Starting a new business venture may be both thrilling and terrifying. Mistakes might cost you a lot of money. While starting an entity, you’ll want to avoid these six typical blunders.
When starting a business in California, the first step is determining which sort of entity would work best for your needs. For instance, would you prefer a sole proprietorship, a general partnership, a limited partnership, a limited liability company, a C corporation, or an S corporation?
Do you have any future plans to raise money from outside sources in order to expand? If so, a limited liability company or a corporation are likely the best option. Corporations are the only legal organizations able to issue stock, so if you’re hoping to go public one day, you’ll want to form a corporation.
Choosing where to incorporate your entity is the next step once you’ve decided the business type that is the best for you. Deciding to incorporate in the state where you reside and do business is often the best option. Some entrepreneurs prefer to incorporate in states like Delaware for tax and legal reasons. For bigger corporations, this makes sense, but for smaller entities, it rarely does. Why? As a result of such incorporation, you will have to deal with issues such as keeping a registered agent in both states where you live and where you incorporate, as well as filing tax papers in both states and paying both states’ taxes. For most people, the time and money it takes to do so aren’t worth it. As such, incorporating in the state where you live and work is generally preferable.
Conduct your due diligence before deciding on a business name. Search the trademark database of the US Patent and Trademark Office to determine whether the name you have in mind is already trademarked someplace else. Conduct an exhaustive Google search for the name you’re thinking of using to see if it is already in use.
In some cases, people make websites, design logos, create marketing materials, etc., before checking if the name they want to use is available or not. And don’t assume that just because a business with the same or similar name is operating in another state they won’t come after you. Even inadvertently violating someone else’s trademark can land you in significant legal trouble. If sued for trademark infringement, resolving a dispute can be time-consuming and expensive. If you are forced to drop the name, rebranding your digital and physical presence will take time and money, wasting resources that could be better allocated to other startup expenses. The damage to your brand and reputation resulting from such rebranding can be costly for a startup. Choose your business name wisely.
If you intend to form an entity with business partners, do not make this blunder. All too often entrepreneurs and small business owners pay little attention to the corporate governance documents at inception. This is especially true when forming a business with a close friend or family member. And during the early stages (i.e., the “honeymoon” phase) you may not have a need for the guidance and structure provided by these documents. However, what happens if things begin to deteriorate and you no longer see eye to eye with your partners? For example, what happens if one of the partners begins to slack off, putting in fewer hours while getting the same income as the other partners? Or how do you resolve a difference of opinion as to how best to raise capital for the business?
The purpose of corporate governance documents is to establish rules as to how the business will be managed along with the rights and obligations of each of the owners. If drafted properly, they will allow you to easily answer the above questions and safeguard your business relationships with your partners and investors.
When starting a company, it’s understandable that someone might want to avoid the expense of legal counsel when resources are limited. Before they spend any money, business owners want to make some. While it may cost a little money upfront to get corporate governance papers or legal guidance, it will often save you money and avoid costly blunders in the long run. Plus, keep in mind that this expenditure might be deductible from your company’s taxes.
Fauver, Large, Archbald & Spray, LLP has been helping clients start and operate their businesses for many years. When it comes to solving problems, we have experts who can assist you. You may book a consultation with us at our Santa Barbara, CA office.
DISCLAIMER: This Advisor is one of a series of business, real estate, employment, estate planning and tax bulletins prepared by the attorneys at Fauver, Large, Archbald & Spray, LLP. This Advisor is not exhaustive, nor is it legal advice. You should discuss your particular situation with us or with your own attorney. Our legal representation is only undertaken through a written engagement letter and not by the distribution or use of this Advisor.
