Founding a business is an exciting time for entrepreneurs. They have dreams of growth, innovation, and success. They believe in their products and services, their new way of doing things and are set to make their mark on the world.
But for all the energy and optimism, there’s one crucial reality each founder must face: without the right legal foundation for the company, even the best ideas can fail, and the best plans can go awry. Too often, company founders have come to me in those circumstances. I wish they had come to me earlier.
Many founders fail to consider the best corporate form for their business and co-owners or see an operating or shareholder agreement as a mere formality. Those are mistakes. It is critical to choose the right legal structure and to spend the time on a clear, comprehensive ownership agreement that lays out appropriate governance terms and protections. These aren’t just tasks to check off a to-do list— they are crucial for the long-term stability of your company.
In my three decades as an attorney, I’ve seen the consequences of skipping these steps: business partners locked in fights among owners and disagreements that could have been avoided. I have seen the wasted money and time. On the flip side, I’ve also helped many founders build businesses that thrive because they took the time to get it right at the start.
If you’re serious about creating something lasting, here are the best practices for company formation that every founder should know.
1. Choose the Right Structure (Hint: It’s Not One-Size-Fits-All)
The first—and perhaps most significant—decision you’ll make is choosing your business structure. This choice will determine how your business is taxed, how much personal liability you’ll carry, and how easily you can bring on investors or partners.
LLCs (Limited Liability Companies) are a popular choice for their flexibility and liability protection. They’re often ideal for small businesses or startups with fewer stakeholders.
C-corporations, on the other hand, are better suited for businesses seeking venture capital or planning to go public. They allow for multiple classes of stock and attract institutional investors.
S-corporations and partnerships can also be effective, depending on your goals, but each comes with its own set of rules and limitations.
This decision is the cornerstone of your business foundation, so take the time to evaluate your options with a legal and financial professional.
2. Write It Down (All of It)
A handshake agreement might feel sufficient when you’re working with friends or family, but it’s not. The best relationships can be strained under the stress of running a business. Clear, written agreements protect everyone involved and set expectations from day one.
These are the must-haves:
Operating agreements for LLCs: Define each member’s role, contributions, and decision-making powers.
Shareholder agreements for corporations: Address stock ownership, voting rights, and what happens if someone wants out.
Partnership agreements: Clarify roles, profit-sharing arrangements, and procedures for resolving disputes.
Without these agreements, you’re inviting misunderstandings that can derail your business.
3. Protect What’s Yours
In today’s competitive landscape, your intellectual property (IP) is often your most valuable asset. Whether it’s a proprietary technology, a brand identity, or a unique business model, protecting your IP is critical.
Trademarks: Register your company name, logo, and tagline to prevent others from copying your brand.
Patents: If you’ve developed a unique product or process, secure a patent before someone else does.
NDAs and confidentiality clauses: Ensure employees, contractors, and partners can’t walk away with your trade secrets.
Think of these protections as the locks on the doors and windows of your business. Without them, you’re leaving yourself open to theft and misuse.
4. Play Nice with Uncle Sam
Taxes may not be the most exciting topic but ignoring them is asking for trouble. Start by understanding your obligations and setting up systems to be compliant.
Here’s where to start:
Obtain an EIN (Employer Identification Number) from the IRS.
Register for state and local taxes.
Set up payroll systems to accurately handle employee compensation.
Working with a knowledgeable accountant can help you avoid costly mistakes and ensure you’re taking advantage of any tax benefits.
5. Plan for Disputes (Yes, Even at the Start)
No one wants to think about conflicts during the honeymoon phase of a new business, but failing to plan for disputes is a recipe for chaos. By addressing potential issues upfront, you can prevent small disagreements from escalating into major disputes.
Include buyout provisions: What happens if a partner wants to leave or sell their stake?
Deadlock resolution: If partners can’t agree on a big decision, how will the issue be resolved?
Ownership changes: Can shares or ownership interests be transferred to outsiders?
A well-drafted agreement acts like a pre-nuptial agreement for your business. It’s there to protect everyone involved.
6. Build a Team
Behind every successful business is a team of advisors who fill in the gaps in expertise. At a minimum, you’ll need:
An attorney who understands both corporate transactions and dispute resolution.
An accountant who can keep your books in order and help you navigate tax laws.
A financial advisor who can help you navigate raising capital and structuring deals.
These professionals aren’t just problem-solvers—they’re strategic partners who can help you avoid pitfalls and seize opportunities.
Conclusion: Start Strong to Stay Strong
Building a business is an adventure, and like any adventure, preparation makes all the difference. By laying a solid legal and operational foundation, you set yourself up for success, even when challenges arise.