Nearly everyone has some sort of New Year’s Resolution. Will 2015 be the year you start your own business?
If you’re seriously considering it, how hard is to learn the language of business? Breathe easy. It’s not hard.
What you need to have is a willingness to learn. Just because you have built and now want to market your better mousetrap doesn’t mean you should jump right in without thinking about the legal structure of your business, capitalization, liability protection, taxes, financial statements and business plans, employee issues and all of the rest of what makes up a business. These days, we are lucky – you can find numerous online articles and books dealing with business. Read everything you can get your hands on – I have found that even the worst business book usually contains a tip or two that I can use in my business.
Articles of Organization or Incorporation make up your initial filing with the State of Maryland. There are forms online for you to fill out to file your articles – but, be aware of the following: setting up a business requires far more than filing articles. A good tip – instead of detailing exactly what the purpose of your business will be, refer to “any purpose authorized by law in Maryland.” That way, when you decide down the road to change the focus of your business to something unrelated to how you began, you will not need to amend your articles.
Once you file your articles with the State Department of Assessments and Taxation (SDAT), they will be accepted. That date of acceptance can be used as the commencement of the business. With that acceptance and an Employee Identification Number (EIN) for your business, you can go to the bank and open a business account. The Articles will set forth the name of your business, its address, the purpose of the business, the registered agent for accepting service of process in Maryland and other matters. Any change in these items will require you to file an amendment.
Every year after your business filing is accepted, the business must pay $300 and file a Personal Property Tax Return. If you do not file this return, your charter to do business in Maryland will be forfeited. You can go to the SDAT website and find out about the status of your business and even obtain business filings online.
Once the Articles are accepted, you need to focus on the Operating Agreements (for an LLC) and the By-Laws (for a corporation). These are the documents that provide roadmaps for the business. Who owns what, how shares or interests are voted, who has authority to run the business, sign contracts, open bank accounts, etc. The important thing to know about these documents is that one size doesn’t fit all. Your Operating Agreement or By-Laws must reflect your business. As I mentioned previously, if you have a partner, or several, you will need to address what happens if someone dies or is disabled. The time to have this discussion with your partners is right up front when everyone is on excellent terms. Let’s face it – unless you decide important issues and reduce your agreements with your partners to writing, you may easily get stuck in a difficult position – especially if you don’t control the vote.
Take a look at XYZ Corp. Five friends came up with a great idea for a business. In a frenzy of euphoria about how much money they were all going to make, all the friends signed an Operating Agreement prepared by an attorney for one of them. That agreement specified that all corporate decisions would be made by unanimous vote. Therefore, all five of the friends would have to agree on all corporate decisions. That worked for a short time, then tragedy struck. One friend died. The operating agreement automatically put the deceased’s beneficiary in place of the deceased and four of the friends had a new partner. The new partner did not get along with the other four. No more unanimous votes. The business came to a complete standstill. But, doesn’t Maryland law say some votes only have to be majority vote, not unanimous? Yes, it does but it also says that the Operating Agreement can override that. The moral is, be careful. Think about the consequences of what you are signing and under no circumstances sign anything without a review by an attorney who represents your interests.
Here’s another one. A corporation adopts By-Laws that provide for the removal of a director “with cause”. That is defined as circumstances where the Director is convicted of a crime. ABC Corporation was in a sensitive business dealing with government contracts. A Director of ABC was indicted for fraud. The optics of having a Director under indictment hurt the Corporation’s business. The indictment and trial lasted many months – ABC could not remove the Director since the Director until the Director was formally convicted of the crime since that was the language used in the By-Laws.
Language matters. You do not need to be a corporate attorney; however, to be safe, you need to hire one when setting up your business. A good accountant is also necessary to set up the chart of accounts for your particular business and make sure all tax filings and employee withholding filings and payments are done in the proper way. You will pay money to get the expertise but the time to do that is right up front, not later when you are in a mess.
If you do your due diligence, read everything you can about business, hire the experts up front and set up your business the right way, you will be well on the way to success.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over 30 years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.