Entrepreneurs and business owners come to us every day for assistance setting up their companies. As someone who has firsthand experience launching his own company, as well as watching my family establish and grow their own businesses, I know that developing a company can be a mentally exhausting process.
I imagine you’ve come to this blog post because you have a great idea that you think can turn a profit, but you don’t know where to start. First, congratulations on deciding to take that next step! Now, let’s jump in to the basics on corporate law to help turn your idea into reality. And, since it’s always easier to show by example, let’s assume for the purposes of this blog post that you plan to manufacture the best water- and drop-resistant iPhone cases on the market.
Why do I need a corporate lawyer?
Corporate law encompasses the formation of legal entities, entity restructuring for tax benefits, and helping businesses raise debt and equity capital. It also includes strategies to grow a company, either organically (e.g. hiring employees) or via mergers and acquisitions.
In short, corporate law is the area of law that handles developing, growing and selling a business.
Yes, LegalZoom can help you set up a company, but it won’t take into account the specifics of your situation. Just as WebMD can’t take the place of a medical doctor, one-size-fits-all software cannot provide the expertise of a lawyer. There are a number of tax and regulatory issues that need to be considered, as well as the issues that are specific to your own situation. By investing in an attorney from day one, it could save you thousands (if not millions) of dollars in the long run.
Going back to our phone case manufacturing example, let’s say the idea was a joint effort with your sister-in-law. That creates a situation where you have multiple company owners, so you’ll need a lawyer to draft paperwork that takes into account what happens if an owner steps down, either voluntarily or involuntarily. LegalZoom can’t handle that.
Setting Up Your Company
If you’re ready to develop a Texas manufacturing company, you’ll probably fall into one of two categories: you either have intellectual property that is unique to your product, or you don’t.
Let’s start with the latter: if your iPhone cases are fairly straightforward and you’ve not created a new compound or manufacturing method, we’d likely form one company in the State of Texas (not necessarily Delaware; we’ll get to that in a later blog post).
However, if you have intellectual property that needs protecting, we will likely form three entities. The first one will be a holding company with two subsidiary companies: one LLC that owns your intellectual property, and the other to own your operations. That way, if a disgruntled employee decides to sue you, your most valuable asset – the intellectual property – stands a better chance of being protected.
As for the aforementioned LLC: Those few letters at the end of a company name can mean the difference between taking home a substantial profit and paying the majority of your income to the government in the form of taxes. A corporate lawyer can help you determine which organizational structure – from LLC to PC and everything in between – is the ideal setup for you.
Growing Your Company
Let’s say you finally have your manufacturing company set up; you’ve filed as a business in Texas and you’re ready to start hiring help. The first step is to determine whether you should begin hiring employees or contract workers.
With regular, full-time employees there are certain considerations to keep in mind. First, the bottom line: You’d be responsible for not only paying their salaries but withholding and paying over to the government their taxes as well. For example, if your company needs a full-time machinist to run your manufacturing equipment, it would make sense to hire someone.
However, if you’re ready to add a fashion component to your iPhone cases, you might want to hire a designer on contract rather than a full-time employee. That way, you’ll only pay your designer for the work he or she does when you’re ready to roll out a new line, and you won’t be on the hook to pay a salary during your offseason when you do not need the help of the designer.
With any hired help – be it contract or full-time – you’ll need to run a background check and make sure your interests are protected. In addition to helping you determine what type of assistance to hire, a corporate lawyer can draft your employment contracts, and make sure that certain safeguards are in place to protect your assets via non-disclosure agreements, non-compete agreements, and other covenants and obligations.
After you have your team in place, have turned a profit and your company is running smoothly, it’s possible that a broker might contact you about selling your iPhone case manufacturing company. Conversely, you might be interested in acquiring another company. An acquisition may provide another option for growing your business, but that area of the law comes with its own challenges and opportunities, so the moment you’re ready to enter into negotiations is the time to involve your attorney. From the initial letter of intent to the final purchase agreement, your lawyer will work with you and the other company’s legal team to develop a holistic plan to combine both your companies.
How much does this all cost?
Setting up an LLC is not expensive! If your manufacturing company is brand-new, without any special considerations, no intellectual property and you’re the only owner (and only employee), it shouldn’t cost more than $850 (including required governmental fees) to set up in Texas. As with any professional service, pricing varies based on complexity, and a good corporate lawyer will explain how he or she is charging you, and why.
Speaking from personal experience, my firm and I work on more LLC formation projects than anything else. Candidly, it’s not the most lucrative work, but it’s personally fulfilling and it’s an honor to know that I’m a partner in helping individuals achieve their professional goals. Plus, collaborating with companies from the beginning allows me to set my clients up for success; too many times I’ve seen poorly formed entities with problems that could have been avoided had the initial setup been done properly (see the “multiple owners” example). It’s all about starting strong, working hard and paying it forward once you’ve found success.
This article is legal information and should not be seen as legal advice. You should consult with an attorney before you rely on this information.