One of the first and single most important decisions that a business owner will need to make when starting a new business is to figure out which type of business management structure they are going to use when they register their business. Business owners will be able to choose from a number of different business management structures, including:
- Corporations (e.g., C corporations, S corporations, foreign corporations, etc.);
- Sole proprietorships;
- General or limited partnerships;
- Limited liability companies;
- Limited liability partnerships;
- Limited liability limited partnerships; and
- Various other business organizations that are permitted by individual state laws.
The business management structure that a business owner chooses can have a significant impact on a company’s future performance or business success rate. This is because the way a business is structured will determine certain business rights, such as:
- Whether or not the business can raise money from investors;
- How many individuals may serve on the board;
- Which persons may be held responsible for liabilities or debts incurred by a business; and
- How the business will be taxed by federal and state agencies.
In addition, some business management structures may also provide rules regarding how a certain type of business must operate. For instance, to register as a limited partnership, the owners must appoint at least one general partner (i.e., the individual responsible for managing the entire business) and one or more limited partners to be considered a valid limited partnership.
Lastly, depending on state laws and the kind of business management structure selected, some managers and owners can even be held personally liable for credit problems, warranty issues, and injury claims associated with their business. Thus, it is crucial that you choose wisely when forming and registering a new business.
Starting a Business
Starting a business is no easy feat. It often requires obtaining a lot of capital and making wise decisions right off the bat. Thus, some factors that a new business owner should consider when starting a business include:
- Which business management structure they intend to register their business as (e.g., limited liability company, corporation, general partnership, etc.);
- Whether to start a business from scratch or sign a contract to operate a business that is already part of a franchise;
- What type of business they want to run (e.g., does it provide goods or services?);
- How many persons will have management or ownership responsibilities;
- Where the business’s main headquarters will be located;
- Whether the owner would prefer to purchase or lease physical office space; and
- How feasible it is for the owner to afford to keep their business afloat with either business funds or their personal finances if the business does not immediately generate profits.
In addition, a new business owner should also create a full business plan to not only make sure that they stay on track, but also so that if they need to raise capital they can prove to investors and/or a bank that they are serious about operating a successful business.
Buying or Selling a Business
Whether a person is buying or selling a business, there are many factors that they will need to consider before entering into a specific business transaction. For example, a person who intends to buy a business will need to perform due diligence prior to purchasing it. This may include reviewing the business’s past and future financial records as well as whether the business has any overdue debt.
Although there are many benefits to purchasing an already existing business, such as having a pre-established customer base, trained employees, and leased office space, a buyer must still know what they may be getting themselves into prior to making a formal offer to purchase a business. Performing due diligence will not only alert a potential buyer to serious problems with the business, but can help them to negotiate a cheaper price when it comes time to buy.
On the other hand, if a business owner has made a decision to sell their own business, then they should know that it will take some time to collect and organize all of the records and financial statements associated with their business. After all, it is very unlikely that a person will purchase a business without seeing a business’s past and future track record first.
A business owner that is selling their business should also do their best to eliminate or resolve any debts and/or legal issues that the business is currently facing before they put their business up for sale.
Lastly, regardless of whether an individual is debating whether to buy or sell a business, it is strongly recommended that both parties hire separate lawyers before following through with the transaction. In fact, some business contracts may even require that each party has their own lawyer in order to complete such a transaction.
Contract Terms and Negotiations
Whether a person is starting, selling, or purchasing a business, they will need to either form or create a business contract. Drafting a solid business contract that contains favorable terms is one of the keys to entering into a successful business transaction. Hence, why the negotiation stage of a contract is so important.
The negotiation stage of a contract is where the contracting parties will be able to argue for certain terms, conditions, and obligations that will benefit them during and after a business transaction is complete. This stage is also the point in the contract process wherein the parties should ask questions about terms that seem uncertain or unclear and to have their lawyer step in to make sure that the other parties clarify them on their behalf.
It should be noted that if one or more parties fail to perform a duty that is legally required by a business contract, then they could potentially be held liable for breach of contract and any damages associated with the non-breaching party’s losses.
Should I Consult a Lawyer about my Business and Commercial Law Issue?
As is evident from the above discussion, making one wrong decision about a business can result in serious consequences. Whether you are starting, purchasing, or selling a business, it is strongly recommended that you retain the services of a local business attorney for further guidance. An experienced business attorney will be able to offer advice that can help you make better decisions regarding your business.
Some general business items that your attorney will be able to inform your about include:
- The potential risks or liabilities associated with a particular business management structure;
- The tax incentives you can gain from choosing a certain type of business management structure;
- Which management structure may be best suited for your specific business;
- The process for registering or modifying your business management structure; and
- The financial statements and business records you will need to collect to sell your business, or alternatively, the ones you should review before you purchase a business.
In addition, your attorney can help you complete the necessary legal paperwork associated with each process. Your attorney can also assist you with drafting, editing, or reviewing the individual contracts related to the type of transaction that you are involved in (e.g., starting, selling, or purchasing a business).
Finally, should any disputes arise over a matter concerning the sale, purchase, or start of a business, your attorney will be able to provide representation in court or at a settlement conference as well.
