What do I need to know when starting a business in San Diego or anywhere California from a legal perspective?  The formation of a new company and selecting the best business entity to position your venture for success requires experience and expertise.  This isn’t about downloading a few forms from a “zoom” site.  There are substantial decisions you will face and these require the advice and counsel of an experienced San Diego business attorney at the Watkins Firm.

3 Key Takeaways about What You Need to Know About Starting a Business in San Diego or Anywhere in California:

• Starting a new business is more than just choosing some form of business entity and filing a some paperwork with the State of California.
• The corporate documents (shareholders agreement) (bylaws) (Operating Agreement in an LLC) establish how the company is going to be run, as well as the relationships between its owners and how profits are to be handled.
• The very reason to have a “business” is the protections of the corporate veil – separating the assets (and debts) of the company’s owners from the risks, liabilities, and assets of the business.  Business is all about calculated risk and reward, and the corporate veil provides the ability to take those risks while protecting the owners of the company.

More Than Just a Corporate Entity

Should you select an LLC, S-Corporation or C-Corporation?  If you are in the healthcare field should you consider a professional corporation and a Management Service Organization?  Starting a business is more than just selecting and implementing a corporate entity.

The importance of a clear focus on what you intend to do with company while you own it, as well as the details within the bylaws and corporate documents (shareholders’ agreement in a corporation, Operating Agreement in an LLC) are two of the most important things you need to know when starting a business in San Diego and Southern California.  Many business professionals and stakeholders under-value the importance of addressing critical business issues at the outset, when everyone is positive and excited about working together and the best interests of the company.

Why do you have a business entity in the first place?  Why isn’t every company just a made up name and in the name of its owners?

A business entity provides the protections of the “corporate veil.”  This is an important legal and financial protection.  The corporate veil establishes the company as a separate “entity” from its owners.  It provides a defensible wall between the assets (and debts) of each owner from the assets and debts of the company itself.  The corporate veil is a shield from creditors of the company, allowing the business to take risks without placing the personal assets of its owners at risk (unless they agree to do so by personally guaranteeing an obligation of the company).

The selection of the actual entity itself depends upon the number of owners now and in the future, the nature of the business to be conducted, and ultimately your exit strategy.  Each type of entity limits or expands the type and number of owners of the business, and how investors may be added in the future and business may be conducted across state and national borders.  This is one of the reasons why you need an experienced business attorney from the Watkins Firm.  We have helped to form tens of thousands of business entities across more than four decades of service to the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California.

A download site provides a few documents, the owner(s) try to figure out the options, and ultimately just go with a boilerplate and jump into business.  This is a recipe for big trouble down the road, and sooner than later.  Why is that?

One example is the valuation of a business interest when a major life event happens to a member in an LLC or shareholder in a corporation.  Divorce, bankruptcy, serious illness, injury and in some cases the death of a partner can result in expensive and time consuming litigation for the remaining owners.  How much is the interest of an ownership position worth?  What happens if a life challenge arises and one of the owners needs to leave the company? How much is their ownership position worth, and who has the first (2nd and 3rd) option to purchase that interest?  How will that affect the balance of power and/or majority control?

How will capital be contributed to the company, and how will it be paid back?  Most companies take a period of time to become self-sustaining.  What are the obligations of the parties during the start-up phase of business and what happens if one of the parties is unable to match required contributions to keep the business moving forward?  Will the entity grow to conduct business across state lines or internationally?  Boilerplate LLC and corporate documents may or may not work in California.  California is home to some of the most complex corporate and business laws in the United States.  How you structure your company at the outset will substantially reduce the risk of litigation down the road, and protect the viability and growth path of your start-up.

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.

You need to carefully tailor the company documents, if you choose a corporation, and not all corporations are the same. If you choose a limited liability company, if you choose a partnership, a limited liability partnership, there’s all types of different variations. And then you can get into the nitty gritty based on your profession and all the regs and all the professional license requirements and all of the, depending on the kind of company, their resale license and permits. There’s all kinds of little things that your old business lawyer knows about <laugh> and can tell you about from the get go. As opposed to you finding out after you’ve made a few mistakes, and your in an expensive dispute or lawsuit.

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.

That’s a big one. 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 at a substantial profit.  It’s an asset that can appreciate (or depreciate). 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. If you get a big opportunity and you didn’t set your company up correctly, then you can’t have your friend or a larger company with an extra (several) million dollars decide to invest or buy the company. You’ve got to rewrite everything and restructure everything and hope you didn’t make any mistakes. And all of a sudden that opportunity doesn’t look so like such a good deal to the investor or company interested in acquisition. And that person or entity who’s got the investment money will say, ‘well, this isn’t professional, it’s not organized, it’s not valuable, and they’re not really serious about doing business.’ And you’ll miss it all because you didn’t pay attention in the beginning when you formed a company.” – Dan Watkins, Founding Partner

Sound Counsel on What you Need to Know When Starting a Business in San Diego or California

What do you need to know when when starting a business in San Diego or anywhere in California?  How can the sound advice and counsel of the highly recommended business attorneys at the Watkins Firm based upon 40+ years of experience help to ensure your present and future success?

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.  Learn about the value of a general business counsel, and how the Watkins Firm serves our business clients through startup and the years to come as a trusted business coach and adviser.

 

Meet Dan Watkins:

Daniel W. Watkins is a true people person who sincerely listens. He cares about things that occur in other people’s lives. Dan enjoys digging into the facts and finding creative solutions to problems. He is not shy about giving his opinion either.

Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.

Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a seasoned litigator and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.

He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.

THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR

Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.

In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.