One thing is certain after a holiday weekend: a case of the Mondays will assuredly still show up on Tuesday. If a manic “Monday” has you seriously considering a new business venture – the one that will make you rich and doesn’t require early wakeups or a boss – or, if you have already decided to embark an entrepreneurial endeavor, then there are some things you should consider. Shark Tank? Perhaps. Discussion with an attorney? Most definitely. We’ll get you started with this Q&A from our good friend and corporate transactional attorney, Kandy Williams (more on Kandy below).
Q: Why work with a corporate attorney?
A: Starting a business is risky. An attorney will help you avoid mistakes that are too easy to make as a new business owner. An ounce of prevention is worth a pound of cure. What little money you spend now will save you a multiple of what you may spend down the road to clean up mistakes. This is important to think about should investors court your company in the future.
An attorney can also act as a strategic advisor, helping with your business plan, making connections, and even advising on the legal consequences of business decisions like hiring key employees.
Q: What type of business entity is best?
A: Ultimately, choosing the entity for a business depends on what type of business it is and how profitable or expansive the business is expected to become. When advising clients, we start with a few basics. The first is risk. What are the risks associated with running the business? If the business is low risk, a sole proprietor might be sufficient instead of forming an entity. If the risks are great, however, you generally want to form an entity to protect yourself from personal liability, such as an LLC, S Corp, or C Corp. Still, there are many other considerations. Certain states don’t allow for certain business to form certain entities (for example, doctors and lawyers cannot be LLCs in California). Then we discuss exit strategy. Is the plan to sell down the line or remain family-owned? If you want to bring in venture capital investors, LLCs and S Corps are not good choices because venture capital investors generally do not invest in them. We also discuss the future. How profitable is the business expected to be, and in what other states might it operate? Finally, taxes are a consideration as each entity will be treated differently in some way. After all factors are considered, I can make a recommendation for the optimal type of entity.
Q: What is the process for creating an LLC?
A: It’s not expensive and doesn’t require a lot of time. An LLC is formed by filing Articles of Organization with the Secretary of State and requires an operating agreement, which should be drafted by an attorney. In addition, there may be an annual franchise tax (which is $800 minimum in California). Since a business divorce is more common than a marriage divorce, the operating agreement should include buy-sell provisions whenever there are two or more members of the LLC. This is especially true in a community property state like California, otherwise you could end up in in business with the ex-spouse of the other LLC member. LLCs must also file a Statement of Information with the Secretary of State.
Q: What are “minutes,” exactly?
A: Minutes are basically written records of actions taken on behalf of an LLC or corporation. They’re really important because failure to keep adequate records is one of the factors that could lead to a piercing of the corporate/LLC shield as protection from personal liability (along with others such as the commingling of personal and business assets). In the case of a corporation, the corporation is required to keep minutes of meetings of, and actions by written consent in lieu of meetings by, its board of directors and shareholders. For example, when a corporation has its annual board of directors meeting and annual shareholders meeting, someone should be appointed as secretary to take notes about when and where the meeting was held, who attended (or was absent from the meeting) and what happened at the meeting. Although LLCs are less formal than corporations, minutes should also be kept for meetings and actions by written consent of its managers and members. If a corporation or LLC does not keep adequate minutes, it can be a huge headache and can cause problems down the road.