NCET explores business and technology
By Fritz Battcher
No one wants to think about the “worst case scenario” in the heady days of a new business venture. But, there are basic legal issues you should address to avoid complications down the road. Taking the time to plan up front can save you headaches and hours of problem solving later. Here is my list of common legal pitfalls to avoid as a start-up.
1) Don’t Lose your Shirt. No matter the size of your business – a one-woman show or a 10-person partnership – taking the time to create a business entity will protect owners from liability by keeping your business assets separate from your personal assets. The most common types of entities for start-up businesses are corporations, including C corporations and S corporations, limited liability companies, and partnerships (limited or general). All of these entity options provide liability protection, but each has its own particular tax treatment, owner/investor requirements, and other characteristics. To choose the right business entity for your start-up, you need to consider your particular circumstances, current plans, and future goals.
2) Don’t Be Vulnerable in a Business Divorce. If your business has more than one owner, all of the owners should enter into an agreement that outlines each person’s rights, responsibilities, and how the business will be operated and ended. You have likely heard of shareholder agreements, buy-sell agreements, operating agreements, partnership agreements, or transfer restriction agreements. They all share the common purpose of establishing owners’ rights and restrictions such as management and decision making powers, restriction on transferring the ownership of the business, and spelling out what will happen in the event of a death, bankruptcy, or divorce of an owner. The owners should discuss and agree on a framework and procedure to handle events if these circumstances arise. I have seen best friends, family members, spouses, and formerly close relationships ultimately destroyed because business owners did not take time at the outset to consider and record their common goals.
3) Don’t Dodge the SEC. When a company issues evidence of ownership (e.g. stock, LLC membership units or interests, or partnership shares), the company is issuing a security. All “issuing” companies are subject to federal and state securities laws that have complex registration requirements. The good news is that various exemptions are available to start-up companies, provided certain requirements are met.
So, whether you are raising money from family or friends, or you are courting investors, in all cases you should consult an attorney who understands securities laws to avoid unwittingly running afoul of filing and registration requirements.
Learn about Common Legal Pitfalls at NCET’s Tech Bite luncheon on February 22, 2017. NCET is a member-supported nonprofit organization that produces educational and networking events to help individuals and businesses explore and use technology. Register for the event and get more info at NCETbite.org.
Fritz Battcher is a corporate attorney and partner at Holland & Hart in Reno. He has counseled hundreds of businesses from formation through exit events. This column first appeared in the Reno Gazette-Journal.