Starting a company can be an exciting experience. But before you get too far down the road, there are a number of legal questions and strategic decisions that should be considered. In this blog entry we highlight five such questions:
- Who owns the company and how is ownership determined? If you are not the sole owner, who are the other owners and what is their involvement? Do they have a high degree of business acumen or technical know-how, or have they invested heavily in the company? Will they (or you) be providing “sweat equity” rather than a financial contribution? Resolving these issues – and putting them in writing – at the outset can save you a tremendous amount of trouble down the road.
- What rights come with ownership? Does each owner possess equal voting rights or are there limitations on some? Is the ownership of the company equally divided or is there a majority owner? How will you make a decision if you can’t reach consensus among the owners?
- What is the profit and loss allocation scheme? Who decides when distributions are made, and does each owner have equal distribution rights? You also need to decide if distributions are made when any of the owners draw a tax liability, and if capital contributions are required in the event of losses.
- Who actually manages the company? Who oversees the day-to-day management of the business? How much autonomy does the manager have, and how are they paid? If an owner does not work for the company, are they entitled to benefits such as stock options?
- Is there an exit strategy in place? If family members plan to take part in the business at some point, is there a plan in place to transfer ownership to them? Alternately, is there an exit strategy to sell the business to an outsider after the owner(s) retire or decide to move on?
When you’re launching a business, legalities are often the last thing on your mind. I understand! Frankly, these legal issues aren’t the most exciting thing in the world. But laying the proper legal groundwork from the outset can help you avoid crippling problems down the road – so don’t neglect these matters. Please contact me today if you’d like to learn more!
Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.
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