The prospect of starting your own business is exciting, but you should take this step only after careful planning. Forming your own business will require you to confront many legal and financial issues. Any one of these issues could spell doom for your business, planning for them is critical to your future success.
You’ve considered the market carefully, talked it over with family, friends, and business associates, obtained leads on customers, and even written a business plan. Now what? The possible legal and financial considerations for a start-up business are vast. However, the most important issues can be summarized into three main areas: potential conflicts with your previous employer; protecting the new business and its owners; and securing adequate funding for the new business.
Issue #1: Conflicts with Your Previous Employer
Your new venture will obviously affect your relationship with your previous employer. If your start-up is in your previous employer’s area of business, they will naturally be concerned about your new business. State and federal laws may protect its trade secrets and proprietary information. If you want to start your new business before leaving your old job, state laws enforce duties of loyalty and care on certain employees. Also, you must address any covenant not to compete, covenant not to solicit, or confidentiality agreement you may have with your old employer.
Overall, you should remember that the law provides protections for the “legitimate business interests” of employers that might prevent you from pursuing your new business. While it is usually acceptable to use general skills and expertise learned from your previous employment, you must ensure that you do not take advantage of secret information or unfairly use your previous employer’s assets or customer list in your new business.
Issue # 2: Legal Liability & Taxes
Now that you have successfully left your employer, your plan should address liability and tax considerations related to your start-up through choice of your new business entity. Should you conduct business as a sole proprietorship, general or limited partnership, corporation, or limited liability company? You might have heard that owners of sole proprietorships are subject to full personal liability, general partners are liable for every other partner’s acts in the partnership, and certain business forms create higher tax burdens for their owners.
Furthermore, when more than one person is an owner of the entity, it is essential to clearly define in writing your agreement for dealing with issues such as capital contributions of the owners, management of the business, sharing of profits and losses, how to resolve disputes among owners, transfers of ownership interests, and exiting the business. These issues are best addressed upfront and in writing to avoid misunderstandings that inevitably occur whether the business performs poorly or very well. Other liability issues include certain business licensing requirements, insurance needs, standard business contracts, and intellectual property. For more information on how your business entity choice can impact your liability and tax status, click here.
Issue #3: Funding Your New Business
As lack of adequate funding is the main reason most start-up businesses fail, your plan must address funding. A common rule of thumb states that your start-up should have adequate funding to cover all operating expenses for at least one year. In order to obtain funding, your business may have to acquire debt or seek capital from other investors. Lenders will likely require you to provide personal guarantees and offer personal assets as security for any debt your business acquires, such as using your house as collateral for a loan. Lenders will also need a great deal of information about the owners, the business, and a detailed business plan with reasonable projections. Investors will generally require much of the same information, if not more. Offering ownership to new investors is also subject to numerous federal and state regulations. Ensure that you are prepared to take such steps and have the necessary information for lenders or new investors before you attempt to borrow funds or raise equity for your business.
How to Address These Issues
In summary, take the time to develop a good business plan that addresses all material issues facing your particular start-up. Among other issues, the plan should address possible conflicts with old employers, the choice of a business entity (including liability and tax considerations), written agreements between the owners, and the provision of adequate funding. The attorneys in Venn Law Group’s corporate practice group have decades of experience in helping entrepreneurs assess the issues discussed in this article, find smart solutions that fit their businesses, and put those solutions into practice. Contact us today.
Edward B. Woodall is an attorney at Venn Law Group who works incorporate law and commercial real estate, including leasing, financing, taxation, business structures, and dispute resolution. He is passionate about helping business owners solve a variety of complex legal problems, and has performed more than 100 hours of pro bono work. In addition to his law degree, he also has a background in history and Spanish.
