You've reached a point in your professional career where entrepreneurial aspirations are fueling your desire to start a new business. Perhaps you are in the early stages of developing a product or service offering and have ideas that you want to work into a business plan. As you work toward turning these big ideas into a company, a critical question remains: What is the best way to launch your new business? Starting out on the right foot can mean the difference between early success and avoidable challenges for many companies. There are many issues facing startups, and in this two-part series from my perspective as a corporate lawyer, I will touch on the most common legal implications about launching a new business.
Select the Right Form of Entity
Entity selection is important at the beginning of a business. For example, whether to form a limited liability company, a “C” corporation, or an “S” corporation. Choose the right entity for your business, and incorporate or form an entity as early as possible. If chosen incorrectly, it could have adverse tax impacts, and it could be costly to change entity types. Further, incorporating or forming your entity early in the process will help prevent intellectual property claims from outsiders and provide you with limited rather than personal liability with respect to third parties. Consult with your accountant and lawyer early in the process to help you make the right decisions for your individual circumstances.
Choose Compatible People
Having the right partners, co-founders, and employees can be critical to the success of your business. Make sure that your interests are aligned and that personalities are complementary. In many cases with startups, money is scarce, so employees need to understand the commitment involved in working for equity and little to no salaries. Ensure that any employees you hire are “at will” employees. Limit or avoid making guarantees of employment, equity grants, and compensation, including promises of deferred salary arrangements. Check out my article on advice for going into business with a friend here.
Ask for Advice
Trust the right people and ask advice from those that have a vested interest in the outcome of your business. This is not a place to cut corners; free advice can end up being the most expensive. Make sure that the people giving you advice have relevant experience. People who stand to benefit from the success of your business — whether personally or professionally — tend to add the most value.
Secure Intellectual Property
Chances are, the intellectual property of the business may be its most significant and valuable asset. Enter into “assignment of inventions” agreements with all co-founders, key employees, and consultants to make sure the company actually owns its intellectual property prior to creating or developing anything. You do not want to run the risk later on that critical intellectual property necessary for the business is not actually owned by the company. This can become a big problem down the road if developers or inventors of company intellectual property are no longer involved with the business. Have anyone who has access to your proprietary information, including future partners and potential investors, sign nondisclosure agreements if they will view business plans or other proprietary documents. At a minimum, any documents you provide to potential investors and partners that are not publicly available should state conspicuously that they are confidential and proprietary.
Carefully Select the Name of the Company and Consider Trademarking It
Make sure the name you select is not infringing on another company’s name if that company provides similar goods or services as your company. It is important to note that just because you are able to register your business name with the state when you form your entity or you are able to obtain a domain name, does not guarantee that you can obtain a trademark for that same name, or that your name is not infringing a business name in another state. With this in mind, you may want to consider a name in which you can obtain your own trademark registration, and trademark that name as soon as possible if the name has value or you believe it will accrue value over time. This will provide you with additional protection in case someone later infringes on your name. Consult with an intellectual property attorney from the start in order to streamline this process. Additional information on trademarking may be found here.
Mind Legal Documents
Whether your business is a corporation, partnership, limited liability company, or other form, your documents should be drafted to accurately reflect the business terms and arrangements among the partners/co-founders. The documents should provide maximum flexibility yet sufficient restrictions on management, as well as restrictions on transferring equity. Regardless of what business form you select, make sure that you can repurchase or reclaim equity from co-founders and employees if they were to leave the company.
For more information on how to set up a new business, stay tuned for Part 2 of “The Smart Guide to Setting Up a Startup” next month, which will include, among other things, information on granting equity of the business and raising capital.
Pamela Zimlin is a member of the DailyWorth Connect Program. Read more about the program here.
This article is made available by Pamela Zimlin and Royer Cooper Cohen Braunfeld LLC (“RCCB”) for informational purposes only, not to provide you with specific legal advice. By reading this article, you understand that there is no attorney-client relationship between you and RCCB. The content of this article should not be used as a substitute for obtaining competent legal advice from a licensed professional attorney.