Starting a Business – An Introduction on How to Start a Business
Starting a business is the beginning of an adventure. Set yourself up for success by thinking through and addressing some of the common issues that arise when starting a business. Listed below are a few of the more common questions I have received over the years when working with clients who want to learn how to start a business. The list is by no means exhaustive and look for additional articles covering additional topics in the future. Questions or comments?
Every business is unique, and the issues they raise often depend on their particular facts and circumstances. If there are other topics you would like to see addressed or if you have questions about how to start a business, do not hesitate to
What Type of Entity Should I Use When Starting a Business?
There are a variety of business forms that can potentially be used to start a business. The most common entities used are corporations and limited liability companies. If formed and maintained correctly, both corporations and limited liability companies can offer certain protection to business owners with respect to their business.
A prospective business owner should work with a business lawyer and accountant or tax advisor to determine what type of entity would be a good choice for the business. In some cases, both a corporation or a limited liability company could be a fit. In other cases, one type of entity would work better than the other, perhaps for specific tax reasons or as a result of certain activities or transactions the entity might wish to pursue in the future. When deciding how to start a business, picking the correct entity type is often the first step.
Working with your advisors to choose the best entity type at the outset is advisable as changing your business entity type down the road can be expensive and may have adverse tax and other consequences. Note that some business owners choose to start a business in a jurisdiction outside of the State in which the business resides for certain reasons which may be appropriate, but which are outside of the scope of this article. In addition, to find out how to start a business in the professional services area (e.g., engineers, accountants, etc.) one may have to review specific regulatory and compliance requirements and, in some jurisdictions, use a special type of entity permitted by statute.
I Have Selected My Type of Entity, What’s Next?
Incorporating a Corporation; Forming a Limited Liability Company
Once you have chosen your type of entity, you should work with a business lawyer and accountant or tax advisor to complete the documents necessary to incorporate your corporation or form your limited liability company. These initial documents are filed with State authorities and are a necessary step in starting a business. There may be specific provisions and issues which need to be addressed in these initial documents, so working with a business lawyer and accountant is imperative.
Other Legal Start-Up Formalities; Shareholders’ Agreement or Operating Agreement
Corporations have to observe certain corporate formalities at the outset. These are often addressed through written consents prepared by the business lawyer who has assisted in incorporating the business. These consents will address the adoption of by-laws, the designation of initial officers, the issuance of stock and other matters.
For a corporation, it is customary for a corporate book to be ordered to hold the corporation’s official documents and the minutes and consents of the corporation’s shareholders and directors. The corporate book also contains stock certificates, a stock ledger and a corporate seal which are used when issuing shares to the owners.
If a corporation is to have more than one shareholder, a shareholders’ agreement should be discussed and put into place. Limited liability companies should have an operating agreement, even if only between a sole member and the limited liability company itself. Shareholders’ agreements and operating agreements are important documents that address key issues regarding the management, operation and control of the business.
They not only protect the business, they protect the owners as well. These agreements address a wide range of issues including how the business is managed, who can become an additional owner of the business, how owners can exit the business, restrictions on the transfer of shares or membership interests (for New Jersey limited liability companies) and what happens if an owner dies, becomes permanently disabled, is terminated or his or her equity is subject to claims by third parties. As you can tell, when you are asking how to start a business, you must also be considering exit strategies and related mechanisms to maximize enterprise value in the future. Indeed, a key goal of starting a business is typically to create something that will continue to increase in value, attract investors and even potential acquirers down the road.
While shareholders’ agreements and operating agreements often take time and expense to prepare and finalize, they are well worth the effort in that they reflect the expectations of the owners and provide mechanisms to address organic changes that occur with the business.
Filing the NJ-REG for New Jersey Businesses
To complete a business registration with the State of New Jersey, a New Jersey business must complete the NJ-REG which can be done online. After completing the NJ-REG, the business will receive a New Jersey Business Registration Certificate. This is an especially important document to have as it is often required when doing business with the State of New Jersey and public entities.
Permits, Licenses, Certifications and Registrations Applicable to Starting a Business
Permits, licenses, certifications and registrations, oh my! Yes, this part does sound like something from the Wizard of Oz. But do not lose focus, as these are often some of the most important preparatory steps to start a business. Indeed, if you are required to obtain permits, licenses, certifications and registrations and fail to do so, it may even constitute a criminal offense. Where do these requirements come from? They originate from law and regulations applicable to your business.
Depending on your business, where it is located and where it does business, it may be subject to a wide variety of federal, state and local laws and regulations. Some of these may apply to the business itself, and others may apply to those involved in the business. For example, some businesses must obtain licenses covering the business itself, and additional licenses are required for individuals involved with the operation of the business.
In some cases, these laws and regulations may even impact the choice of entity for the business itself, as noted above. Businesses operating internationally may also be subject to international treaties, conventions and the laws of foreign jurisdictions that may impact their businesses.
As part of planning for the start-up of a business, a business owner must investigate applicable laws and regulations and raise their questions and concerns with their advisors. Many of these laws and regulations are available online or directly through the governmental authorities responsible for their enforcement. Many governmental authorities also issue helpful Frequently Asked Questions (FAQs) documents that can help answer common questions that business owners may have about the applicability and scope of particular laws and regulations. When in doubt, a business owner may want to consult with its counsel to seek clarification from the applicable authority.
What Contracts are Common When Starting a Business?
There are a variety of contracts that are involved in starting and maintaining a business. In addition to the shareholders’ and operating agreements mentioned above which address internal governance and management issues, a business will likely need to prepare, review and negotiate a number of other contracts. Here are some examples:
Contracts with Employees
When starting a business, an entity should memorialize its relationships with its employees and independent contractors in written agreements. With respect to employees, a business may have a mix of “at will” and contract-based employees. Most employees are typically “at will”, which means that the employer and the employee can terminate the relationship at any time and for any or no reason (but not for an unlawful reason).
At-will employees typically sign an offer letter and a Confidentiality, Inventions Assignment and Restrictive Covenant Agreement that set out the basic economics of their relationship and contain provisions relating to intellectual property, non-competition and non-solicitation that are intended to protect the business.
Key employees, such as executives, may have a more comprehensive employment agreement that deals with these and other issues such as severance, resignation, participation in bonus or incentive plans and other matters. As you can tell, when asking how to start a business, you are also asking how to establish relationships with a wide variety of internal and external individuals and entities that will be involved in the ecosystem supporting the business.
Contracts with Independent Contractors, Vendors & Suppliers
A business may engage a variety of independent contractors, from individuals acting as consultants to large companies supplying goods and services critical to the business. These relationships should be documented in writing and negotiated to protect the interests of the business.
There are many issues that arise when dealing with independent contractors that are different than those that arise with employees. Consideration should be given to intellectual property and insurance issues, as well as other key aspects of the contractual relationship.
With all agreements, the owners of a business should discuss how different principles of law work and may differ in practice depending on the nature of the relationship (e.g., employee vs. independent contractor) or the terms and conditions presented by a third party. A business lawyer can advise the business on what provisions are common, what are not and what terms and conditions present more risk than others. This will help the business owner spot these issues when dealing with future contracts.
Contracts with Customers
A business will also need a contract or other terms and conditions that govern the relationship between the business and its customers. A business lawyer can assist in the preparation of these contracts, and discuss provisions that can protect the business and its interests if the relationship with the customer does not go as planned.
These provisions include limitations on liability, tailored warranties with specific limited remedies and an appropriate disclaimer, choice of forum and attorneys’ fees provisions. These provisions can assist the business in defending claims and also in collecting what is due from a customer if it has not paid.
Generally, unless a business contract contains an attorneys’ fees provision (or a statute or Court rule otherwise provides), a business cannot collect attorneys’ fees from its customer in addition to whatever amounts are owed. While attorneys’ fees provisions are often negotiated or even excluded from a contract, many companies selling goods or providing services will include them in their contract templates.
What Insurance is Suggested When Starting a Business?
Insurance on the Business Itself
When starting a business, an insurance advisor should be a member of the team. While a business can now bind insurance without ever interacting with a human being, this is often a risky proposition. Insurance coverage is a complex and technical area, and having an insurance advisor on board to work with the business from its early days and while it grows can help protect its interests and address risks that may interests.
What business insurance should be considered when starting a business? Your insurance advisor will explain not only what is required based on applicable law or other contractual obligations agreed to by the business (e.g., under a loan agreement with a financial institution, a lease with a landlord, etc.), but other types of insurance that a business owner may not even think of.
While many businesses may have similar types of coverage (e.g., workers compensation, property and liability insurance, auto, errors and omissions insurance, etc.), what is appropriate depends on the business itself, what it is doing and where. There are many other types of coverages such as cybersecurity, privacy, employment practices, directors and officers, intellectual property, etc. and an insurance advisor can not only explain what they cover and what they exclude, but can work to get competitive quotes. An insurance advisor can also discuss the nature and types of insurance, such as the differences between occurrence-based and claims-made policies, and how and when insurance tail coverage can come into play and what it will cost.
Insurance is part of the cost of doing business, and is often the key source of protection that a business needs when something goes wrong. With appropriate insurance in place, a business can face adverse events knowing that it has coverage in place that will defend the business and pay claimants so that the business can continue forward, subject to any applicable insurance limits and exclusions.
In the absence of insurance, a company will need to fund the defense and resolution of claims through cash-flow which, even if sufficient, may take funds away from critical business operations. While a startup business may be tempted to put off obtaining insurance until the business grows to a certain level, this is not advisable as a claim may arise at any time. If an uninsured claim is asserted, it may cause severe disruption of the business in its infancy or, in the worst case, put it out of business altogether. So, when asking about how to start a business, part of the inquiry is also asking how to prepare the business for claims, challenges and issues that may arise from the business activities.
Insurance to Fund Buy-Outs; Key-Man Insurance
Another key role of an insurance advisor is to assist the business in advising on buy-out insurance issues. As noted above, shareholders’ agreements and operating agreements can provide mechanisms for business continuity. This includes providing for buy-out insurance to serve as a funding source for certain events, such as the death or permanent disability of a shareholder or member.
Without this insurance, the company may not have sufficient funds available from its cash-flow to buy-out the interests of the deceased or disabled member. Where appropriate, a business may also procure “key man” insurance that will provide funds to the company to enable it to survive and continue its operations upon the death of a key principal or employee.
Insurance in Contracts
Insurance advisors are also important in that they can advise on other insurance issues that will arise during the course of the operation of the business. For example, an insurance advisor can provide the company with advice on what insurance and limits it should be requesting from its independent contractors, customers or vendors, can provide suggested insurance provisions, and can review policies and certificates of insurance for conformance to contractual requirements.
The foregoing are a few of the initial steps that a business owner must address to start a business. Future articles will address other issues that should be addressed as part of starting a business. When asking how to start a business, there is no question that you should not feel comfortable asking. Indeed, your team of professional advisors are engaged for the purpose of helping you navigate the process and answering your questions along the way.
Copyright 2018, 2020 Geoffrey G. Gussis. All Rights Reserved.
Shared by Geoffrey G. Gussis, Esq., a business attorney and technology attorney licensed in New Jersey and New York. Learn more about me, the legal services I provide, and articles I have written. Contact: firstname.lastname@example.org or (732) 898-0549 or (646) 389-2946 for a free consultation.
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