Entrepreneurs are busy on executing on the day-to-day operations of their startup. Founders are actively engaged in making sure that (1) your development team is on track, (2) working on the customer acquisition channel strategy, (3) pushing all of your agile projects, (4) keeping an eye on your financial targets and dealing with…. Your business!!!
So much time is spent on entrepreneurs learning the basics of startups including learning the language of startups which things like the following:
- minimum viable product,
- pitch deck, reading decks, presentation decks;
- elevator speech;
- burn rates;
- scrums, etc. etc.
I speak to founders every day and have found sometimes it is very difficult to have a conversation regarding the language of business law on the entrepreneur’s business because they don't understand the language. They understand some aspects like SPAC (special acquisition company) and IPO (initial public offering), but for the entrepreneurs that I work with, these founders are beginning the journey versus exiting in some fashion the startup journey through those type of vehicles.
The following concepts are what every entrepreneur should have basic understanding when setting up their business. Too many times I have spoken with entrepreneurs who have an exact formula for what they need which does not meet who they are today but is something that they have caught on Inc magazine or entrepreneur or Business Insider. Understanding where you are today and where you want to go along with these concepts will help to choose the appropriate starting point for your business.
Every single company is structured in the following way: there are owners, there is a governing authority, and then there are the day-to-day operator slash managers of the organization. Read on to learn more regarding the basic language of entities. This basic language is part 1 of selecting the right entity of your startup. If you need legal representation to help you negotiate these concepts with regard to your startup/company, give us a call and we can help.
The owners of an organization go by the names of shareholders, members, limited partners, partners.
Ownership entitles the owner to receive distributions from the organization as well as to have certain shareholder rights all as set forth in the governing documents. General rights also include access to certain information, such as tax returns and a copy of the governing documents. Owners do not have the right to participate as a governing authority or as a day today operator/management unless those rights are enumerated in the governing documents.
Issues as pure owners include understanding things like
- what sort of distributions are required to occur (such as distributions to pay taxes) versus permissive distributions by the governing authority?
- What are the restrictions on transfer of the shares?
- What happens on the death, disability, or divorce of an owner (the 3 D’s)?
- What happens if someone wants out of the organization or what if the other owners want someone out?
- What happens if the company runs out of money?
If you need legal representation to help you craft, understand or enforce these types of situations with regard to your startup/company give us a call at Duke Law Firm and we can help.
The Governing Authority of the organization is the part of the organization that is responsible for the overall organization including:
- Provide direction for the organization through strategic decisions and certain policy decisions.
- Recruit, supervise, retain, evaluate, and compensate the operators/management
- Govern the organization and the relationship with the operators/management
The governing authority goes by names such as the Board of Directors, Managers, and General Partner.
In most circumstances a fiduciary duty arises between the governing authority and the owners to ensure that the governing authority is looking out for the best interest of the company and the owners and not their own personal interest. This will be discussed in greater detail at a later time.
There are many different choices of entity models that blend owners and the governing authority, and even more models that blend the governing authority with the management/operators. These models along with these questions should be discussed with a lawyer with business law experience:
- Who will be the governing authority and how are they selected? Who are they removed?
- Where can decisions be made? Can decisions by writing be by less than unanimous consent?
- What is the time frame for notice for a meeting? Quorum requirements? Voting Thresholds?
- What are the voting rights of the governing authority? What is the voting threshold?
- What sorts of matters are not voted on by the governing authority and are delegated to management?
Management/Operators are responsible for the day-to-day operations of the company. These persons are held accountable by the governing authority. Their power is given to them through the delegation of power from the governing authority to management. The extent of their power is based on that delegation.
Common titles of the management/operators are Chief Executive Officer, Chief Financial Officer, Manager, Executive Director, etc.
Certain issues to address for these persons include:
- What is the process for appointing these persons? Removing the person?
- What is their authority (e.g. can they bind by contracts of all values or certain values? Can they incur debt on behalf of the organization?)
- What authority do they have for putting together their team?
Are You Forming a New Company? We Can Help.
If you are thinking about creating a new business, you know choosing the right type of business structure is no small decision. If you have considered establishing your new company as an S corporation, we hope you found the information above useful.
That said, we know that business formation can be a complicated process for any business owner to handle on their own. Duke Law Firm has more than 12 years of experience when it comes to helping new companies get off the ground, and we can provide the legal support you need right now.
If you require legal advice and services to help you create your new business, get in touch with us today. Call Duke Law Firm at (210) 880-0652 or contact us online to learn more about how we can assist you.