I have this recurring nightmare. I don’t have it every day, or even every month, and to be truthful it usually doesn’t even happen when I’m sleeping. It’s more of a daytime occurrence, but in substance and fear factor, it’s every bit a nightmare. And I have it often enough that it merits writing about here.
If you read my blog last week, you know that I’ve turned my attention to the legal issues surrounding the startup of a business. My nightmare relates to the scenario that occurs when a new client comes to me for the first time and tells me that he’s been running his business for a few months, things are going well, and he needs some sort of legal help with a new line of credit, or with a contract he’s about to sign with a new vendor or joint venturer, or something similar.
When I ask this hypothetical client what kind of company he’s formed, and whether I can see his formation documents, he gives me a blank stare. That’s when the nightmare begins. Both for me and, often enough, for my client as well.
When you form a new venture, it’s not enough to go to some online company or to OfficeMax, fill out a few forms, and file them with the designated state office. Sure, technically, you can do it that way. But there are too many issues (legal and accounting being only two) that need thoughtful consideration out of the gate, and a do-it-yourself kit isn’t going to adequately prepare you to think through those issues.
Instead, you need legal help.
Here are just a few of the issues that I’d ask a new client to consider and discuss with me before he opens his doors for business:
- What type of business are you going into?
- Did you sign any documents or commence any business operations before coming to me to discuss forming your company?
- Are you raising money from third parties (i.e., investors or lenders), or just from the “three F’s” (i.e., family, friends, and fools)?
- Do you have investors? Are they people or companies? Did they lend you the money, or invest it? Is there anything in writing evidencing their investments or loans to you?
- Are you minority or woman owned? How do you make that determination if you have several owners? Can you take advantage of contracting and funding programs related to your ownership status?
- Did you prepare a business plan? If you raised (or intend to raise) outside money, did you prepare an offering document? Did/does your investment offering comply with Securities and Exchange Commission regulations?
- In what state will you conduct the bulk of your business?
- Did you speak with your accountant about tax issues related to operations and the various corporate forms?
- Have you signed any documents in the name of the company?
- Do you have office space? Did you sign a lease, or do you intend to sign one?
- Did you open a bank account? Who has signatory authority on checks?
- What happens if one of the business partners decides to leave the business, or dies? Or one of your partners just decides to stop working on the business but continues to collect profit distributions? Can he do that?
It only took me about 45 seconds to think of the issues above, and I’m just getting started. My point is that when you start a business, there’s a lot to think about. Startup issues will affect the remainder of your business’s life, and your personal life (and mental health) as well. Your lawyer and your accountant need to be part of the process from the very beginning.
There’s an old saying: “Junk in, junk out” (the saying is actually a bit more, uh, “colorful” than this, but I think we all get the gist of it). In other words, it’s best to put high quality legal and accounting work into the startup phase of your business so as to avoid a lot of “junk” (in the form of liability, headache, tax, and other issues) later on down the road when you’re up and running.
I’m going to explore a number of the bulleted issues above in my next several blogs. In the meantime, feel free to call me if you’ve got any questions about any of these issues, or other legal issues affecting your business.