When Starting Your Own Business
29-Jan-2018By Alan Rudd, Attorney
For most, life’s dream includes spouse, children, buying a home, and owning your own business. It’s the dream of owning your own business that I want to address, particularly how to reduce the emotional and financial risks associated with a new enterprise.
Not long ago, I had a woman make an appointment to see me because of problems she was having with a friend that she had gone into business with. The two had gone onto the Internet and had an online service prepare the paperwork for forming a Limited Liability Company, or LLC. The LLC is a popular business entity because of its partnership tax advantages and liability protection. The LLC is often a good structure for the new business, but that’s not always the case.
The Internet is replete with websites enticing people to create business entities, particularly LLC’s and corporations, by using documents which they advertise as “tried and true” and “proven” documents from years of experience in the law. Unfortunately, one size seldom fits all.
My soon-to-be client (we’ll call her Debra), had entered into the business with a partner in what appeared to be a very lucrative opportunity. Now she was expressing fear that she was being forced out of business by her partner and friend, and she was right. For months her partner had been attempting to take-over the reins of the company. Debts were being incurred without her approval, bills were going up-paid, and her partner was engaged in questionable marketing practices. Her focus had been finding new clients and bringing money into business, of which she did a remarkable job. She left much of the day-to-day business decisions to her partner. Debra also learned that her partner had formed other businesses of which Debra was unaware, diverting the partner’s attention away from the joint venture with Debra.
Because the Operating Agreement had not been tailored to address the situation now facing her, Debra’s business partner was capitalizing on missing and ambiguous language in the agreement. There was also an issue of ownership interest. When Articles of Organization are filed with the state, the state doesn’t look at the fairness of the ownership interests, just that the forms are completed and the fees paid.
I met with the other party’s attorney and got the mistreatment to stop, but the damage had already been done. The thought of a legal battle with her partner was so traumatic to both Debra and her family that she just wanted out. Despite her belief that the LLC agreements provided by the internet provider were adequate, they were not. Debra walked away but only after losing many thousands of dollars, along with all the goodwill she had created.
Debra has rebounded and is today a thriving entrepreneur . . . without her former business partner. But how much better it would have been had we visited before the business was formed instead of after the drama had unfolded. Had she used an attorney upfront, hopefully, that relationship would have been such that she would have felt comfortable in calling the attorney at the first sign of impropriety.
In most cases, the price of a business formation charged by a local attorney is not much more than the prices charged by internet providers. But what it offers, exceeds any cost savings that may come from using a faceless legal services provider.
My recommendation, always seek competent local legal assistance when chasing that dream of starting a business and minimize the possibility of legal doom.
Alan Rudd is the senior attorney for The Rudd Firm, P.C. and one of its founders. He has more than 35 years of legal and business experience. Mr. Rudd focuses his practice in Business Law, specifically Entity Formations, Commercial Contracts, Shareholder and Partner Disputes, Corporate Governance, Software Licensing and Mergers and Acquisitions.
THIS ARTICLE IS NOT INTENDED AS LEGAL ADVICE, AND IS FOR INFORMATIONAL PURPOSES ONLY.