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Before starting a business in California, you should consider the multitude of legal issues that surround such a task, including choosing the right business structure (sole proprietorship, corporation, limited liability company, or partnership), selecting the right company and/or product name, and how the business (including legal and accounting fees) will be financed, what potential liabilities you face with your proposed business, and what licenses and permits you will need.
Whether your company is an emerging business start-up or mature, securing an experienced a transactional attorney is essential to your continued success in today’s economy. Gone are the days when deals were done on a handshake. Gone are the days when people honored their oral promises. On this web site, you will find numerous tools to help you identify and fulfill your company’s legal needs to protect you and your business.
Choosing the Right Business Entity For a California Business Start-Up.
Once you have determined that you are prepared to start your own business, you should begin the process of making your business legal. The first step should be to decide which legal structure is right for you. There are four main types: sole proprietorship, partnership, corporation and limited liability company. Which one is right for you? A sole proprietorship may be sufficient if: (1) you have no assets; (2) your proposed business is unlikely to be a source of liability; and (3) you don’t anticipate earning more than $50,000 a year. If you do have assets that you want to protect, or if you believe your new business will generate at least $50,000 in income, then you should consider either a corporation or a limited liability company. See, S-Corporation or LLC and then discuss your impressions with a local attorney, hopefully Melissa C. Marsh. Seeing an attorney for just an hour to learn more valuable information could save you thousands down the road.
If you are not ready to form a corporation, or a limited liability company, you can simply remain a sole proprietor. To start a business as a sole proprietor, all you need to do is get: (1) a taxpayer identification number ( EIN ), (2) a fictitious business name, (3) a local city business license, (4) a seller’s permit if you will be selling taxable goods, and (5) other city or state permits required for your particular business. Prior to selecting a fictitious business name, it is important to make sure the name is available.
If you are planning to go into business with one or more other individuals, get a commitment — an agreement that sets forth your planned relationship, expectations, and financial commitment. If you are forming a corporation, make sure there is a shareholder buy-sell agreement in place. If you are forming a limited liability company, make sure the Operating Agreement contains buy-sell provisions. If you plan to operate as a general partnership, ask yourselves if the additional co-owners are merely going to contribute products and/or services as opposed to money. If so, consider forming a single owner business (sole proprietorship, corporation, or single member LLC) with contractual agreements with those who are to provide products and/or services. If a party later fails to perform, then you can typically find a replacement. If you are going to operate as a partnership, then make sure you execute a written partnership agreement that contains provisions addressing how each partner can leave the business.
It is always best to start a business on your own, rather than with partners. If co-ownership is essential, then make sure you have a well written partnership agreement that: (1) calls for the formation of a corporation or limited liability company if a certain goal is met, and (2) contains buy-sell provisions that provide for the buyout of any co-owner at a set price in the event the co-owner fails to perform, becomes disabled, dies, files for bankruptcy, or becomes involved in a divorce. Most owners of a business never intend, or expect, to become partners with their co-owner’s spouse, but that is exactly what can happen if you don’t have a well prepared buy-sell agreement executed by all of the co-owners.
Corporation. To determine if a corporation will best suit your needs, see Should I Incorporate.
Naming Your New California Business and/or Product.
After you have determined the legal structure under which the business will operate, your next step should be to come up with a name for your business and/or your products and services. The name should be catchy, and not too general. For more information, see our article on Naming Your Company and Choosing A Trademarkable Product Name. Once you have come up with three to five potential names for your business, you need to make sure the name is available, and if available, then you should register the name as a DBA with the county. If the company name is also being used as a trademark, or service mark, you should prepare to have it filed with California and the USPTO as soon as you begin selling.
Preparing a Business Plan For A Small Business Start-Up.
After you have determined the legal structure under which the business will operate, and found the right available name for your company and product/service, you should then take the time to prepare a thorough business plan. Preparing the business plan will help you gain a deep understanding of the company’s vision, market, customers, strengths and weaknesses, competitors, risks and required budget. In addition, the business plan can serve as the main document to market the company to potential investors. For more information, see Business Plans.
Financing Your New Small Business in California.
One of the greatest mistakes a new business makes is trying to operate with insufficient capital. A new business must be properly financed to succeed. Financing can come from many sources, including family loans, bank loans, investment from angel investors or venture capital firms, and the sale of stock.
Choosing A Business Location in California.
When starting a business, you should also consider where the business will be located. Research the applicable cost for a city business license, and for city taxes for your intended location. Many California cities base the cost of a business license on a percentage of your company’s gross revenue! In addition, some neighboring city may offer much more favorable tax treatment or breaks. Next consider if the business will be run out of your home, or if you will need commercial office or industrial space. If you decide to rent commercial space, you will need to make sure the location is properly zoned for your intended use of the premises (do not rely on the landlord’s verbal assurances). You will also need to negotiate beneficial commercial lease terms. Again, do not rely on the landlord or your real estate agent is mostly concerned with their commission. A commercial lease is very different from a residential lease. With commercial leases, by way of example, it is not uncommon for the lessee (renter) to be responsible for all maintenance and damage that occurs to the structure being rented, including the air conditioning system, windows, and roof. Not only are there steps you can take to reduce your rent and security deposit, but you can negotiate away some of the potential liabilities. Every commercial lease should be reviewed by an attorney before it is signed.
Pre-commitments From Your Customers.
Once you have settled on a business structure, chosen and secured your business name, mapped out where your business will be located or secured space, and arranged the financing elements, you should get pre-commitments from potential customers. It is always a good idea to line up potential customers for your goods and services even before you are ready to sell. Start preparing your customer contracts (purchase order terms, refund policy, warranties, disclaimer of implied warranties, shipping costs, risk of loss in delivery, consulting agreement, software or hardware development agreement, construction agreement, etc.). Start by collecting examples of contracts from your industry to create a written agreement with fairly standard terms and conditions appropriate for your business. Then take the agreement to an attorney to review and revise. Having an agreement somewhat pre-prepared could save you hundreds, if not thousands, of dollars.
Acquiring Service Providers.
It’s now time to get phone service, electrical service, a cleaning service, and the equipment necessary to operate your business effectively such as computers. It is important to compare companies and services and know the right questions to ask a potential service provider.
Hiring Employees or Independent Contractors in California.
If you will be hiring employees, it is important to properly handle the hiring process. Obtain all information on applicable state and federal payroll taxes, workers’ compensation insurance, and state and federal laws on hiring and employment. Obtain a federal employer tax ID number (EIN), get the forms you need to have new employees sign for state and federal withholding and immigration law compliance, and obtain the employee notices you will need to post at the workplace. Line up a payroll service such as Paychex or ADP, or use some other method to handle payroll. As early as possible, determine what your employment policies will be. Have new employees sign an offer letter setting forth the terms of their employment and an employee non-disclosure agreement to protect any confidential information that the employee may become privy to as a consequence of employment. Be careful of employee handbooks that are sold on a shelf, or prepared by an HR consultatnt; these poorly written policies often tend to be a mecc of employee rights that lead to grave unintended consequences for the employer. We strongly suggest all employers forgo having an employee handbook unless it is prepared by an attorne
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