The New Business Blueprint

Fourscore Business Law’s Guide for Startup Founders

Introduction and Preface

“Fourscore and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.”

These are the opening words to Abraham Lincoln’s Gettysburg Address. One of the most famous speeches in history, the Address was delivered in less than two minutes. Lincoln’s genius was the ability to achieve maximum and lasting impact in just a few sentences. We think the mindset required to produce that result is a mix of understanding, humility and empathy – and those are essentially what we refer to as the Fourscore Principles.

In the same manner, Fourscore Business Law attorneys work diligently using the Fourscore Principles and the best technology to produce value-based results for our clients. Our business clients come to us with complex transactions and projects because they know we can make the complex understandable and help them achieve their business goals.

Lincoln’s Gettysburg Address proves that short and simple can be extremely effective, and we take pride and joy in applying the Fourscore Principles to every interaction with our clients.

Based in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in Raleigh, Durham, Chapel Hill, Wilmington, Charlotte and throughout the Southeast. We also represent venture capital funds and other investors who invest in companies located in New York, Silicon Valley, and everywhere between.

A Roadmap to This New Business Blueprint

What to Expect

This is a guide for the founders of early-stage startups. It walks founders through the process of forming and running a successful enterprise, from selecting an entity type to seeking funding and plotting effective exit strategies.

In this new business blueprint, we address the four primary steps involved in starting and running a successful business:

Selecting an entity type,
Financing your business,
Running your business – from hiring to crafting an effective website, and
Effective exit strategies for your business.

How to Use This Blueprint

Please note that this guide does not substitute legal advice, but is to be used as a general blueprint to outline the key parts of the process of running an early-stage startup. If you have specific questions, please consult your attorney, or reach out to us.

Your Next Steps

If you are a founder interested in setting up your entity or taking your business to the next level, contact us. In the meantime, if you would like to learn more about how to organize, fund, run, or exit your early-stage startup, check out our business law blog, download one of our business law whitepapers, or subscribe to our monthly newsletter, More from Fourscore, for business growth resources, industry news, and interviews with local entrepreneurs.

Chapter 1: Selecting an Entity Type

C corporation. LLC. PLLC. Sole proprietorship. S corporation. B corporation.

There are so many entity types out there, and for new founders, deciding which is best for their own enterprises can feel completely overwhelming.

Selecting an entity type is one of the very first foundational steps an entrepreneur can take in launching and growing a successful company. While it may seem like a simple formality, the specific entity type you select will dictate many parts of your journey as a founder, from seeking funding to taxation, protecting yourself from legal liability, and plotting an effective exit strategy.

Some founders gloss over this step, thinking they can always “change it later” if they decide to seek outside funding and scale their businesses. But this is not always the best approach. In some cases, it can be administratively and logistically overwhelming to convert your business from one entity type to another, so it is advisable to do your due diligence before deciding how to organize.

Here, we will outline the most common entity forms, starting with the non-entity: the sole proprietorship.

Section 1: Entity Types

The Sole Proprietorship: The Non-Entity Entity

The sole proprietorship is what we call the “non-entity entity” because a sole proprietor operates as him or herself. A sole proprietor is not a legally-recognized, independent entity, but rather, the business and the founder are indistinguishable from both a legal standpoint and a taxation perspective. Said simply, you and your business are one and the same.

Pros of acting as a sole proprietor

When it comes to organizing your business, the sole proprietorship is the simplest form. As a sole proprietor, you are not required to file any formal paperwork with your state’s Secretary of State office, as you are not a legally-recognized entity. From a taxation standpoint, the sole proprietor’s task is simple as well: reporting the business’ profits and losses on the founder’s personal tax returns each year.

Cons of acting as a sole proprietor

But despite the simplicity of this arrangement, the cons severely outweigh the pros. Here are three cons that show that it is advisable to operate as an entity – not as a sole proprietor.

Sole proprietors have no liability shield. Since you are acting as yourself from a legal perspective, you become indistinguishable from your business. That means that if someone wins a judgment against you in your business capacity, your personal assets become subject to a civil judgment. In the same vein, if someone sues you personally, your business assets are compromised. In other words, your business creditors can come after your personal assets, and your personal creditors can come after your business assets.
A sole proprietorship lacks professionalism and polish. Organizing as an entity rather than operating as a sole proprietor will give your business a more polished, professional appearance. Not to mention, you cannot take a sole proprietorship public, and you cannot obtain financing from a venture capitalist or angel investor if you are operating as yourself. If you want to quickly grow and scale your enterprise, you will need to organize as a legally-recognized entity.
A sole proprietorship dies with you. Because you and your business are one and the same, your business will not continue after you pass away. If you seek longevity for your business or you want to pass it on to your family members or colleagues, you will need to organize as an entity.

The Limited Liability Company

The Limited Liability Company, or LLC, is one of the most common entity types. It has gained popularity because as a “flow-through” or “pass-through” entity, it is not subject to double taxation, but does still shield founders from personal liability. This means that because an LLC is a legally-recognized entity separate from the founder, individual members’ personal assets will generally be protected from a legal judgment against the entity.

LLC Pros

LLCs are attractive options for new founders for three primary reasons: their simplicity, the liability protection they offer, and the tax benefits they afford.

• LLC formation is simple and straightforward. Many new founders choose to organize as an LLC because this type of entity is fairly easy to establish. In North Carolina, for instance, an LLC founder files straightforward paperwork with the North Carolina Secretary of State’s office and pays a small fee. An LLC is also easier to manage than a corporation, as it does not require as many formalities. In fact, many LLCs are single-member LLCs, which require little other than making annual tax payments to both the State Department of Revenue and the IRS.

• LLCs protect founders from personal liability. Unlike sole proprietorships, LLC’s provide liability protection for their members. The law recognizes the LLC as separate from its members, so unless the party specifically seeks and obtains a judgment against an individual member of the company, his or her personal assets will not be subject to a civil judgment. In other words, your company’s creditors will not be able to collect your personal vehicle or claim a lien on your home unless they obtain a judgment against you personally.

• LLCs are not double-taxed. Finally, an LLC is a “flow-through” or “pass-through” entity, meaning it is not subject to double taxation. This means that profits and losses “flow through” to the owners of the company, who pay these taxes themselves, and there is no entity-level tax. For example, if a four-member LLC made $100,000, it would have $100,000 to distribute among the four members. If each member shared the profits equally, they would all receive $25,000 from the LLC and would pay taxes on their distribution individually. Many founders like this arrangement because it reduces the overall tax burden of the business and allows them to keep more of their money.

LLC Cons

Despite these clear benefits, the LLC is not the ideal model for every business – particularly those with high growth potential. While an LLC may be ideal for small businesses with no intention of going public, companies that intend to seek outside funding are typically better suited as C corporations. This is because investors are generally not interested in investing in pass-through entities— such as LLCs. Also, publicly-traded companies are typically not LLCs, but rather, are organized as C corporations. However, this does not mean that LLCs can’t be publicly traded: It’s just much more complicated, rare, and will make raising capital more difficult. As of January 2016, there were only 22 publicly-traded LLCs in existence, all of which were formed under Delaware law utilizing unique and fact-specific structures.

C corporation

A C corporation is the most common entity choice for high-growth businesses. The law recognizes the C corporation as its own separate “person” for liability and tax purposes, so like the LLC, it provides liability protection for its members. Examples of well-known C corporations include Apple, General Electric, and Walmart. Most early-stage, privately-held tech companies are also C corporations.

C Corporation Pros

The benefit of organizing as a corporation is largely twofold: The C corporation offers liability protection, and it is investors’ preferred entity form.

The C corporation provides liability protection. Like the LLC, the corporation protects its founders from personal liability for the entity’s debts. This liability shield is strong, and typically can only be pierced in cases of fraud. Generally speaking, founders who comply with corporate formalities in running their entities will enjoy this protection from personal liability.
Angels and VC funds typically only invest in C corporations. Because investors are most familiar with C corporations, and because the flow-through taxation model of LLCs usually causes unacceptable complexities for investment funds, founders who intend to seek outside funding typically organize as C corporations rather than LLCs. While most state statutes impose more corporate formalities on this type of entity, it is often easy to issue equity compensation to executives and other hires, to issue series and classes of shares, and to establish different sets of rights and preferences among shareholders, which is almost always required in angel and venture capital financing. For this reason, corporations are also the best entity type for taking a business public.

C Corporation Cons

Despite its benefits when it comes to funding, growth, and scaling, the corporation is not as tax-efficient as the LLC. It is not a flow-through entity but rather is subject to “double-taxation.” In short, this means that company revenue is taxed: 1) at the corporate level, and 2) when dividends are paid out to shareholders and others who have an interest in the company. This is because the corporation is considered a separate, distinct legal “person” with its own set of liabilities and responsibilities from a tax standpoint.

In the LLC example above, imagine the entity at issue is a corporation with four shareholders. If the company made $100,000 and was subject to 20% taxation, it would have $80,000 to distribute among its shareholders. While each shareholder would receive $20,000, the distributions received by the shareholders would also be subject to tax.

S corporation

Contrary to conventional belief, the S corporation is a tax designation, not a separate legal entity. In short, it is a legal entity that is taxed like a partnership, but otherwise structured and treated like a C corporation from a legal and operational standpoint.

The S corporation is often referred to as a “mini” C corporation, as it is limited to 100 shareholders and one class of stock. Also, the law requires shareholders to be individuals (as opposed to entities) and U.S. citizens or permanent residents.

Because the S corporation is simply an election for taxation purposes, the state filing requirements are the same as for a C corporation. And an S Corporation (like an LLC) is not subject to double taxation. Some businesses elect to be treated as S corporations so that they can enjoy the benefits of the C corporation structure without the burden of double taxation, but also without the hassle of converting from an LLC to a C corporation. When an S corporation elects to issue another class of stock or seek outside financing, it will switch its tax designation to a C corporation.

The Public Benefit Corporation

The Public Benefit Corporation, or “B corporation,” arose from the socially-responsible business movement. While the goal and purpose of most C corporations is to maximize shareholder value, the B corporation aims for social impact beyond financial benefit.

This does not mean that all B corporations are nonprofits. In fact, many for-profit companies select this designation. The key is that these businesses are, at their core, mission-oriented. Well-known B corporations include Patagonia, Etsy, and Ben & Jerry’s.

Many states, including North Carolina, do not yet recognize the B corporation as a legal entity. Others, though, statutorily provide for a distinct entity type called a Public Benefit Corporation, or some variation thereof. Most notably, in Delaware, the B corporation is a distinct entity type that the state laws recognize. The Delaware statutes not only acknowledge the B corporation as a separate entity type, but also delineate certain rules and regulations for setting up and running a B corporation. For instance, the statutes specifically provide that the board of a B corporation is required to consider values beyond maximizing shareholder value.

In states where there is no statutory B corporation, a business can apply to be certified as a B corporation by a company called B Labs. Before certifying a company as a B corporation, B Labs will want to know factors like the company’s socially-oriented goals, its mission, how it treats its employees, and its commitment to environmental sustainability. However, it is important to understand that the B Labs certification is not a legal designation. A North Carolina company, for instance, that seeks certification from B Labs is not in the same category as the Delaware statutory B corporation: In North Carolina, the B Labs certification does not make a business a statutorily-recognized B corporation, but rather, identifies it as a company that is socially-oriented at its core.

Based on your particular business model, the B Labs certification may be a valuable designation. If you seek to establish a reputation as a thought leader or change agent in your industry, the socially-oriented aspect of a B corporation can actually be quite profitable, allowing your business to break into a defined niche and scale very quickly.

Nonetheless, founders who seek to organize as a statutory B corporation will need to carefully consider how they will pursue outside funding. From an investors’ perspective, investing in a statutory B corporation may not be as financially rewarding as investing in a traditional corporation, whose primary goal is to maximize returns for shareholders. Also, investing in a B corporation does not entitle investors to tax write-offs. For tax purposes, investing in a mission-oriented business is not the same as donating to a charitable organization or cause. As such, you can see how investors could be financially disincentivized from investing in a B corporation. While this should not discourage you from seeking certification as a B corporation, it is nonetheless a caveat you should carefully consider: If you intend to pitch to investors, make sure you thoroughly explain why you chose this designation and how their investments will benefit them financially.

The B corporation certification mandates that the businesses file annual disclosures detailing their socially-beneficial goals. It does not, however, change the business’ underlying tax obligations. For instance, if the business is a C corporation, it will still be subject to double taxation.]

Fourscore takes great pride in providing legal services to many certified B corporations, including Vital Plan, Offset Solar, Murphy’s Naturals, and HQ Raleigh.

Section 2: Considerations for Selecting an Entity Type

Now you understand the basic entity types. But one burning question remains: “Which one is best for MY business?”

Selecting the right entity type for your business will depend on a variety of factors. Let’s walk through six key issues.

Single vs. Double Taxation

Many entrepreneurs fail to consider how much taxation will affect the day-to-day realities of running their businesses.

There are two primary types of entity taxation: flow-through taxation and double taxation. Recall that LLCs are flow-through entities, while C corporations are subject to double taxation. The different schemes will determine how much money you, as a founder, will keep. It will also determine the complexity of your taxation responsibilities and liabilities.

Funding and Financing

Before you select an entity type, consider how you intend to finance your business. Will you bootstrap? Apply for a business loan? Seek help from family and friends? Pitch to an angel or VC fund? Keep in mind that most professional investors are not willing or able to invest in an LLC. As such, if you are aiming for high growth and outside investments, consider organizing as a C corporation, or at least be prepared to convert to a C corporation before you close an investment round with outside investors.

Changing Entity Types

At some point, you may want to convert your entity from one type to another. It is considerably easier to convert an LLC to a corporation than vice versa. While it is not impossible to reorganize a C corporation as an LLC, it can be a nightmare from a taxation standpoint. Give careful thought to your long-term business goals and choose your entity type wisely at the outset.

Exit Strategy

Devising an exit strategy is one of the most important parts of starting a new business, as it will largely govern how you run, grow, and scale your enterprise.

Do you plan to take your company public? Do you want to sell it? Will you simply pass it down to family and friends? Does your business model involve valuable intellectual property that you want to license? Your answer to these questions will help you decide which entity type to choose. For instance, if you want to sell your company, it is advisable to organize as an entity rather than operating as a sole proprietor. If you want to seek a strategic partnership with a mission-oriented business, consider seeking B corporation certification.

Sharing Ownership

Perhaps you plan to share ownership of your company with someone else. If so, you will need to determine how to divide ownership. While many business partners default to a 50/50 split, an even division will generally cause problems down the road unless you take very careful consideration at the outset.

Compensation

Do you intend to compensate your employees using cash or equity? An LLC can be set up to allow for equity compensation, but it can get complicated quickly. If you would like to compensate your employees by offering them a share in the company, you should consider setting up a C corporation.

Please note – The lawyers at Fourscore Business Law are experienced in business matters of many kinds, which gives us the opportunity to be involved in tax discussions on a regular basis. However, we are not CPAs or tax lawyers. We have many great contacts and refer our clients to them when needed. Please do not take the summary set forth in this section as tax or business planning advice!

The Entity Types: Key Facts

Sole proprietorship
- No liability shield
- You are the business, legally and from a tax perspective.
The LLC
- Liability shield
- A flow-through entity
- Typically not attractive to investors
The C corporation
- Liability shield
- A separate legal “person”
- Subject to double taxation
- The best choice for high-growth companies
The S corporation
- Not a separate entity, but a tax designation
The B corporation
- A recognized entity type in Delaware, but not in every state
- Reserved for purpose-driven, mission-oriented companies

Chapter 2: Financing Options

Pursuing funding for your new enterprise is an exciting but often intimidating process. There are several ways to fund a new business, but most of them can be condensed into two primary categories: through debt and through equity.

Debt financing involves seeking loans, lines of credit, or convertible debt, while equity financing involves selling an investor a share of your business in exchange for capital.

No matter which option you choose, it is critical to carefully study the pros and cons of each. While it is ideal to grow a business debt-free, this may not be an option for every founder. Similarly, scoring an investment from a VC fund or angel investor might seem like an ideal situation, but keep in mind that there are almost always strings attached: Every time you sell ownership in your business, some measure of control goes with it.

Being adequately informed about the different types of financing is critical, as it will ultimately help you make the best choice for your specific enterprise.

Section 1: Angel and Venture Capital

Angel investors and venture capital funds are key forms equity financing. While many business owners think of outside investors as promising fast growth for their startups, it is critical to understand all that is involved in working with investors. Also, know that it takes much longer than you think to raise funding for your company, so start early and keep your expectations reasonable!

Before you meet with an investor, do your research. There are several important considerations in choosing an investor. Here are the basic questions you should answer before seeking an investment partner:

Know and understand their industry and the types of companies in which they invest. Do they fund small, early-stage companies, or do they focus on larger, high-growth enterprises seeking their second or third rounds of financing?
How much cash are they likely to invest based on their investment portfolios?
What are their strategies for investing in companies like yours?
Look up some of the other companies in their investment portfolios. Is your business consistent with the investors’ desired partners?

Angel Investors

If you’ve ever watched the hit show Shark Tank, then you likely have an idea of what angel investors do. But though their popularity throughout mainstream media might suggest otherwise, this type of investment is actually quite rare and is unsuitable for many types of new businesses.

Angel investors are typically wealthy individuals, entities, or networks that support promising new businesses in a variety of ways:

By investing cash;
By providing connections with other investors and experts in your field or industry; and
By sharing their technical knowledge or industry experience.

In other words, the best angels provide value beyond just the initial financing. However, it is important to remember that this is a two-way street: Your investors will want a share in your business in exchange for the value they are giving you, and they will want to see a return on their investments. Also, there are several pitfalls new founders can stumble into if they aren’t careful.

Beware of giving your investor too much control in exchange for a small investment. Weigh the investment against how much of your company you will be asked to sell. Keep in mind that while it may be tempting to accept cash and connections up front, relinquishing a share of your business means you are also giving up control – something that as a fledgling business owner, you may want to keep.
Don’t over inflate your business’ value. Some founders fall into the trap of valuing their entities too high. This can cause problems down the road. While you want your company’s valuation to be high, you also want to leave room for growth. Raising too much in an initial round of funding and valuing your company at too high a price will also require a much higher exit price, limiting your number of potential buyers. In these cases, many businesses find that the only way out is through an IPO.
Don’t accept too many small investments. Taking on too many small investments can make managing your capitalization chart a nightmare, and will make you accountable to too many conflicting forces in your business. (Think: too many cooks in the kitchen!) Not to mention, without fail, the investors that invest the smallest amounts will be the ones that take up the majority of your time.

If you are interested in seeking an angel investor to fund your startup, sit down with your attorney to discuss the pros and cons of this financing approach.

Venture Capital (VC) Funds

Most people confuse and conflate two types of outside investors: angels and VC funds. In truth, the two are starting to grow closer together. Historically, a VC fund would not even talk with a company that had yet to raise outside capital: Those “early stage” deals were left to angel investors. Conversely, angels would not be interested in later opportunities to invest. But now, VC funds frequently have an “early stage” fund, which essentially makes angel investments, and some angel funds are making bigger and later investments in companies.

While angels will still typically invest in newer businesses in more nascent stages of growth, both angel financing and VC funding are typically reserved for companies with tremendous growth potential. For that reason, “lifestyle” companies (think yoga studios, bakeries, clothing boutiques, restaurants, and coffee shops, to name a few) are not attractive to these types of investors, as they are looking for a large return on their investment of time, money, effort, and connections. With a few rare exceptions, lifestyle businesses generally do not promise the large-scale returns VC funds are seeking.

As with angel investors, VC firms are not a quick-growth scheme for new businesses. There are several important factors to keep in mind if you would like to pursue VC funding.

Consider how much control you are relinquishing. Accepting VC funding means you agree to bring people into your business who will have a say in how to run it. VC firms who invest in your business will put someone from their firm on your board. This means you will lose a proportionate amount of control. These people will be with you throughout the life of your business, so make sure you don’t jump at an enticing opportunity to take cash, only to regret it later. While angels can be as hands-on or as hands-off as you want, a VC firm that writes a large check will be heavily involved in your business and will assert much more control.
Think about your capital structure. Investors typically want preferred stock rather than common stock, while your co-founders will receive common stock. This is another reason that LLCs and S corporations are generally not attractive to VCs.

If you would like more information about angel and venture capital financing, take a look at our video series for new founders on the nuts and bolts of seeking outside capital.

Section 2: Debt Financing

If pursuing professional investors isn’t for you, or if your business is a lifestyle business, then you may consider financing your business through debt.

Although debt may seem like a dreaded four-letter word, it is a viable funding option for many new founders. The key, as with any type of financing, is to ensure you are well-positioned to pay off the debt within a short timeframe.

There are several types of loans available to businesses, from simple business bank loans to seeking a loan from a colleague, friend, or family member. Some founders use loans from the Small Business Administration (SBA Loans), to fund their new entities. These loans are attractive to small businesses because of their lower interest rates. Also, founders who need just a small amount of startup capital can take out a very small loan – an option that is not available with VC funding, which generally occurs on a much larger scale. If you would like to learn more about how to apply for an SBA loan, check out the SBA website.

As with any form of financing, taking on a loan is not a quick fix for the cash-strapped new business. If you plan to fund your business through debt, make sure you carefully study and understand the following:

Your interest rates. What are they? Do they compound? Are they so high that the amount you have to pay back will substantially increase in a short amount of time?
Your ability to repay. Do you have a clear plan to repay this debt? Does your business have a demonstrable, consistent revenue stream?
The minimum amount you need to fund your business. How much funding do you actually need? Borrow as little as possible. You can always seek more funding later, but if you take on too much debt at the outset, you may quickly become overwhelmed by compounding interest rates and increasing principal.

Special Considerations for Pursuing Financing

Before you decide how to fund your business, there are a few key questions you will need to answer.

What type of entity are you running? Remember, if you are an LLC, you are unlikely to attract angel investors or VC funds.
How do you plan to compensate your employees? If you are funding your enterprise through equity, consider that this will affect how you compensate your co-founders and employees.
How much funding do you need? If you need only small amounts, VC funding likely isn’t for you. Consider angel investors or possibly even just a small bank loan or SBA loan. Or, you can simply bootstrap if you have some seed money available.
How do you plan to use the funding? Are you more interested in quick cash to purchase inventory? Or, are you diving into unfamiliar territory and would benefit from the industry knowledge and connections an angel investor or VC fund would offer you?
How much control do you want to keep? Many founders are protective of their new businesses. Are you setting up a family business that you want to run and control yourself? Or, are you looking to quickly scale and eventually exit?

No matter which funding option you choose, remember that there is no get-rich-quick scheme when it comes to building a successful business. Do your homework, understand the territory, and be honest with yourself about your growth goals.

Chapter 3: Running Your Business

You’ve selected an entity type. You’ve walked through the legal formalities. You’ve scored your first round of funding. Congratulations! You’ve made it through the initial startup hurdles. Now, it’s time to step into the challenges and rewards of running a new business.

New founders typically have a hand in every aspect of a business, from hiring to employee management, handling basic accounting, and keeping the business’ records. It can be an overwhelming charge, but keep in mind that as the business grows, you will have the opportunity to outsource many of these tasks and to focus on what you do best.

In the meantime, it is a valuable practice for a founder to understand – even at a basic level – every facet of the business in order to help it run smoothly and to bring your vision to fruition.

Here, we will walk through three major areas of running a startup: building a team, protecting your intellectual property, and basic business administration.

Section 1: Building Your Team

One of the most important steps in building a successful business is assembling a cohesive team. While you may eventually want to hire employees who collectively offer a full suite of services, new businesses with smaller budgets may opt to start by distributing work to freelancers who can handle certain discrete tasks.

In deciding which approach to take at the outset, it is important to understand the differences between employees and contractors.

Contractors:
All about the Control

In short, businesses have much less responsibility for – and consequently, less control over – contractors than employees.

Contractors are professionals a business will engage to handle discrete tasks. They typically work remotely, pick up tasks at the business’ direction, and maintain control over where and when they work.

As a business owner, you are not responsible for filing taxes on behalf of contractors, nor do you need to provide them benefits. You will, however, provide them with a 1099 each tax year.

In the early stages of running a new business, working with contractors may be an affordable option, but keep in mind that you can put your business in a precarious position if you mischaracterize your workers. The Federal and various states’ Departments of Labor have made the mischaracterization of employees as contractors a hot button issue over the past several years. You should contact your attorney if you have further questions about the differences between employees and contractors.

Employees:
The Benefits and Drawbacks

Businesses have substantially more control over employees, but also more responsibility. Your employees represent your company to the public, so in hiring it is critical to consider not just skill and aptitude, but also character – especially for a small business seeking to develop a positive reputation in the community.

While a freelancer or contractor may have a set rate that you pay, with employees, you can determine whether to compensate them based on a salary, a commission, or through stock options and other benefits. There are also substantially more regulations that govern employee compensation and treatment.

Protect Your Business from Your Employees and Contractors

When engaging team members, no business owner wants to anticipate problems arising. But the truth is, sometimes employees can go rogue. Not only may your employees or contractors quit at a moment’s notice (and after a short amount of time), but you need to consider how to protect your business’ assets, including your client roster, from disenchanted former employees who might end up joining competitors or even starting their own competing entities.

There are a few ways to protect your business from former employees and contractors, but here are the two most common:

Sign a non-solicitation clause. Require your employees and contractors to sign an agreement that they will not solicit your employees, or any business from your clients or customers, outside of their role within the company.
Include an enforceable non-compete clause. A noncompete clause is an agreement between parties that states that the employees will not compete with the company after leaving. Keep in mind, though, that non-compete clauses are often challenged in court and if they are too restrictive, they will likely be struck down. Not to mention, they are per se unenforceable in certain states (like California). The law imposes both geographical and temporal limits to non-compete clauses, so if you attempt to restrict your employees too severely, your agreement won’t hold water. Consult your attorney when drafting this or any other documents to ensure it is airtight.

General Considerations in Growing a Successful Team:

Shared vision in the company. When engaging a contractor or hiring an employee, select individuals who are personally and professionally invested in furthering your company’s mission.
Liability concerns. Companies have more potential liability for employees than for contractors.
Public perception. A company with a cohesive team may appear more polished than one that is supported by freelancers.
Outsourcing your weaknesses. When deciding whom to hire first, think about your weakest point, and outsource this to someone who can handle it more proficiently. That way, you can focus solely on your strengths.

Section 2: Protecting Your Intellectual Property (IP)

As you build a team, there is another issue that naturally arises: protecting and preserving your intellectual property, or IP.

What is Your IP? An Overview of the Basic Types

Your company’s intellectual property, or IP, consists of any original material that it produces, from patented products to original content, trade secrets, trademarks, and more. Generally, your IP can be broken down into four primary categories: patents, trademarks, copyrights, and trade secrets.

Patents

In short, a patent is an exclusive right to use an invention or creation. A company that seeks to patent a product will file an application with the U.S. Patent and Trademark Office (USPTO). If the application is approved, the company or individual will essentially protect its idea from being copied or appropriated by another entity.

In order for an item to be patented, it must be both original and useful. Examples of products that can be patented are computer software and hardware, chemical formulas, medical devices, drugs, and consumer products. The process of obtaining a patent is highly complicated, so it is advisable to reach out to an experienced patent attorney if you would like to seek patent protection for one of your products or ideas.

Trademarks

Unlike patents, trademarks are more about identification than invention. A trademark is a brand or name associated with your business. For instance, large companies like Google have received trademark protection for the words, names, or symbols that comprise their brands. Although it seems intangible and hard to grasp, your company’s brand is one of its most valuable assets, so it is critical to seek trademark protection for your company’s name, logo, motto, or other components of your branding. In other words “Just Do It” (see how powerful branding can be?). By doing so, you signify to the public that your company has the exclusive right to use, claim, and display these branding marks.

As with a patent, you may register your trademark with the USPTO, but it is not mandatory. Even if you opt not to register, you still retain some localized rights to your marks. However, there are certain benefits to registering your trademarks, specifically if your business uses the internet in any substantial way.

Copyrights

A copyright is the exclusive right to reproduce, publish, sell, or share any original work. In short, any original form of work is automatically copyrighted. However, there is an important distinction between the work itself and the ideas underlying the work: The underlying concepts or ideas are not copyrightable, but the author or creator’s particular arrangement of them is copyrightable. Most of the original content you produce, whether your marketing materials, blog, video content, social media posts, and creative assets will be protected by copyright law. If anyone reproduces your work without your permission, you might have a legal claim against them.

Before copyright protection was incorporated into our statutes, common law copyright protection applied to a variety of unpublished works and attached at the time of creation, not publication.

Today, the federal Copyright Act protects authors and creators from having their ideas, time, effort, and ingenuity stolen and gives them the right to reproduce, distribute, or display their work. The owner of the copyright also has the ability to transfer these rights to someone else. For example, if you produce an original piece of content for a client, you may transfer the IP rights in that content to your client.

As a general rule, for works created after 1977, copyright protection lasts for the life of the author, plus an additional 70 years.

Trade Secrets

A trade secret is any valuable commercial information that gives companies a competitive advantage in the marketplace. It may comprise some design, invention, idea, or compilation of data that a business uses to give itself a competitive edge or to be more successful.

Typically, these items are not readily accessible to the public, but rather, companies will protect them in order to maintain a competitive advantage. In order to protect proprietary information as a “trade secret,” a business needs to treat it as such by limiting access to those who truly need to know and keeping it under lock and key (or the electronic equivalent). In other words, the law won’t treat your proprietary information as a trade secret if you don’t.

Liability for taking or appropriating trade secrets generally arises in cases where a party breached a contract or engaged in activity prohibited by company policy, like unlawful surveillance or espionage. Additionally, employees and agents of a company may still be held liable for disclosing trade secrets if they had reason to know the information was competitively valuable to the company and knew they were expected to keep it confidential.

Protecting Your IP

Any original material that your company produces, from its products to its content, to any trademarks or copyrighted materials, should belong solely to the company. Additionally, your clients and customers belong to the company, and as a business owner, you have a right to retain control and ownership over both your IP and your customer base.

For that reason, before you engage employees or contractors, consider how you will protect and preserve your IP. There are several ways to do this.

Secure a confidentiality agreement. Ask your employees and contractors to keep proprietary company information confidential. Additionally, require your team members to explicitly agree, in writing, that the company’s IP belongs solely to the company and that they may not assert any rights to it.
Especially when working with contractors, clarify who owns your business’ IP. If you engage a contractor to develop a product for your company, make sure you are very clear at the outset about who owns the IP rights to that product. Many business owners execute consulting agreements that expressly state who owns the work product the consultant was engaged to create. Airtight provisions in a contract would state, for instance, that all intellectual property rights to a product belong exclusively to you, the business, and that by signing the agreement, the contractor expressly assigns away any and all rights to it. In some cases, the work done by consultants is known as a “work made for hire,” an exception to the common law implication that IP rights vest in the person who created the work.

What To Do When Your IP is Compromised

If a current or former employee, contractor, or co-founder steals your IP or breaches one of your agreements, you have legal recourse in a variety of forms.

First, you can hire an attorney to send a cease and desist letter, demanding that the individual cease any and all infringing activities. Typically, these letters will give the person a discrete timeline – usually no more than five business days – to “cease and desist” all offending activity before the aggrieved party pursues legal action.

If the person does not cease and desist, you can consider filing a lawsuit. This allows you to request and pursue either monetary damages or a court order demanding that the infringing individual take certain actions, from signing an order to restoring any and all IP to the company.

Section 3: Basic Administration

Keeping up with the day-to-day tasks of running a business can be overwhelming. While you may eventually opt to outsource some or all of these tasks, it is still important to understand how each foundation step involved in running your business has a role in making it successful.

Basic Accounting: Best Practices

When it comes to managing your company’s finances, it is generally advisable to hire a trusted accountant to help you navigate the ins and outs of taxation – especially if you are a corporation or an LLC with multiple members and employees (taxation for sole proprietors and single-member LLCs is far simpler). However, even if you outsource your accounting, it is nonetheless advisable to grasp some basic accounting practices so you can keep your finger on the pulse of your business’ financial health.

Paying Yourself a Salary

One of the first financial decisions you will have to make is how to pay yourself as the President or CEO of your business. The laws on paying yourself a salary will vary based on your business type.

If you organized your business as an S corporation, the law requires you to put yourself on the company’s payroll and to pay yourself reasonable compensation. Keep in mind, though, that in some situations and for certain company owners, this may be an initial salary of $0. Speak with your attorney or accountant if you have questions about what constitutes a “reasonable” salary for your specific business.

Conversely, if you are a single-member LLC, the law does not permit you to place yourself, asn owner, on the company’s payroll. Additionally, partners in a partnership are not permitted to be on a company’s payroll.

TIP: Recall that an LLC is a flow-through entity. As an owner, you will pay taxes on the LLC’s profit, regardless of whether you pay yourself or not.

No matter the business type, the IRS provides some guidance, saying owners must pay themselves a “reasonable salary.” What is “reasonable” will vary based on the business structure, revenue, and size, among other factors. To determine what is reasonable for your business, consult your attorney or accountant.

Tip: When you earn your first $50,000 within one year, convert your business to an S corporation, then start paying yourself payroll, which comes out of the business’ net income. This allows you to treat yourself, as the founder, as one of the business’ “expenses,” which will yield taxation benefits without affecting the business’ net profitability.

Your Tax Timeline

When it comes to handling your taxes, there are certain triggers throughout the year that will help you manage your finances.

As a best practice, complete your W9s by the end of January and prepare your previous year’s records well in advance of the April tax deadline. Also, it is advisable to start reconciling your sub-ledgers early to account for and correct any discrepancies.

For most business owners, it is advisable to engage an experienced CPA to navigate the often complicated territory of taxes. If you need a suggestion about who to hire, consult your attorney. He or she will likely have recommendations of reputable tax preparers in your state or region.

Growing and Scaling Your Business

When it comes to growing your business, there are several things to keep in mind.

First and foremost, what are your revenue streams? Are you a services-based company or do you also offer products? If the former, would you consider expanding into products?
Is there a certain skill you are marketing that you would like to offer your customer base for free?
Can you host a live workshop or a webinar where you share your expertise? Could you publish a blog post, white paper, or instructional e-book that shares some aspect of what your business does?
Can you use lead magnets, like free digital resources, to grow and build an email list and develop a loyal following?

No matter what you choose, consider that in scaling any business, the key is to not just amass an audience but to cultivate an engaged community of followers. Rather than flood your audience with promotional messaging, communicate with them. Figure out their challenges and pain points, and ask them how you can help address them. Then, tweak your products or services accordingly to better meet their needs.

Building an Effective Website

Your online presence is an important aspect of your business’ intellectual property. It presents your mission to the outside world, and so it is critical to build a site that is clean, professional, and easy for your prospective customers to navigate.

Here, we will walk through two important steps in curating a powerful online presence.

Selecting a Domain
Choosing the domain for your website seems like a small step, but is one of the single most important things you will do as a new business owner.

Selecting a domain that is easy to remember will help your potential customers and clients think of you first when they are ready to make a purchasing decision. Conversely, if you choose your domain poorly, it will limit your chances of driving traffic to your website by either organic searches of word of mouth.

As a general rule, your domain should:
- Include your business’ name in some form. While it might seem creative to choose some other word or phrase, keep in mind that when your customers want to check out your website, the first thing they will likely start typing is your company name.
- Avoid underscores or hyphens. If at all possible, keep your domain clean. For instance, if your business is called Oak City Coffee, your domain should be www.oakcitycoffee, not www.oak-city-coffee. Omitting extraneous symbols will make it easier for your prospective customers to remember your site address, and it will also make it easier for you to relay it to others. Keep in mind that you will be repeating this address several times a day on the phone, at events, or in face-to-face conversations, so make it easy to recite. Also, keep in mind that it should look sharp and polished on a business card or promotional materials.
- Use .com whenever possible. For the same reason, avoid a domain that ends in .net, .org, or .co. Most people will immediately think of .com when they are trying to recall an address, and you want to make it as easy as possible for your customers to find your site.
- Avoid referencing your geographical location. Unless you resolve to make – and keep – your business as a strictly local shop, don’t reference your geographical location such as your city or state in your domain. That way, if you want to expand beyond your local community, you will not then need to purchase a new domain.
Designing Your Website
Whether you outsource your web design or do it yourself using Squarespace, Wix, or WordPress, there are certain keys to making your website as effective as possible.
- Channel the minimalists. Keep your site clean. Don’t clutter it with sidebars or gratuitous images, and succinctly tell your customers what your business is all about.
- Make it as easy as possible for customers to contact you. Include a phone number or email address in addition to including a “contact us” plugin on your site. Many customers – especially those in older generations – like to be able to call a live human being rather than send a message through a website.
- As applicable, include a map and your operating hours. If you have a brick-and-mortar shop, be sure to include a map showing your geographical location, as well as your store hours.
- Keep images crisp and clean. If you use professional or stock images, remember quality beats quantity. Use only a few quality images that accurately represent your brand.

Chapter 4: Exit Strategies

It may seem counterintuitive, but you should keep your exit strategy in the back (or maybe the front) of your mind throughout the life of your business, and most especially, in its early stages.

You may be wondering why you should think so far ahead when you are struggling just to get your new business off the ground, and this is a legitimate question. However, your exit strategy will largely dictate how you run your company, from the entity type you select, to how quickly you grow and scale, the IP you develop, and the type of financing you pursue.

For instance, if you plan to sell your business within a shorter (5-10 year) period, you will likely need to infuse capital in your enterprise and commit to a high growth model, so that your company will be more attractive to potential buyers down the road. Companies like these will likely need to seek VC funding. On the other hand, the exit plan for a lifestyle company structured as an LLC could be to enter into a strategic partnership or to pass the company on to the next generation or a group of trusted employees.

In this section, we will explore common exit strategies for businesses of all types, as well as important considerations for an early-stage founder.

Section 1: Selling Your Business

Selling is a great option for many high-growth, high-value companies – often (but not always) C corporations. If you plan to sell your business one day, there are certain practices you need to adopt now in order to prepare for a smooth transaction.

#1: Keep your finances organized.

Granted, you should do this regardless of whether you intend to sell your business. But particularly if you plan to sell, it is critical to grasp your company’s financial health. You need to intimately understand the company’s profits and losses and to maintain organized records of transactions, purchases, sales, employee information, and tax documents. Devise an efficient filing system and keep a paper trail of any documents evidencing your company’s growth.

It is also critical to develop a strong sense of your company’s monetary value. It is advisable to hire an accountant or business consultant to help you value your company so that you can accurately market it to potential buyers.

#2: Research the market.

When you are ready to tentatively explore the buying market, conduct a thorough examination of your potential buyers. Specifically, make sure you understand exactly how each buyer will purchase your business, their solvency, and their relationships with lenders. Develop a sense of who your best buyers would be so that you can confidently approach them when the time to sell is ripe.

It is just as important to consider your company’s culture and vision and to seek buyers who want to continue that vision. You will invest a tremendous amount of sweat equity into your company, so consider whether you want to continue the legacy you worked so hard to instill into your brand when you decide to part ways.

Keep in mind that you may receive unsolicited offers throughout the life of your business and while this may be flattering, for the above reasons, this is likely not the best approach. Alternatively, consider engaging an investment banker or broker to help you navigate the process of negotiating the sale or transfer of your business.

#3: Build a cohesive team.

Forming the right team to help you sell your business is critical – particularly when it comes to engaging the professionals. Find an experienced attorney and accountant to help you navigate the legal and financial side of the sale. Consider that it is best to be as transparent with these professionals as possible so that they have a clear expectation of your personal and professional goals.

Your attorney partner will help you facilitate the sale transaction, from negotiating a price, to obtaining customer or client consent, to seamlessly transferring the company’s assets. In many cases, sales of businesses simply involve transferring the right to customer lists and data. In these cases, failure to obtain customer consent could result in unexpected and time-consuming litigation.

#4: Plot your post-sale business and financial plan.

If you intend to sell your business, consider how you will manage your business relationships post-sale. Are you transferring the business’ clients to the new owner, or will you close out the clients’ accounts? Will you take any of your clients with you to your new business endeavor? Speak with your attorney or consultant about how to manage your proprietary relationships and clearly articulate this decision to your buyer.

Equally important is your post-sale financial plan. If your business has accrued any debts, make sure those do not follow you after the sale closes. Be sure to negotiate with your buyer about any post-sale business debt liabilities and how those will be managed.

Finally, understand your post-sale career plan. Before you sell, you should consider your experience, skills, relationships, and other assets you will take from your business, and determine how you can and will use them in your next venture. This will help you determine your next move and how you should use the money you earn from the sale.

Section 2: Additional Exit Options

Go Public

While your company may have tremendous monetary value, executing an IPO is a lengthy and expensive process, costing anywhere from several hundred thousand to several million dollars, depending on the size of the offering. This route all but disappeared until a few years ago, but seems to be making a comeback as some of the largest tech companies and their investors are looking to cash out (perhaps because their valuations are so high that there are no other options!).

Merge

Two complementary businesses can often create more value as a single company, so you may consider merging. If you don’t want to relinquish all control over your business, you can consider staying on in an advisory capacity. Otherwise, you will likely step aside and let the head of the other company take over.

Be Acquired

Other companies might want to acquire your business. Make sure you have a strong sense of your business’ monetary value to ensure that it is comparable to the price they pay to acquire you.

Liquidate

Liquidation involves selling all of your business’ assets at market value and using the revenue to pay off outstanding debts. This approach is simple but will likely not result in excess revenue for you as a founder unless your business has high-value inventory. Also, your price will be largely dictated by what the market is willing to pay, so you will likely have little bargaining power when it comes to the sale.

License Your IP

If your company produces valuable IP – for instance, in the form of a product – you can license that IP to another company. Simply stated, your intellectual property can be bought, sold, or licensed.

Licensing your IP means you give another company the right to sell and manufacture your product, or use your IP to integrate into, or create, their own products. This can be an extremely lucrative approach, but as with any other, it is not without its possible pitfalls.

First and foremost, you want to ensure you engage with companies who will work to maintain the value of your IP. If you are licensing a trademark, for instance, consider the brands to which it will be applied and whether they will affect the quality of your own brand. You also will need to consider whether to license your IP in an exclusive deal, what the royalty structure looks like, and whether you retain the ability to revoke the license for any reason.

Choosing the Best Exit Strategy for Your Business

No matter what your colleagues or competitors do, keep in mind that the best exit strategy is always the one that fits yourspecific business model and goals. In deciding what option is best for you, there are a few key questions you should answer.

First, decide what you want to walk away with – is it just money, or is it also the legacy and brand you’ve built? If the former, an open market sale might be a viable option, but if you want to continue the legacy you’ve created, you may consider staying involved in some capacity or passing the business to a family member, employee, or colleague.
Second, what is your business’ contribution to the world? Are you a lifestyle brand with valuable products and services? Or, are you a high-growth corporation with a unique product? Think about how your business will continue to contribute to society even after you step out of it.

No matter which strategy you choose, start to work on it as soon as you launch your company. If you plan properly, stay abreast of your company’s financial health, and cultivate positive relationships in the business community, you will set yourself up for lasting success.

Appendix

We hope that this new business blueprint was helpful! If you are a new business founder in the exciting and challenging stage of getting your enterprise off the ground, Fourscore Business Law offers resources beyond this blueprint.

More About Fourscore Business Law: The Fourscore Principles

Understand who you are. Fourscore Business Law is a customer service company. We just happen to be lawyers. Fourscore lawyers build relationships, not client lists. Serving our communities is a way of life, as is living responsible and sustainable lives with our families, clients, and co-workers.
Understand your environment and find a pain point.
- Clients and lawyers alike hate the billable hour. Ruthlessly stamp it out of any situation in which it isn’t absolutely necessary.
- Lawyers are notoriously slow and unresponsive. Be proactive with communication.
- Business people hate it when lawyers (a) make things more complicated than necessary and (b) talk down to them. Do the opposite – use Lincoln’s mindset to make the complex understandable. Be approachable.
Do excellent work. Whether we are representing a Raleigh tech startup, a small business in Durham, or a venture capital fund investing in a Silicon Valley company, Fourscore lawyers take every opportunity to use our experiences, training and common sense to do our best work, every time.
Provide value in unexpected ways. Fourscore Business Law leverages useful technology to increase efficiency in our workflows and make life (and business) easier for our clients. We love connecting clients and friends, helping our community build its work together.
Be mission-driven. We believe that our clients are going to change the world for the better, and we want to be a part of that. Our mission is to change the public perception of lawyers through the way we act, communicate and participate in our community. Through our extensive experience working with entrepreneurs, investors, and business owners, we understand that predictable pricing is important and that helping our clients budget for legal services is part of our job. To that end, we offer flat-rate pricing on many projects and when we must bill by the hour, we always provide good faith estimates and commit to keeping our clients up-to-date on their legal spend.

Fourscore Business Law Practice Areas

Our experienced attorneys assist business clients in the following areas:

Angel investment and venture financing
Startup counseling and business formation
Mergers and acquisitions
Outside general counsel services, including contract drafting, negotiation, and review
Intellectual property
Employment law and consultant relationships
Real estate development

At Fourscore Business Law, we have years of experience representing business clients at every stage of running their businesses, from formation, to financing, to executing successful mergers, sales, and acquisitions. Our commitment to explaining the law in the simplest, most straightforward way possible has made us extremely effective at counseling clients and helping them maximize their success as business owners.

But don’t take our word for it.

“Murphy’s Naturals has found a partner in Fourscore Business Law that provides value through more than just legal services. It’s nice to know that Jesse has us covered from a legal perspective and we really appreciate his ability to explain things in a way that makes sense to a business person. But one of the things I like most about working with Jesse is his transparency. He’s always upfront about the scope of the work he’s doing and is very conscious about his time, so I’m never blindsided by my bill.”

Phillip FreemanFounder of Murphy’s Naturals

“As a startup founder, it’s easy to get so wrapped up in the heart and soul of your company and the people you serve that you forget the importance of understanding all the complicated legal components of running a business, especially when raising capital. That’s why you need a level-headed advisor who can give smart counsel that always keeps your best interest in mind. The Fourscore team understands that an investor’s main focus is getting the best return, and every decision has implications now, but also years down the road. The stakes are high, and there’s really no room for error, so having a thoughtful partner to help me think through these decisions has been invaluable.”

Stephen ValencinFounder of Growers

“I partnered with the Fourscore Business Law team because they understand startups, their challenges, and how they work. Fourscore provides me with valuable counsel and resources, so I can make the smartest and most efficient decisions for the good of the company.”

Van MurrayFounder of AppSmart

“It’s clear that Jesse knows where entrepreneurs are coming from. He understands that it’s all about building relationships and trust. He’s worked with some big players in the community, and that knowledge base and experience with the early stages of a business have been critical to us.”

Jason WidenFounder of HQ Raleigh

Connecting Beyond the Blueprint:

If you have specific questions about this guide or would like to meet with us to talk about your business goals, we invite you to reach out to us. You can contact us through our website, email us at info@forescorelaw.com, or call our office at 919-307-5356.

If you would like to learn more about how to organize, fund, run, or exit your early-stage startup, check out our business law blog, download one of our business law whitepapers, or subscribe to our monthly newsletter, More from Fourscore,for business growth resources, industry news, and interviews with local entrepreneurs.

If you are a high-growth business seeking outside funding, we have created a guide to 100 VC and Angel Firms in the Southeast .

Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.

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A Guide For Startup Founders