Business Formation

Formation Errors that Can Destroy Your Business Startup

Almost every client I see has already registered their entity with the Secretary of State prior to meeting with me. While technically the registration process is relatively simple, there are a number of common mistakes most clients make. Some mistakes are made out of sheer ignorance during the filing process and others are the result of failing to finish the process.

As stated in the video: The real reason for registering an entity,  the Secretary of State is primarily concerned with whom to serve papers to (registered agent) in the event of a lawsuit. That said, there are three common mistakes that I see people make when filing articles of incorporation or articles of organization with the Secretary of State.

  1. Failure to include any entity identifier in the name (LLC, Corp., Company, Inc., etc.). By including the entity identifier in the name, it communicates to the general public that the personal assets of investors are insulated in the event of a lawsuit.
  2. For limited liability companies: Here you need to make the distinction between the election of member-managed and manager-managed. By electing member-managed, you are saying that every investor/member is involved in the decision-making process. As decision-makers, every member, therefore, can potentially be held personally accountable in the event of a lawsuit. While a member-managed LLC is desirable for investors that want a direct say in the company’s direction, it comes with the potential for additional exposure to personal liability in some cases.
  3. For corporations: Here many businesses fail to include/file important additional attachments. For example, these attachments could include documents that spell out indemnification/limitation of liability for officers to deter litigation or the use of restricted shares of stock that do not allow for transfers of such stock or only allows transfers under certain conditions.

In addition to mistakes made during the actual registration process, there are many mistakes that are the result of failing to complete the process that takes place after filing the articles with the Secretary of State. Here is a list of things many incorporators forget or don’t bother to do after they file articles with the Secretary of State:

Corporations:

  • Failure to create bylaws which are the internal rules that govern the day-to-day operations of the corporation
  • Failure to create shareholder/buy-sell agreements that describe how a change of ownership may, and may not, occur and what happens where there is a change in ownership
  • Failure of the owners to appoint a board of directors
  • Failure of the board of directors to hold a first meeting to:
    • Set the corporation’s fiscal year
    • Appoint officers of the corporation
    • Adopt the bylaws
    • Authorize and issue shares of stock

Limited Liability Companies:

  • Failure to draft an operating agreement that describes how decisions are made and how profits and losses are allocated, capital contributions made, how/when meetings are held, buy-sell provisions, dispute resolutions, etc.

Both:

  • Failure to move assets from the founders into the company, primarily intellectual property

So, what happens if you fail to complete the process outlined above? Answer: A lot! Here is a short list of the consequences of failing to complete the process.

  • If the assets aren’t transferred from the founders to the company, then any founder who owns an important company asset can hold that asset as extra leverage to get what they want. After all, it’s still their property. You can often transfer the assets using a simple bill of sale trading equity in the business for the asset.
  • If there is no operating agreement, bylaws, shareholder agreement, etc., then everyone is free to argue about it later. This often leads to bad feelings and legal actions that are VERY expensive.
  • Failure to capitalize the company or follow the proper formalities can lead to “piercing the corporate veil,” which means personal liability for the company’s founders/owners. This means that the entire formation process was overall a waste of time.
  • If you fail to issue stock now, you’ll have to issue it later when the tax cost could be very high.

Related Post: Seven Common Business Formation Errors 

Have you followed the proper formation process?


I would like to acknowledge Terry Doherty of the Doherty Law Firm P.C. for his gracious assistance as a reviewer to make sure that the legal issues conveyed in this post were an accurate representation of U.S. corporate law.

This article originally appeared at www.stevebizblog.com

 

Why Business Startup

Why in the Heck Would You Start a Business?

Having been involved as a founder, investor or early-stage employee at over a dozen startup ventures, I have a few entrepreneurial chops to draw upon. One of the companies I helped start was eventually sold for $500 million and a few didn’t make it, with all the others falling somewhere in between. So why did I participate in these speculative ventures and why do so many of us put our time, energy, passion and finances into launching a new business. Here are a few of the motivating factors and my brief thoughts on each.

Flexibility. Most entrepreneurs crave freedom from the 9 to 5 routine. What they often end up with is a more demanding schedule than being a so-called wage slave, but the point is; they have more self-determination and flexibility, and these can be precious commodities.

Desire to be your own boss. How many times have you had a desire to fire your #$%& boss? In my career I’ve had some terrific bosses but also a couple that made my working life painful. I’m sure the same is true for you. One answer to this problem is to fire the boss and go to work for yourself. But consider this carefully because if you don’t have the right discipline, skillset and financial backing, you may prove to be a poor boss indeed.

Money. The desire to build wealth is a big driver of new businesses. There is a misconception among some that entrepreneurs are getting rich but this is not necessarily the case. According to Payscale, the average small business owner earns $71,600 per year. Many make more but a large number make less – sometimes far less.

Passion about a new idea.  Although I tell my entrepreneur students not to fall too much in love with their idea (since most businesses need to pivot) – many great ventures were started based on a dream about how a particular product or service could solve a large problem. Working on something that really matters to you can reap large dividends.

Lifestyle. Whether it is the freedom to work from home, or to take extra vacations, there are large lifestyle implications to being a business owner (good and bad). One of the best ways to transform your life is to combine a hobby or avocation with a marketplace need. As Harvey MacKay put it, “Find something you love to do, and you’ll never work a day in your life”.

Security. Like several of the other factors, security is a double edged sword. On the one hand, if your startup is successful, you can create an independent economic asset that provides you way more security than the average corporate job. Conversely, small businesses do have a high failure rate so the security is relative.

Learning. Entrepreneurs sometimes start ventures because they are fascinated by a particular subject and want to use the business to develop their skillsets. Of course you do need enough knowledge about your business to satisfy customers out of the gate.

Fun. Never underestimate fun as a driver of new business startups. Of course not all days in an entrepreneur’s life are blissful, but once the company is established, very few business owners want to go back to the paycheck lifestyle.

There are other factors motivating new venture creation – for example: an inability to find suitable employment, the need for part-time income, or simply for the opportunity to test oneself in the marketplace. Regardless of why you choose to take the entrepreneurial path, make sure you have a good blend of solid reasoning and strong motivation. And remember that the “why” you do something is often more important to success than what you actually do.

Business Buyers

Types of Business Buyers

When it comes to the buyer of a business, buyers fall into one of two basic categories: financial buyers and strategic buyers.

Financial Buyers
Financial buyers value a business based on its past earnings, but decide to buy a particular business based upon its future earning potential. While small lifestyle businesses are often bought by individuals, larger businesses are primarily bought by investment groups and high net worth investors.

Strategic Buyers
Strategic buyers, also called synergistic buyers, may value a business based on its past earnings, but decide to buy a business based on its intangible assets. Often strategic buyers are buying things you never anticipated.

In one case, I recall a struggling lumber yard was bought on the cheap. The sell just assumed that it was going to sell its business to a financial buyer. Because its sales were declining they thought that the business could not command a premium price. In reality, the buyer was a strategic buyer who had no intention of operating the lumber yard after the purchase. The strategic buyer was actually purchasing a deep water dock on the property of lumber yard.

Strategic buyers are often competitors who want your intangible assets, market share, or location. They could even be customers that want to expand their business downstream or vendors looking to expand upstream.

Can you tell the difference between a financial and strategic buyer?

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Crowdfunding Platforms

16 Popular Crowdfunding Platforms

There are a wide array of crowdfunding platforms, each with its own unique spin on raising funds. Some platforms support charitable or creative campaigns, others reward-based campaigns, while still others support equity-based campaigns. Some are for accredited investors only while some are open to all types of investors. Some are designed to help raise funds for product development while others are looking for donations to help an individual or family deal with personal needs. While some are designed to help charities raise money. The following list should help you make some sense out of which platforms are best suited for your crowdfunding needs:

  1. Kickstarter is the largest platform with over 13 million visitors a month. It is a good platform to host product and event campaigns, but not social causes.
  2. Indiegogo has upwards of 9 million visitors a month and is similar to Kickstarter. Here you can raise funds for any legal project. It is a good platform for not only raising funds from domestic sources, but international ones as well.
  3. RocketHub is the next most popular platform and is known for its support system “Success School.” It offers many funding models, including ones where you get to keep pledges even is you never meet your funding goals at the end of the campaign. Since they partner with A&E, business owners have the chance of being featured on TV and on the A&E website.
  4. Crowdrise is similar to RocketHub in that it has flexible funding models where you can keep pledges even if your goals are not met. It is one of the biggest platforms to raise money for social causes.
  5. Fundable is one of the few platforms that offers both equity-based and reward-based crowdfunding. What makes it unique is that it does not work on a commission based on the amount of money raised. This quality makes it attractive for large projects.
  6. AngelList is a platform for start-ups to meet accredited investors and is geared for equity-based campaigns only.
  7. SeedInvest is a platform like AngelList that enables accredited investors to invest in start-ups.
  8. CircleUp is an equity only platform that connects accredited investors, innovative consumers, and retail companies. Companies must have existing revenue in excess of $500K to be listed. Funding can be through convertible debt or equity.
  9. WeFunder is another equity-based crowdfunding platform for accredited investors only, but allows for pledges as small as $100.
  10. GoFundMe is a popular platform for personal fundraising causes (e.g., covering medical expenses), but also for a select group of charities. They also support reward-based all-or-nothing campaigns similar to Kickstarter.
  11. YouCaring is another platform for charitable and personal causes with specific categories for medical, funeral, tuition, adoption, faith-based, pet expenses, and community causes.
  12. GiveForward is a donation-based platform with specific categories for medical bills, veterinarian bills, and funeral expenses.
  13. Patreon is a platform for fans to support their favorite creative projects such as music or video projects on a more ongoing basis.
  14. AlumniFinder is a relatively new platform to fund creative and innovative projects within a university community.
  15. AppStori is a crowdfunding platform to connect consumers with app developers. Consumers can make contributions to developers while developers find beta testers and build an audience.
  16. CauseVox is a platform tool for developers to develop their own website for peer to peer fundraising campaigns.

Which crowdfunding platform is right for your next fundraising campaign?

Note: this post originally appeared at: http://www.stevebizblog.com/

Entrepreneur

Entrepreneur or Not – You Need to Read This

If you are a corporate wage earner — as I was for much of my working life — you may decline to read this post because of the term “entrepreneur” in the title. However, I assure you that, regardless of how you make your living, it does have relevance and can provide food for thought.

I had the pleasure of attending a 90-minute talk by Gary Schoeniger on the topic of Redefining Entrepreneurship. Gary knows his stuff as the founder of the Entrepreneurial Leadership Institute (ELI) and co-author of one of the best-ever business books: Who Owns the Ice House: Eight Life Lessons from an Unlikely Entrepreneur. ELI is doing some amazing things in teaching the lessons of the Ice House to students and would-be entrepreneurs. Here are a few of the actionable and fascinating notes from Schoeniger’s presentation:

  1. According to Gallup, only 13% of employees are actively engaged, 24% are actively disengaged and 63% are disengaged. Scary stuff, but it gets worse – on the education front, while 76% of elementary students are engaged, the numbers drop to 61% for middle school and 41% for high school students.
  2. Employers are demanding an entrepreneurial workforce, but there is a large disconnect between what schools are teaching and what entrepreneurs are actually doing.  For an interesting take on this, view the Ken Robinson TED talk titled Do schools kill creativity? Robinson’s talk is profound, funny and worth a listen.
  3. While much of the college-level teaching about startups is focused on the “outliers” like Jobs, Gates and Zuckerberg, such entrepreneurs are a tiny fraction of new businesses. This has the effect of creating unrealistic expectation and discouraging students who would otherwise be successful business owners.
  4. Universities primarily teach management and “delivery” skills but entrepreneurship is more about “discovery” skills. A key entrepreneurial attribute is the ability to identify a problem and craft a solution by utilizing inquiry, creativity, curiosity, observation, networking and collaboration. In other words, an entrepreneur is a detective that is searching for the right signals amongst all the noise.
  5. Google’s head of people operations, Laszlo Bock, announced that the company no longer looks at an applicant’s GPA or where they went to school as hiring criteria. According to Bock, “College can be an “artificial environment” that conditions for one type of thinking. IQ is less valuable than learning on the fly.” This is the essence of the entrepreneurial spirt.
  6. Despite the common myths, most Inc. 500 companies had these characteristics:
  • Start as “ugly babies” where success is by no means apparent
  • No breakthrough technologies
  • Not venture funded (only .018 of all companies are VC backed)
  • Little formal planning, backed up with ad-hoc research
  • Start with average of $10K from friends and family
  • No identifiable educational or personality type of founder(s)

In addition to the search and discovery skills mentioned above, here is what makes for a great entrepreneur:

  • Put themselves out there, creating “tactical serendipity”
  • Self-directed – don’t wait for others to tell them what to do
  • Ability to delay gratification
  • Know how to transform adversity into advantage
  • Persistent and resilient

I will leave you with two final thoughts. First, the world is full of opportunities if you are willing to be a startup detective and find solutions to existing problems. Second, if your career choice finds you working for a company, non-profit or government entity, that’s great, but you and your organization can still benefit greatly from the lessons taught by Gary Schoeniger and other inspirational business leaders.

Note: this post originally appeared at www.GreatB2BMarketing.com 12-10-2015.