LEGAL TIPS FOR STARTUP COMPANIES Houston, TX

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1 LEGAL TIPS FOR STARTUP COMPANIES Houston, TX

2 Organizational Entities There are several types of organizational entities available as options for new startup companies. This includes, but is not limited to, sole proprietorships, partnerships, LLC s, and corporations; we highlight each below. Sole Proprietorship This is a business run by one individual for his or her own benefit. Proprietorships have no existence apart from the owners. The liabilities associated with the business are the personal liabilities of the owner, and the business terminates upon the proprietor s death. The proprietor undertakes the risks of the business to the extent of his/her assets, whether used in the business or personally owned. Partnerships-General and Limited A general partnership is an agreement between two or more persons who join together to carry on a business venture for profit. Limited partnerships limit the personal liability of individual partners for the debts of the business according to the amount they have invested. Partners must file a certificate of limited partnership with state authorities. Limited Liability Company (LLC) An LLC is a hybrid between a partnership and a corporation. Members of an LLC have operational flexibility and income benefits similar to a partnership but also have limited liability exposure. While this seems very similar to a limited partnership, there are significant legal and statutory differences. Consultation with an attorney to determine the best entity is recommended. Corporation A corporation is a legal entity, operating under state law, whose scope of activity and name are restricted by its charter. Articles of incorporation must be filed with the state to establish a corporation. Stockholders are protected from the liabilities associated with the business.

3 as possible. Larger companies are less likely to receive loans from friends and family, although they can undergo very similar transactions. Suppliers, clients, strategic partners and even competitors can make loans to other companies, as is the case daily in the banking industry. Financing and Funding A ll businesses, regardless of size, need financing for start-up and growth. However, the financing options available to small businesses can be different from large business options. Specific types of financiers, such as venture capitalists and stock investors, favor different sized business. Knowing the financing options available to your business can help you maximize the value of your fundraising efforts. Personal Loans Almost any list of sources of start-up capital will include loans from friends and family. This form of financing is common for start-up small businesses who need all the money they can get from as many sources Bank Loans Traditional bank loans are offered to small and large businesses alike, but larger companies can have a significant advantage over new entrants. Companies with established reputations and heavy balance sheets can obtain larger sums of money quickly, while small businesses often go through rigorous application processes and presentations to obtain much smaller amounts. Venture Capital Venture capitalists invest large sums of money into new or growing small businesses in return for a management or ownership stake. Venture capitalists generally only look for companies with rapid growth potential, giving them a quick return on their investment.

4 Legal Documents Before company founders do any significant work on a startup, it s well-advised to put something in writing about how they plan to work together and what their respective roles, ownership, compensation, etc., will be. Otherwise, things can get really messy if the co-founders were to get into a dispute later, especially if they decided to split up. Non-Disclosure Agreement Many conversations need to begin with a signed NDA on file. It s ideal to have this document ready to go for any unanticipated developments to protect the privacy of the company and ideas. Operating Agreement A clear operating agreement, including a buy/sell clause, is essential. It should also include how partners compensation may change based on their role changes within the organization. These two items are must-haves in order to avoid miscommunication down the road. Ownership of Assets If there are any kind of contributors who are unpaid (or freelance), make sure there are legal documents that stipulate what both parties can do with the contributions. Assignment of Intellectual Property Every person who works in any manner for the company, including the founders, should execute an agreement assigning all intellectual property they create to the company. Especially during the startup phase of a company, almost all of the value of the venture will be tied up in the intellectual property being created i.e., without having a legal title to the IP, the company is worthless.

5 The notion that legal issues can be solved when they arise and waiting until there is an actual need for a lawyer before hiring one is a costly mistake, literally. -Odun Longe Presented by Sources