Things to consider when beginning a business

Many entrepreneurs are unsure about the steps to take to get started with their new business.  Robert Sanders, a business attorney in California, shared his perspective on some of the most important considerations when starting or growing a small business:

1.     Company Structure – Selecting the right business structure is vital to a new business’ taxes and liability protection. Here is a list of the four most common business structures used in California:

a.     Sole Proprietorship – By default, when an individual goes into business in California without a formal entity, the law deems them to be a sole proprietor.  These individuals often provide services or sell goods on a small scale and report their earnings on their IRS form 1040. There is no liability protection from third parties afforded to sole proprietors. The major advantage to using a sole proprietorship is that it is extremely simple; beyond a business license, there is not much else required of a business owner to run the company.

b.     Partnership – Akin to a sole proprietorship, a general partnership is the default business structure when two or more people start a business enterprise with the purpose of making a profit.  There are some significant legal drawbacks to partnerships, among which is the fact that all partners are liable for all of the business dealings of any of their partners.  A formal partnership agreement is recommended whenever a partnership is used.

c.     Limited Liability Company – LLCs provide the most degree of flexibility in structuring a company. Members are the owners of the LLC. Managers are those individuals who carry out the day-to-day business of the LLC.  Having a carefully-drafted Operating Agreement in compliance with California law is vital to the proper functioning of the LLC.  A significant advantage of employing an LLC structure is that provided certain conditions are met, the company can serve as a legal protection for the members from third-party claims.

d.     Corporation – The corporation (whether an “S-Corp” or a “C-Corp”) is a very commonly used business structure in California.  Shareholders own the company.  The shareholders appoint a board of directors to make high-level decisions for the business.  The board of directors, in turn, hires officers, including a President, CFO, and a Secretary at a minimum.  The corporation also provide legal separation from the shareholders and the corporation’s debts and liabilities. There may also be some significant tax savings by using a corporate form.

2.     Financial Plan/Capitalization – Although many businesses are based on good ideas, many of them fail because they are not adequately funded (or capitalized).  Prudent entrepreneurs will ensure they review their projections with financial advisers, accountants, bankers and others who can lend valuable perspective to the process and will make sure they have enough funds to survive the start-up phase of operations.

3.     Location – For many ventures, securing a good location for the business can be critical to the company’s success.  Ensuring there is adequate space for operations and easy accessibility for clients/customers will help propel the company’s business forward. If space is to be leased, is advisable to have legal counsel review the terms of the lease to make sure the business’ interests are protected. 

4.     Insurance – Many business owners are underinsured for their core business.  Depending on the details of the business, any or all of the following insurance products might be necessary: commercial general liability, products liability, disability, life, business interruption, and commercial automobile insurance. A review of the business’ prospects should be made with an insurance professional.

5.     Banking – Most banks offer small businesses a wide range of tools to help them be successful.  Each small business should have a separate bank account at a minimum.  In addition, credit card processing, lines of credit, business credit cards, commercial savings accounts, and other products can be helpful to businesses in growing. 

6.     Seed Business – Having a core group of customers who can provide immediate income to a new business can be extremely helpful to a new enterprise. Many businesses begin their operations by acquiring an existing customer base from an existing market participant or a competitor. Legal counsel should be consulted before entering into a purchase agreement or a joint venture to ensure that the company’s interests are protected.