Thanks to the Internet, starting a new business doesn't have to be an ordeal. There are many websites, like LegalZoom and RocketLawyer that will guide you through the process of incorporating or filing an LLC. But is that enough? Hardly. A primary purpose of filing is to protect you from claims against your personal property and family assets. You need some comprehensive (but not costly) legal advice that these sites cannot offer. In fact, they tell you right up front that they do not offer legal advice.
Besides the legal filings to incorporate or form your LLC, there are other important steps you can and should take to help avoid or minimize personal claims. Without them, you may be nearly as vulnerable as before.
So here are six things you should do when you do set up your new business.
- Purchase ample insurance. Every business has different exposures and risks. A manufacturer will have very different concerns than a retailer. A liquor store will have different risks than a coffee shop. But at the end of the day, if claims are made against your company, insurance can be the difference between staying in business and closing your doors. Or worse if a creditor tries to hold you personally liable. Work closely with both your lawyer and a skilled insurance agent and consider all of the issues that may result in liability.
- Follow the proper formalities. Both corporations and limited liability companies have various legal procedures that must be followed or you risk that a creditor may seek to hold you personally liable for any claims. You must file annual reports and pay excise taxes to remain in good standing with the secretary of state. Corporations are also required to hold annual meetings of the directors and shareholders and document those meetings with proper minutes. Even at start up, there are various recommended documents beyond those needed by your state. An attorney can help you identify those procedures and create systems to be sure they are followed.
- Open separate bank accounts and keep proper books and records. Even if you are the only shareholder or owner of your company, creditors can try to make claims against you personally if you co-mingle money from your business and personal lives. Work closely with a good accountant who can instruct you on how to set up your accounts, how to maintain and document them, how to handle receipts and pay bills, etc. Any money that is moved back and forth from your personal to your business accounts should be carefully documented to avoid claims of improper co-mingling of assets.
- Document loans and capital contributions. Small businesses frequently need infusions of cash. If you are putting in your own money, it is best to document it very thoroughly. That includes distinguishing between a loan, which will be repaid, and a capital contribution, which is a permanent investment that typically cannot be recovered until the business is sold or through another liquidation event. Loans should be documented with a proper promissory note and other paperwork, and there should be a repayment schedule. If a loan is not documented properly, the money will very likely be considered a capital contribution which creates challenges for taking it back out later, especially if you are scrutinized by creditors.
- File a trade name certificate. If you are operating your business using a trade name (also referred to as a “dba” or “doing business as”), be certain to follow the requirements for registering that name. Failing to do this properly can support claims against you personally if you use an unregistered trade name.
- Prepare these other important documents. Do you have partners? Disputes between owners can paralyze or destroy a business. A written agreement between the owners is highly recommended to help minimize the impact if there are irreconcilable differences among stakeholders. Will you have employees? Will they have access to confidential information or your client lists? Consider employment agreements that contain non-compete and non-disclosure obligations. What about client contracts? These can help avoid misunderstandings and facilitate getting paid. Please click here to see an article on contracts that I wrote recently.
And here is one more important tip:
- Hire a lawyer. There are many considerations when forming your business. For instance, you can file papers in your own home state, or you might choose a different state because it has better laws. When forming the business, you will likely specify your business purpose. Often, do-it-yourselfers will choose a narrow purpose and this may limit you in the future if you want to change or expand. And what about the choice of entity? Many of these websites have charts to explain the various differences, but it is impossible to include every possible nuance. For instance, your choice may change if there are multiple owners or investors or if you plan to sell or go public at a later point. Hiring a lawyer now can save lots of money in the long run. And working with a lawyer who is skilled at helping start-ups might cost less than you think.
Do you need help starting a business? Let’s chat and I will show you how I can help. Send me an email, fill out my contact form or call the number above. It costs you nothing for my initial meeting or call.