3 Key Steps to Success
Clients starting new business ventures or structuring new investments often ask what form of business entity should be used. The answer is “it depends,” as multiple factors impact the desirability and feasibility of various options. Designing and bringing the structure to life, however, is just a first step towards achieving business goals. Below are the three key steps to maximize the opportunity for success, and we will explore each step in greater detail in future blog posts:
- Design and implement the initial legal structure.
When setting up a business, choosing the right legal structure can be critical to the success and life of the company. Proper structuring of businesses and investments can mitigate risk, limit liability, and help achieve tax objectives, and the variety of structures available vary as widely as those who use them.
There are many categories of structures to be considered: associations, limited liability companies (with or without series), partnerships, corporations (public or private, for profit or nonprofit, cooperative corporations and more.) Layering entities may also be desirable to compartmentalize risk. But the considerable time and effort you put forth to create a legal structure tailored to your goals may be all for naught, if you fail to take step 2…
- Consistently operate the structure in compliance with its governance requirements (aka operating rules).
When an entity is created, its governance documents establish its operating rules playbook. This is the chance to largely “write your own rules.” It can be tempting to use a template for governance documents, but considerable care should be given to tailor governance documents to your particular needs and goals. Each entity type has limitations, but there is also considerable latitude under most state laws to tailor entity’s governance documents. For example, what scope of authority will managers or officers have without getting owner approval? What decisions require a majority versus unanimous vote? Do owners have a right of first refusal when another owner wants to sell his or her stake in an entity? How will disputes be resolved?
Once you establish your entity’s operating rules, be sure they are consistently followed to avoid the risk of having the legal structure be invalidated for the purposes of liability – also known as “piercing the corporate veil.” State law varies on this topic, and we will explore Nevada’s approach in future blog posts.
Businesses that have tailored their structure and governance to their specific needs are on the right track, but that doesn’t mean that the plan you originally set in motion is still the best approach, which leads to Step 3….
- Assess the structure on a regular basis to determine if it continues to further business goals. Businesses, their needs, and their operating environments change over time. What may have been a good legal or tax structure when a company was formed may not best suit its needs later. For example, corporations that have elected subchapter S taxation are limited to 100 shareholders. Or perhaps your business is an LLC but you are now in need of venture capital – many venture capitalists avoid LLC structures. The legal structure should be reviewed and assessed on an annual basis, and tax season is a great time to do so to make sure the structure and its financial implications are still working well for you.
As you can see, there is much more to starting a business than just downloading stock documents and forming a legal entity. Work with an attorney who can help identify the legal risks and opportunities associated with your venture and custom tailor a legal structure that maximizes your venture’s chances of success.