The excitement of starting a new business and preoccupation with practical business concerns frequently means owners overlook proper corporate formation and documentation. It is natural to be preoccupied with the company’s products or services and to overlook basic formation and legal issues altogether.
Before forming a new entity, the following requires consideration:
• Entity Selection & Structure: Whether selecting a Corporation, Limited Liability Company (LLC), or Limited Liability Partnership (LLP), one should consider the benefits and downsides to each entity, as well tax considerations and record keeping that may be different for each entity.
• Preparation of Shareholder/Member Agreements: A shareholders’ agreement is an agreement between the company’s shareholders that outlines how the shareholders will manage and operate the company. It also establishes certain shareholders’ rights and obligations.
• Appointment of Directors/Officer: Officers handle the day-to-day operations of a business, while the directors make important decisions about the overall management of the company and its products/services. Shareholders appoint the directors, while the directors appoint the officers.
• Record Keeping/Documentation: There are differences between the record-keeping and minutes required for distinct business entities. Corporations are usually required to keep adequate and correct written minutes of shareholder and board of directors’ proceedings. Failure to comply may cause negative consequences, such as losing the limited liability protection that a corporation provides for its shareholders. LLC record keep is simpler and less formal.
• Proper Financial Record Keeping/Avoidance of Co-Mingling Personal and Business funds: Co-mingling personal funds with that of business can lead to an array of problems that can eliminate protections individual shareholders have under the corporate umbrella of limited liability.
This is not an exhaustive list. However, keeping in mind the fundamentals at the outset of the company’s formation may well avoid the business and legal consequences of not doing so.