What All Entrepreneurs Must Know About Startup Law

AdobeStock_92258605-300x181Here in Los Angeles, there are myriad opportunities for creative entrepreneurs – but it is important to protect your and your business’s legal rights before you begin operations. Doing so will allow you to get through the difficult initial startup stages of a business free from legal disputes over equity, management rights, and other legal issues.

Structuring Your Company

One of the first issues you must resolve is what type of business entity you should form. Corporations (including C Corporations and S Corporations), limited liability companies (LLC), general partnerships, limited partnerships, and sole proprietorships each have unique advantages and disadvantages. There are different tax implications and legal protections associated with each type of entity. For example, if you choose to form an LLC, you may enjoy both limited liability protection and pass-through taxation benefit (meaning no tax will be imposed on the LLC level, and all profits or losses will pass through to the members of the LLC on their individual tax returns). However, if you have capital raising needs in the near future, LLC may not be a good choice because many investors may not accept LLCs for many reasons. This is why it is important to consult with a Los Angeles business attorney about the specific needs of your particular business. An attorney can help you select the business entity type that best meets your business goals.

Equity

Another important decision is who will own your company and how ownership interests will be divided up. Equity in a company can be apportioned in many different ways. It can be divided amongst the initial investors or reserved as incentives for initial managers and other high-level employees. It can even be used as an incentive for all employees. But dividing too much equity can be a problem for a new business. It is important to have a strategic plan for your company’s equity that does not impair its ability to operate effectively. It is also important not to burden your company with too many financial obligations in its early stages. Many businesses struggle to make a profit in the first year, and this will be exacerbated if you commit to too many equity obligations.

Founders

The founders of a business typically have significant control over the direction of the business. This, in turn, means that they will be responsible for the success or failure of the business. It is important to be sure that all founders share the same vision for the future of the business. This can be accomplished by setting clear expectations and having all founders agree to them in writing. Startup documents should include provisions for:

 

  • How ownership equity will be apportioned between the founders
  • Who will be responsible for the daily management of the business
  • Who will be responsible for long-term management of the business through strategic planning
  • How the founders will resolve disputes among themselves (for example, majority rule, identifying a mediator, identifying someone to serve as a tie-breaking vote, etc.)

 

The clearer your startup documents are, the less opportunity there will be for disputes between founding members in the future. Disputes can cost companies large amounts of time and money and can spell the end of a new venture if they become sufficiently disruptive.

Call Us Today to Schedule a Consultation with an L.A. Startup Attorney

Starting a new business can be an overwhelming prospect, but it can also be an exciting opportunity to take control of your own professional destiny. You do not have to take this step alone. Let the experienced Los Angeles startup attorneys at Structure Law Group help you create a business structure and strategic plan that will help ensure your success. Call (323) 880-7500 or visit our website to schedule a consultation.

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