Start a business: Legal tips (part I of III)

 

How to get your business started

 
March 3, 2010

I was asked to speak at “The Entrepreneurial Series” sponsored by Lone Star College. Of course, “entrepreneur” is just a tongue-tying way to say business owner. I’ve always loved the word, so when asked to speak to entrepreneurs, I jumped at the opportunity. The participants came with all of their exciting ideas. I came with tips on how to turn them into reality...from a legal perspective. Here, I’ve summarized my points, in three parts: (I) Starting the Business; (II) Being Smart About Contracts; (III) Avoiding Litigation. My tips aren’t intended to be exhaustive; they are to be used as a tool to discuss issues further with your attorney. [B]Part I: Starting the Business[/B] Generally, an entrepreneur can start a business by: • Starting from the ground up (set up his own legal entity), • Acquiring a franchise, or • Purchasing an existing business or assets. Not surprisingly, most new businesses fall into the first category. If a person starts a business, he should create a formal legal entity. Doing so can, among other things, help the individual shield himself and family from personal liability, can help enhance legitimacy with financial institutions and vendors, and can help attract investors if need be. This is an easy process, and a person can do through the [URL="http://www.sos.state.tx.us"]Texas Secretary of State website[/URL], through the service called SOSDirect. So what legal entity should a person choose? An excellent author on this issue is Byron Egan. Take a look at this article about [URL="http://images.jw.com/com/publications/1175.pdf"]legal entities 101[/URL] and especially Appendix A and B for some snapshot views. A lot of the important issues, when making the decision of what entity to choose, will be: business purpose, type of profession, types of investors/business partners, ease of management and operation needed, tax issues, and liability exposures. Of course, when acquiring a franchise, it is still usually necessary to create an entity to own the franchise. However, it is not a “ground up” operation. There are operation advantages (e.g., easier to get funding for a known business), but there are also disadvantages (e.g., compliance with company requirements can be limiting on the entrepreneur’s creativity). With a franchise of a smaller company, there is more likelihood that the attorney someone hires can have input into the franchise agreement (compared with a “take it or leave it” approach of the major national brands). Always be careful on the “personal guaranty” – where the Franchisor Company wants the individual starting the Franchisee Company to personally be on the hook for all debts and liabilities. When someone buys a business, they need to be clear on what they are buying – Customers and customer lists? Assets? Accounts receivable? Name? Other? Usually after some initial discussions, there is a Letter of Intent drafted by an attorney – it covers basic terms. It usually has binding and nonbinding sections (e.g., confidentiality, who is responsible for what fees, what prior conditions need to be met before any deal is final, a date by which the parties will continue to negotiate on more specific terms, etc.). After the Letter of Intent is signed, there begins a period called “due diligence”. This is where the buyer (personally or through a CPA and lawyer) gets to look at the books of the seller, the tax records, accounts receivable, etc., and the buyer will sometimes do title searches, background checks, asset searches, etc. Simultaneously, the parties will be working on all of the definitive agreements that complete the transaction – purchase agreement, financing documents, non-compete agreement, employment agreements, real estate agreements, and any security interest agreements, to name a few. There are many paths to become an entrepreneur! Just make sure you’ve done the ground work to make the path you choose a success. ...Stay tuned. Parts II and III still to come, here on this blog.

Taunya Painter

Taunya Painter is an attorney and member of Painter Law Firm.

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