August 2020 Newsletter – So You Started a Company… Now What?

By: Cheryl Looper

Executive Summary: Starting a business is challenging.  You’ve got a great idea and have decided to take the plunge. But how do you get from here to the vision you have in your head?  What infrastructure do you need to give your business the best chance at success? The exact steps a new business needs to take depend on a variety of factors, most importantly what your business will be doing and where.  Your lawyer and tax advisor will be able to guide you through initial steps and help address issues as they arise after your company has begun operating, but there are certain actions to take and practices to establish early on that can prevent big headaches down the road.  This newsletter helps highlight a few areas most new businesses should consider early in the process, so they can hit the ground running.  

Forming Your Business       

Once you’ve made the key decisions about whether to have partners, and if so, how to share profits and decision-making responsibilities, the next big move is to choose the proper form of entity.  Companies come in several shapes and sizes – corporations, limited liability companies, partnerships, etc. – each with their own benefits and drawbacks.  A skilled lawyer can help you navigate the options and select the most beneficial one for you, taking into consideration where your business is now and your anticipated trajectory.  

After selecting a form of entity, the next steps to forming a business in Texas are filing the required documents with the Secretary of State, adopting initial resolutions, putting an operating agreement in place, and obtaining an employer identification number (also called a taxpayer identification number, EIN, or TIN).  Depending on your choice of entity and your tax and financial considerations, you may have additional filings due shortly after forming your entity.  Your attorney and tax adviser will be able to guide you through this process.  

Once these initial steps are coplete, you should be able to set up a bank account and obtain insurance.  These are important steps that can help keep the business’s funds, assets, and liabilities separate from its owners’, offering each better protection.  

Trade Names and Out of State Work 

Just like people, businesses can have both legal names and “nicknames”.  If you will be conducting business under a name that is different than your business’ legal name, you will likely need to file for a tradename (also called a “dba” or “doing-business-as” name).  Tradename filing requirements vary by state and local jurisdictions, as do their durations.  

In addition, if your business plans to conduct business outside the state of Texas, you will likely need to file documents with the office of the Secretary of State (or similar offices) in those states requesting permission to operate there.  These forms are often called Certificates of Authority, and the process is often referred to as “foreign qualification”.  Depending on the state in which you seek to operate, you may also be required to register or file with local jurisdictions or taxing authorities prior to doing business in those localities.  Some states and local jurisdictions have expiration dates on these certificates, so your business should track these dates to remain in compliance.  Further, certain tax, reporting, and compliance regimes will be imposed on your business once you operate in a foreign jurisdiction.  

Licenses and Permits 

Depending on your industry, and the particular services or products you will sell, you may be required to obtain and maintain certain licenses or permits.  The rules and regulations for licensing and permitting vary widely across industries and jurisdictions.  Certain professions require professional association membership, licensing of a business and its members or employees, annual testing or reapplication, bonds, and even required disclosures on operational contracts.  Understanding what you need, how to obtain it, and how to remain in compliance is critical.  

Good Corporate Governance

After you know what your company will be doing, where, and which regulatory bodies will have authority over your business, your company will need a compliance plan.  Depending on each business’ circumstances, compliance plans may be as simple as annual filings with the Texas Secretary of State and tracking license and permit expiration dates, or much more complex, including public filings and disclosures, quarterly (or more frequent) reporting to various agencies and private parties.  The bottom line is that you need to know which rules apply to your business (whether through the government or through private agreements with insurers, lenders, investors, or others), and start tracking that compliance early.  

Protecting What Makes You Special

Businesses succeed through their “secret sauce”: a revolutionary new product, an inventive process, or simply leveraging years of hard work, know how, and contacts.  How do you protect what’s yours?  Patents, copyrights, trademarks, confidentiality agreements, non-disclosure arrangements, and carefully crafted agreements with third parties are all great ways to protect your “secret sauce” while putting it to work.  Putting these agreements and protections in place can give your business the best opportunity to keep its valuable intangibles protected.

Operations

Chances are, whatever your business does, you will need a written contract to do it.  Whether your business is selling a product or providing a service, form contracts can help your business run smoothly.  Having your own form of customer and vendor contracts, scopes of work, purchase orders, releases and other documents can streamline your processes and help you control risk.  Understanding your risk profile and properly allocating that risk is a significant benefit when working with your insurer and lenders and pricing your products and services.  

Insurance

Most businesses benefit from some sort of insurance coverage, and often, agreements with lenders, clients, or vendors, and certain permits and licenses will require specific minimum coverage.  Working with your attorney and insurer to understand your exposure, contractual requirements, and risk tolerance can help save you money on premiums, right size your coverage, and understand the effects of any exclusions or riders.  This front-end planning can also help you avoid expensive mistakes that can occur when businesses operate in a way that accepts risks outside insurance coverage or in violation of lending covenants, or price their products or services without considering these factors.  

Employment 

If your business involves more than one person, you will want to think through some basic employment questions.  Will any of the owners have an employment relationship with the business separate from their ownership relationship?  Proper agreements defining those separate relationships can help everyone start off on the right foot and track compensation and distributions.  Will you hire employees, contractors, or both?  Proper classification of your labor force is critical; enforcement actions for misclassification of employees as contractors can lead to lengthy proceedings, audits, and penalties.  

Will you pay employees hourly or a salary?  Errors in classification among your workforce can be costly and lead to disruptive enforcement actions.  Will you offer benefits?  Failure to provide required benefits or gear (often including personal protective equipment and tools), depending on your headcount and industry, can also have serious consequences.  

In addition, certain other benefits come with their own compliance regimes, making good planning on the front end the best way to economically achieve your objectives.  Finally, employee manuals and policies are important parts of the corporate structure that can help set expectations early, and protect your new company and its workforce as it grows.  

Plan Your Exit (and Your Growth Along the Way)

You just started this business and you’re already thinking about leaving it?!  Although your business is new, in order to maximize value and avoid some common and expensive mistakes, it is helpful to keep a general idea of your exit strategy in mind.  

Do you intend to operate your company indefinitely?  You will need to think through succession planning, internal talent retention and management, and consider including options for company ownership in compensation structures.  Are you looking for investors in the future?  You will need to comply with securities laws and fundraise in a responsible and compliant manner.  Do you want to grow your business through merger or acquisitions?  Outsource portions of your workstreams – whether back office or client facing?  Incorporate a social responsibility program?  The long-term possibilities for your company are endless, and each opportunity requires careful consideration on the front end to set your business up for the greatest chance of success.  

Conclusion

When starting a new business, careful planning with tax advisors and your lawyer can help you avoid expensive mistakes and help set you up for success.  Early partnership with experienced business lawyers can also help you spot issues as your business grows, maximizing your potential with an aim to minimize liability and risk.  If you have any questions about this Newsletter or would like some advice as you begin or grow a business, please feel free to reach out to our office at (832) 831-2289 or info@rreeselaw.com

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