A while ago I told you some reasons why lawyers are expensive. I also gave you some examples of how I have seen clients get in trouble. Now, I’d like to give you some thoughts on how to stay out of trouble.
To start, give serious thought to whether you want to go into business with someone, and who that person is. One of the business coaches with whom I work and consult, David Ferguson, generally recommends that his clients who are starting a business do so on their own and “outsource” the skills they don’t have to prevent these types of problems. I think we’ve all seen good friendships and even family relationships ruined by trying to do business together. While we would all like to live in a “handshake” world, the truth is that we do not.
Ask yourself a few questions: Does your potential business partner have the types of skills that can complement yours? Are they outgoing where you are more reserved? Are they financially savvy where you are not? Are they organized? Are they a marketing wizard or a “natural” salesperson?
If you are going to go into business with a partner, you need to decide what type of entity under which you are going to operate. If you don’t form an LLC or a corporation, then you will be a partnership. Each partner can be liable for the decisions, actions, and inactions of the other partner! And, liability can pass through to each partner individually!
If you decide to form a “corporate” entity—which would include Limited Liability Companies, as well as C and S Corporations—then you should talk about which type, and why you are choosing that type. Each has advantages and disadvantages.
If you have the next great idea and think you will want to take the company public, then you may want to consider a C Corporation. However, there are potentially negative tax consequences to doing so.
A Subchapter S Corporation has “better” tax ramifications for smaller businesses (in terms of number of people involved,) but there are limitations on who can be involved, how marketable the business itself is if you decide to sell. And there are still formalities that must be observed or you run the risk of liabilities passing through to you individually if you do not follow them.
Limited Liability Companies are a relatively new corporate animal. They provide the limitation on personal liability that corporations do, but are relatively informal. The rules relating to Limited Liability Companies do not require meetings and minutes like Corporations do. They also do not have limitations on numbers of owners or the types of people or entities that can be owners.
Regardless of the type of entity you choose, an agreement on how it will operate is critical. A Partnership, Operating, or Shareholder’s Agreement, should define the roles of the partners/members/shareholders. For example, who will take responsibility for taxes? I talk to the Florida Department of Revenue more frequently than anyone should feel comfortable doing. Making sure that the tax liability owner is doing his or her job, and having checks and balances (no pun intended) is important for the other owners to try to limit their own exposure.
Owners should try to define their roles. Determine how much anyone can spend without approval and how decisions will be made. Decide whether there will be different rules for different levels of decision making. Outline how to bring someone—or at least their money—into the company and how to get them out. Decide what your end game is.
Dispute resolution is something that you should consider before you even start. Having a set procedure for dealing with the inevitable disputes actually helps to prevent or quickly resolve them since there is a procedure and the disagreement is not just left to fester. My agreements include multiple levels of dispute resolution that increase with formality and effort as the problems become more serious or intractable.
You can see that, like most projects, the results stemming from starting a business are much better if you do the “prep work” first. Don’t just try to slap the paint on as you go. No one can anticipate every situation. If you give the foundation of your business serious thought, chances are you will keep it strong.
• Bruce H. Vanderlaan, Attorney at Law, P.A. • 239-220-3326 • Bruce@BruceVanderlaan.com