Start Ups and Small Businesses
Well, has anyone seen the economic recovery? I have been looking, but can’t find it. Restructuring and deleveraging continues and we must adjust. Business downsizing or failures present both challenges and opportunities. As companies vacate their sectors, the need increases for new leaner businesses which provide better services and products for lower prices. As companies continue to shed employees, for some, the only option is to start their own business. For example, I have a friend who was released by a law firm a few months ago. Now, he is doing reasonably well working out of his home providing contract services to businesses with which he has relationships. Similarly, I have another friend who is making a living providing “1099” advertising and marketing services. I also have a client who has retooled to sell “green” technology services.
I work with small businesses in many sectors, i.e. government contracts, publishing, real estate, construction, development, intellectual property, manufacturing, advertising, services and non-profits. Start-ups and small businesses in each of these sectors have specialized needs, but also share common concerns which require close attention up front. However, because entrepreneurs generally place their emphasis on marketing and production over management, these concerns often go unaddressed until a problem arises, which can be too late or needlessly expensive to fix.
In starting or operating a small business, spend some time and hire a lawyer and accountant to take care of the following basic business concerns:
1. Concept and strategy: Confirm that the market will buy what you are selling and that you are competitive. Focus your activities on a single niche. Initiate plans for expansion or diversification only after you have successfully exploited the first niche and developed a reputation for reliability and quality.
2. Formation: Because of their flexibility, limited liability companies (LLCs) are today’s vehicle of choice for small businesses. However, partnerships, limited liability partnerships, and corporations are more appropriate in certain situations. For example, non-profits must be corporations. Companies and LLCs must be registered with the state of formation. Partnerships generally are not registered per-se, but a notice of partnership interest may be required depending on the state.
3. Division of equity and rights: Divisions of equity, ownership rights, and buy-sell provisions limiting alienation of equity should be planned at the beginning when questions of value do not cloud judgment.
4. Registration and licensing: Most businesses require one or another form of registration or licensing. Businesses organized in one state, generally must register in the other states in which they have a physical presence or substantial activity.
5. Tax Id: Once the organization documents are certified, tax identification numbers must be secured from the IRS, state of formation, and some cities.
6. Registration of trade or service name and mark: Marks and Names are registered with both the USPTO and the state, the later sometimes in the form of a registration of doing business under a fictitious name.
7. Organization documentation: Generic by-laws or LLC operating agreements purchased over the internet may work for a business with a single owner. They are a disaster when the business has more than one owner or takes on new investor-owners. Partnership agreements serve as the equivalent of by-laws. Key provisions in all of these documents include delegation of authority; persons eligible to call meetings; holding meetings by phone, proxy, or “in-lieu of meeting” ratification; use and disbursement of revenue and assets; alienation of equity interest; and termination of participation.
8. Insurance: Selling products and services has risks which should be mitigated where possible. Key risks include employee misconduct and defalcation, worker’s comp, negligence, and record preservation and recovery.
9. Internal controls: Employees may steal. Partners may steal or cut side deals. The cost of goods sold is too often under priced, unnecessarily turning potential into failure. Internal controls mitigate these risks.
10. Standardization of relationships: Client/customer relationships work best if documented with agreements that are clear, vetted, mitigate the risk of breach, mitigate the risk of disagreement of interpretation, incorporate securities and personal guarantees, and are enforceable.
11. HR policies: Employees work more efficiently if the environment is standardized, expectations are clear, rights and duties are clearly stated, and supervision is both constant and effective.
12. Government contracts: Small businesses must secure a number of registration identification numbers i.e. Dunn, OCCR, and SBA status; enroll in appropriate lists and programs; and hunt the federal source sites. Similar opportunity mechanisms are available for contracting in some states and local governments. Ultimately, it is useful to identify and speak with program and contracting officers.
13. Internet. Domain names are easily registered, but should be coordinated with trade and service names. Domain names often present issues of “cybersquatting” and “typosquatting” which can be troublesome and require enforcement. The best protection of a domain name is a pre-existing valid trade or service name application for registration.
Taking care of the basics is easier and cheaper if done early, completely and maintained.