November 3, 2011
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Ron Troy
Everyone knows hiring a lawyer to help you form your company is expensive, right? Wrong. Jeffrey A. Unger, OPEN member and founder of eMinutes, is offering to do it free for 500 entrepreneurs. I repeat: free.
After 20 years of specializing in forming and maintaining corporations and LLC's for A-List entertainment clients, Jeff Unger is on a mission to assist in the recovery of jobs in the U.S. by supporting the driving force of job growth—small businesses and entrepreneurship: "I think the Kauffman Foundation is right when they say that when it comes to U.S. job growth, startup companies aren’t everything. They’re the only thing. The time is now to recognize that the road to a U.S. economic recovery lies in entrepreneurship. With our Entrepreneurs program we hope to do our part and help serious and motivated entrepreneurs get started and remain in the game."
Unger is looking for “nuts and bolts” companies that have the potential to grow and hire employees. The eMinutes Entrepreneurs program is dirt simple: lawyers will provide complimentary legal formation services to 500 first-time businesses in both California and New York State, jurisdictions where the company is licensed to practice law.
When I heard about this, I admit that the investigative journalist part of me thought it sounded almost too good to be true. So, I set up a face-to-face meeting with Jeff Unger to get a peek behind the curtain and learn more. I ended up with far more than I expected. In fact, I got a free education. Jeff informed me of the six biggest legal blunders small business owners make, and how to correct them.
Mistake 1: Overstructuring
"Keep the structure simple," advises Jeff. "Even with the most well thought out business plan, no entrepreneur can anticipate how events will unfold. A simpler structure provides flexibility for the entrepreneur to make changes in the future. Don’t try to structure your business for a potential investor who does not (yet) exist, to make it easier to go public, or to make the company more attractive to future employees or VCs. It's the biggest and most prevalent mistake in the book, and the source of a lot of wasted effort and resources, which drains a startup unnecessarily."
Mistake 2: Incomplete filing
"There's umpteen websites that offer a boilerplate approach to preparing and filing the Articles of Incorporation for a new business," states Jeff. "But there's a lot more to properly forming a company than just filing your Articles. If you don't do it right, the corporation won't protect the business owner from liability. And it won't be respected by the IRS, and that's not good. In addition to the Articles, you need to prepare bylaws, execute organizational minutes, issue shares of stock, execute key agreements, file IRS elections (e.g., S-Election), etc. So be careful..the boilerplate, fill-in-the-blank documents won't hold up in court."
Mistake 3: Assuming mandatory incorporation
Contrary to conventional thinking, Jeff says that when trying to choose the right business entity, most entrepreneurs fail to consider the option of not incorporating. "It is absolutely not necessary to form a corporation or LLC in order to start a business," he says. "It really only makes sense to form a corporation or LLC when co-owners desire to memorialize their business arrangement, or the business has potential liability and the owners want to protect themselves from the risks of owning the business. You need to ask yourself whether the benefit of incorporating is worth it in light of the cost of annual franchise tax, preparing a tax return, and administrative hassle. And often enough, it's just not worth it."
Mistake 4: Using stock as currency
"Don’t use stock as currency," Jeff asserts. "Resist the urge to use shares of your new company’s stock as a form of 'checkbook' that can be used to pay vendors or employees. When issuing small numbers of shares, it is important to consider that making someone a shareholder means that you will have to deal with that person for the life of the business. It changes the nature of the vendor or employer relationship considerably when the business owner owes an employee or supplier a duty to deal with that person with the utmost good faith as a shareholder."
Mistake 5: Careless filing
"LLC just looks and sounds good to a lot of people," explains Jeff. "Far too frequently, choice of entity is made based on cocktail party conversation. It makes you sound so official, distinctive from good 'ole Inc., and formal, and maybe even bigger or more successful than you are at the moment. But here's the thing: corporations and LLCs are very different animals. They may be similar in terms of liability protection, but they are hugely different from a tax, and thus monetary, standpoint. In California and New York, for example, LLCs pay so much more than corporations in fees and costs that I always advise using LLCs as an entity of last resort. Making the right choice in entity should be based on the individual tax situation, objectives and needs of the entrepreneur."
Mistake 6: Ignoring jurisdiction
"A 50-state drop down menu is not the way to select where to incorporate your business," Jeff warns. "Carefully consider choice of jurisdiction. A good general rule is to incorporate in the state where you are conducting your business. There's virtually no good reason to incorporate in Nevada despite popular myths to the contrary."
My personal takeaway from the interview was that paying for solid advice on choice of entity and jurisdiction is worth its weight in gold. It may be quick, easy, and simple to jump online to prepare and file Articles of Incorporation, but doing so may be disastrous, and end up needlessly costing you thousands of dollars every year. The documents are the easy part, the choices about structure will impact your business forever.
If you're considering a formal structure for your company, and have the entrepreneurial passion and plan Jeff's looking for, you may just qualify to one of the lucky 500 entrepreneurs selected to receive free comprehensive formation from eMinutes!
Check your balance, review recent transactions and pay your bill on the go.
Ron Troy 6 months ago
I was being pressed to form an S Corp or LLC - in New York State, in order to receive consulting work. I agree with the premise that I need the protection that I MIGHT get from one of these. But nowhere have I seen a clean breakdown of the differences, in particular the expenses. The NYS governmental site is confusing at best, noting but giving little detail on various requirements (like the requirement to publish something in 2 types of local papers). The do it yourself sites don't help either; they wrap up their offerings in all sorts of possibly needed - or not, extras, and once you've looked at 2 or more of these sites you are convinced this is like digging a hole in the ground and pouring in cash.