This excerpt, courtesy of A.J. Yolofsky, Family Business Laywer®, was originally published on Avvo. The guide can be read in full here.
This guide will give you information about the four pillars upon which every business foundation is based. Ignoring your business’ foundation means you are essentially flying by the seat of your pants not knowing where you might be exposing yourself to risk.
Pillar 1 – Legal Structures
The first part of organizing your business is choosing the entity for your business. There are different types of entities, such as corporations, limited liability companies, partnerships; or, if you are just by yourself – a sole proprietorship. Quick note, the sole proprietorship is the most risky type of structure because it is not actually a structure, it’s just you, which means that your personal assets are at risk if you cause damage or default on a creditor.
There are different reasons for choosing a corporation, an LLC, or a partnership that depend on the type of governance, control, tax, and life of the business. Many people quickly choose the LLC structure because it is popular and easy to set up. However, the LLC structure requires that the members spell out their relationship between themselves, their contributed capital, how decisions are made, and importantly, how members can come and go. Often, many do-it-yourself people forego the LLC operating agreement, which means that they then rely on the language of that particular state’s LLC statute for the default operating agreement.
The next part of legal structures is documenting your relationships. Many small businesses use the “handshake” method of making deals; however, this creates enormous uncertainty and puts your business at risk. Indeed, the closer a relationship you have with someone (e.g. spouse, sibling, or good friend) the MORE you need to properly document your agreements. The important agreements to have are the entity agreement, vendor agreements, client/customer agreements, and employee agreements. If you are working with particular technical or proprietary knowledge, you will also want to have confidentiality and non-disclosure agreements. Without these agreements in place, your business will be operating from a place of extreme uncertainty. Ask yourself, what happens if something goes wrong?