6 Things Every New Business Owner Should Consider
Starting a business can be very rewarding. But it can also be very stressful. The risks alone are enough to drive a person crazy. Not to mention the various legal documents that are associated with it. It can be a complex and frustrating process if you don’t have the information you need (which, by the way, you can find in this book, Start Your Own Business, Sixth Edition: The Only Startup Book You’ll Ever Need).
The main problem new business owners have, in my experience, is not knowing what their options are. Or, not knowing the best option for them. I’ve advised a lot of up and coming business owners. What I’ve found is that, even though each business is unique, there are certain considerations that apply across the board.
That is to say, there are some common considerations every business owner should keep in mind. To that end, here are 6 things every new business owner should consider before hanging that first shingle.
1. LOCATION, LOCATION, LOCATION
I’m not talking about setting up shop on a valuable piece of real estate. Although that’s certainly something to strive for. When I say “location, location, location,” I’m talking about renting v. owning.
If you’re going to open a new business you’re going to need a store, a location. I mean you can’t “hang a shingle” without a roof, right!!
This means that you’re likely going to shop around. You’re going to check out different locations, see which one fits your business best. This also means that you will likely be presented with two options: (i) you could rent the store or (ii) you could buy the store.
Which one is best?????
Well, they both have their advantages and disadvantages.
If you rent, you’ll have a landlord. And that’s fine. But you need to make sure of few things first. For example, how much is rent? It may be a better option to buy a store, the mortgage payments could be cheaper than rent.
Another point to keep in mind is whether there will be a written lease agreement. Remember this: NEVER RENT ANYTHING WITHOUT A WRITTEN LEASE AGREEMENT. You want your agreement in writing. This is very important. You’ll want a lease agreement that puts some responsibility on the landlord. If the building is damaged, you really don’t want the obligation to repair it falling on your head.
If you buy the store yourself, you need to be focusing on the loan. Who’s going to loan you the money? A bank? A private lender? The state? They will all have different terms and conditions.
Another consideration is default. What happens if your business defaults on the loan? Can they go after you personally? The last thing you want is for a bank or other lender attaching a lien on your home should you default on the payments.
Regardless of which option you choose, you should let an attorney take a look at the paperwork to make sure your rights are protected.
2. HOW MUCH AUTHORITY WILL YOUR EMPLOYEES HAVE?
Most business probably have 1 or more employees. In the legal world these folks are called “agents.” These are people that have the authority to act on behalf of your business.
You need to decide how much authority your employees will have. What can and can’t they do? There are several “types” of authority an agent/employee can have. For instance, there is express authority to act on behalf of the business. This an employee that knows exactly what he/she can do. If you’re going to be working with regular customers, you may want to put them on notice as to the amount of authority your employees have.
There’s also implied authority to act on behalf of the business. This is an employee that doesn’t necessarily have express permission to act in a given situation. But based on the nature of the employment and the history of dealings, he/she could have implied authority to act.
You’ll want to specifically detail the “type” of authority your employee(s) will have. You don’t want them signing something you haven’t agreed to.
3. WHAT IS THE NATURE OF THE EMPLOYMENT?
You’ll also want to decide the nature of the employment. Most states, including Tennessee, are “employment at will” states. This means that an employee can be terminated for any reason as long as it’s not discriminatory.
However, your employees will only be considered “at will” as long as there is not an employment agreement that lists “for cause” reasons for termination.
A lot of businesses have employment handbooks. Guidelines, if you will, that set out the terms and conditions of the employment. The problem that can arise is that these handbooks, if not worded correctly, could be considered an employment agreement. Thus changing the employment from “at will” to “for cause.”
If you’re going to have a handbook or set of guidelines, let an attorney review it first.
4. WHAT ARE YOU SELLING AND WHO WILL BE YOUR CUSTOMERS?
You probably already know what you’re going to sell. But what’s important to think about is to whom you will be selling.
Selling to individuals is one thing, but selling to other businesses is completely different. If you’re going to be selling to other businesses, perhaps a retailer for example, you’ll want to consider drafting an “exclusivity agreement.” This is an agreement that locks a business in for a certain period of time. If drafted correctly, the exclusivity agreement will prevent your customer from buying similar products from another company.
Maybe you’re selling a service to folks. If that’s the case, you’re going to want to consider having your employees sign a “non-compete agreement.” This is an agreement that prevents your employees from quitting and taking your clients and inside knowledge to your competitors.
I’m not a tax attorney nor an accountant (although that was my major in college for 1 year). But I can tell you, as co-owner in a business, that taxes are everything.
You’re going to want to sit down with a tax attorney or an accountant and get a very, very good idea of how your business will be taxed.
Maybe there are certain things you can do to maximize your deductions. Maybe you’re business will require you to travel. If so, it may be beneficial to have your business purchase a car. You can write the purchase off as well as the miles you travel.
And, depending on how you set up your business (which will be discussed in the next section), it could have major tax implications.
6. HOW WILL YOU “SET UP” YOUR NEW BUSINESS
Ok, this is going to be a long one.
There are generally 4 major “types” of businesses: (i) Sole Proprietorships, (ii) Partnerships, (iii) LLCs, and (iv) Corporations.
(i) The Sole Proprietorship is a business with one owner. You’re by yourself. This type of set up is popular among folks that want all the control. You get all the profits to yourself. BUT, this also means that you get all the responsibility.
If creditors come knocking you wont be able to share that obligation with another person. Also, if you’re sued, it’s on you and only you. If your business gets a judgment against it, you could be held personally liable. This means that creditors or successful plaintiffs could place a lien against your property should your business not pay the judgment amount.
(ii) The Partnership is a business with one or more owners. You could be equal partners with a friend, family member, or even another business. This set up generally requires you to split the profits and the losses equally among the partners.
There are a few categories (at least that’s what I consider them to be) of partnerships.
- You’ve got the general partnership. This is the bare bones partnership. You and your partner(s) will share everything equally.
- You’ve got the limited partnership. This is a partnership where you’ll have one or more general partners and one or more limited partners. The limited partners won’t have the same amount of authority as general partners.
- You’ve got the limited liability partnership. This partnership is similar to an LLC (see below). The big thing with this partnership is that the partners will not be held personally liable should the business get sued.
Regardless of the nature of the partnership, you’re going to want an attorney to draft a “partnership agreement.” This will set out the terms, responsibilities, rights, obligations, and duties of each partner.
(iii) The Limited Liability Company (LLC) is a business that (in some instances) can be taxed like a partnership but also carries the protection of limited liability. This means that the members/owners of the LLC can’t be held personally liable for the business’s obligations (generally).
If the LLC is sued and loses, the members/owners will be protected. The business alone will be responsible.
If you’re going to do an LLC, you’ll have to register your business with the Secretary of State’s office. That’s a pretty easy process. Most states today allow you to do all of that online.
(iv) The Corporation is another option. A lot of folks think that you have to have a large and wealthy business to set it up as a corporation. That’s not true. Anybody can set up their business as a corporation (generally speaking).
Like the LLC, the members of a corporation enjoy limited liability. They, too, are protected. Another similarity between the corporation and the LLC is with formation. To form a corporation you have to register it with the Secretary of State and follow the instructions on the application.
If you do an LLC or a Corporation you’ll have to either put L.L.C. or Inc. (or some version of that) by the name of the business. For example if your business is “Lawn Mowers” and you want to set it up as a corporation, the name will have to read “Lawn Mowers, Inc.” (or some version of that).
Also keep in mind that each “type” of business will have different tax obligations. So you’ll want to sit down with your accountant or tax attorney and figure out which option is best for you. But from a pure liability standpoint, if your business is the type that has a higher risk of being subjected to lawsuits then you may seriously want to consider setting it up as one with limited liability.
If you’re confused or concerned about how to get your business going, make an appointment with your local attorney. He/She should be able to guide you to a legally sound business plan. You don’t have to do it alone. Discuss these considerations with him/her. Figure out your options, get everything in order, and you’ll be on your way to a successful business.
Good Legal Health.
The Juris Doctor