Recently, a distraught business owner came to me in desperation.  He had identified an area of need in the market and had just the expertise to fill it.  An industry insider, he had contacts in place and was ready to hit the ground running and quickly.  Then he got undercut and sued.  And that’s where his American Dream turned into a nightmare. 

With mere handshake deals in place with the vendors he used, he was growing frustrated by vendors treating him like a guinea pig and copying his business model to strike out on their own and steal clients.  He also failed to adequately review the agreement with his manufacturer and, when a consumer was injured, was left panicked about whether he was liable or covered by the manufacturer.  To make matters worse, because he had not formed a business entity, he was worried about losing his personal assets. 

Excitement and energy runs high when you’ve got the next great business solution – but before you embark on making your millions, pause to consider whether you’ve laid a solid foundation for the mansion you want to build.  As we all know, if the foundation is cracked, the house may fall.

Business Name

It is imperative that the business name you plan to use is not already being used by another entity.  If it is, you run the risk of being sued (at worst) or being forced to stop using the name after you’ve invested significant sums in signage and marketing – not to mention building recognition.  You can ensure your name is available for use by doing various name searches, such as checking with your state’s Secretary of State for similar business names and registered state trademarks, as well as searching the United States Patent and Trademark Office database for prior users.  Ideally, you should retain an attorney to do a comprehensive analysis of prior uses and trademark availability.

Business Structure

What business structure best suits your business? Your business could be structured as a sole-proprietorship, partnership, limited partnership, corporation, S-corporation (which is really just a tax distinction for a formalized company), or limited liability company. How to choose?  There are a multitude of considerations, such as whether you are taking on investors, your liability exposure and tax issues.  There isn’t an article that can  be written, or that has been written, which can definitively tell you how to proceed.  It is imperative to take stock of the company’s purpose, business strategies, financing and future goals in order to determine the right fit.

Raising Dough

It is critical to consider, at the outset, how you are going to raise money to operate. Unless you independently wield enough money to self-fund your venture, you’ll need to look elsewhere for operating capital.  The first issue to consider with respect to this is how taking on a lender or investor will affect your taxes.  Typically, it is best to issue shares (for corporations) or units (for limited liability companies or partnerships) and make sure to claim them as a tax benefit when your new business has little or no value.  The last thing you want is to get a substantial tax bill after someone has valued your business for significant amounts when you could have paid the taxes for your ownership at little to no value when you first began operating. 

Next, you must consider your realistic goals, risks and future outlook in order to strategically determine the best way to take on investment capital or structure loans.  Common issues to weigh are the benefits of industry professional advice, lack of control and limitations on growing or selling your business.  For instance, taking on capital from angel investors (friends, families and the like) may offer you more control, but places strain on the relationships and often provides you with no added value beyond the investing capital.  Signing with a venture capitalist, on the other hand, may come with useful experience, contacts and industry know-how, but almost always means the loss of significant control.

Watching Your Assets

When you establish relationships with investors, lenders, suppliers and other vendors, you may be disclosing confidential information – or trade secrets.  Or perhaps your business is built on intellectual property.  Prior to discussing proprietary information with others, you should consider entering confidentiality and non-disclosure agreements. The more confidential information or intellectual property your business plan contains, the more important these agreements become.

Works for Hire and Vendor Agreements

Most businesses will need to enlist the help and cooperation of a variety of vendors to get started – from logo designers to marketing (social and otherwise) strategists to supplier and distribution channel assistance.  Every relationship you create should be governed in writing by an agreement that will protect you and protect your business.  One rule of thumb is if money exchanges hands, you ought to reduce the transaction to writing.  While this may sound like a headache and an expense, a couple of considerations may ease your pain: (1) better to deal with a slightly slower roll out to get agreements in writing than to find yourself embroiled in legal troubles, and (2) the cost is usually much less than you imagine.  A good lawyer won’t reinvent the wheel for every contract they draft on your behalf; they’ll draw from their vast pool of experience and prior agreements and use their business and legal acumen to properly tailor contracts to your needs.