Starting a business is an exciting adventure. It can also be a costly experience. Unless the new business owner has plenty of cash on hand, they likely must obtain financing. These days, interest rates on such loans are through the roof. To save a small amount of money, many newly minted entrepreneurs will attempt to file their own business incorporation documents with the Secretary of State’s Office. However, as the saying goes, “you don’t know what you don’t know.” Many new business owners fail to draft important business-governing documents such as operating agreements, bylaws, partnership agreements, and buy/sell agreements. Furthermore, new entrepreneurs who form a corporation frequently fail to issue stock certificates and properly document the number of shares each shareholder owns. Failing to draft these important agreements and other documents will have negative consequences when an owner eventually leaves the business or if the business sells later in time.

To start an LLC (limited liability company) or corporation, Articles of Incorporation must be filed with the Secretary of State for the state the business is incorporated in. While this document/filing officially registers the new business with the government, it does not serve to govern the business’ operations. Instead, an operating agreement is needed for an LLC, a partnership agreement is needed for partnerships, and bylaws are needed for corporations. These documents address how the business will handle a number of topics, including the admission of new owners, the expulsion of owners, who has authority to make important decisions (buying real estate, obtaining financing, and making large item purchases), how the owners will handle disputes, voting powers for each member, etc. Suffice it to say, such agreements are critical to a healthy business.

Moreover, businesses should always have a buy/sell agreement. This agreement regulates the process the owners will follow if an owner seeks to sell his interest in the business. Do you want your co-owner to first have to offer you his/her shares? Do you want your co-owner to be able to sell shares on the open market? How will you value the selling member’s shares? What timeframe will be utilized for the sale of shares? These important issues should always included in buy/sell agreements. Failing to have a buy/sell agreement can lead to confusion and, potentially, costly litigation.

Lastly, many new entrepreneurs either obtain a FEIN (Federal Employer Identification Number) when they do not need one, or, fail to do obtain a FEIN when they do. Making the wrong decision can lead to trouble with the IRS.

The attorneys at May Oberfell Lorber are well-versed in counseling new business owners and assisting start-up companies.

This article is for information purposes only and is not intended to constitute legal advice.