A business starts at T minus one. Before the business is formed, the owners should methodically follow formal procedures during the creation process in order to guard against problems down the road.
1. Identify Expectations in Your Business Plan
The business plan should be filled with all of the goals, forecasts, capital assets, stockholder investments, and expectations of each participant. The largest driver of conflict can be unfulfilled expectations—if the stockholders can memorialize their expectations early on, future conflict can be avoided.
2. Identify Business and Ownership Structures
Determine the entity type for the business, whether a limited liability company, a corporation, a limited liability partnership, or a sole proprietorship. This choice includes which type of tax status the business should have, such as a C-Corporation, or a pass-through like a partnership or s-corporation. It is essential to determine what types of equity structures will be used, such as common stock, preferred stock, or convertible notes.
3. Drafting Your Founding Documentation
The founding documents should be drafted with care. For an LLC, the founding documents are the operating agreement and articles of organization; for a corporation, they are the articles of incorporation and the bylaws. These documents govern who controls the company, the types of stock that can be issued, the process for the issuance, how the board/manager meets, how communications should be made to stockholders, and other important rules that the business must later follow.
4. Filing Founding Documentation
Filing either the articles of organization or articles of incorporation with the California Secretary of State, reserving the company name, and paying the required fees is the first action of becoming a recognized company. To do business in California, a company must also designate an Agent for Service of Process, which can be an officer of the company or an external company hired for this service. This person receives notice if there is a lawsuit against the business. All of the records of this process are recorded in the corporate minute book.
5. Board of Directors First Actions
If the business is a corporation, the first board meeting should be held in order to pass the bylaws, issue stock, and appoint the officers. If the articles of incorporation did not designate a board member, the incorporator should designate an initial board. If the business is an LLC, the organizer should sign the operating agreement and issue stock. Any one being issued stock will have to sign the operating agreement. Compliance with SEC regulations regarding the sale of stock should be considered.