The decision to start a business raises a number of legal, tax and financial issues that must be carefully examined before incorporating or starting a business. You will need to understand the tax ramifications, liability and indemnification concerns and financial reporting obligations associated with different business entities.
For corporations, you will need articles of incorporation, bylaws, organizational minutes and shareholder agreements in order to put in place desired processes relating to corporate governance, stock transfer restrictions, reporting mechanisms, dispute resolution provisions and other matters that ensure achievement of the specific goals of the owners and managers of the business. You also will want to review your existing estate plan in order to ensure that the provisions contained in the company’s articles of incorporation and bylaws agree with any provisions contained in a trust or business succession plan.
For partnerships and limited liability companies, you will need certificates of formation or articles of organization and partnership agreements or operating agreements to accomplish the goals and objectives of the business owners and, at the same time, achieve clarity in how the business will run into the future.
Business Formations and Business Contracts
In creating a new business, you should consider the following topics and issues:
• Choice of Entity: What type of entity should I use? The choices include: S corporations, C corporations, limited liability companies (LLCs), professional limited liability companies (PLLCs), partnerships, limited partnerships, sole proprietorships, non-profit organizations, and joint ventures.
• Ownership issues: What agreements and documents do I need to own and operate my business? Your choices include: partnership agreements, buy-sell agreements, stockholders agreements, voting agreements and operating agreements, investor rights agreements and right of first refusal and co-sale agreements.
• Mergers and acquisitions: What should I consider in getting my business ready to be sold or to acquire another business? Due diligence review of corporate records and contracts, sale and purchase of stock or assets or both, divestitures, liquidations, mergers, reorganizations, recapitalizations, conversion from or into an LLC, conversion into Delaware corporations or LLC.
Avoiding Unwanted Liability
Since most businesses start out as small ventures among friends or family members, money is often pooled in one account and mixed with personal funds. However, once you decide to form a business, it’s extremely important to put procedures and reporting requirements regarding company funds in place. Not only will this ensure a measure of transparency, it will protect your company against financial mismanagement by a business partner and from claims by outside creditors.