Starting your New Company: Things to Know

Great startups begin with the germ of a great idea, but as you run with that there are many things you need to know in order to give yourself the best chance to succeed.

Learn more about some of the fundamental aspects of creating a company that can grow and thrive, and change your life as well as the lives of your partners, employees, and customers.

Creating and maintaining effective partner relationships

If you choose to create your business as a partnership you will benefit from the additional experience, creativity, connections, and determination. However, the partnership relationship is often a tricky one to navigate, and it’s crucial that you go into the arrangement with a solid strategy on how to best benefit from each other’s contributions while limiting the risks that come from co-ownership.

You can have silent partners who simply invest in the company, and you can have working partners who may invest but who principally earn sweat equity and income from the business.

To have the best chance at creating an environment that allows everyone to thrive, partner roles and duties need to be explicitly written out in the operating agreement (of an LLC) or by specific contracts and agreements.

These rules of operation need to be followed in every situation, or the liability protections of the company entity can be placed in jeopardy. Defer to each other when appropriate and collaborate when necessary and you’ll be on the road to partnership success.

Choosing a business entity that offers the best benefits and protections

One of the first big decisions you will be faced with as you get your startup running will be what kind of entity the business will be registered as. There is no single right answer for every business, so you will need to do your research into the pros and cons of each type of business entity and think about what will work best for your company.

Sole proprietorships don’t require you to fill out forms to create them, and they’re the default entity for a self-employed person, so they’re a common way to start a business. General partnerships require more paperwork but don’t in themselves create a shielding entity that can protect partners from liability arising from their operations.

The LLC (limited liability company) structure makes sense for many startups because it is simple to create and offers robust personal liability protection. It has evolved from the partnership principle, with the additional protection that a corporation traditionally has offered.

The operating agreement, which is the central document driving the LLC, offers great flexibility in managing roles, duties, incomes, and interests in the company, and it can be amended as needed.

While it is simple enough to learn, say, how to form an LLC in California, or any state, online in a few minutes, much thought should go into how the operating agreement can best be structured – professional advice could be crucial here for the long term.

Then there is the corporate structure, with the most popular configuration being the C-corporation. C-corporations offer similar personal liability protections to LLCs, but one area where they differ significantly is in the ability to issue shares of stock.

LLCs don’t allow this, whereas with a corporation you can easily and robustly issue shares of stock to investors as compensation for their capital infusion. On the other hand, creating a C-corporation may reduce some of your operating flexibility, and certainly will require you to pay corporate income tax which can be avoided with an LLC.

The most important thing is to find the structure that makes the most sense for you and understand what its specific advantages and disadvantages are.

Safeguarding your IP for the short and long term

Inexperienced entrepreneurs will find any number of excuses for putting off developing a comprehensive intellectual property (IP) protection strategy in the early stages of a company.

It’s tempting, but dangerous, to think, “we’re not a high-tech company so it doesn’t matter,” or that “I can worry about other things once the supply chain gets sorted out,” or “we’re not big enough to be on anyone’s radar yet.” Every company creates IP and it can be one of the most valuable assets over time. IP is always under threat unless you proactively work to protect it.

There are routine steps to take to give you legal recourse in the event of an IP dispute. Have new hires and partners verify that they are not bringing over any proprietary information from a previous venture or employer.

Commission all freelance work for hire only, and keep documentation on file for every employee indicating that they consent that all work done for the company, using company resources, and on company time is the property of the company.

Staying vigilant to keep your liability protections strong

The personal liability protection afforded by the correct business entity is one of the main reasons entrepreneurs decide to form one. It’s important to shield personal assets from business liabilities that may arise – anyone in business can be sued, and often will be.

The protections are not bulletproof, however. Business officers must act in accordance not just with laws and regulations but also with the terms of their agreements and company structure requirements.

Failure to do so can open a company up to a court’s choosing to pierce the corporate veil of the entity’s protection and reach to personal assets. To limit this risk, avoid commingling your business and personal funds; keep diligent financial records of all expenses and reimbursements to company officers, and leave a clear paper trail showing how decisions are agreed upon and funds are handled.

As long as you do your part, you’ll be able to enjoy the robust personal liability protection that gives you peace of mind as you work to achieve your dreams.