Dreaming of Starting Your Own Business? Legal Considerations for New Business Owners

November 21, 2023

Starting your own business can be the realization of a dream for many people. To keep this dream from turning into a nightmare, there are a number of considerations an aspiring business owner should take into account during the planning phase of their new business venture.

ENTITY TYPES

First, consider what type of entity you wish to operate as. The most common are sole proprietorships, corporations and limited liability companies (LLC). A sole proprietorship involves filing a certificate of assumed name with the county clerk in the county in which the business will be located. While quick and cost-effective, in a sole proprietorship you and your business are one and the same—meaning you, as an individual, are simply operating under a business name. You have no liability protection for your personal assets in this scenario, and your personal assets may be exposed to creditors of your business in the event something goes wrong.

To shield your personal assets from business creditors to the extent allowed by law, you need to form a business entity, such as a corporation or LLC, and observe proper corporate formalities during your operation of the business going forward. In New York, corporations and LLCs are formed by filings with the New York Department of State. There are different tax and legal advantages to each type of entity depending on the nature and structure of your business. It is very important to consult with an experienced business attorney and accountant to help select the best entity type for you. Although it can be tempting to form an entity yourself online, you might be doing yourself a disservice by not picking the most advantageous entity type for your business.

PARTNERS

You might also be considering having a business partner. If you are going into business with a partner, even with a friend or family member, it is crucial to document their roles, rights and responsibilities at the outset of the relationship in either a carefully written operating agreement for an LLC or a shareholder agreement for a corporation. If problems with a partner arise down the road, such documents can help provide a roadmap for resolving disputes or terms for a partner’s exit. Too often, business owners neglect to enter into these types of agreements at the outset of the relationship or use form documents online that very often do not reflect the realities of their business and partner arrangements.

LEASES

Finally, you may be considering renting a physical location for your business. In negotiating a lease, some of the paramount considerations are: a) the rental structure and whether the rent is fixed or fluctuates based on expenses such as the landlord’s common area maintenance, taxes or insurance costs; b) the extent of your maintenance obligations as a tenant; and c) whether there is a personal guarantee by you individually for the business’s rental payments or obligations under the lease. It is always wise to have an attorney review a lease before signing it to help you understand your obligations as a tenant and negotiate items that are material to you.

This is not an exhaustive list of considerations but some items new business owners often overlook. With careful planning during your business setup and through enlisting the help of professionals such as attorneys and accountants, you can help minimize common pitfalls and ensure the success of your new business venture.

Dreaming of Starting Your Own ...