Are you wondering what legal steps are required to start up your own company?
Or which legal form to choose for your new startup company?
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I understand how all this can be frustrating. Especially that lawyers & legal auditors would normally only give you the different options, without talking the business decision for you.
Commonly, they’ll let you take a decision based on your business judgment.
If you're like most of the entrepreneurs starting new businesses, this will make things even worse.
It’s totally fine. Don’t panic. Take it easy. One step at a time.
Seek progress not perfection.
First, let's figure out what you want for your business. How do you want it to look like?
Then let's look at the legal structures and what's the one that’s most aligned with your purpose.
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You’ve probably heard before, there isn’t a magic key or perfect business structure.
Each business form has its pros and cons. Make sure that you at least understand this and most importantly, how it will impact your own startup, especially from tax & liability perspectives.
A golden rule would be to start small.
The business structure role is not to impress anybody or make you shine. Some positions like a (CEO or Chairman) look or sound tempting. Don’t fall into this ego trap. Just stick to what reduces your risks and makes your life easier on a day to day basis.
If you're a sole entrepreneur starting out or just with a family member or two,
probably a limited liability company can be your most suitable option, from a practical prespective.
Anyhow, here's a list of questions & steps, that will give you more clarity on what’s legally required. It's what you need to think about when you start your own business (which may vary from one country to another).
You definitely need to talk to a corporate lawyer & a certified accountant who is licensed in the jurisdiction where you want to start your new business.
You'll walk away with clarity about where to start, your next step, strategy & action plan.
Does a Partnership or Corporation Better Suit Your Business?
In general, a limited liability company or a joint stock corporation is what’s more recommended, in my view in most cases.
Most of the comparative companies’ laws distinguish between two broad types of business forms – partnerships and companies.
Without going into much detail, you need to understand something important: that in most jurisdictions, incorporating a partnership will not limit your liability. Meaning, all your money will be at risk to cover your partnership debt although some laws would give a limited partner option, for the partners who are not engaged in managing their business. It is not very recommended to chose this type of legal form for your startup in my view.
Why? Because you need to limit your liability. Limited liability companies and joint stock corporations, both in most jurisdictions, limit your liability to the money you invested in parts or stocks. Which means your personal money (your home, car, money in your bank) is not at risk.
Assuming you are not in the venture capital or private equity kind of business or have a plan to get listed on the stock exchange in the near future. If you have one or two partners, capital to startup with that’s less than USD 100K, most probably a limited liability company would be your best option, in my opinion.
How Much Shall You Invest In Your Startup?
It’s recommended to invest surplus money that you don’t need to cover your normal daily living expenses, rent, and bills.
It’s important to have a business plan, SWOT analysis, STEP, and business model to start off with. You need to research theses and figure them out. If you don’t know these acronyms, it would be best to find some templates to make your life easier.
Comparatively, a limited liability company’s capital requirement ranges from USD 5K to 50K depending on the jurisdiction in question. Typically around USD 20K.
Usually, a joint stock corporation capital requirement will start from USD 100K. However, some jurisdictions allow partial payment starting from 25% to be paid upfront. The remaining may be paid later in subsequent years.
Obviously, you’ll need to cover the minimum capital requirement or partial payment. Your capital should be moderate and adequate to your activity or similar businesses of your size. Not too much or too little. Typically, you need at least what will cover your expenses (for the first six months to one year).
It is normal for you to encounter more expenses than revenue in the first year. If all is set up correctly and you put in the hard work, you should see a gradual shift in the opposite direction in the following years, until you reach a breakeven milestone. This is when your revenue covers your expenses. Anything in excess of that is profit.
As concerns profits, you’ll either distribute them, so they become dividends, or you can reinvest them in your business as retained earnings for the following years. There are normally rules for distributions, which in some cases oblige you to build legal reserves, commonly up to half your capital.
It is common practice that you retain your earnings for the first few years to grow your company and build reserves. Some countries that prioritize prudence over transparency in their accounting standards, may allow you to have latent reserves. Other countries won’t.
Accordingly, it’s very important to have a business plan with estimated costs for the future. Sometimes, it’s not easy to figure out those numbers precisely, but it’s important to have an estimate. Anyways, as Mike Tyson once said, “Everyone has a plan until they get punched in the face”.
Think of your planning documents as living documents that you will always need to adjust, tweak, and tune going forward. Like a musician who adjusts his guitar chords over and over again before every gig.
You’ll need to do that for every business, project, service or product.
Master plans are not just important to build your strategies and tactics, but you will also need a metric to measure them against. You can pivot and take corrective actions whenever necessary in your business development journey.
Do You Need a Partner?
In most cases, you will need a partner, delegates, and outsourced collaborators.
Some jurisdictions allow one-man show businesses and others don’t. In all cases, it takes two to tango, I suppose. Doing everything alone is not the most recommended option in my view.
Having at least a partner is good for brainstorming, support, and to hold each other accountable for what needs to be done.
Any successful business, project, service or product needs good teamwork behind it. Those teammates need not necessarily be your partners owning shares in your business, but you will rely on them in many cases.
Doing everything yourself is not something I would recommend. To scale your business, you would need to focus on only doing what you are efficient at. Delegate or outsource the rest. The internet offers a great opportunity for that. Check sites like Upwork, for example.
You can even leverage the difference in labor costs, and get better value for money, by outsourcing to overseas skilled labor intensive countries like India, the Philippines, and Egypt.
Arbitrage can also be done, given the fluctuation of exchange rates so you can benefit from major and sudden drops in exchange rates against the US Dollar like what happened in South Africa and Egypt in recent history.
Don’t marry for money. Your partner is here to stay, at least for a few years, in case he exists. Have partners who you like to be with. Those who share your vision. Those who you enjoy working and chatting with. Like-minded, yet diversified and multi-talented.
Since you – the partners – are assumedly going to be managing your business, as most startups do, then try to have the right mix of brain set, knowledge, skills, attitude, and experience. It’s strongly recommended to have interdisciplinary skills and diversity in the workplace.
Hiring or outsourcing to disabled, marginalized and disadvantaged people, who have the required skills, knowledge, professional attitude and experience is something to be encouraged and nurtured. The social aspects and philanthropic impact of your business is something that you should seriously consider.
Environmental and economic awareness is becoming a must these days. Sustainability is something you need to consider, of course, and having partners and collaborators who have that level of awareness is necessary.
You definitely also need to consider a good corporate lawyer and the legal auditor or tax accountant for your accounting and taxes. You do not need to retain them on a continuous basis, but at least have their opinion or services at the start of your journey to ensure you walk on the right foot, you know your rights, obligations, and how to manage your legal issues and accounting books.
Virtual assistance these days is a good option if you are looking for an assistant or a secretary.
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Which one of these two options describes what you do?
Legal Procedures To Form or Incorporate
- Name: You will need to choose a name for your business. You will need to search a database to check if it is free to take or if it’s already used by another business. It’s good practice also to check it as a domain name too, and even better to search it as a trademark as well. To make sure that you can later protect it as a domain name (if you plan to have a website) and trade or service mark if you are selling a branded product or service.
- AoI: You need to prepare your Articles of Incorporation, which in some jurisdictions is referred to as Articles of Organizations. In other jurisdictions, there are also by-laws or statutes.
- EIN or UID: It is your Employer Identification or Business Number, in some other jurisdictions they call it Commercial Registration Number, or Unified Number. It is a unique number to identify your business. It’s like your business ID when dealing with governmental agencies or third parties.
- Taxes: You will need to register with income and sales taxes in most jurisdictions, except if you are in a free zone or tax-free area, where such registration is not required. Normally you get a number for your tax registration. In some countries, you are not required to register for sales tax unless you reach a certain turnover threshold.
- Bank A/C: Businesses need a separate bank account so that the partners can deposit their shares of capital, and later it operates as a business account to make and receive payments. Partners need to designate who’s eligible to sign to transact on its business account. Only those eligible designees will be entitled to transact at the bank on behalf of the business.
- Social: In most jurisdictions, you will need to register your business as an employer at the social insurance services. With some exceptions, you might only be required to do that if you have employees or a minimum number of employees.
Finally, I am wishing you the best of luck and success in whatever journey you chose.
Just remember to move forward, to progress.
It’s those small steps you consistently take every day or week that build up and make you eventually achieve your goals.
Time flies so enjoy every moment of your journey. Choose joy & stay positive.
As a corporate lawyer and certified IP/Cybersecurity professional, I manage https://ecorporate.lawyer that helps entrepreneurs, business owners, and investors start, secure, scale or sell their business and investments.
At E-Corporate Lawyers I offer our magic circle lawyers and law firms legal technology, marketing, and management consultancy, tools & resources to start, secure and scale their virtual practices and online presence.
Disclaimer: This article is not intended, construed or interpreted as legal or financial advice to any particular person or case. This information is for educational purposes only. It is just my personal view, based on my corporate legal experience. Views are relative to both their authors and audience.