The ultimate goal of many individuals is to start a business and be their own boss.  Prior to forming a business, you should seriously consider creating a business plan.  Not only should this business plan lay out your long-term goals including product, market share, and accounting; the plan should also contain mini-goals that are easily measured and will lead to success in your long-term goals.

Additionally, you may be tempted to save money by drafting and filing your own corporate documents.  This decision may not affect your overall success and profitability.  However, what happens if you fail to fully analyze your overall business goals and create a complete business plan prior to filing?  The result may be that you have created the wrong type of entity or you have failed to properly administer the entity you created.

The analogy I like to use is a map. All the destinations on the map represent all the possible directions your business could take.  Without a clear goal, you may become distracted, lose focus, and end up off course.  However, if you fully analyze what your ultimate destination is and how you will get there, you will be less likely to go off course without considering the consequences of your detour.  Furthermore, making the wrong strategic decisions during entity formation may ultimately be equivalent to crashing into a construction barrier—it WILL slow you down and it MAY end your venture entirely.

To ensure the greatest chance of success, you may wish to consult an attorney who can walk you through the different entity types.  During these explanations, the attorney should give you the pros and cons of each entity type and advise you of the tax consequences and liability issues associated with each.  While consulting a professional may be more expensive initially, it will likely save you money and headaches in the future.

photo credit, Daquella Manera

For decades they’ve made a good living, smooth sailing at times, struggling at other times, making payroll for staff but not themselves sometimes.  Their child, now forty-something and a shareholder in the company, decided to declare bankruptcy but didn’t bother to disclose that to mom and dad until after the fact.  Actually, he was rummaging around the books when they asked what he was looking for, to which he responded, “The corporate papers.  I have to show the court and the trustee.”  They didn’t fully understand what that meant.

Sitting across my desk, their eyes as big as saucers now that I had explained that the bankruptcy trustee was now their new partner in the business and he might demand them to liquidate assets and pay him off, the need for planning was apparent.  You see, companies need to have what we call “buy-sell agreements”.  These agreements are like wills for a business.  It tells the owners what to do when one of their shareholders are partners declare bankruptcy, die, divorce or don’t want to work anymore.  The buy-sell says if one of the owners does one of those things, and some others, that the other owner(s) have the first right of refusal to buy them out and the price is set as a number or an equation that they all agreed on already.

So, if this couple would have planned properly, when their son declared bankruptcy, they would have exercised their option, their first right to buy his interest out, via their agreed upon price or procedure to determine the price.  If they would have done that, they wouldn’t be going to court with us defending their interests.  They wouldn’t be losing a lot of sleep wondering if they’ve seen the end of the business.

Got company?  Get buy-sell.

Photo Credit, Kevin Dooley