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Posted: November 15, 2012

So you want to start a business?

Some words to the wise

Cindy Wolf

Working for yourself can sound very attractive, particularly if your job search hasn’t been yielding good results or your employer seems less than appreciative. Go ahead and do some Internet research. Check out your business name at the Secretary of State and US Patent and Trademark Office. But don’t go it alone, hire a lawyer and accountant.

            As an attorney, I represent business owners of many stripes. In the startup world, I find the personalities fascinating. They all have a passion for what they do and they also have mad skills in certain directions. They also lack skills in others. What are the most common mistakes they make?

  1. Filing their own corporate or LLC formation documents online and thinking they are done with the legal work.
  2. Pulling a form set of business organization documents off a website (often for hundreds of dollars), not reading them, understanding them or filling in the blanks.
  3. Believing that you and your cofounders understand each other completely and always will, and failing to assign rights and obligations in writing.

As my good friend and accountant has said many times: The Secretary of State has made it too easy to organize a business. For $50, you can fill in a simple online form, and they will accept your company (as long as the name hasn’t already been taken). While I appreciate the efficiency of electronic filing, most entrepreneurs do not know what else they need to do to get the benefits from that $50 filing.

The primary reason to have a corporation or LLC is to keep the liabilities of the company within the company and not allow its creditors or claimants to become your personal responsibility. This is known as the “corporate veil.” If a corporation never has an organizational meeting of the shareholders to issue shares, elect directors (who must also have an organizational meeting), adopt Bylaws and observe other corporate formalities, this advantage of having a corporation evaporates. LLC’s have different documentation requirements, but the same concern about losing the protection of that corporate veil if they aren’t done.

Virtual law firms abound with seemingly cheap solutions to these documentation requirements. I have yet to see a set of Internet documents that a company used that were working for them. And the real crime is that they paid the same or close to the same for those documents as they could have at an actual attorney’s office. If they had sought live advice up front, they would have gotten an organization that meets their needs and has all the blanks filled in properly - and continuing advice on keeping up with their future corporate governance requirements. When the entrepreneur tries to pay taxes and the ownership interests of the cofounders were never allocated in the organizational minutes or Operating Agreement, interesting (by that I mean confusing and distressing) things happen.

Finally, we’re all human. As much as we want to get along with our cofounders, there are bound to be disagreements. Sometimes they are inconsequential or easily resolved, but other times the future of the business hinges on whether a certain action will be taken or not. Shareholders and LLC members have rights under Colorado law, but the code only goes so far and if the company hasn’t adopted the rest of its foundational documents, these rights may not be available. How many votes are necessary to take a major action like bringing in a new investor? Can you walk away from the debt your cofounder incurred without your approval? There is definite risk in these situations and unraveling them will cost far more than doing it properly to begin with.

Honeymoons don’t last forever and the tax man comes every year. So, far from being too expensive and limiting, your lawyer and your accountant are your friends. Include these advisors in your business plan and let them help you build a successful business.

 Cindy Wolf is a Colorado lawyer with more than 25 years experience representing large and small domestic and multinational companies. Her expertise is in corporate law and commercial contracting, with an emphasis on international issues, technology licensing and the Internet. She can be reached at cindy@cindywolf.com  or visit her blog at www.cindywolf.com

This publication is provided for informational purposes only. It does not constitute legal advice. There is no implicit guarantee that this information is correct, complete, or up to date. This publication is not intended to and does not create an attorney-client relationship between you and the author.

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