Where Every Startup & Small Business Should Begin

January 25, 2011  |  By Kevin Vela

One of the best things about running a boutique law firm is that we really get to dive into our clients’ businesses and help them from the ground up. Every day we receive calls from small business owners, rogue inventors, and budding entrepreneurs who are filled with excitement about their brainchild but are looking for guidance on how to best turn their idea into overflowing revenue streams.

Each matter and client is different, but a few guiding principals can help every small business owner ensure that they are creating a foundation upon which their business can be built.

These VW essentials will make sure that you’re starting off on the right foot.

Determine the best legal structure

This issue is really worth a call to an attorney. It does not have to be one of the big boys downtown; just find an attorney whom you can trust. Ask for a referral or call and interview them yourself.

When determining the appropriate legal structure for your business, the critical considerations are tax liability, personal liability, and business management and control.  These considerations will be crucial to your growth.

With each small business, a different issue or concern may define what entity structure is appropriate for your situation and future goals. Who will manage the entity? Who is responsible for fundamental business decisions? If you hope to sell the entity soon, which structure will allow for the easiest transfer? Even if you are a solo operation, the structure will determine how you take on additional investors, how you grow, and how you exit (i.e. sell the business and retire!).

Next, taxes…yup, we said it. “Taxes” is a scary word to most small business owners just getting started, but with the appropriate legal structure an owner can learn to manage entity taxes in a fiscally sound way that will actually strengthen the business. As a small business owner, your two best friends should be your attorney and CPA. Okay, maybe not your actual two best friends, but they should be people you talk to regularly. A small investment with a CPA in year one can reap substantial savings down the road.

Finally, small business owners must ensure the structure of their entity minimizes personal liability, as the cold hard facts show us that almost half of all small businesses will not make it longer than 4 years. Accidents and mistakes are going to happen. It is a part of a business growth cycle. If your liability is properly managed, you can make sure that a small mishap does not lead to a big problem.

Hope for success, but plan for obstacles

Without a business plan and forecast of where you’re headed…you are without a paddle up a creek we shall not name. As you continue to move forward with your dream of having your own small business, it is imperative that you have projections for every facet of your entity to crystallize your benchmarks for success. Honestly, the projections are only marginally useful, but the exercise of creating them is where the value is. So when you create these projections, make sure you think through the good, and the bad.

You know that book “The Worst Case Scenario Handbook?” That’s what you need your attorney to be. If your product is going to be an instant success, you may never encounter issues with your partner or investors, and you may never even sniff a lawsuit. But instant startup success is difficult to come by, so you must be prepared for the inevitable hiccups all young companies will encounter, and have an attorney who has a game plan for them.

One thing we impress on our clients is that it is our job to think through the worst case scenarios and help you prepare for them, so that you’ll never have to worry about them again. Think about this when a few modifications on your Excel forecasts leave you dividing up your future millions with your partner/investors. That’s a fine exercise, but also spend some time discussing a contingency plan in the event that you run out of money, encounter partnership troubles, or bump into a lawsuit.

Tax Considerations

A critical issue that is often overlooked by many small business owners is retaining an accountant who works with small businesses. For most small business owners, a trip to see their accountant is an annual forced drop-off of twelve months worth of mangled receipts…grumbling about Uncle Sam the entire way. You should not look at your accountant as an unnecessary, costly expense, but rather as a valuable tool that can save you significant money (and headaches) each year.

Successful small businesses should leverage their accountant’s expertise in at least quarterly meetings. The goal of the meetings should be to gain insight and ensure they are taking advantage of all of the tax incentives available to the small business and its owners. Also, remember that tax laws are constantly changing – they are deleted, modified, and added. Hopefully your CPA will keep an eye on anything that could benefit you, but if not, he/she should know a good tax attorney who will. Google “small business overpay taxes” and look at how much is left on the table each year.

In the end, many small business owners or startups are hesitant to reach out to attorneys (and/or CPAs) because they see them as unnecessary startup costs. In actuality, the right professionals should save you money over time, help you to prepare your business for success, and be a valued partner as you grow your business.

About the Author(s)

Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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