Declares the kind of entity, state of operation, classes of stock, and number of shares.
Documents: Crossing T’s and Dotting I’s.
Getting Your Startup Off to a Good Start.
GENERAL LEGAL AGREEMENTS ARE NEEDED FOR FOUNDERS, SHAREHOLDERS AND INVESTORS.
Filing the proper paperwork is critical and potentially money-saving, as it keeps you on the legal straight and narrow. Beginning with establishing your organization and obtaining the proper federal and state permits, then identification numbers and licenses, is a fundamental part of the process to prevent tax penalties or hefty fines. How you structure agreements and term sheets are also critical to avoid headaches and difficulties later on.
Below are a few of the basics and specifics to consider.
Registering your business entity is one of the first things you must do as a new business owner. There are several ways to register a business each with different liability and tax pros and cons: corporation, limited liability company, partnership or sole proprietorship. CMLaunch can advise you before you create your business organization to make sure you are using the type which is best suited for you and your business.
Sole proprietorship organizations and partnerships use the Social Security Number of the owners as the tax identification number for the organization. On the other hand, C-corporations and limited liability companies must have a federal tax identification number which can be obtained by filing an SS-4 Form with the IRS.
Permits are required for specific types of businesses such as restaurants, bars, firearm sales or even florists. We can help you determine if you need one, and help you apply.
The proper licenses to conduct business is vital. Industries like insurance and financial services require state and federal registration and licensing. For this type of category, a business and its respective sales force would need to obtain a life insurance agent or Securities and Exchange Commission licensing prior to conducting business.
The rights and obligations shareholders have in various situations (e.g. sale of stock, sale of the company, or death of a shareholder) should be clearly defined, with attention given to the particular circumstances of the founders and the business. This agreement should include items such as this:
- Election of the board
- Special shareholder approvals
- Share transfer restrictions
- Pre-emptive rights
- Drag-along rights
- Reverse vesting provisions
For a corporation, bylaws are the guideposts by which the corporation operates. For instance, it specifies who can be a director, how often meetings are held and how voting is done. The same purpose is accomplished for limited liability companies by the operating agreement, which combines these subjects with many of the items listed above under Shareholders Agreements.
Term Sheets can be confusing. Although angel, seed and venture capital may not look different at first glance, they are and should be handled differently. In addition, the Term Sheet is a key document that is often used to identify any material terms for the definitive agreement. For this reason, having one of CMLaunch’s attorneys spend a short time reviewing the document before finalizing it can flesh out whether there are actually hidden business issues that may pose hurdles to making a deal BEFORE you are too far down the road.
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