So you have a product or service and you believe that you can profit by selling it to others. Before you go drawing up contracts and dive into the world of entrepreneurship, before you choose the structure of your company from the alphabet soup of business entities, and long before you bring your product or service to market, there are several broad and important questions you should address from a legal and business perspective.
Perhaps the most important question to ask from the get go is “Who?” That is, “Who is participating in the operations of the company and in what capacity?” Defining roles in a new business is critical in its early stages in particular, mainly because it sets out the rights and duties of each individual and allows for all future decision making to occur in a smooth and orderly fashion—from deciding company structure to managing day to day operations. This is crucial even before you officially form the company for three big reasons.
First, making roles clear from the start can protect against the possibility of the risks associated with a “de facto partnership” prior to forming an actual business entity. Under North Carolina General Statutes § 59-36, a partnership exists when there is “an association of two or more persons to carry on as co-owners of a business for profit.” Many people (mistakenly) believe that for formal business ventures to actually exist there must be something in writing. This is simply not true. If you are just starting to get your business off the ground but have not yet formed and are working with any other individual for profit and if there is evidence that they worked as or were treated as a part owner, even if you did not intend for that person to be a part owner, a court may rule that they are indeed a part owner and entitled to own an equal share of the business. Moreover, because you have not formed an entity with limited liability protection, you might be held personally liable for your de facto partner’s actions while engaged in business related activities.
Second, it is generally much easier to set out the rights and responsibilities of each party before the company takes off or makes any real profit. As soon as possible, the role of each person should be clear in terms of employment, management, ownership, and investment. This is the point where so many ventures run into trouble. Once the business begins to accelerate and real value is realized, it is more likely for power struggles among key players over who is in charge of specific business decisions or who should be steering the operation. It is a common problem that can sprout up on both the small scale and large scale (for example, the turbulence in management and ownership among founders at Apple and Facebook). These conversations can be difficult, especially when there are multiple co-founders and a company’s major players involve the butting heads of “sweat equity” owners (who heavily participate in day to day operations or may have created the product) and more traditional financial equity owners (who have invested their dollars in the company). Once the gears begin moving, many companies forget to address these questions and are left arguing over questions such as: What ownership interest is each person receiving and when? How should certain decisions regarding the direction of the company be made? If there are passive investors, what are their rights? These decisions, and many others, are much easier to decide when the stakes are low (and the risk of inflated egos is minimal).
Third, many startup businesses involve new technology or a novel idea and it is important to establish the ownership of the intellectual property before the business achieves a measure of success. Too often, disputes over who owns the essential intellectual property derail a promising new business. As in the previous paragraph, the higher the stakes, the more likely a disagreement will arise. Moreover, as time passes and other individuals build on or assist in the development of the intellectual property, the lines begin blurring as to who owns which parts.
Forming a company can be an exciting time, whether you are entering the world of entrepreneurship or creating a new subsidiary of your already profitable business. Regardless of your level of experience, proper early planning of your business and defining the roles of participants is an incredibly important juncture if you want to ensure a successful future. For assistance in answering the questions posed by this post and the many other questions that come with planning and operating your business, contact Allman Spry to speak with our team of experienced business law attorneys.