Launching Your Business Right: Six Steps to Success
Starting a business is an exciting journey, but without the right foundation, it can quickly become a legal and financial headache. That’s why we’ve put together the Skufca Law Six-Pack for Business Success—six critical steps to help you build your business the right way. Whether you’re embarking on a new venture or formalizing an existing operation, these steps will help you establish a solid base that protects your interests and supports your long-term success.
Step 1: Select Your Business Type
Your business structure determines everything from liability protection to tax treatment and management flexibility. Choosing the right entity from the start is key to avoiding future complications. While there are several different entity types available in North and South Carolina, the primary choices for most situations are LLCs and corporations.
LLC vs. Corporation
Limited Liability Companies (LLCs). These are a popular choice for small businesses due to their flexibility and pass-through taxation, meaning profits and losses are reported on the owners’ personal tax returns rather than being taxed at the entity level.
Corporations (C-Corps & S-Corps). Offer strong liability protection and potential tax advantages but come with more regulatory requirements. C-Corps face double taxation (corporate and personal level), while S-Corps allow pass-through taxation but have shareholder limitations.
Professional Entities: If you’re a licensed professional (e.g., doctor, lawyer, architect), you may be required to form the professional form of these entities (a Professional Limited Liability Company (PLLC) or Professional Corporation (PC or PA).
Did you Know? People often speak about forming an “S-Corp.” This is really a tax election and not an entity type. Whether you choose an LLC or a corporation, your CPA may advise you to make an S-Corp election for its potential tax advantages, such as avoiding self-employment taxes on certain distributions.
Learn more about entity selection here.
Step 2: Operational Documents & Defining How Your Business Runs
Your business entity is only as strong as the documents that govern it. Operating agreements are the governing documents for LLCs, and bylaws are the foundational documents for corporations. These are essential for defining the rules of partnership and preventing disputes among owners and managers. These foundational documents outline:
- Ownership Structure: How ownership is divided among members or shareholders.
- Decision-Making Processes: Who has authority to make key decisions, how voting works, and what percentage is needed for major actions.
- Adding or Removing Owners: The process for admitting new owners and the terms under which an owner can be bought out or forced out.
- Handling an Owner’s Death or Incapacity: Establishes continuity and transition planning to avoid legal battles or operational disruption.
- Dispute Resolution: Defines how internal conflicts are handled to avoid costly litigation.
Without these documents, state default rules apply. These may not align with your business goals and intentions and can still leave you without guidance in many circumstances, thus increasing the chances of disputes and increasing the time and effort needed to reach a resolution.
Learn more about business governance and operational documents here.
Step 3: Ongoing Compliance: Stay in Good Standing
Forming a business is just the beginning. Maintaining good standing under state and federal law requires ongoing care, and failing to meet these requirements can lead to penalties, loss of liability protection, or even business dissolution.
LLCs, PLLCs, corporations, and PAs have some overlapping and some unique compliance needs.
- LLCs & PLLCs: LLCs require the filing of annuals reports while PLLCs do not (although, you may need to file a license renewal with the relevant licensing board).
- Corporations & PCs: Corporations have more administrative requirements than LLCs and must hold annual shareholder and board meetings, keep corporate minutes, and file annual reports. Like LLCs, professional corporations do not need to file annual reports with the Secretary of State but may be required by the relevant board to annually renew the license.
- BOI Reporting: The FinCEN Beneficial Ownership Information (BOI) is a federal requirement that businesses report key ownership details to the U.S. Treasury Department. Since the rule’s implementation, there have been various legal challenges and internal decisions that have placed enforcement of the requirement in flux. Businesses should strive to stay up to date on the latest BOI developments.
Learn more about Initial Compliance here.
Step 4: Formalize Your Business Relationship with Contracts
While verbal agreements are common, they are risky, as they fail to address important details and are difficult to prove in the event of a dispute. Strong contracts provide clarity and legal protection, preventing costly misunderstandings and disputes. A few Business Contracts that may come up in the course of a business’s operations include (but are by no means limited to):
- Vendor Agreements: Define pricing, deliverables, and payment terms to prevent conflicts with suppliers.
- Employee & Independent Contractor Agreements: Clearly outline roles, compensation, restrictive covenants, termination terms, and ownership of intellectual property.
- Customer Agreements: Establish terms of service, refund policies, and liability limitations to protect your business.
- Investor Agreements: Define rights, obligations, profit-sharing, and exit strategies for all parties.
In each contract, you should take care to include important provisions governing termination, payment and pricing structures, liability, indemnification, and dispute resolution. Download Skufca Law’s free guide to Business Contracts to learn more about these terms in depth.
Step 5: Employment Rules and Considerations: Build Your Team the Right Way
Hiring employees or contractors is a significant step in the growth of a business. This step comes with a number of legal responsibilities and considerations. Understanding employment laws as they relate to worker classification, contracts, restrictive covenants, and legal requirements will help you avoid costly mistakes, lawsuits, and penalties.
Worker Classification
When a business moves to expand its labor force, one of these first considerations is whether it can hire an independent contractor or whether it must hire an employee. Hiring independent contractors is less expensive for employers because the employer doesn’t need to provide benefits to or pay employment taxes for independent contractors. However, it is more difficult for an employer to classify a worker as an independent contractor as the legal standards are strict.
Learn more about employee classification.
Employee and Independent Contractor Agreements
Whether you have an employee or a contractor, you should enter into written contracts with your workers to set expectations and prevent disputes over job duties and compensation. These agreements can establish important restrictive covenants, such as non-compete and non-solicitation clauses, to protect your business from unfair competition during and after the worker’s engagement with your business. Learn more about non-competes and recent law and restrictive covenants.
If you’re ever in a position where you need to terminate an employee’s employment, separation agreements can be a useful tool to protect the business from future claims by the employee by incentivizing them with severance to waive all claims they have against the business. Learn more about terminating an employee.
Employee Handbook
Another important document in a business’s relationship with its workers is the employee handbook or manual. A well-drafted employee handbook should set clear workplace expectations and guidelines.
These documents also perform several important legal and business functions as well. For example, if an employee ever brings a discrimination lawsuit against a company, one of the company’s important defenses will be demonstrating that it has an established “Anti-Discrimination Policy” that prohibits discrimination of any kind, establishes a reporting procedure, and prohibits retaliation against an employee for reporting perceived discrimination.
Another example of the utility of an employee handbook is regarding to paid time off (PTO). Many businesses are happy to provide PTO as a benefit to encourage employees to rest, but they do NOT want employees to hoard PTO and cash it out upon their exit from the company. However, North Carolina law requires employers to pay out PTO unless they have written policy, provided to the employee, that says otherwise. The employee handbook is the typical document where this kind of policy would be distributed.
Step 6: Estate Plan Ahead: Plan for the Unexpected
When starting up, it’s also important to consider what happens when it’s time to wind down. What happens to your business if you become injured, retire, or pass away? Without a plan, your hard work could be lost or entangled in legal disputes rather than going to benefit your loved ones.
As you set up your business, you should consider questions like:
- When I die should my ownership transfer to family members, key employees, outside buyers, or be re-purchased by the company?
- How should I provide for this transfer? Should I use a will or trust?
- Are there legal considerations?
If you have business partners, answering these questions together becomes even more important to ensure that your loved ones are taken care of and aren’t engulfed in a legal dispute in the midst of a tumultuous time.
NEXT STEPS: Start Your Business Off Right with Skufca Law
Starting and growing a business is more than just having a great idea, it’s about setting up the right legal foundation to ensure long-term success. Every business has unique needs. Contact Skufca Law today at 704.376.3030 to establish the right foundation for your business.