You have a lot of options when it comes to deciding how you want to operate your business. You might want to simply open up a company under your own name (e.g., “Johnson Painting Services”) and start doing business without much fanfare. That’s called a sole-proprietorship. Or, you might want to open up a business with someone else, still in your own names (e.g., “Johnson Bros. Painting Services”), again without much fanfare. That’s called a partnership. Alternatively, you may want to start doing business, but also wish to limit your personal liability and shield your personal assets. In such a case, you could form a corporation or a limited liability company (“LLC”), both of which the law treats as separate “people,” and both of which offer their owners (i.e., shareholders and members, respectively) a shield from the debts/obligations of the business.
Choosing the correct structure for your business is one of the first important decisions you’ll have to make, and what you choose will depend on a variety of factors, including how your company will be taxed, whether (and to what extent) your personal assets will be safe from creditors, and the best way to obtain investors to help your company grow.
No matter what organizational structure you choose, however, there’s a good chance that you’re going to need at least some of the following documents properly prepared for your business:
- formation documents, such articles of incorporation and bylaws (for a corporation), or articles of organization (for an LLC);
- contracts spelling out the rights and obligations of the company’s owners, such as a partnership agreement (for a partnership), a shareholder agreement (for a corporation), or an operating agreement (for an LLC); or
- fictitious business name statements (for sole-proprietorships and certain kinds of partnerships)
To be clear, when it comes to the partnership agreement, operating agreement, and shareholder agreement, their importance must not be underestimated. Those documents become incredibly important in cases where the owners stop getting along. In fact, those contracts by and between the owners, signed when everyone was getting along beautifully, are the documents that specify everyone’s rights and obligations toward each other, the kinds of things each is allowed to do (and not do), how to value an owner’s interest, etc.
Documents that important should never be generic, one-size-fits-all, online documents that somebody threw together for you with no prior thought. They should be fully customized documents, created specifically for your company, following a detailed conversation with you regarding how you want your company to operate. Such a conversation should involve, for example, all of the following topics:
- how the company will be managed on a day-to-day basis;
- what individual(s) have the power and authority to bind the business (i.e., enter into agreements in the company’s name);
- what individual(s) have the power and authority to spend the company’s money, write checks, open bank accounts, etc.;
- whether the company will be limited to operating a certain type of business;
- whether decisions should be made on a majority basis, or something more, such as unanimity or via a super-majority vote;
- how to value an owner’s share if the owner leaves the business (either voluntarily or following an owner’s incapacity or death);
- whether distributions of net profits (in a corp or LLC) should be mandatory or not (to avoid the problems associated with phantom income); or
- what, if any, voting rights current and future owners should have.
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