Considerations When Starting A Business: Seeking Professional Counsel

As you get started with your new business, there may come a time when you will need to seek professional counsel from a good business law firm and/or CPA firm. Even if your circumstances may not warrant professional counsel at the onset of your new business, you may eventually need to seek counsel as your business grows. Speaking with a good business law firm and/or CPA firm can help you stay on the straight and narrow and in compliance of the constantly changing local, state and federal regulations, requirements and laws.

Legal Counsel

A good business law firm can provide an array of vital services to your business. They can provide key legal counsel during the initial setup and establishment of your new business, helping you to better understand what the legal implications of your new business venture will be. They can offer important insight to help you operate your business legally and avoid unnecessary risks. They can also serve as a critical line of defense between you, your business and potential third-party litigation.

Business law firms can help you figure out the best legal entity for your business (ex: LLC, Corporation - C-Corp or sub-chapter S), assist with filing the necessary paperwork with the appropriate federal, state and local agencies (ex: Department of State, IRS) to setup the legal entity, prepare Operating or Shareholder agreements specifically customized for your business and act as a designated agent for legal notices. They can help prepare and review contracts/agreements (ex: client contracts, NDAs, merger agreements, employment contracts) and they can step in to provide legal aid/counsel in the event of legal action for or against your business.

CPA Firms

A good CPA firm can provide your business with an array of vital Accounting services. They can provide guidance on the different types of legal entities best suited for your business (ex: LLC, Corporation - C-Corp or sub-chapter S). They can provide insight on the potential tax liabilities and obligations you, as a business owner, should be aware of and can expect. CPA firms can handle a variety of required tax reporting and filings for federal, state and local jurisdictions. They should stay current on all the latest changes to the tax laws and requirements to keep you (and the rest of their clients) compliant and up-to-date on the potential impacts those changes will have on you and your business.

For instance, if your business is a single-member LLC treated as a disregarded entity for tax purposes or a multi-member LLC taxed as a Partnership, the owners or LLC members typically do not take a salary through payroll. An owner of a single-member LLC will take a draw and members of a multi-member LLC taxed as a Partnership will receive what are called Guaranteed Payments in lieu of salary via payroll. In either case, unlike salaries via payroll, payroll taxes are not withheld on the income. As such, owners/LLC members are responsible for making quarterly tax payments to the appropriate federal, state and local tax agencies on the applicable earnings. Failure to make the appropriate payments may result in a huge tax bill and tax penalty at tax time.

In addition, single-member LLCs, multi-member LLCs taxed as Partnerships and corporations taxed as a sub-chapter S (including LLCs that elect to be taxed as a sub-chapter S) are treated as pass through entities for tax purposes whereby the business entities themselves are not taxed. Taxes on income/profit are passed down to the individual owners (usually reported on a Schedule K-1) and reported on their individual tax returns. While LLCs taxed as Partnerships and corporations taxed as a sub-chapter S (including LLCs that elect to be taxed as a sub-chapter S) are not taxed at the entity level, they are still required to file the proper annual Partnership or Corporation tax returns for the applicable tax year.

This is just a scratch on the surface, but you can see how complex the tax obligations and implications can be if you don’t understand how the tax laws affect you and your business and/or have appropriate guidance from a tax professional like a good CPA firm. You and your business can easily fall into a tax maze. A good CPA firm should be an active partner in helping you and your business remain compliant with all applicable tax laws and requirements.

There will be times where it may be necessary for your business law firm and CPA firm to collaborate and work together. For instance, when deciding what type of business entity to form for your business (ex: LLC, Corporation - C-Corp or sub-chapter S), it’s a good idea to get insight from both a legal and an Accounting perspective as different types of business entities will have different requirements and implications. While your law firm and CPA firm won’t necessarily tell you which type of entity to form, they should advise you, make recommendations and offer pros and cons. You’ll want to gain as much insight from their counsel to make a well-informed decision.

It should go without saying that both business law firms and CPA firms can be quite expensive so it’s important to know how and when to properly use these professional resources to avoid unnecessary costs. Far too often, business owners use professional counsel prematurely, fail to use counsel until situations get out of hand, don’t know the right questions to ask and/or how to lead, manage and streamline the conversations. Before you speak with a business law firm or CPA firm, take some time to gather your thoughts and put together an overview of what you want to discuss and the questions you want to ask. Try to keep the conversations on point and focused. Don’t be afraid to ask questions if you are unsure about something being discussed. At the end of any conversation with a business law firm or CPA firm, you should feel comfortable that you have gotten the answers that you needed to get from the conversation.

Considerations When Starting A Business: Putting Together A Game Plan

Now that you’re ready and committed to starting a business, you need to put together a game plan. There are a lot of moving parts when it comes to starting a business so it’s important to be organized, detail-oriented and have all your ducks lined up. You’ll first want to take a “view from 10,000 feet” and then drill-down into the specific details.

During the process, gather information and be prepared to answer a series of questions related to your business venture. This information will be extremely helpful during the setup of the legal entity and establishing business operating parameters as you begin operations. In addition, if you need to consult with professionals (ex: business law firm, CPA firm), this information will help to streamline the conversation. You’ll learn quickly that streamlining conversations and meetings are crucial when dealing with law firms and CPA firms, especially if you don’t want to rack up enormous legal and accounting bills.

Below is a list of questions that you should seek answers to. This list is not intended to be a complete list of questions but serves as a starting point in putting together your game plan.

  • What type of business do you plan on starting?

  • Will you be the sole owner or will there be other owners?

  • Do you or any of the other owners have non-compete agreements (or similar) that would prevent or prohibit you and/or the other owners from joining or participating in this business venture? Are there any potential conflicts of interest?

  • Are you or any of the other owners currently participating in or are a part of another business venture, whether in the same industry or a different industry?

  • Will the business be owned by individuals, another business entity or a combination of individuals and business entities?

  • What will be the name of your business?

  • Is the business name unregistered and available to register with your state’s Department of State?

  • Are there any other individuals, companies or organizations using this business name or names similar that may cause confusion for clients/customers and/or pose legal issues (ex: trademark)?

  • Is the corresponding Internet domain name available for your business name?

  • Are the corresponding social media handles available for your business name?

  • What type of legal business entity is best for your business (ex: LLC – single-member LLC, multi-member LLC taxed as a Partnership, LLC taxed as a sub-chapter S, Corporation – C-Corp or sub-chapter S)?

  • What will be the designated role (ex: job function or area of responsibility) of each owner?

  • What does each owner bring to the table of the business venture?

  • How will the business be managed (by the owners, by designated managers, by owners and designated managers)?

  • How much starting capital do you and your partners have to invest in the business?

  • How much capital will you and your partners need to invest in the business to cover startup costs and at least the first three to six months of business operating expenses?

  • If you and your partners don’t have the necessary capital, how will you and your partners secure the necessary capital (ex: bank loans)?

  • Do you and your partners have a solid credit history and a good/excellent credit rating? Do you and your partners have collateral, if necessary?

  • When do you expect to officially begin business operations?

  • Will the business operate in a single state or multiple states?

  • Where will the principal office for the business be located? Will there be a single office location or multiple office locations?

  • Will you require commercial space for your business?

  • Will you be hiring employees?

  • Will you be using independent contractors or external personnel?

  • What resources will you require to operate your business (ex: supplies, equipment, software)?

  • Do you currently have or are you working with existing clients?

  • Who are your target clients or customers?

  • What’s your business plan or strategy for acquiring new clients or customers?

  • If your business requires inventory, how do you plan on acquiring, storing and securing inventory?

  • Will your business be required to collect sales tax?

  • Does your business operate within an industry that has industry-specific or governmental requirements (ex: certifications, memberships, licenses, permits, insurance)?

Considerations When Starting A Business: A Reality Check

So, why do you want to start your own business? Time for a REALITY CHECK!

This is a very important question to ask yourself and you’ll want to think this through carefully. You’ll recall in a previous post, Considerations When Starting A Business: An Introduction, I mentioned that starting your own business is not a decision to take lightly nor a decision to make hastily. If you plan to start your own business, you need to consider these “driving” words – discipline, dedication, passion, motivation, drive, sacrifice, determination, focus and commitment. These words describe what you will NEED to have to drive yourself and your business forward.

You may dislike your current job or your boss, feel unchallenged or stuck in your current position or simply need a change of scenery. While these factors may be part of the answer to why you want to start your own business, they alone should not be the ONLY reasons why you want to start your own business. You could just as well find a new job at a new company or seek a position with greater challenges and responsibilities. When you ask yourself WHY, you need to look at the big picture and your short and long-term goals. Challenge yourself to make sure this is the right decision for YOU!

As a business owner and entrepreneur, you will have a vested interest in your business. Its success and failures will have a direct impact on you. You will be responsible for setting the direction and steering your business through good times and bad. You will need to be the face of your business to clients and prospects. You will need to make investments in your business, take risks and make sacrifices. You will need to take an active role in the day-to-day management of your business, its activities and in making critical, time-sensitive decisions. You must familiarize yourself with every aspect of your business operations especially understanding financials and the importance of A/R, A/P, working capital, gross revenue, net income, cash flow and the P&L.

Sure, as your business grows, you can hire key, trusted people to help you steer and manage the business, but in its infancy, you will need to be extremely hands-on and involved. Even with the right people, you cannot be passive or take a back seat to your business. This is a mistake that some business owners make. If you want to be an employee, then find a job and be an employee. But, if you want to be a business owner and entrepreneur, you need to step up to the plate and be willing to give it your all.

Considerations When Starting A Business: An Introduction

So, you’ve reached a point in your life and career where you want to take a leap outside of your comfort zone and are considering starting your own business. Maybe you’re tired of being an employee, dealing with a bad boss or working in a toxic work environment. Maybe you’re tired of changing jobs or putting up with a flurry of layoffs. Perhaps you’re tired worrying about job security or you’ve gone through so many mergers & acquisitions you’ve lost track of who your current employer is. Perhaps you don’t feel challenged enough or feel that you aren’t tapping into your full potential. Whatever the case may be, you’ve made a choice to embark on a new journey that will hopefully lead to many potential opportunities, personal & professional growth, achievement and self-fulfillment.

Starting your own business can potentially open the doors to various opportunities and be rewarding in many ways. However, it is not a decision to take lightly nor a decision to make hastily. If you plan to start your own business, you should consider these “driving” words – discipline, dedication, passion, motivation, drive, sacrifice, determination, focus and commitment. These are “driving” words because every single one of these words describe what you need to have to drive yourself and your business forward. If these words don’t hold any meaning to you, you’re probably looking at your business more like a costly hobby. If that’s the case, don’t do it!

There are many things you should know and understand before you start a business. We’ll touch on a number of these things in future posts. However, one important point to touch on briefly is that there are many factors that can affect the success or failure of your business. While you can take steps to mitigate the impact of many of these factors, there may come a time where the costs will far outweigh the benefits of continuing your business operation. To quote the song lyrics from Kenny Rogers’ “The Gambler,” - “You've got to know when to hold 'em. Know when to fold 'em. Know when to walk away. And know when to run.”

There’s a big difference between seeing light at the end of the tunnel and throwing money and resources into a big black hole. This is something you need to understand right from the start. You don’t want to “rob Peter to pay Paul.” You don’t want to be in debt. You don’t want to go bankrupt. You don’t want to be insolvent. If you reach a point where you’re going to shut the doors forever, you want to wind down operations in an orderly fashion on your terms!

If you haven’t been scared away and you’re still considering starting your own business, stay tuned!