Before starting any business, you should give some thought to the following issues.
1. Choice of Legal Entity
More likely than not, you will want to establish some sort of legal entity to operate your business. While it is certainly possible to operate your business as a sole proprietorship (i.e. no legal entity), there is no protection from personal liability and your personal assets (home, bank accounts, personal property) are exposed to creditors should your business not succeed. The same is generally true for general partnerships; partners are personally liable for partnership debts.
Depending upon the state in which you reside and/or intend to operate, there are certain legal entities that limit your liability. These are corporations, limited liability corporations and limited liability partnerships. The major benefit of these entities is that, properly structured, you may avoid personal liability for debts. Certain tax benefits may also flow from having an entity. There really is no “one size fits all” approach for your business, and you need to decide carefully which path you will choose. Keep in mind that strict formalities are required and compliance is crucial to preserve any protection the entity provides. If you incorporate and do not follow these required formalities you risk exposing personal assets to creditors. The following general advantages and disadvantages might be helpful to you.
2. Choice of Whether to Execute Personal Guarantees
Major vendors, lenders, and franchisors usually ask for this. A personal guarantee means that you are securing the obligation with your own personal assets; your house, money, and personal property. Try to negotiate out of executing a personal guarantee. Developing a strategy on this issue may be helpful by raising a number of points of negotiation with an eye toward settling on the elimination of the personal guarantee. An attorney may be able to assist you in this regard. .
3. Consider Licenses and Insurance
Certain businesses require local, county or state licenses. You will need to do your own research regarding what licenses may be available as these may not be disclosed or adequately discussed in the franchise disclosure document. Do not underestimate the importance of such licenses because without them you will not be able to operate your business. Consider the timing of obtaining such licenses as well as any fees associated with them in your analysis.
You should ensure you have appropriate insurance coverage for liability and in case of fire or other property damage. Should someone slip and fall on your business premises, you will need to be insured. If you have employees that drive for you, you will need automobile liability and property damage insurance. If you have employees, you will need Workmen’s Compensation insurance. Also consider the need for your own disability insurance in case you are injured and cannot work. Business interruption insurance can protect your income in the event your location is damaged by some unforeseen event.
4. Consider Creating Pro forma Profit and Loss Statements
Preparing a pro forma is an excellent way to take a hard look at the expected revenues and expenses to make sure that you are missing any major components needed to evaluate the business. Consider your rent, loan payments, cost of goods, salaries, royalties, advertising fees, initial franchise fees and other fees. Do not forget an appropriate salary to pay yourself.
5. Consider Employment Costs and Compliance Obligations
If you are hiring employees you will have to pay them the minimum wage, proper overtime wages, make withholdings, provide workers comp insurance, and comply with employment laws. State laws differ in these regards so we recommend that you consult a local employment lawyer or contact your state employment agencies for further information. At a minimum, you will be required to comply with the various federal employment laws. Strict compliance with employment laws is important because, among other factors, you can be personally liable for violations depending upon the statutes at issue.
6. Consider Leasehold Obligations
You may be required to lease a location for your business. Commercial leaseholds are complex obligations and often require long-term commitments that will carry on even if your business fails or you decide to move it. As a consequence, the assistance of a capable lawyer may help you eliminate some of the downside risk should your business fail or if you decide to close it for any reason. In most cases, landlords will seek personal guarantees as well.
8. Consider an Exit Strategy
The situation may arise where you decide to exit the business. With your own business you have maximum flexibility. But with a franchise there is a contract that will cover what you can and cannot do. If you decide you want to sell a franchise, you may be limited in the terms, who you can sell to and the price you can receive. In your own business, this would not be the case.