Typically, when a person consults an attorney for help in forming a new company, he will have thought of an initial plan for the company, who the owners will be, and what the company will do. However, a good business owner will also work with his attorney to help finalize his ideas and consider solutions to potential legal problems.
Tip #1 - Owners of the Company
Who are the owners of the company and why are these people owners? Do you need their business experience, their technical expertise, special skill, financial funding? If the company will need funding, it may be possible to attract investors who are willing to loan the company money rather than take an ownership position.
Tip #2 - Rights of the Owners
What are the decision-making rights of the owners? Does each owner have equal voting rights or are some limited? Do the owners all have the same percentage interests or is someone a majority owner? Keep in mind that in a 50-50 ownership company, if the owners disagree over a major decision, the business of the company can come to a standstill. In extreme cases, a disagreement between owners (with no method of resolving the conflict) can cause the company to fail.
Tip #3 - Profits and Losses
How are profits and losses to be allocated? Does each owner have equal distribution rights? Who decides when distributions will be made? In the event of losses, are owners required to make capital contributions? Are they allowed to make additional capital contributions or loans to the company?
Tip #4 - Management of the Company
Who conducts the day-to-day management of the company? How much autonomy does management have and how is management paid?
Tip #5 - Buy-Sell Agreement
Does the company plan to adopt a Buy-Sell Agreement to limit transfers of shares in the event an owner leaves the company or becomes unemployed, disabled, divorced or deceased?
Tip #6 - Type of Business
What type of business does the company plan to conduct? Is this plan supported by proper contracts like employment agreements and leases?
Tip #7 - Formation of the Entity
When will the entity begin doing business? Has it already acquired assets? The owner should wait for the official formation of the entity before doing any sort of business without entity protection.
Tip #8 - Tax Issues
The owner needs to consult with his CPA or tax advisor to make sure he understands the tax issues associated with the business and has procedures in place to report and pay all taxes on time.
Tip #9 - Regulations and Special Permits
Is the business heavily regulated so as to require special permits? Are there governmental restrictions on who can be an owner of the company?
Tip #10 - Exit Strategy
Does the business have an exit strategy? Is the exit strategy to grow and sell the business to an outsider or is the business created primarily to provide an income for the owners until retirement?
We often see new business owners get so excited about their new ventures that they jump in to doing business without thinking through all of these important issues. A new business is exciting, but new business owners should temper their excitement with a good plan by considering these 10 tips.