Starting a business can be one of the most rewarding things that a person can do in life. The moment when months or years worth of ideas combine with the courage to take a leap of faith and officially enter the business world provides a rush of adrenaline, excitement, and accomplishment. Sitting around a living room saying, “We should start a business”, is one thing. Actually engaging in the steps necessary to make that business a reality is another.
Starting a business can also be a very stressful experience. Many excellent ideas have failed due to poor preparation and execution. Oftentimes, a failure to fully consider and understand the legal implications associated with operating a business creates pitfalls down the road that are completely independent of whether or not the business is successful in the traditional money-making sense. It is always easier to prevent a mess than to clean one up.
Choosing business partners wisely is one of the most essential elements of a successful business venture. While the idea of forming a business with your best friend from high school or your favorite cousin may sound fool-proof, business disputes often damage and, in some cases, destroy, close friendships with friends and family alike. As with most things in life, money complicates things. The dynamics at play while discussing the Broncos with your best friend are drastically different than those at play when you and your best friend are discussing the need and responsibility for investing time and money into a business venture.
Selecting the proper legal structure for a business is also critically important. Various business structures are available in Wyoming, such as sole proprietorships, partnerships, corporations, and limited liability companies. Properly choosing the correct business structure is dependent on a variety of factors, including the number of individuals involved in the business, the nature of the business’ operations, as well as the desired tax implications.
For example, a sole proprietorship may make sense if a person intends to work alone and run a business with minimal risks. However, if an individual is operating a landscaping business as a sole proprietorship, such person could be personally liable if the truck used for the business activities is involved in an accident thus putting their house, car, or prized Gibson Les Paul at risk.
Partnerships are generally defined as an “association” of two or more persons to carry on as co-owners of a business. A partnership could make sense if the desire is for the business to be owned and operated by several individuals. Partnerships also present certain tax benefit opportunities. However, the power structure of the partnership often depends on the investment of each partner, which can sometimes result in certain partners feeling powerless when it comes to the fate of their investment.
Corporations are, generally, more complex than sole proprietorships or partnerships, and thus, can require more costs up front to properly organize. However, a corporation is a distinct legal entity from its shareholders, thus providing a layer of personal protection. Corporations also provide certain methods for raising money, such as the selling of stock, that can allow for an influx of funds in times of need.
Limited liability companies are growing in popularity because they combine various characteristics of partnerships and corporations. Limited liability companies allow for more individuals to participate in the operation of the business, while also providing protection from personal liability resulting from the company’s actions or debts.
After choosing a structure, a business must execute certain organizational documents prior to formation. These documents are extremely important in protecting the rights of the business owners, as well as governing the methods and procedures that the business will follow. A business will likely have either articles of incorporation, bylaws, an operating agreement, or something of the like, which should be viewed as the “Constitution” of the business that will govern in the event that a dispute arises. The utterance of the common refrains of “I didn’t think I needed to include that language” or “he was my best friend and I trusted him” can be prevented by the careful crafting of business formation documents.
Ultimately, the courageous decision to start a business can lead to great rewards; however, headaches and problems also proliferate in the business world, especially when money is involved. Fortunately, it is possible to prevent or limit some of these problems on the front end by carefully choosing business partners, selecting the proper business structure, and paying close attention to the drafting of the proper formation documents.