Forming and Operating Business Entities

Whether you intend on going into business for yourself, forming a partnership or joint venture, or raising money from investors choosing the right business entity involves complex legal issues that cannot always be addressed on internet websites like Legal Zoom.

Choosing the Correct Trademark Can Be Crucial

One of the first things you need to do is select a strong trademark. A trademark is a word or a symbol that identifies your goods or services and differentiates them from your competitors. A trademark says “who you are not what you are”. An example of a trademark is the golden arches which people associate with MacDonald’s hamburgers.

Once you establish a strong trademark you then promote that trademark, whether a word of a symbol, by advertising or public relations. When people become familiar with your trademark and associate your trademark with quality, your company has established “good will”. Good will is an intangible asset that generates sales based upon your reputation. Levi Strauss & Company sells denim jeans. Levi Strauss attaches a little red tag sewn into the back pocket of its blue jeans with the word “Levi”. When people see that red tag and they associate that trademark as a symbol of quality, they will buy Levi jeans over its competitors because of a strong trademark. That is the meaning of good will.

The mistake many new businesses make is they do not properly research whether the trademark they chose infringes on another company’s trademark. I have seen companies that have spent hundreds of thousands of dollars promoting their trademark only to be sued by another company that had superior rights in that trademark. If you are found to be selling your goods or services with an infringing trademark a federal court will order you to stop selling your infringing goods and destroy any infringing goods in you possession. The court will even prevent you from shipping your goods in the federal waterways which means you cannot even sell off your remaining goods by shipping them to other countries. The result can be devastating.

Federal and State Security Laws Issues

If you want to establish a business entity and plan on raising money from investors who will be passive investors, that could raise issues of whether you need to comply with state or federal securities laws. A “security” is defined as a promissory note, stock, evidence of indebtedness, or any certificate of interest or participation in any profit-sharing agreement. Every offer or sale of a “security” is required to either be registered with the Securities & Exchange Commission or be subject to an “exemption” from registration.

This is another complex legal issue that needs attention. If your corporation or limited liability company qualifies for an “exemption” from registration certain steps are required before you approach any potential investor.

Choosing the Proper Form for Your Company Has Consequences

There are many different forms of entities to choose from when starting a business or joint venture. Those range from Sole Proprietorships, Corporations including S corporations, General Partnerships, Limited Partnerships , Limited Liability Partnerships, Limited Liability Companies, and Social Purpose and Benefit Corporations.

Choosing the best form for you is a complex legal issue. Some things to consider are federal income tax considerations and tax considerations upon formation including the effect of cash contributions, property contributions and contribution of services. Other issues involve the tax consequence of forming a C corporation as opposed to an S corporation and the effect on partnership taxation including various elections that can be made.

The management and control of the entity you chose also has consequences including the liability of owners for business organizations. Other issues that arise deal with establishing a capital account that reflects each member’s equity or shareholder equity in a corporation and a member’s economic interest as reflected in a limited liability company. The difference between a member’s capital account and their economic interest is critical. Other issues on operating the business entity is the ability for members or shareholders to transfer they shares or interest in the entity and their rights upon liquidation.

If you intend on raising money from investors the form of the entity you choose can decide the ease or difficulty in raising money. Other issues you need to consider are the fiduciary duties the owner or majority shareholders owes to investors and minority shareholders.

Many people starting companies choose to form their companies in different states. We see a lot of California businesses decide to form their business entities in Nevada or Delaware. This raises issues of additional costs of foreign limited liability companies and corporations and the advantages and disadvantages of forming entities in Delaware or other states.

Considering the legal issues involved in starting a new business it is important to obtain competent legal advice to avoid these numerous pitfalls.