Company Legal 101 Basics & Entering the Market
• 20 Dec 21
Starting a business is exciting, but can be rather daunting since entrepreneurs are presented with a host of challenges. As a Startup founder, it is also a great opportunity to learn more about business-related rules, laws and regulations, which can often be complex to navigate.
Each and every legal decision made in the launch-phase of a business must be carefully considered since it has the potential to impact all aspects of the company. In this article, we examine some of the basic legal structures every Startup business owner should consider, along with the legal support you may need when entering the market.
Forms of Incorporation
The incorporation of a company refers to the formation of a legal entity that operates and exists outside of the business-owner’s personal affairs. This involves the drafting of legal documents, namely ‘Articles of Incorporation', which states the purpose of a company, particular details such as name and location, as well as the number of shares being issued, should there be any.
The incorporation of a Startup business clearly defines the responsibilities and obligations of the company, as well as more intricate details, such as taxes, financing and employment contracts. In the United States, incorporation of a business can take on various forms (which operate under different rules and regulations) such as an LLC, Sole Proprietorship, C-Corporation and S-Corporation.
It is always advised to seek legal advice when determining which incorporation structure is best suited for a new business, ensuring that all legal bases are covered and the company is set up for success.
If an entrepreneur intends to incorporate a company limited by shares and intends to engage investors, it is important to consider how many shares they intend to hold within the business structure and what type of shares..
An entrepreneur may wish to approach third-parties to invest funds in the business in return for profit shares in the company. This is a common method Startup owners use to generate funds for launching their businesses.
However, entrepreneurs should remain mindful that making use of second or third-party investors may result in reducing their own stakes held within the company. This could lead to the business-owner possessing less decision-making power and an imbalance within the executive structure.
In short, investor funds may come at the expense of valuable control in the business and should be carefully considered by striking the perfect balance between investor control and business ownership. Careful legal advice on protecting the founders position when taking on investors is critical.
Issuance of Shares
Simply explained, issuance of shares refers to the shares in a business which are allocated and held by shareholders. Issued shares are a division of authorised shares that are held by company shareholders, whether internal members, external investors or members of the general public. Issued shares are the shares of a corporation which have been allocated (allotted) and are subsequently held by shareholders.
Any and all decisions that concern share issuance should be carefully determined and legally sound to protect against potential losses.
Taxes and Accounting
All Startup business founders must pay critical attention to the subject of taxes and accounting. While this area can be quite complex and intimidating, following the first basic steps can make the process simple and worry-free.
- Open a business bank account
This step helps to maintain a clear distinction between personal finances and finances dedicated to the business.
- Track and record all business expenses
Much like keeping a close eye on the income and expenditure related to personal finances, all Startup owners should keep a close eye on business expenses, ensuring that there are no unaccounted for purchases and unnecessary expenditure.
- Formulate a bookkeeping system
While it is not required to be complex or elaborate, establishing a reliable bookkeeping system is paramount to staying on top of company finances. A bookkeeping system will aid in recording, storing, retrieving and analysing all company financial records.
Furthermore, during the incorporation stage of a Startup business, it is advised to be thorough in analysing the methods of tax to which the business must conform. This may impact the business entity you choose. Taxes are calculated differently under every business structure, and should therefore be pre-determined. All necessary tax forms and documents should be completed under legal advice.
Of course, a good accountant is likewise a good idea.
Should your Startup business include the prospect of having any employees, it is advised to be sufficiently knowledgeable of employment law. Failure to comply with state-sanctioned employment laws may lead to serious implications and could even result in criminal charges.
Becoming familiar with employment law will aid in drafting the necessary legal documents which will state the terms and conditions under which employment will be carried out. This may include details such as working hours, work location, salary and compensation, worker benefits and so on.
Employment law will also determine the working relationship between employer and employee, i.e. whether the engagement will be contractually, permanently or casually based - all of which must be agreed upon by all parties involved.
In today’s business climate who is genuinely an “independent contractor” and who is an “employee” is no longer so clear. So, you need to be very careful to ensure the basis upon which you are accessing help - from both employees and contractors alike.
Further details to be considered in an employment contract backed by employment law are workplace rules and regulations, company policy on confidentiality and grounds for immediate dismissal. Seeking legal advice to straighten out these particulars is crucial.
As mentioned before, many companies rely on strict confidentiality in order to stay ahead of the competitive curve. Confidentiality policies can be explained as a statement set up to declare a company’s policy on confidentiality and what that entails.
These policies are aimed at clearly communicating to all company employees that certain information may not be shared outside of company walls. This often includes clauses to indicate that company members should be aware of their internet usage, uploads and downloads and any activity that may place the organisation at risk of losing valuable data.
Legally binding confidentiality policies must be signed by all employees and employers alike in order to protect company property and to protect against any legal action.
A strategy document is useful in formalising the general direction that a company will take with respect to achieving its desired goal. Documenting the company’s strategy formally is a great management tool that will assist with developing focus and directing resources to the organisation.
Prior to documenting the details of the discussion into a formal founder’s agreement, it is often a good idea to first commence on a strategy document.
As the Strategy document can be updated periodically, this helps with mitigating the risk of conflict where there is a misalignment in company direction and strategy – particularly when strategic plans shift with the passing of time.
Good legal support ought to be commercial and practical. After all, legal support does not take place in a vacuum, but in the intricate world of commerce. In this regard, quality legal support would offer advice on how to manage legal risks in light of market practices.
Experienced lawyers are likely to have supported their fair share of Startups and have worked on enough deals to understand market practices, and how legal risks should be managed.
When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.
We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.
*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.