[9] (Part 3: Company Set-Up Basics) De-Risk Your Biz: Minimum Small Business Legal Requirements

Company Set-Up

The so-called corporate documents legally required for a company range from simple boilerplate templates – which can be sourced from places like Legalzoom or Clerky – to more nuanced documents that need to be custom drafted by a business lawyer.

Company Founders & Roles

As a rule of thumb, complexity tends to increase with the number of owners of a company. Complexity further increases when there are different types of owners, since different owners play different roles. For example, some owners are the visionaries who came up with the idea and drive product/service development. Others are financial investors who are passive and don’t take part in the day-to-day operations. Others are the early executive team who jumped on board early on due to their experience and skillset. Quite often, owners play multiple roles. The relationships between multiple owners and the overlap (or lack thereof) between their roles are spelled out in the organizational corporate documents for a company. By way of illustration:

LLCs vs. Corporations

The most common types of company entity structures in the United States are limited liability companies (LLCs) and corporations. Each has pros and cons, including different tax implications, which I won’t spell out in this writing since I’m more focused on overall legal risks and how to mitigate them. Here are a few links which give an overview of the differences between the two entity types:

Forbes: LLC Vs C Corp – How to Choose a Business Structure

UpCounsel: LLC vs Corporation Pros and Cons: Everything You Need to Know

LLCs

In general, LLCs are the legal version of a brute force business structure. You can pretty much design the governance structure of the company the way you want, using plain language in the formation documents to lay out the roles, responsibilities and obligations of the owners and decision-makers.

The owners of an LLC are called members and the decision-makers are called managers.

The foundational legal document for LLCs is called the Operating Agreement, or sometimes the LLC Agreement. The Operating Agreement is like the “constitution” for an LLC. It contains all of the ownership and management-level governance rules and generally lays out how the owners of the company plan to work together. It answers questions like: who will put in the initial capital, what to do in the event of disputes, what are the procedures for voting on major issues, and who makes the decisions. While lawyers often have templates to work off of with standard provisions already drafted, you have a lot of leeway as to how to set things up according to your needs and preferences.

Corporations

Corporations, on the other hand, are more formal and structured. There is a feeling of historic elegance in the way a corporation is designed, which is ingrained in the law. Think parliamentary procedure on parchment paper. There are specific roles in a corporation that must be filled in order for it to have legal validity:

  • Shareholders: The owners of a corporation are called Shareholders, who are responsible for electing a Board of Directors. Typically, the more shares owned by a Shareholder, the more power they have to control the Board.
  • Directors: The Directors are the overlords of the company and are responsible for major decision-making, including electing Officers. The Directors are elected by and serve at the pleasure of the Shareholders, meaning the Shareholders can remove the Directors if the Shareholders aren’t satisfied with how they vote.
  • Officers: The Officers are responsible for the day-to-day operations and serve at the pleasure of the Board, meaning the Board can remove the Officers if the Board isn’t satisfied with their performance. More traditional officer titles are President, Vice President, Treasurer, and Secretary – who is responsible for maintaining the corporate records. More modern and well-known titles for the Officers are CEO, CFO, COO, CMO, etc. – the so-called C-Suite.

By way of illustration, here you can see the decision-making hierarchy of both LLCs and Corporations:

In the next post, we’ll cover the minimum documentation required for each of these company types.

De-Risk Your Biz: Minimum Small Business Legal Requirements