Are you thinking about starting a business in San Diego? What does an entrepreneur or new business owner need to know and what are some of the primary issues you should consider as set out in business here in California? What are a few of the biggest mistakes new business owners make when forming a new company?
3 Important Takeaways About Starting a Business in San Diego:
- Selecting the right entity positions your company, from the start, to pay less in taxes, grow faster, and allow you to accomplish your short and long term goals without having to go to the time and expense of reorganizing down the road.
- The protections of the corporate veil separate the assets and liabilities of the owner(s) of the company, from the assets and liabilities of the business itself.
- Most new business owners don’t take the time to set up the corporate documents (operating agreement in an LLC or shareholders’ agreement and bylaws in a corporation) at the outset. This greatly increases the risk of disputes and litigation down the road, increases tax liabilities, and makes the company less valuable and less attractive in a merger or acquisition.
Why is Entity Selection So Important?
The first concept to really understand when starting your business in San Diego is the number of key questions that must be considered before selecting an entity for your new company. These questions relate to the nature of your new business, how and where you will transact business, and how profits are to be distributed.
Many download sites would have you believe that for $50 or less you can download the forms you will need, pay a couple hundred dollars to the Secretary of State and you are instantly “in business.” This is absolutely the greatest mistake a new business owner or entrepreneur can make at the outset of going into business in San Diego, especially if there is to be more than one member, partner, shareholder or owner in the venture.
The “operating agreement” in an LLC or the corporate documents in an S-Corporation or C-Corporation should clearly establish the roles of each owner, the voting authority of each stake, and how profits are to be divided.
Tax considerations could affect the basic decision of a corporate entity. For example, if the business is going to primarily focus around a single individual and that person will make more than $150,000 per year, the S-Corporation may provide advantages that are not to be found in a C-Corporation or LLC.
Medical practices and healthcare entities should draw on the Watkins Firm’s 40+ years of experience and ask about a Management Services Organization or MSO. How can the MSO help increase the efficiency of your company and it’s business operations, as well as patient satisfaction and the patient experience? How does an MSO substantially increase your profitability each year?
The Corporate Documents Must Be Carefully Crafted
Corporate documents such as the “operating agreement” for an LLC or the “bylaws and shareholders’ agreement” for a corporation must be carefully crafted to fit your unique situation and to protect your interests down the road when starting a business in San Diego. For example, California recently changed our corporate laws to provide additional protections to minority interests in Corporations and LLCs unless otherwise specified within the corporate documents. This may or may not meet the desires of the owners who are forming the company, and most downloaded sites or forms copied off of the internet do not reflect the appropriate clauses and terms for California’s unique business climate.
What happens when one of the business owners faces a life challenge such as divorce or personal bankruptcy? What happens when a managing partner in the company becomes disabled or passes away? Notice we didn’t say “if” (something happens), we said “when.” After decades of serving San Diego businesses of all sizes and markets we can tell you these issues will surface, and the time to handle these questions is at the outset.
How will the valuation of an ownership interest in your company be calculated, and will that amount be paid immediately or over a period of time. If the spouse or child of an owner takes control of an interest, how will that affect voting rights, profit distribution or other critical factors of business ownership? These questions are best addressed in the beginning, when everyone is excited about the new venture and the atmosphere is cooperative and productive. Resolving these issues down the road leads to expensive, time consuming and distracting business disputes and often litigation – usually when the company is least prepared to handle the burden. A small amount invested in your business today will save you tens of thousands or more down the road.
Pro-Tip: ” You’re giving birth to a living creature that’s been recognized by the United States Supreme Court. And so what it means is birth is what we call capitalizing. And so you have these corporate documents and you have to decide on how much ownership will be and who owns what. Then you decide about what potential ownership there are. Reserve shares, I mean other ways in which people can own it. And then you capitalize it. Either you capitalize it with cash or you capitalize it with goodwill or a combination or a property. But how you capitalize it can determine whether or not it’s a real company or you have all those protections of corporate veil and creditors and you’re personally shielded. So how you start it is very important. And thinking about it, we’ll send you on the right path to avoiding all kinds of pitfalls and trouble.
And let’s talk about the corporate veil for a minute. Because the whole reason to have an entity is to separate you the person from the legal person of the business. This is really important. I mean, especially if you’re going to be doing some big business, you’re going to have big liability or you could personally not have big liability. And also you can have an entity that can be sold. You can have an entity that can be sold in whole or bring in investors. If you do everything right, you get to do all these things.
Then once we’ve selected the entity, and that’s going to be based on the nature of what we’re doing and how many people and all of those things we just discussed, the biggest mistake that people make, especially at the outset, is they don’t pay attention to the corporate documents. They don’t pay attention to the LLCs operating agreement. They don’t pay attention to the shareholders’ agreement. And they take some boilerplate default and then down the road they get into a dispute or a lawsuit (internal or external), they’re making some money and there’s real issues that would’ve been easy to address back at the beginning.
Why is it important for a business owner to get the corporate documents right during business formation?
Let’s take the operating agreement. What does that do for an LLC and why should they pay attention to it at the outset? When we bring in an LLC, we’ll charge $1,500. You can get it done online for $500, maybe less. All you’re getting is access to someone’s form file. Then you have to take the time to customize that boilerplate to your own unique situation. Most people don’t, and that results in genuine problems down the road… but they’re trying to save money, right? What is the value of getting your new company set up correctly at the beginning? Here’s the secret after almost 40 years of doing this: if they take the time to set it up right in the beginning, they make more money, they grow faster, they handle their business better, and their risk of litigation is genuinely, substantially reduced.
What we do is we create that relationship with you, and we go through and tell you why we’re doing this and how it could impact you and why we’re filling this form out and what your options are and all those things that don’t take very much time, but it puts your mind in the right frame to know why you have this company and what each document does and also what selections need to be made. I’ve known people that have formed companies and forgotten to do the S form election four months later with the I R S and then they go on and they’re paying substantially more taxes and they don’t understand because they didn’t pay attention to their corporate formation in the beginning.
And the same is true for your tax ID number. If you’re a doctor, a tax ID number is the same number you use to go contract with providers insurance to get you paid and all these other little things. You’ve got a relationship with a lawyer who’s probably represented exact same companies like yours. And you can ask basic questions about vendors, about contracting, about how I sign my documents, how I sign my name, my articles, my bylaws, all those things that are in place very simply for us. We give you a menu, take this, I wouldn’t do that for your kind of company. We go through them all, tell you what they mean and then three years later you have somebody investing with you and they say, ‘oh, I’m going to do (something they think will give them more money, and you, less).’ And you can legally and firmly say, ‘no, no, no, we already have that spelled out in the corporate documents, and I already talked about it with our attorney.’
You’ll remember that they can’t do that to you because you spent a little time with your Watkins Firm lawyer while forming your company. Dispute avoided. Potential lawsuit avoided. More money in your pocket, now and in the future.” – Dan Watkins, Founding Partner
An Experienced Business Attorney is a Valuable Member of the Team When Starting a Business in San Diego
The experienced business attorneys at the Watkins Firm are prepared to efficiently and cost-effectively guide new business owners when starting a business in San Diego. We provide a reasonable package for start-ups that helps them to keep as much money on hand as possible, while ensuring that the company is well positioned for the start-up and initial phases of operations and growth. We will conduct an extensive interview, and guide you through the process of selecting the best entity for your new company and produce the corporate documents that will guide your company and protect your interests.
If you are forming a new company in San Diego or anywhere in California we invite you to review our podcast Episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today
According to the US Bureau of Labor Statistics, one out of 5 new companies will fail in the first year. 50% of new companies fail within the first 5 years in business. We have served the San Diego business community for more than four decades. We are small business owners ourselves. We can help you to make sound decisions and avoid the pitfalls which have harmed or ended other companies.
I always tell my clients they should have 3 close advisors when starting a business in San Diego: an experienced business attorney, a CPA or tax advisor and a banker or financial backer. You will need sound advice and counsel you can depend upon at each step in the journey and these 3 professionals provide insight, sound advice and support to help you get into business, grow and ultimately thrive.
