Getting Your New Business off to a Good Start Early Decisions have long-lasting impact By Andrew J Thompson Even in a troubled economy, new businesses emerge constantly, and many meet with tremendous success shortly after opening their doors. While the rate of business failure is presently very high, along with unemployment, increasing budget deficits and energy prices, opportunities abound for start ups that are well planned and executed. The owners’ vision and passion, marketability of the brand, and good planning are all critical ingredients in the formula for growing a young enterprise. When planning your business, two key advisors are invaluable at an early stage: an accountant and an attorney. Why? Tax and legal decisions made early-on can have long-lasting implications for your business’s success. A good business plan is one thing, but putting the necessary structure around that plan is a vital part of the execution and will enable not only current success, but future opportunity as well. Unfortunately, this part of the planning process is often neglected until some risk is exposed, and the costs of that exposure become incredibly high. If, however, good legal planning accompanies a good business plan, the best structure for a start up business can be created at a reasonable cost without opening the door to unwelcome exposure to liability, so it’s important to get good advice as you’re starting out. Incorporating It isn’t long before the new business owner typically seeks out the advice of a CPA. Quite often, they come away from that connection feeling that they know exactly what kind of business model they want to create, and it is an S-corporation. While that is often the best advice for the tax structure of the entity, it does not address the legal structure. Surprisingly, there remains a great deal of confusion about this distinction. For instance, a one person manufacturer’s representative in the medical device industry, may understand he needs an S-corporation to gain certain income tax benefits for his business – the one most commonly thought of first is the potential to reduce self-employment tax. But the question of whether a traditional, domestic corporation or an LLC is better for the particular business is quite different. You can choose either as the legal entity, but still be taxed as an S-corporation. Many people do not understand this until after they’ve retained a competent attorney who explains these options. A qualified business attorney can help you create the structure you need to accomplish your objectives – whether it is an LLC, domestic corporation or partnership. Among the other legal issues you need to consider early on:
- the form of the entity or entities
- corporate governance structure and rules
- provisions and covenants placing boundaries around potential competition between owners and/or employees
- protection of intellectual property
- employee benefits and other HR issues
- acquisition or leasing of real estate – essentially anything that has to do with transactions involving the land, labor and capital your business will need to succeed.
Many business owners delay addressing these important issues, often because of the fees involved. It’s true that legal work is expensive, but it’s expensive for a reason. When you have proper documentation in place, you also have protection from much greater costs in the future. It is reasonable to believe that for every dollar you spend with your attorney in planning, you will save at least five to ten dollars in litigation or other “clean up” costs down the road. The alternative for the business owner isn’t so much about whether to pay the attorney, it is a question of whether to pay a smaller amount now or a much larger amount later. In the end, it’s truly about the value that is added to your business for the work that gets done. If your attorney provides with the advice that enables you not only to get your business up and running, but also protects you from the hazards that are most likely to derail growth and future profit, you will find yourself well ahead of the curve. Though by no means perfect, planning has always been a good predictor of success. When you plan, just take care that you’re considering all of the needs of your business, and they are being addressed in the best way to help you succeed. Henry Luce noted that, “Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight.” The best advice for the tax structure of the entity may not always consider the legal structure. Include both your tax advisor and a good attorney early on as you begin to execute on your business plan. For assistance with your business plans and structure, contact the Thompson Law Office today at (317) 564-4976 or toll free (877) 365-1776.