Business Start-Ups
A group of professional licensees desired to form a new business entity. They were excellent and skilled in their profession but had little idea and no experience in how to form a new business. Some, but not all, of them met with an experienced advisor to discuss how to form a new entity and brought with them a list of questions they needed answered. Their list was in fact quite typical of the issues faced by the owners of a new business in the process of forming an entity to operate the business. The following matters appeared on their list and required explanation and action:
  • What kind of an entity should we form? The choices were either a C or an S Corporation or an LLP. What do those entities consist of and how do they differ operationally and as to the cost of setting one up?

  • How should the new business entity be capitalized? Should the existing practices of the individual professionals be contributed to the new entity? Should additional cash or other property be contributed? How are these contributions to be valued for purposes of establishing capital accounts for the members of the new firm?

  • What kind of an accounting system and books and records do we need? Who sets those up?

  • What tax filings are required, Federal and State, at the outset? Who performs these tasks?

  • What processes of registration with the governing professional agency are required? Who arranges for registration?

  • How much working capital do we need to start with? How is that capital obtained? Can owners loan money to the new entity or must all of the working capital be contributed?

  • Do we need an accountant? If so, how do we find one?

  • What other outside professionals do we need. What is the cost of their services typically?

  • What kinds of contracts do we need internally in order to document the relationship between the owners of the new entity? Who prepares these documents?

  • How do we decide who should be the officers and managers of the new entity? What should their duties and authority be?

  • How do we decide how each of the new owners should be compensated? How is compensation for administrative duties determined?

  • Do we need to provide for disability, death or retirement of one of the owners? How do we do that?

  • What kinds of insurance do we need?

  • What bank should we use? What kind of a banking relationship do we need? Do we need a line of credit to start with?

  • What do we do about a lease for our new offices? Who negotiates the lease? Who is liable on the new lease? How to we fund the cost of tenant improvements for the new location? Who is authorized to design the new offices?

  • Who owns proprietary properties which individual owners have developed over the years and which are used in the new practice? How are those properties valued?

  • How do we decide on hiring and firing of employees? Who decides on employee policies? Do we need a written employee policy manual? How do we design employee compensation and benefit plans? Who is responsible for that task?

  • How do we decide what kinds of marketing to engage in? What if there is disagreement among the new owners as to the types of marketing available?

  • What do we do if the firm is successful and grows quickly thus requiring more capital, larger space, additional employees? How are these decisions made?

  • What do we do if the firm never develops new business and fails? How do we unwind the firm? Who is responsible for the winding-up process?

  • How do we resolve fundamental differences among members of the new firm as to important firm matters? Is it simple majority rule?

  • What do we do if a member elects to simply quit the new firm? How do we determine what rights and obligations the member and the firm each have? What if the departing member decides to compete directly with the firm?

  • How do we dissolve the firm? If there is a dissolution, who is entitled to which assets and who is responsible for which liabilities? How does the firm operate during the process of dissolution?

  • How many of these questions must be resolved at the outset and which ones can wait until a later date?

This seemingly inexhaustible list of questions and concerns is quite typical of those encountered by any inexperienced person or group of persons forming a new business. What is required is the formation of a team of advisors to assist in responding to all of these concerns to assure that the proper steps and actions are taken in the proper order and within reasonable budgetary boundaries.
Generally, at a minimum, formation of a new business requires an experienced business lawyer and a skilled business CPA. These are specialized areas of expertise and cannot be replaced simply by an owner’s brother-in-law who just happens to be a lawyer or an accountant. There is just no substitute for hands on experience and specialized knowledge. Those individuals should be able to refer the client to other required professionals such as insurance providers, commercial real estate brokers, space planners, architects, bankers, etc.
Undercapitalization is the bane of new businesses. If there is insufficient capital available to establish and operate the new business properly, with rare exception, the resulting anxiety and pain will far outweigh any potential benefits. A clear business plan in writing should precede the formation of any significant new business entity. In the absence of a well thought out business plan, the owners of the new business are risking their capital and careers on what amounts literally to a gamble.
Anticipate that the time involved in the proper formation of a new business will be at least several months from the initial planning stage to actual operation. It takes at least that amount of time to meet with professional advisors, formulate plans, raise capital, find locations, prepare proper documentation, build out tenant improvements if required, hire needed employees and commence operations.
11870 Santa Monica Blvd . Suite 106-572 . Los Angeles . CA . 90025 . Phone 310 826-8505 . Fax 310 826-8522
Fax to email 775 256-8679 . email
© Dallinger Business Consulting 2012