Per capita, Colorado is the most entrepreneurial state in the country. It's probably no surprise then, that one of the most common reasons clients come to us, is to create some form of startup business or partnership. In fact, in the past month, we've taken on three new clients seeking to start businesses. Much can be learned by comparing these businesses, where they’re similar or different, and why we chose a specific legal structure.
Our three new clients vary dramatically from each other. Company A is an established company with millions in assets, looking to carve a new company out of their existing one. Their main motivation is raising money to develop unused assets. In this case we will have to be very careful in structuring the partnership to comply with the huge number of laws relating to raising funds. Company B is a situation where one partner (“Dave”) has agreed to provide investment capital for the business, and the other partner (“Dan”) has agreed to manage and run the business. Dan will earn a salary, and ownership in the business based on how long he works there. Dave will have no rights to manage the business, but also will have no liability for anything the business does. Company C is a true, ground floor startup where three people have pooled a little money and decided to start a small, local business. All three partners have taken on this venture as a career change, and will be actively involved in running the business.
Though these businesses have little in common, many of the issues that must be addressed are the same for all three companies. Who will run the business on a day-to-day basis? How will profits be shared? What happens if the partners can't agree on a particular decision? Are there certain decisions that must be made unanimously such as the decision to sell the business? How will ownership vest in each individual partner? What is the process for taking on new partners or investors? What happens when one partner wants to leave the business? Can the manager be removed by the other partners?
All of these issues, and more, will likely arise in the course of a long-term business. One of the main reasons for creating business documents is to address as many as possible upfront.
While it will never be possible to address every issue that could arise in the life of a business, properly drafted business documents can address many of them, and at least provide a framework for handling disagreements when they do arise.