Legal Issues Every Startup and Small Business Owner Needs to Cover Before Opening the Door
Newly emerging, fast-growing businesses are exciting and rewarding—both for entrepreneurs and our regional economy. Starting your own business is the combination of hard work and a dream come true. Before hiring your first employee or greeting your first customer, there are important legal issues to address. Founders often don’t realize the importance of building a solid legal foundation for their business until it’s too late. From crafting a business plan, to structuring an optimal business entity, to adopting important business agreements, and also adhering to employment law—make sure you’ve covered your bases to position your venture for success.
Venture Out with a Plan
Benjamin Franklin said, “If you fail to plan, you are planning to fail.”
This oft-quoted adage is sound advice for entrepreneurs launching a new business. Whether you’re just starting out, growing your venture or seeking outside capital, you need a written business plan. In fact, investing time—and having patience—to craft a written plan ahead of time will pay off as your company grows.
Writing a business plan will force you to think about your business ideas, your markets and your goals in an objective and meaningful manner.
The analysis assists you in defining your customers and understanding market demographics, recognizing growth prospects and trend influences, and identifying strategies to keep competitors at bay. Identifying and resolving potential legal and business issues on paper ahead of time is much less painful than correcting oversights once real capital is at stake.
Your business plan will help you and your advisors establish the right steps to starting your business, including what you need to do to achieve your goals and what resources your company will require. While your business plan is not a legal document per se, it nonetheless sets forth an invaluable comprehensive overview of your venture that you’ll revisit and tweak as a key strategic and operational guide, and that you’ll be expected to provide to lenders and investors when seeking funding. You should share your plan with an experienced startup attorney, who can help with executing your strategy and tackling specific action points to facilitate launching, funding, operating and, someday, selling your business.
Build a Solid Foundation with Appropriate Entity Formation
Wondering what is one of the most common mistakes made by startups and new business owners? Not establishing the right legal entity structure for their business and long-term objectives.
In Virginia, a business may be conducted as a corporation (including the S-corporation), a general or limited partnership, a limited liability company (or LLC), a business trust, or a sole proprietorship (a business owned by one person without legal significance separate from its owner). An LLC often will be the preferred structure for most small businesses, owing to its flexibility and flow-through tax attributes. Every business is unique and every situation demands careful attention to structuring.
Often, entrepreneurs fail to establish the most appropriate legal structure for their company—or worse, embark upon their ventures as sole proprietors, without knowledge of the exposure to significant personal liabilities or adverse tax and longer-term business consequences resulting from misinformed startup decisions.
Organizing an appropriate legal entity for your business is one of the most critical undertakings for a business owner. At some point in the business’ lifecycle—whether amidst litigation, consideration of joint venture opportunities, a tax audit, outside investor interest, or a merger, acquisition or sale—the choices made at the onset will make or break your long-term prospects. Well-informed attention to the technical legal, tax and financial considerations relevant to structuring an entity best suited to your specific business is crucial.
Put Partnerships in Writing (and Everything Else, For That Matter!)
Just as good fences make for good neighbors, good, carefully-drafted agreements among business partners make for good partnerships. If you and a partner are launching a business—whether he or she is a third-party investor or a day-to-day colleague—a written partnership agreement is a must-have document.
The partnership agreement is a legal agreement between the owners of a company. For a company organized as an LLC, the agreement is an Operating Agreement among members, and for a corporation, it’s a Shareholders Agreement among shareholders. No matter the title, these agreements serve the same critical purpose: To put parameters around the relationships of the owners and address basic questions that are easier dealt with up front.
For example, what services, cash or property is each owner bringing to the table? Who is responsible for managing the business? If a bus hits your partner, does his or her ownership interest go to a spouse, and, if so, will the spouse have a say in management decisions? If a partner exits, what do they get and under what terms? How is available cash distributed? Do owners get a preference upon a sale or liquidation? How should profits and losses of the business be allocated among the owners for tax purposes? What rights do owners have to transfer their interests, and do other owners have a right of first refusal? Having a well-considered written partnership agreement among business founders is critical for heading off disputes and promoting harmony.
Employee Handbooks: Establish the Culture of Your Business
For employees, an employee handbook is just what it sounds like—a reference guide where employees obtain basic information to questions about company policies, benefits, or the nature of their employment. The handbook is also much more—it serves as a shield for many employee-related battles.
Creating a handbook makes you think about your business: What kind of culture do I want to establish? What tasks do I want to delegate? What should my disciplinary policy look like? Do I need a rule on e-cigarette use at work? Should I have a dress code?
There is a lot to think about when running a business of any size, and the handbook helps you create a written culture. It helps you decide what kind of expectations you set for your employees and what happens when they do not meet those expectations. After all, it is your business; you must take this opportunity to establish the company’s policies and procedures.
More importantly, a well-written employee handbook is your first line of defense in responding to all manner of claims by former and current employees. Successful unemployment claims cost you money. Proper policies assist you in defending a former employee’s claim for unemployment benefits. If you terminate an employee for misbehaving or poor attendance, you must cite a clear-cut company rule and corresponding disciplinary action the employee violated. The handbook also protects against allegations of harassment and many other workplace labor issues. An employee handbook is the best way to put employees on notice of company rules and help you keep an orderly work environment.
Consider the long-term goals of the business, company culture, employer expectations, and protecting your profit margins. It’s a good idea to establish workplace policies and procedures on Day One and the employee handbook might be the best way to start the process.
Two attorneys from Woods Rogers’
Emerging Growth and Labor & Employment practice groups weigh in on key legal issues to address before Day One.
About the Authors: Corey S. Davis is a member of Woods Rogers’ Emerging Growth practice group in Lynchburg, where he advises rapid-growth companies and entrepreneurs as well as VC and private equity funds in all aspects of their business. Leah M. Stiegler is an associate at Woods Rogers in Roanoke, where she assists the firm’s Labor & Employment and Litigation practice groups.