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Business Creation: The First Steps
Entity Selection: Many individuals run businesses as sole proprietors without ever creating any separate legal entity. While this may be appropriate in limited cases, it is almost always advisable to seek enhanced liability protection through the creation of a separate business structure for the company.
In the past, owners had to balance liability and tax concerns. Corporations offered enhanced liability protection, but profits were subjected to two levels of taxation – once at the corporate level when earned and again when paid to the owner as a dividend or compensation. Partnerships allowed owners to pay only a single level of tax, since profits generally “passed-through” to the owners’ personal returns, but they provided no liability protection for the general partners.
Today, owners can have their cake and eat it too. Most entrepreneurs now elect to run their businesses using either a limited liability company (“LLC”) or a corporation for which an election has been made to be taxed under sub-chapter S of the Internal Revenue Code (an “S-Corporation”). Both allow for pass-through taxation and a high (though not absolute) degree of protection from personal liability for company losses. While either would be suitable in many cases, a careful analysis is required to determine the best option in a given case. Several other options, including use of a "C-Corporation", may need to be considered in a particular case.
Articles of Incorporation/Organization: Once it has been determined which entity structure would best serve your business, Schumacher Law, LLC will likely draft Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC) to be filed with the Secretary of State. The acceptance of the Articles by the Secretary of State formally establishes your business and entitles you to certain legal rights and protections under state law.
Bylaws/Operating Agreement: Rather than rely on the default rules of state law to govern your business, you will want to have bylaws (for a corporation) or an operating agreement (for an LLC) to govern the relationship between co-owners and to spell out how decisions related to the business will be made. Negotiation between owners may be required to finalize this document. The bylaws or operating agreement may also include “buy-sell” provisions that restrict each owner’s ability to transfer ownership interests and provide for what will happen if an owner dies, becomes unable to work in the business, or wants to sell his or her interest.
After Establishment: If your business will have employees, or if you add new owners, you may need one or more of the following agreements:
• Employment agreements; compensation and bonus plans: Particularly for employees who are not “at will,” you may wish to have an employment contract that describes job responsibilities, compensation, and fringe benefits. Customized agreements may be needed depending upon each employee’s role and importance to the company. Schumacher Law, LLC can also assist employers with designing certain incentive or bonus plans for employees.
• Noncompete agreement: In many cases, a business owner will want to prevent key employees from leaving to work for a competitor. While generally disfavored by the courts, in South Carolina, a noncompete agreement may be upheld if certain requirements are met. The courts recognize that the enforceability of such agreements must be decided on the specific facts of each case. Often a noncompete agreement will also include a confidentiality agreement and a non-solicitation agreement.
• Non-solicitation agreement: More important than a noncompete agreement for many employers is the non-solicitation agreement. Its goal is to prevent former employees from “stealing” current or prospective clients or employees of the employer after voluntary or involuntary termination of employment.
• Confidentiality agreement: This agreement is designed to protect an employer’s competitive position by preventing employees or independent contractors from disclosing the company’s non-public information.
• Buy-sell agreement: If not included in the bylaws or operating agreement, it will usually be advisable to have a separate buy-sell agreement that restricts each owner’s ability to transfer ownership interests and provides for a smooth transfer of ownership if an owner dies, becomes unable to work in the business, or decides that he or she wishes to sell out. Coordinated use of life insurance and/or disability insurance on each owner (owned by the company or by the other owners) will often be advisable to ensure that the buy-sell agreement is properly funded.
• Contracts: In certain cases, Schumacher Law, LLC will draft or review commercial contracts to be used by clients as they conduct their business.
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