Sole Proprietorships: Advantages and Disadvantages
Many small businesses in the United States operate as sole proprietorships. In fact, this is the most common type of business and is business in its simplest form. In this article we will discuss some advantages and disadvantages of sole proprietorships and more specifically, owning and operating a sole proprietorship in California.
Advantages of Sole Proprietorships
Pros and Cons of a C Corporation vs. an S Corporation
Selecting a business entity is one of the most important decisions an entrepreneur faces. There are numerous options including sole proprietorships, partnerships, limited liability companies and corporations. To make things even more complicated, there are two primary types of corporations, each with its own benefits. In order to ensure you choose the best business entity for your purposes, you should always conduct careful research and consult with an experienced California business attorney to discuss your options.
Once you have decided you want to incorporate, your options are to form a regular C Corporation or an S Corporation. Though these two types of corporations are quite similar, there are a few key differences that can determine which one is right for your business.
There are a number of ways to fund a startup. We’ve all heard about loans, grants and crowdfunding but new rules from the SEC will make it easier for entrepreneurs to raise capital. In this post we’re going to look at changes to “Regulation D” and what that means for startups.
Understanding Regulation D
Regulation D is part of the Securities Act of 1933. Section 506 specifically deals with the solicitation of private offerings. In the past, the SEC essentially banned all forms of advertisement for private investment. The revised Regulation D does away with most of the restrictions. It’s now possible for a company to publicly solicit funds for a private venture.
One of the first things any newly formed corporation should do is draft bylaws. Bylaws are a corporation’s operational blueprint. They identify what the business does, how it is run and who is in charge. Here then are five steps to drafting a set of bylaws.
5 Steps to Creating Corporate Bylaws
1. Detail relevant information concerning shareholders. This includes who holds stake in your corporation, what rights they hold and when and where meetings are to be held.
A strategic alliance is a fairly simple concept. Two companies with similar interests join forces to produce favorable outcomes for all involved. An everyday example is the Starbucks inside of Barnes and Noble bookstores. This move helped Starbucks expand, but it also kept people in the bookstore, perhaps reading the first few pages of a book they were thinking of buying. A strategic alliance is good for business, but you’ll need to take the proper steps to make it work.
1,2,3 – The Steps to Creating a Strategic Alliance for Your Company
Step 1: Choosing a Partner
With any luck, you or your business will never end up the subject of a lawsuit. Since this isn’t a perfect world, it’s best to start thinking about what to do if the unforeseen happens. Like most things, business litigation is an involved issue. We can’t go through the entire process in one post, so we’ll start with three basic steps to take if you find yourself in legal trouble.
Step 1: Purchase Liability Insurance
This step should happen long before trouble starts. In reality, this is one of the first things you should do as a business owner. Liability insurance protects the purchaser from the risks of liabilities imposed by lawsuits and similar claims. Say a customer slips on a wet spot in your store; your insurance would step in and handle the costs. You may want to add extra protection such as errors and omissions coverage. For businesses that have a Board of Directors it’s a good idea to have directors and officers coverage. This type of coverage protects the corporation as well as the personal liabilities for the directors and officers of the corporation.
Limited liability companies combine parts of both corporations and partnerships. Because they’re a hybrid, LLC’s can be more difficult to setup. One part of this process involves choosing a management structure to fit your specific LLC.
Single Member or Multiple Member LLC
The difference here is implied in the name. Single member LLC’s have only one owner, while multiple member LLC’s have at least two. Choosing one over the other typically comes down to financing. Starting a single member LLC comes with a higher level of risk as the profits and losses are reported on the individual’s tax return. However, as the sole owner, you don’t have the stress of running a company with another person.
Starting a business can feel overwhelming. Whether you’re opening a brick and mortar store or an online business, there are a lot of steps involved in turning your idea into reality. Creating a business plan and securing funding are a solid beginning; at this point you’ll also need to do a few things to make sure your business is legal.
Steps to Legally Starting a Business: It Takes More Than a Business Plan!
Picking a name is a fun element of starting a business. A name not only tells potential customers what you sell but it also reveals something of your personality. Before you jump into the next activity on your business plan and start advertising your store front or online business, make sure someone else isn’t already using the name. Fortunately, most states offer a searchable database through the Secretary of State’s Office. Also, be sure to do a national trademark search to find out if another company owns the rights to the name.
I spend a lot of time talking to founders of Silicon Valley start-ups about the stock they will receive in exchange for their contributions to their new company, and then preparing restricted stock purchase agreements for the founders. In the last couple of blogs, I have discussed the issues surrounding how founders’ stock could vest.
The concept of vesting is usually intertwined with the concept of repurchase rights. Simply put, for founders’ stock, vesting is where the repurchase rights held by the company disappear or change. In a typical scenario, when a triggering event occurs, a company can repurchase unvested stock for its original purchase price. A company may not, however, repurchase any vested stock or may only repurchase vested stock at the stock’s then fair market value.
What kind of triggering events might allow a company to purchase unvested stock? One common trigger is anything that results in the shareholder not working for the company. Most often, this means a termination of employment.
Working with start-ups in San Jose, I have often had to counsel founders on the intricacies of business law as it relates to issuing stock. A large part of initial discussions with the founding group involves the funding needs of the new corporation, how shares will be divided, and the best way to provide equity incentives to founders, advisors, and new employees.
As I discussed in my last blog, one of the key issues involved in issuing stock to founders is how to incentivize them to stay with the new corporation. One mechanism discussed is reverse vesting, where the corporation can repurchase a founder’s shares of company stock at their original purchase price when certain events specified in a contract occur.
A typical reverse vesting structure is to allow the corporation to purchase a declining number of a founder’s shares at their original purchase price as time goes on. Typically the number of shares the corporation can repurchase will reduce on a straight-line basis over the course of three or four years.
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