Building a Solid Foundation for Your New Business

A solid foundation is critical to the success of your business. Not only does it provide protection from the risks that could derail your dreams, but it also puts you in position to take advantage of new opportunities that can help your business grow. 

Unfortunately, many new AND experienced entrepreneurs don’t understand what it actually means to have a solid foundation. And as a result, they often make basic (yet costly) mistakes. For example:

• Believing that their LLC is an impenetrable shield that prevents them from being sued
• Mistaking their LLC for a business license
• Commingling business and personal funds
• Using contract templates from friends or previous places of employment
• Thinking that business registration protects their brand name
• Confusing copyrights for trademarks
• Sharing proprietary information without an NDA
• Failing to get a written partnership or operating agreement in place
• Etc.

Whether you’ve made any of these mistakes or not, I’m not here to judge. I’m here to inform. If nothing bad has happened yet, you still have time to get your house in order and avoid a future headaches. Here’s a SUPER SIMPLE breakdown of what it means to build a solid foundation for your business or side hustle.

Building a Solid Foundation — The 4 Cornerstones

There are 4 legal cornerstones that serve to protect and sustain your business: 

1. Entity Structure 
2. Contracts 
3. Intellectual Property
4. Compliance

Entity structure refers to the legal structure of your business. Are you an LLC, corporation, partnership, sole proprietor, etc? Entity structure helps determines what laws govern your business. Therefore, it will have an impact on the risks that you’ll face as a business owner, as well as the regulations that you’ll be required to comply with. 

Contracts are the backbone of every successful business relationship. They allow businesses to collaborate with one another by creating accountability from the start of their relationship.

Intellectual property (IP) includes all the things you’ve created that give your business a competitive advantage. Protecting your IP allows you to keep that edge over your competitors, while also creating opportunities to generate passive income.

Finally, we have compliance with government laws and regulations. This category includes licensing, taxes, and observing employment laws that apply to your business.  

Let’s dive a little deeper. 

Entity Structure

Entity structure is the first cornerstone of your business’s legal foundation. While there are a wide variety of different business legal structures, LLCs are the most popular because they provide the management flexibility of a partnership combined with the personal liability protection of a corporation. However, the LLC structure is not right for everyone. 

For example, entrepreneurs looking to raise money from professional investors (i.e., venture capitalists) are often better off forming their business as a C-Corp. Investors prefer to invest in company’s structured as C-Corps because:

1. They can issue shares of stock and have the ability to go public
2. Investors aren’t required to report the corporation’s income on their personal tax returns
3. The laws governing Corporations are more well established than those governing LLCs

So, an entrepreneur looking to raise venture capital may be making a mistake by forming their business as an LLC. 

It’s true that you can always change your entity structure down the road. However, this process can be expensive and time consuming. So, getting it right from the beginning is important to the long-term success of your business. 

There are two factors to consider when choosing your business structure:

1. Your short-term needs
2. Your long-term goals

Start by asking yourself, ‘what resources do I need in the next 12 months to successfully launch my business?’ Or if you’re starting a family business and you need flexibility as you all learn and discover what the business could be, a partnership or LLC might be a good fit. 

Next, ask yourself, ‘what are my long-term goals with this business?’ For example, if you’re just testing the waters to see if you can turn your love for basketball into a personal training and coaching business, you might want to consider starting out as a sole proprietor. That way you can easily shut the business down if things don’t work out.

At the end of the day, don’t assume that what’s worked for someone else will work for you. Consider the specific facts of your situation, and do what’s best for your business. 

Contracts

Few entrepreneurs comprehend how important contracts are to protecting and growing their business. Most think of contracts as documents for the judge to read and interpret if you end up in court. But that’s just one piece of the equation. 

More importantly, contracts are practical documents that you can use to resolve issues without going to court. In this respect, a contract is helpful in two ways.

First, the process of contract drafting and negotiation gives business owners a chance to identify, discuss and address potential risks at the outset of their relationship. Nine times out of ten small business legal disputes grow out of issues that the parties failed to address in their contract. By taking the drafting and negotiation process seriously, you can significantly reduce the likelihood that your contract will land you in court.  

Second, when parties are able to communicate effectively through the negotiation process, it sets the stage for effective communication throughout the business relationship. Even if they encounter an issue that isn’t addressed in their agreement, there’s a greater likelihood that they’ll be able to work through their issues and continue their relationship.

It’s always a good idea to get your agreements in writing. However, contracts with partners, customers, and contractors are especially important. These are the relationships that will make or break your business. Make sure these agreements set proper expectations for both parties. Under-promising and over-delivering is the easiest way to build a solid reputation for doing good business.

Finally, remember that a good contract is:

1. Written in plain language that everyone can understand.
2. Complete and thorough in addressing potential problems.
3. Fair.

Intellectual Property

Every successful business has valuable intellectual property. EVERY. SINGLE. ONE. 

Maybe your business holds the rights to a new invention. Or, an original work of artistic expression. Perhaps you created a proprietary and confidential method or procedure. Or, you may have constructed a widely recognizable brand. 

These assets are what set your business apart, and give you an edge over the competition. So it’s critical that you protect them. But how? The answer of course is, it depends. 

There are four types of intellectual property: Trademarks, copyrights, patents, and trade secrets. Each of these different types of IP need different forms of protection. 

Trademarkable and copyrightable assets are generally entitled to common law protection as soon as you use or create them (provided no one else has established their rights prior to you). However, full statutory protection is only granted through federal registration with the USPTO or the US Copyright Office.

Registration is also the key to protecting patentable discoveries. However, unlike trademarks and copyrights, before a patent application is filed they are completely unprotected. 

Then there are trade secrets, which (due to their confidential nature) cannot be registered. Instead, they are protected by contracts and proper procedural protocols.  

Therefore, the first step in protecting your intellectual property is listing and categorizing your IP. Once you understand what you own, you can create a plan for protecting it. 

Finally, when it comes to making the most out of your IP, protection is just the beginning. Your IP can be a valuable source of passive revenue if you have the right legal framework in place to license it.  

Compliance

The final cornerstone of your business’s legal foundation is compliance. In this context, compliance refers to observing the laws and regulations that apply to your business. 

Typically, the most challenging aspect of compliance is knowing what laws actually apply to your business. For most businesses, there are laws and regulations on the national, state, and local level that they’re required to follow. And when you’re new to business, you’re often unaware of what rules apply. Don’t feel overwhelmed.

The key to keeping your business compliant is relying on people who have more knowledge and experience than you. Mentors and professional colleagues can be a fantastic resource because they’ve been there before. Not only can they give you a heads up on what you must do to stay compliant, they can also share practical tips to help speed up the process. 

Industry associations are another resource that you can turn to. While your colleagues may not be willing to share their knowledge for fear of generating competition, trade associations are different. Not only do they possess a wealth of specialized knowledge, they also want to see you succeed. So they shouldn’t have a problem sharing information and advice with you. 

You can also turn to your local elected official’s office and local non-profits for help. These groups can help you stay compliant with state and local laws in particular. And they should be more than willing to assist you because your success will ultimately benefit the community in the form of jobs and taxes. 

And here’s one last tip. As you take care of your licensing and other requirements for the first time, create a list that you can refer back to year after year. Your list should include notes on what you need to remain compliant with each regulation. Not only will this list help to keep you from forgetting your compliance requirements, it’ll also speed up the process by helping you stay prepared. 

Does Your Business Have a Solid Foundation?

Now that you know what goes into building a solid legal foundation for you business, it’s time to find out whether you’ve already taken those steps. 

At MZA Legal, we’ve created a self-guided legal assessment that helps entrepreneurs spot weak spots in their legal foundation before they become problems. If you’ve got 5 minutes, take the quiz today to see how your business stacks up, and whether you’re missing something that is leaving your business exposed. 

After completing the quiz, we can email you your results and a link to schedule a 10-minute follow up call to review them with an attorney for free. 

So don’t let this opportunity pass you by. Find out whether your business stands on solid ground by taking our small business legal assessment today!