October 11, 2013
By David L. Walker, Jr.
The prospect of starting a new business can be viewed as both a daunting and exciting task. Any entrepreneur who decides to embark on such a journey must first make several decisions about what type of business is best for his or her particular situation and needs: whether to organize the business as a sole-proprietorship or one of the many types of corporate entities available under the law. It is a rare occasion when it is advisable to operate as a sole proprietorship, because such an election poses the greatest exposure for potential personal liability and offers the fewest opportunities for beneficial tax treatment of the business income and expenses. Many small businesses benefit by being organized as either a Subchapter-S corporation or Limited Liability Company, and determining which entity will best fit one’s needs will be based largely upon individual circumstances and business pursuits.
Almost any business involves some kinds (even if not formalized) of contractual engagements with customers and vendors. While many entrepreneurs are eager to “hit the ground running,” a business owner who fails to use well-crafted written contracts may create significant unintended problems and liabilities for the business, as well as unrealistic expectations from its customers. Drafting and incorporating customized contracts into the new business operations from the outset is an inexpensive way to ensure that both the business and its customers or vendors have a clear understanding – or at least a clear framework for understanding – of the terms and conditions that will govern their business relationship.
Unfortunately , some individuals, even those having the greatest entrepreneurial ambitions, are frequently deterred from their pursuits by the mountain of municipal, county, state, and federal rules and regulations that directly influence their business and the viability of their business model. A new business owner must be acutely familiar with Workers Compensation rules, Department of Labor Standards, EPA requirements, healthcare mandates, IRS restrictions, and a host of other regulations which are adopted and expanded on a daily basis. Ignorance of the law – even law that is counter-intuitive to the basics of logic – is almost never an excuse for failing to abide by it. It is therefore critical for a new business owner to comprehend the legal landscape that will affect his or her business.
For individuals who intend to partner with others in a new business, it is imperative to establish a well-drafted set of rules – either in the form of bylaws, an operating agreement, or a partnership agreement – to clearly and explicitly govern the company’s operations and each partner’s respective rights and obligations. Too often people go into business with each other on a wave of optimism, making unreasonable assumptions about the plans and expectations of their partners or co-owners. These misplaced assumptions can result in dissent, disagreement, even strife, and potentially the demise of the business. Nonetheless, in many cases, these problems may be avoided by simply establishing ground rules on the front end that will explicitly govern the roles, rights, liabilities, and benefits each owner of the business will be expected to bear. While optimism is a necessary element to starting a successful business, it is also critical to have contingencies in place to confront the possibility that things will not go as planned.
Yet another consideration for an aspiring business owner is to determine what will happen to the business if he or she dies, or becomes disabled. Too often entrepreneurs fail to account for such a possibility, and such an oversight can result in an unnecessary waste of business assets and heartache for remaining family members if the business owner(s) has not established an adequate succession plan. The need for such a plan is even greater when the business has multiple owners, because an ownership interest in a business will pass through probate like any other personal asset unless a pre-existing contractual agreement binds the parties to a separate course. Accordingly, without a well-organized succession plan, co-owners of a business could find themselves as joint owners of a business with complete strangers overnight. Such an outcome rarely benefits any of the parties.
While this is by no means an exhaustive list of the legal issues that confront a business owner, it serves to highlight just some of the considerations which must be accounted for in order to responsibly and successfully establish a profitable and valuable business.
David L. Walker, Jr., is a partner in the law firm of Flint, Connolly & Walker, LLP where he represents businesses and individuals in various legal matters.