STRATEGY GUIDE: BEFORE YOU START A BUSINESS: BUILD THE LEGAL FOUNDATION BEFORE YOU BUILD THE COMPANY

The excitement of starting a business usually centers on the idea.

What will we sell? Who will buy it? What should we call the company? How do we market it? How quickly can we open?

Those questions matter.

But many business failures and disputes have surprisingly little to do with whether the original idea was good. Problems arise because ownership was never clearly documented, partners misunderstood their roles, contracts were copied from the internet, money was mixed together, intellectual property belonged to the wrong person, or regulatory requirements were addressed only after the business had already begun operating.

A strong business therefore requires more than a good concept.

It requires a legal foundation capable of supporting the company as it grows.

At Elkhalil Law, P.C., we encourage entrepreneurs to view legal planning as part of business planning—not as something to address only after a problem occurs.

Choose the Entity Based Upon the Business You Intend to Build

One of the first decisions is how the business will be structured.

A sole proprietorship, partnership, LLC, and corporation can have very different implications for ownership, management, taxation, liability, investment, and administration.

The correct answer is not simply “everyone should form an LLC.”

An LLC may be an excellent vehicle for many closely held companies because it offers considerable flexibility. A corporation may make more sense for a business expecting particular types of investment or ownership structures. A professional business may have separate licensing considerations.

The entity should fit the business plan.

The Georgia Department of Revenue expressly treats business structure as a foundational consideration when registering a new Georgia business, and Georgia businesses may also need state tax registrations depending upon their activities.

Decide Ownership Before There Is Value to Fight Over

Founders sometimes begin operating before determining exactly who owns what.

Someone says, “We'll split it later.”

Another says, “We're basically 50/50.”

A third person begins helping with the expectation that he or she will eventually receive equity.

When the company is worth $5,000, these conversations may seem informal.

When it becomes worth $5 million, they are not.

Ownership should be documented.

If ownership is being given in exchange for future work, consider what happens if that work is never performed. If an owner leaves after six months, should that person retain the same percentage permanently?

Businesses anticipating equity compensation or outside investment should think carefully about vesting, dilution, transfer restrictions, voting rights, and future capital needs.

The earlier these issues are addressed, the easier they generally are to resolve.

Establish the Rules Between Founders

Even founders with identical ownership percentages may have very different roles.

One may contribute money. Another contributes intellectual property. Another manages operations. Another generates customers.

A founders agreement, operating agreement, shareholders agreement, or combination of documents can establish how those contributions translate into rights and responsibilities.

The agreement should address management authority, voting, compensation, distributions, additional capital, transfers, departures, death, disability, and dispute resolution.

Successful companies change.

The founders' agreement should anticipate that change.

Separate Business Finances Immediately

One of the simplest but most important business practices is separating company finances from personal finances.

Open dedicated accounts.

Pay business expenses through the business.

Document capital contributions.

Document loans.

Record owner distributions appropriately.

Maintain accounting records.

A business account should not become the owner's second personal checking account.

Financial discipline improves accounting and tax administration and reinforces the practical reality that the business is being operated separately from its owners.

Obtain the Necessary Registrations and Accounts

Creating an entity with the Georgia Secretary of State does not necessarily complete the process of starting a business.

Depending upon its activities, a business may need a federal Employer Identification Number, Georgia tax accounts, sales-tax registration, withholding registration, unemployment accounts, occupational tax certificates, professional licenses, or industry-specific permits.

Georgia's Department of Revenue currently requires specified information for new business tax registration, including an EIN, business structure, legal name, NAICS code, and responsible-party information.

Registered Georgia business entities also have continuing annual-registration obligations. The Georgia Secretary of State currently provides that annual registrations are generally due by April 1 and may be filed beginning January 1.

A business should maintain a compliance calendar rather than learning about deadlines through penalties or administrative problems.

Put Important Business Relationships in Writing

Contracts are not simply documents used when parties distrust one another.

They are tools for preventing misunderstandings.

A good agreement should identify what is being provided, what it costs, when payment is due, how long the relationship lasts, how it can be terminated, who owns resulting work, who bears particular risks, and what happens after breach.

The specific provisions depend upon the relationship.

A customer agreement is different from an employment agreement.

A vendor agreement is different from an independent-contractor agreement.

An investor agreement is different from a commercial lease.

Businesses should resist the temptation to use the same generic template simply because it is convenient.

Protect the Company's Intellectual Property From Day One

Many startups spend enormous energy creating a brand but surprisingly little time determining who legally owns it.

Consider the company's name, logo, website, photographs, written content, software, designs, processes, customer data, domain names, social-media accounts, and proprietary systems.

If an independent contractor creates those assets, the company should address ownership contractually rather than assuming that payment automatically solves the issue.

The same applies to founder-created intellectual property.

If one founder developed important technology before the LLC was formed, determine whether the technology is being assigned or licensed to the company.

These questions are far easier to resolve before investors or buyers conduct due diligence.

Classify Workers Correctly

Another early decision is whether people performing services are employees or independent contractors.

The label in the contract is not necessarily dispositive.

Businesses should evaluate the actual relationship under applicable tax, employment, and other legal standards.

Misclassification can create problems involving payroll taxes, wage obligations, benefits, unemployment, and other liabilities.

Hiring should therefore be treated as a legal and financial event—not simply an operational one.

Buy Insurance for the Risks the Entity Cannot Eliminate

Entity formation is not a substitute for insurance.

Depending upon the business, insurance may include general liability, professional liability, commercial property, commercial auto, cyber liability, employment-practices liability, workers' compensation, or specialized industry coverage.

A company should identify its major operational risks and determine whether those risks are contractually allocated, insured, or retained.

Think About the Exit While You Are Entering

Founders often think exit planning is relevant only to mature companies.

It begins much earlier.

What happens if one owner wants to leave?

What if an owner dies?

Can ownership be transferred?

Could the company eventually be sold?

Would investors be able to invest without restructuring everything?

The legal architecture created at the beginning can either facilitate growth or force the business to rebuild later.

Build for the Business You Want to Become

Forming a business may be relatively easy.

Building one correctly takes considerably more thought.

The objective should not be merely to register a company.

The objective should be to create a business with clear ownership, reliable contracts, appropriate insurance, protected assets, accurate records, regulatory compliance, and governance capable of surviving growth.

At Elkhalil Law, P.C., we assist Georgia entrepreneurs, startups, and established businesses with formation, operating agreements, founders agreements, contracts, governance, transactions, and the legal issues that arise throughout the business life cycle.

A strong legal foundation does not guarantee success.

But a weak one can make success much harder to keep.