Today operating a business in California is more challenging and complicated than ever.
We thought it would be helpful for entrepreneurs, executives, start-ups, and emerging companies to have a brief “road map” to help navigate the challenging path of starting and maintaining a business in the state.
We hope this road map will provide a high-level guide through the strategic journey of your business from formation, through operations to your ultimate business objective.
There are several preliminary steps to take. First, choose the name that your business will be known by. This is your trade name and if you are considering selling your business at some point, a buyer will likely valuate the good will associated with your company name. Before deciding, perform research with the state secretary of state to determine your name is available. Further, perform trademark research to ensure that your preferred name is available for federal protection at the national level. Note that your trade name need not match your business’s legal formation name. Typically, laws allow you to form your business under one name and operate under a different, or “doing business as” (DBA), name. If you use a DBA, keep in mind that you may be required to file the appropriate DBA paperwork with the county where your business operates under that name.
Next, determine the sources of capital for your business, including both the source of your initial start-up capital and any future capital calls. If your strategic plan involves private equity as capital, you will likely want to utilize an S or C Corporation, as opposed to an LLC (Limited Liability Company). LLCs are less suited to this type of capital because they do not allow for the creation of distinct classes of preferred versus common stock. You also need to decide where to incorporate. Some companies prefer to incorporate in the state where the business is headquartered, while others may choose states like Delaware, Nevada or others, due to those states’ advantageous legal or tax environments.
Now, you are ready to file Articles of Incorporation/Formation with the Secretary of State (if you’ve chosen to create a corporation or LLC) or establish a Partnership Agreement (if you’ve chosen that form of business entity). Additionally, you need to draft an Operating Agreement or Corporate Bylaws. You will need to file a Form SS-4 with the Internal Revenue Service in order to obtain an Employer Identification Number (EIN) for your business. If you have employees, you also need to submit the appropriate paperwork to the state and federal government for purposes of compensation withholding, unemployment insurance, employment verification.
Your newly minted business needs to hold its first meetings, which include one for the business’ shareholders and one for its members or directors. Record the minutes of both of these initial meetings, which will include the election of the Board of Directors or, in the case of LLCs, the election of managers and the business’ officers. California corporation law requires that you elect a chief executive officer (president), secretary, and chief financial officer (treasurer), but allows one person to hold all three offices simultaneously. An LLC can be member or manager managed. The business next should issue its stock certificates (for corporations) or membership certificates (for LLCs) and account for all of the capital and assets received. The final formation step is to consider creating a buy-sell agreement. If your business has multiple members or shareholders, you will probably need one of these agreements.
You should investigate the licensing and permit rules in each state where you plan to operate. Some or all states may require licenses or permits to conduct your type of business, and you should file all necessary paperwork prior to conducting business in those states. If you strategically incorporated in a remote state, file the necessary papers to qualify to operate in the state where you’ve established your home office. If your business uses sales representatives in multiple states, check the rules in those states, as it may be necessary to file qualification papers in those states too.
You should carefully review all leases your business considers entering into. Without exaggerating, a commercial business lease could be the single most one sided document used today, in favor of the Lessor. Watching out for pollution clauses, common area maintenance fees, or other expenditures such as capital expenditure (your landlord would love to put in a new roof on the building and have his tenants pay for it) and property tax increases should the building be sold since those costs will be passed along to you, the Lessee. Finally, if you are forced to sign a personal guarantee, make sure it falls away after a period of time, once the Lessor has evidence that your business is viable.
With your business fully formed, you will need to consider a human resources professional or outsource the Human Resources Function. You will also need to create employee related documents such as employee handbook, arbitration agreement, non-disclosure agreement and other policies. Bear in mind that California law presumes that all employees are “at will,” which allows the business to terminate them or lay them off at any time. However, your business can choose to create specific employment agreements for top executive employees that run for a stated period of time. Your employees should also sign an acknowledgement of receipt of your company’s policies and/or employee handbook. Also be sure that your business properly classifies its workers, as exempt, non-exempt, contractors, salaried or hourly so as to avoid issues like missed lunches, breaks, or failing to make proper overtime payments.
You should consult with a competent insurance broker about insurance coverage for your business. Depending on the nature of your business, these policies may include workers’ compensation, general commercial liability, auto, business interruption, products liability, professional malpractice, employer’s liability insurance or errors and omissions insurance. Also consult a competent tax accountant about possible income, franchise, withholding, unemployment, sales and use, and other taxes your business may owe. You should formulate a plan to meet these financial obligations. This plan should include preparing for both the tax obligation in your home state and other states where your business operates.
Your company should also maintain a portfolio of all its intellectual property, including trademarks, copyrights, patents, confidential information, and trade secrets. To ensure protection of its intellectual property, your company should create a confidentiality and/or non-disclosure program with the necessary agreements. These confidentiality/non-disclosure agreements can be stand alone or incorporated into the employment agreements of employees and principals and the contractor agreements of independent contractors and vendors. The definition of intellectual property in these agreements should be specific enough to defeat a court challenge alleging vagueness or over-breadth, but general enough to avoid exposing the property you wish to protect. These agreements should also have consideration tied to them. For new employees, execution of the agreement should be a condition of employment. For existing employees, the business may offer some other consideration, such as a few vacation days. Starting a business can be intimidating. Doing it right requires careful consideration of all the above issues. It is important to remember that help is available with all of these concerns. Be sure to seek out financial and legal professionals for tailored advice to get your enterprise off the ground.