Q&A: Answers to Your Questions about Starting and Growing a Business

If you’re thinking of starting a business, you probably have questions. Lots and lots of questions.

That’s a good thing. Entrepreneurs tend to be inquisitive people. And it’s good to do a lot of research about your market, competitors, pricing strategy, legal options and potential liabilities, before you open your doors for business.

I come across a lot of frequently asked questions, so I thought it would be a good idea to put together a list of the most common questions I get about starting a business from entrepreneurs. I hope we can make this a repeat feature.

This list of questions and answers is by no means all-inclusive, but it hopefully addresses some lingering questions you may have in your mind.

Without any further ado, here are a number of the most frequently asked questions by entrepreneurs about starting and growing a new business.

 

 

Q: Do I need a lot of money to start a business?

No. And yes.

It depends. How is that for a lawyerly answer?

The cost of launching a business is lower than it has ever been. However, the price of doing business seems to be constantly increasing, in part because of broke governments looking for new sources of revenue.

(Having said that, let’s put away our pitchforks and torches for a moment and remember that we still live in a free market economy which has produced some of the largest, most prosperous companies the world has ever seen, even if we don’t like paying taxes.)

If you want to start a rocket ship company, then you are going to need to have a kajillion dollars (that’s an exact number).

If you want to start an online business, then you won’t. You will have to pay for the domain, hosting and any add-on’s, but you can easily get by spending under $100 per year. So stay away from rocket ship companies for the time being.

If you want to start a consulting business or a company selling information, you can keep your costs down. If you need to have a physical presence – including either office space that isn’t under your home roof, or retail space – your costs can vary widely depending on industry, needs, size of the space, and location.

Now, if you are going into business with partners, the price of saving money up front can be very expensive on the back end. If you don’t form a legal entity such as a LLC or a corporation with your business partners, and you don’t write down the ground rules for your new business, you are bound to come across disagreements in the future and you will have no foundational “Constitution” to turn to as your tiebreaker.

 

Q: What kind of business form should I use?

I generally advise clients that a Limited Liability Company (LLCs) is the quickest, cheapest, and most flexible entity for a new startup business if your chosen field is eligible.

Read more: Six Step Plan to Choose the Right Form for Your Business

However, not all types of businesses can be run out of a LLC. You cannot render professional services such as legal advice or accounting advice through a LLC. Generally, “professional services” includes any service may only be lawfully rendered if you have a license, certification, or registration. This includes, in addition to lawyer or accountant, a doctor, chiropractor, architect, etc.

If you are planning on launching a business to provide services in one of these fields and you have the appropriate licensing, then you may need to form a professional corporation.

Another common form of business entity is a sole proprietorship, which is another name for having no separate legal entity. On the plus side, a sole proprietorship is the easiest and least expensive form of ownership. Sole proprietors are in complete control, and may make decisions as they believe would be best for the business. Profits from the business flow through directly to the owner, and the owner claims the profits on their personal tax return. The business is also easy to wrap up.

There are also disadvantages to a sole proprietorship, including the fact that sole proprietors have unlimited liability and are legally responsible for all debts against the business. The owner’s business and personal assets are at risk – which may not be an issue now if you don’t have many assets, but it could be an issue later.

On the other end of the spectrum is a corporation. Setting up a corporation can be cheap, but maintaining it is more expensive. If you are not planning on taking on outside investors, then I generally advise sticking to a LLC.

Read more: How to Set Up a Corporation in California Without Pulling Out All of Your Hair

Q: I’m thinking of going into business with my brother/sister/cousin/fraternity brother/guy I met at Burning Man. We don’t want to spend a lot of money on lawyers at this point. Can we work out the details later?

A: Sure! That’s a great idea. It’s folks like you that keep lawyers in business.

Actually, I hate it when I see lawyers say “no, absolutely not, you must pay $3,000 to a lawyer to draft a custom operating agreement” even if you are starting a business on a shoestring because frankly, I know that advice gets ignored.

So let’s be real. You’re probably going to forge ahead and start that business anyways because you have an idea and are motivated. That’s a good thing. You could be the next Google, or Microsoft, or Netflix. However, promise me one thing: when you do start to make a little cash, you’ll put some of it towards stabilizing your ship.

In an ideal world, you and your business partners would form a LLC or a corporation right off the bat, and each of you would have your own legal counsel to advise you and represent your individual interests.

However, that’s not always possible. If you’re really trying to start a business on a shoestring, you probably can’t all afford separate lawyers or maybe not even one lawyer.

Many lawyers will say you should stop right there, and if you don’t have money to pay a lawyer to form a LLC or a corporation, you shouldn’t be in business. Some lawyers will also say new business partners absolutely must have their own separate lawyers to represent them in the drafting and negotiation of the operating agreement.

I don’t completely agree. I know that certain shoestring businesses wouldn’t start at all if they had to spend hundreds or thousands of dollars on hiring a lawyer right at the start. In addition, a basic LLC with a cookie cutter operating agreement can be fine if partners are able to get along and agree on most issues, and work things out when they disagree. (That’s a big “IF”.)

What I recommend is to wait a year. If after a year or two the business is humming along and making money but the founders still get along, then set aside a little money and hammer out a custom, non-cookie-cutter operating agreement. You will be glad you did.

Even if you don’t start off with a perfectly crafted LLC prepared by an expensive lawyer in a beautiful downtown high-rise office building, promise yourself that you will go back and address any legal issues you leave unresolved at the start.

Q: I have an idea for a new business, but I already have a LLC set up. I want to use the LLC to protect my assets from personal liability. What do I need to do if I want to keep the old LLC and run the new business out of it?

If you want the new company to be a part of the LLC then you just need to be sure to transact business in the name of the LLC, and not in your personal name. So, be sure to have any funds in a separate, dedicated checking account owned by the LLC. Be sure to pay for anything related to the new company with funds from that dedicated checking account rather than with your personal checking account funds. If you enter into any contracts, be sure the contracts are between the LLC (not you personally) and that company.

In addition, if you are going to be transacting business in a name other than your own personal name (in other words, if you are launching a consulting business called Acme Consulting rather than Jane Smith Consulting), then you should register a fictitious business name.

Read more: How to Pick a New Business Name That’s Legal and Doesn’t Suck

An LLC can’t absolutely protect your assets 100% from liability – there are certain claims which could be made against you personally, such as fraud claims or negligence claims. I recommend getting good insurance – work with a good insurance broker to be sure you’re covered for any potential liability that could arise out of the new company. Also, even if you do everything perfectly, there is always a risk that a party suing you could name you personally, though good insurance should protect you from that scenario. It can be very expensive to get yourself out of the case, even if you are named improperly.

Also, there are certain professions which can’t operate as an LLC, such as lawyers, accountants, doctors, etc. – generally professionals that require professional licensing.

 

Do you have a question I didn’t cover here? Feel free to leave it in the comments below and I’ll do my best to answer.

Like this entry? Sign up for our FREE Business Startup Course. Or check out the “Best of” California Law Report.

John Corcoran is an attorney with Plastiras & Terrizzi in San Rafael, California (Marin County).  He advises clients about real estate/land use, general civil litigation, and small business matters.  He can be reached at  (415) 250-8131 or jcorcoran@ptlegal.com.

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Photo credit: Flickr/taberandrew

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