Items for new owners to resolve
Are you starting a new business venture or investing in potential opportunities in the marketplace? Before you make any commitments, be aware that there are numerous practical considerations from a business, tax and legal perspective. In other words, there is much more involved than just fronting the cash.
Although the “to-do list” is too long to enumerate and explain here, the following are five primary issues that may deserve your immediate attention.
1. Form of ownership: One of the first decisions is the form of business ownership. Typically, you must choose between operating the company as a C corporation, S corporation, partnership, limited liability company (LLC) or, if you are on your own, a sole proprietorship.
Notably, C corporations, S corporations and LLCs provide protection against liability from creditors. In addition, taxes may be a major factor, especially in light of the new tax law changes involving lower corporate tax rates and deductions for certain pass-through entities (see page 1). Obtain expert tax advice for your situation.
2. Place of incorporation: You may choose to incorporate your company in the state of your main location or in a state such as Delaware, which promotes favorable rules for businesses. Consider all the costs and tax ramifications of being incorporated in Delaware versus the main place of your business.
3. Structure of ownership: For most corporations, the simplest ownership structure requires you to issue fully vested shares of stock for a designated price. But this approach is not always preferred if you are seeking financing from outside sources. In that case, you might impose vesting restrictions. Discuss alternatives with your legal adviser.
4. Intellectual property: Does your company have a “secret sauce” or other recipe for business success that will set it apart from the competition? Protecting your brand is vital to the growth of the company. There are various legal means of protecting intellectual property, including use of patents, copyrights, trademarks and domain names. Furthermore, have employees sign agreements concerning trade secrets of your company.
5. Recordkeeping: As you might imagine, keeping good records is essential to avoiding legal battles and winning the ones you are forced to fight. Resist the temptation to do things informally as your business gets off the ground. The time spent documenting actions and business relationships, including contracts and other agreements establishing responsibilities and obligations, is time well spent.
Do not overlook these five important issues and related matters. If you do things right from the start, you may avoid problems later on.