining the differences in more depth.
QUESTION 4 - How do I grow with my business?
Running a business is both mentally and physically draining. Here are some tips to make this exhausting process more sustainable.
You also must avoid the Founder’s Disease. Here is an article on Quora on how CEOs avoid being fired.
The Founder’s Disease is when the initial founder(s) do not gain the necessary skill set to meet the demands of the organization as the company's scale increases. It can result in failure of the company.
The symptoms most often include an inability to delegate or to maintain control over the right parts of the organization.
You can secure more control of your company using an attorney. If you are going to take VC money, be like these famous CEOs and negotiate.
Larry Ellison - 25% stake in Oracle
Mark Zuckerberg - maintains control of Facebook through “supervoting” shares
Evan Spiegel - he and cofounder Bobby Murphy each own 22.4% of Snap Inc
These CEOs maintained control of the board and retained a large percentage of ownership of their company.
Founders who negotiate greater control rights ended up receiving on average $3.7 million more than those who failed to negotiate! As famous VC and entrepreneur Paul Graham stated, Mr. Zuckerberg likely would have been forced by his venture capital investors to sell Facebook, but Facebook has always been controlled by Mark Zuckerberg.
In other words, the rights negotiated by founders when taking venture capital matter. If you are contemplating taking outside money, make sure you hire counsel and negotiate.
There are also many lessons to be learned from others that were not as successful such as Steve Jobs or Cisco’s Sandy Learner.
QUESTION 5 - Do I have what it takes to run a small business?
Okay, this isn’t really a question for your lawyer. In fact, it would be much better directed at a therapist. However, the only person who is qualified to answer this question is YOU.
Here is some guidance though, don’t start the business unless your motives are more than money. Because as long as you are the rule and not the exception you are not going to make very much money your first year. Also, if you are doing it for the wrong reasons, everyone you come across is going to know. So make the decision based on a combination of passion and what makes sense fiscally.
Keep asking questions
Intelligent entrepreneurs ask a lot of questions and then listen carefully and resolve to incorporate their newly acquired knowledge into their actionable plans.
Although legal expertise is expensive to purchase, it can truly save you in the long run, so be sure to get answer to all these questions before you need them. Your future self will be very appreciative.
If you would like help answering these questions, us Click here to get started or give us a call at (310) 955-5828 to schedule to speak to a representative of The Founder’s Attorney.
The Founder’s Attorney is a no pressure legal service provider. Whether you are here as a potential client or to further your knowledge base, we wish you the best of luck with your new business and ask you to follow our blog for courteous and informative articles on all things business formation.
This article was written by Curtis Roberts, an attorney at The Founder's Attorney with a special thanks to Christian Odegard.
If you have any questions or suggestions he can be reached at firstname.lastname@example.org.
This article is for general information and entertainment purposes only. The views of the author are their own and do not represent the views of The Founder's Attorney. The information presented should not be construed to be formal legal or financial advice nor the formation of a lawyer/client relationship or any fiduciary duty.