CORPORATE LAW & GOVERNANCE
Crucial Conversations for New Business Owners
June 1, 2017
Starting a business can be one of the most exciting times in an entrepreneur’s life – and it should be! However, a young business should not be swept away in the honeymoon stage. It is imperative for business owners to think ahead and prepare for the good, the bad and the ugly at the very beginning of their business’s life (or even before they open their doors).
It is easy for owners to plan months or even years ahead when it comes to business issues, like their marketing, operations and product strategies; these are the flowery, great and exciting things when starting a business. However, many owners fail to plan ahead when it comes to legal issues; no one wants to focus on what can go wrong.
However, addressing issues before they arise is often times the only way to ensure the business continues.
Sure, everything is great now, but what if…
- The owners have a falling out?
- One of the owners becomes disabled, insolvent or passes away?
- The company needs additional financing?
- One of owners wants to leave the business?
- One of the owners is not pulling his or her weight?
Without planning ahead, these simple issues can end up destroying a promising business.
To maximize your business’s potential, the owners need to have serious conversations about tough subjects, including (and by no means limited to):
- Selecting an appropriate business entity (i.e. LLC, C-Corp, S-Corp, Partnership). Unless the owners file the appropriate formation documents, by default the business is a partnership or sole proprietorship and the owners will be subject to unlimited personal liability.
- Ownership percentages and voting rights. 50/50 splits seem nice but often lead to “deadlocks” where the business is unable to continue if the owners do not agree.
- Valuing the company. Sure, the company may not have substantial value now, but if you do not provide a mechanism now, one owner may have significant power to de-value or overvalue the company later on when the business has appreciated.
- Buyout rights. You may love doing business with your partner, but that does not mean you want to do business with his or her spouse in the event that such partner passes away, becomes disabled or gets divorced.
We understand that it can be extremely difficult to discuss or even think about these issues when all you want to do is focus on all the wonderful things your business can become. That’s where we can help. An attorney can help foster these discussions and help give your business the best shot at success. A small investment in the beginning can be the difference between a short-lived business relationship (that often ends in costly litigation or total destruction of the business) and a successful lifelong (and even beyond) company.