I recently asked my friend Joanna, a corporate attorney, a series of questions on starting a business. I first inquired about general advice, and then moved on to advice specific to partnering with a friend.
Below is Joanna’s advice re starting a business generally. The dos and don’ts of partnering with a friend will appear in a second installment.
General Advice Before Starting a Business
1a. You frequently work with new businesses in their very early stages. As it relates to legal issues, what are general steps every business owner should take in the early stages of starting a business?
A solid legal foundation is a critical component to every successful business. Working with a great CPA and attorney will help you take into consideration the different tax, legal, and growth factors when choosing the right type of entity structure and jurisdiction for your company. Some examples of considerations your CPA/attorney should discuss with you are if you’re raising money from outside investors or self-funding, revenue projections for the first few years, whether you want to offer stock options or other incentives to your employees, and whether you see your company as a lifestyle business or if you want to position it to be sold or IPO one day.
After you set up your legal entity, the most important thing moving forward is to document all of your business relationships, including with vendors, customers, employees, and independent contractors. Having contracts in place is the best way to protect your relationships from miscommunication or misunderstanding. Through the contract negotiation process, each side will be able to communicate their expectations of the other party and work through difficult issues that are easier discussed at the beginning of the relationship when the parties are on amicable terms.
1b. How might these steps differ when there is more than one owner?
If there is more than one owner, it is essential to have a partnership agreement in place (such as an operating agreement for an LLC or shareholders’ agreement for a corporation) that lays out the rules between the owners in regards to how the company will be controlled and managed. While a partnership agreement may be the last thing founders want to worry about, it should really be one of the first corporate documents that founders negotiate and put into place, especially while the relationship is still new and on non-contentious terms.
An effective partnership agreement should lay out the plan to resolve disagreements and detail restrictions on founders from being able to freely transfer their interests. Without transfer restrictions between the partners, the default law is that any partner can freely transfer their interests to anybody they choose. This can be problematic for a startup where the removal or addition of any team member can have a major impact on the entire company.
Other provisions that are often included are related to finances, management, voting, and non-competition, but each partnership agreement is highly customizable. The greatest benefit of putting together a partnership agreement is that it encourages founders to engage in open and honest dialogue and plan for future contingencies. This dialogue forces everyone to get on the same page in case a conflict does arise in the future.
2a. What are some issues you see working with clients who seek legal advice after the business has already been operating?
The most common error I see with clients who first seek legal advice after the business has already been operating is that they are doing DIY legal. While I always appreciate that my self-starting clients are very eager to get started, DIY legal is one area that can really get someone into trouble. The biggest risk you take when using another companies’ forms is that those documents are not customized to your growth strategy or business needs. There could also be clauses in the document that are not valid in your state, which could ultimately render the contract invalid in a court of law.
Joanna Kong is a business attorney at Vero Law Group who specializes in counseling business owners from initial formation through the various stages of corporate growth, including exits. Prior to joining Vero Law Group, Joanna was a corporate associate at the international law firm Akin Gump Strauss Hauer & Feld, where she represented large, multinational corporations in their business transactions. At Vero Law Group, Joanna works to make major contributions to her clients’ growth, as they rely on her not only for her legal advice but also as a trusted advisor for their businesses.
PLEASE NOTE: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Pinot Epiphanies, Joanna Kong, or Vero Law Group, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.