One of the most common questions that we get from our clients, contacts, family, and friends, is whether they should engage an attorney to help them start their company. There are some firms that tell their clients, no matter what, that they should engage an attorney to form their limited liability company or their corporation, and often at a high price.
At EntrePartner, we always strive to help our clients find ways to save on legal fees when the situation warrants it and the risk is low. So, here’s the honest answer we would tell our dearest relative to steer them in the right direction.
If you are a solo entrepreneur, starting an entity primarily for local operation (within the State of Minnesota, for example), and don’t plan to conduct any external fundraising, you can file an application for your entity yourself through an online process. The Minnesota Secretary of State provides a relatively simple to use online process that will guide you through the process. To do so, you will need to determine whether to form a limited liability company (LLC) or a corporation (or s-corp). In this scenario, 90% of our clients form an LLC, but this can be quickly confirmed through a quick call to your accountant. You will also need a business address within the State of Minnesota to receive notices and where third parties may serve you with documents, if the need arises.
If you go this route, you will need to visit the Minnesota Secretary of State’s website and do a quick search with the intended name of your entity, to make sure there isn’t anything confusingly similar that exists already. It is a good idea to search different variations of your proposed entity name, including specifically searching each word that is part of it, and variations on spelling, to make sure that you find all existing options. Once you come up with the appropriate name, you can answer the online questions and pay the initial entity filing fee right on the website.
All of that said, if your entity has more than one owner, we do recommend that you utilize the services of an attorney. You will want to ensure that ownership is properly issued to each party, and that an operating agreement is put into place that outlines the rights and responsibilities of each owner as to one another and to the company. For example, many typical scenarios involve a financial partner and a sweat equity partner – and the organizational documents of the entity should outline the rights and responsibilities of each role to ensure that the company has the proper capital promised and that the sweat equity partner delivers on their obligations in exchange for ownership. We have helped many clients who did not have a proper agreement in place with their partner from the start, and who later found that there were significant miscommunications or lack of follow-through on the obligations of each partner causing significant stress to the company and to the partnership.
In addition to the above, an operating agreement covers the following:
– How will decisions for the entity be made?
– How are majority, or minority, owners protected?
– How are monetary and capital requirements of the company handled?
– How will distributions be made?
– How and when can an owner transfer their interest to a third party?
– What happens if an owner dies or becomes disabled?
– Is insurance appropriate for future business planning?
– Should owners be subject to a non-compete?
None of the answers to these questions are standard for all parties, and as such, an attorney should help you ensure your particular needs are considered and addressed. EntrePartner offers a complete formation package for entrepreneurs who need help with setting up their entity properly, and you can learn more about that package here. We’d love to hear from you!