Legal Considerations of Forming a New Business – Part 1/3

Part 1/3 of a series of blog posts on the legal considerations of forming a new business authored by Ginny Morris, Four Athens partner and in-house legal counsel.

One of the first legal issues a new company encounters is how to organize itself.  This first decision can affect many other legal issues down the road, and there are several considerations that should go into this decision, including the owner(s), human resources, taxes, and projected growth.  You need to create a plan of how the company is going to operate, and how it is going to grow, before you can consider the different forms your company can take.

The first thing that needs to be considered when deciding what structure your company should take is the ownership.  Is it a single owner or a team?  Are the owners hands-on or investors?  How sophisticated are they and what is their business experience?  How do they plan to divide the different areas of responsibility for the business?  A single owner has more options than a team, but a single owner may have to bring on employees sooner than a team of hands-on owners who work together.  Corporations have more regulations and a more defined structure that might not fit the casual organization that you want for your company.  The more people involved in decision-making, the less nimble a company can be in making adjustments to market conditions (the “drop back and punt” factor).  Sit down all the owners of the company and draw up an organizational chart, mapping out responsibilities.  If you don’t know all of the tasks that need to be included, talk to other companies in the same business and/or that you admire.  Figure out if compliance and regulatory oversight is important.  How complicated do you anticipate your finances to be?

The next consideration, related to ownership, is human resources.  Do you need employees?  Can you use independent contractors or do you need workers who are directly responsible to you?  Can you pay on a 1099 form or do you need to set up withholding?  What about workers’ compensation insurance?    Any company with 3 or more employees is required to have workers’ compensation insurance.  However, up to 5 corporate officers or limited liability members can be exempt from coverage if they file the proper certification of exemption and their exemption takes the number of employees to zero.  Once there is one employee hired, the corporate officers or limited liability members are added back in and workers’ compensation is required.

(Ginny’s next post in the series will discuss tax considerations new business owners must address.)

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