Startup companies face a long uphill battle to become successful businesses and in these tough economic times the climb is ever harder. However, many companies are surviving and even becoming thriving businesses. These successful entrepreneurs in charge have a firm grasp of the legal necessities and requirements of them needed to start and maintain a profitable business. Having knowledge of the business laws and regulations on a business is a necessity for creating and growing a startup company.
The Business Plan:
A company’s business plan should be both strategic and comprehensive. Since this is the blue print of the business, it needs to cover the overall encompassing concepts of the business as well as the layout for general day-to-day activities. The business will need to include the structure of the administration, sales strategies, marketing goals as well as other foreseeable goals and milestones. A comprehensive business plan will be a key tool for raising the capital needed to start the business.
A company has several legal entity choices when deciding how they would like to conduct business. These choices will have effects, both positive and negative on aspects like taxes, liability and employment structures.
The solo proprietorship is a popular choice for small startups because no further steps are needed to create a separate legal entity. The business pays taxes under the owners social security number and it treated like and extension of the owner. A major downside of a sole proprietorship is the lack of legal protection from obligations of the business.
Another popular entity is a Partnership, also described as “the association of two or more persons to carry on a business for profit as co-owners.” (Lambert, 2003) In a partnership, you get the benefits of expanded management but other the other hand; each partner is responsible for the liabilities of the other partners.
A Limited Liability Corporation, or LLC, is another very common type of business entity. In a LLC, business receives the benefits of pass-through tax treatment like an S corporation, but members are not personally liable for the obligations or debts of the other partners. A Limited Liability Partnership, or LLP is very similar and is usually favored by working professions such as a doctor’s office.
A Corporation, by definition is a separate entity, as in a separate person. Ownership of the corporation is made of shareholders, who are not directly liable for the actions of the company and can buy and sell their shares. The corporation is also made up of a team of people that are critical to the operations, the directors of corporations, officers of corporations and shareholders.
The directors of a corporation usually referred to as the boards of directors are elected to their positions by shareholders. At annual shareholders meeting, each shareholder is usually allowed one vote per share that they own. The board of directors has the authority to manage the corporation as they see fit. However, corporation’s board of directors usually opts to hire a staff that will handle the day-to-day operations. These board members are generally referred to as the executive committee or other smaller committees. These committees can be tasked with making management decision to keep operations running smoothly. Other day-to-day operations tasks maybe also assigned to individual board members and officers of the corporation. Directors of the corporation play the role of acting on behalf of the best interests of the shareholders, therefore the shareholders with, or without cause can remove directors. The board of directors is also responsible for appointing officers of the corporation.
Officers of the corporation are usually made up of a president, vice president, secretary, and a treasurer. These officers act as agents for the corporation are giving certain authority such as implied authority, which is needed to conduct daily business. The president of a corporation is not automatically given the authority make binding contracts; however, usually when a president is additionally a chief executive officer, CEO, he or she will then posses more authority. “A president with an additional title such as general manager or chief executive officer has broad implied authority to make contracts and to do other acts in the ordinary business of the corporation” (Mallor, 2010, p. 1054).
Naming the company is a very important aspect of how the company will be portrayed by the public. Many companies will use a separate trade name then their corporate name. A trade name, also know as a doing business as or DBA is a name the general public recognizes as your business. This name is often trademarked, giving the business legal ownership of the logo. A corporate name however is the name in which if filled with Secretary of State.
Before the business can choose a name, they must first conduct a name availability search with the Secretary of State in their state. Once an available name is determined, if will need to registered as wells as any DBA and trademark information. Additional trademark searches need to be conducted to ensure legal use.
Depending on the type of business, several avenues of funding can be used to raise the necessary capital to start and grown the business. Funding for startups usually comes from the owners, friends, family, banks, venture capitalists, angle investors, and shareholders.
Owners are usually on line for funding their own startups. It’s pretty hard to ask others to risk their money without the owner first taking a risk. However, often the owners will not have enough access to cash to fund their entire startups and need to ask for outside assistance.
Friends and family can be the easiest or hardest area to raise the necessary fund to start a business. Typically, your friends and family will not be as finically savvy as a bank or venture capitalist will be looking over the business plans and model. But at the same time, since there is a relationship with these people, it is very necessary to be overly carful with these funds.
Banks can offer loans to provide the capital necessary when starting a business. These loans are considered to be debt financing. Often they will require liens, such as a real estate or equipment liens, to offer secured loans. An alternative to getting a commercial bank loan is a Small Business Administration, or SBA loan from the federal government.
Venture capitalist and Angle investors will sometime step in on more risky ventures; in return they may want a more significant piece of the business or higher repayments. Angle investors, usually play a similar role to venture capitalists but they usually goes a step further by providing funding and guidance to the owners. Typically, angle investors have been successful in their own business and can offer great advice and an outside perspective.
Corporations have an advantage as they can raise funds by issuing stock options of their company. This is where multiple people can be owners of a company without being liability or debts of the company beyond their investment. “A corporation needs not only to be established in conjunction with the rules of incorporation under the laws of the individual state, but must also be maintained as such by following ongoing requirements and formalities.” (All Business, 2009)
It has been said time and time again that a company is only as talented as the people that work there. Choosing the right employees for a startup is trickier than for a regular business. Most startup businesses need employees that are capable of wearing many hats. That is to say it is necessary to have employees that are willing and able to perform many tasks over a wide range of areas as in a startup there may not be resources to hire every position needed. Employees may also need to work for less money than they would have to at an established business. Money is often tight in a startup until sales can really be established. To compensate for this, employees may be willing to accept stock in the company in lieu of higher salaries.
The best way to ensure you have quality employees is to perform a thorough interview and vetting process. During this process the qualifications of the interviewee should be checked and verified. Questions should be asked about previously work history and qualifications.
Employees of the business have certain rights such as child labor laws and minimum wages. The child labor laws are federal laws that restrict the working hours and conditions of children ages 14 to 18. Minimum wages have been standardized by the federal government and may also be higher individual states. These are a set minimum wage the employees must receive for work done on a per hour basis.
The use of consultants and independent contractors is an alternative to hiring employees for certain tasks of the business. These are people that do not officially work for the company, but are brought in to perform a specific task. Independent contractors have some advantages to the company “Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.” (IRS, 2010) However, the IRS has set strict guidelines on who is classified as an independent contractor.
Contracts between employee and employer called Employee Agreements can be beneficial to both parties. Employment Agreements can ensure that both parties know exactly what is expected of them, and how they will be compensated, for example wages, stock and fringe benefits, for these activates.
Another contract that is often overlooked, but can be critical for any startups is a Non Disclosure agreement, or NDA. This essentially a contract that is signed by employees stating that will not release any company secrets they learn while employed and even after they are employed. This is extremely important in today’s business world fore several reasons including the abuse of patients. A patient, while secure in the United States, does not always offer the same protection overseas.
Taxes and Regulations
“In this world nothing is certain but death and taxes.” (Benjamin Franklin) The same is true for companies. Taxes are different depending on the type of entity the companies is but in generally, taxes will have to be paid to both the sate in which the company operates and Federal Taxes. Generally, business will be obligated to pay, Federal Income Tax, State income tax, Unemployment tax, Disability Tax, Sales Tax, use Tax, Real Estate Property Tax, and a various amount of other taxes depending on the activates of the business such as Alcoholic Beverage Taxes.
With all these taxes and expenses to track, having a good accountant or accounting department is an essential aspect of a startup business. This will ensure that accurate bookkeeping and records are maintained and up to date. This will keep the business on track and out of trouble for with government for not paying the appropriate taxes, which could result in serious fines. Having an accountant prepare annual and semi annual finical report is an essential tool getting more investment in the business as well as well as stock holders.
For a startup business, an important decision is where is it going to be located. Depending on the type of business being conducted, different locations will serve different needs. If the business needs foot traffic coming in the door, then a popular retail location may be necessary. However if traffic is not needed, for example an ecommerce business, then more economical industrial locations will be better.
Different area will have different regulations on them called zoning laws. Zoning laws allow certain types of business activates in certain areas. The local ordinances can control the business hours of operations, exterior lighting, types of chemical that can be used, manufacturing limitations and so on. Therefore, it is vital that accurate research be conducted on the area in question before making an offer to lease or buy.
In addition to zoning laws, many states have laws that regulate the process of manufacturing that the business uses called Environmental Laws. These laws are in place to protect the environment and local residents from harmful air emissions, water pollution and storage of harmful substances
Any seasoned venture capitalists knows, the vast majority of startups companies fail in the first few years. This is why it is vital that entrepreneurs have a firm grasps of the legal necessities and requirements needed, as the business is bound to have numerous important legal aspects that need to be addressed, in order to help the company startup up, grow and thrive.